Kohl's 2012 Annual Report Download - page 30

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If the lease is considered an operating lease, it is not recorded on our balance sheet and rent expense is recognized on a
straight-line basis over the expected lease term.
The most significant estimates used by management in accounting for property leases and the impact of these estimates
are as follows:
• Expected lease term—Our expected lease term includes both contractual lease periods and cancelable option periods
where failure to exercise such options would result in an economic penalty. The expected lease term is used in
determining whether the lease is accounted for as an operating lease or a capital lease. A lease is considered a capital
lease if the lease term exceeds 75% of the leased asset’s useful life. The expected lease term is also used in
determining the depreciable life of the asset or the straight-line rent recognition period. Increasing the expected lease
term will increase the probability that a lease will be considered a capital lease and will generally result in higher rent
expense for an operating lease and higher interest and depreciation expenses for a leased property recorded on our
balance sheet.
• Incremental borrowing rate—We estimate our incremental borrowing rate using treasury rates for debt with
maturities comparable to the expected lease term and our credit spread. The incremental borrowing rate is primarily
used in determining whether the lease is accounted for as an operating lease or a capital lease. A lease is considered a
capital lease if the net present value of the lease payments is greater than 90% of the fair market value of the property.
Increasing the incremental borrowing rate decreases the net present value of the lease payments and reduces the
probability that a lease will be considered a capital lease. For leases which are recorded on our balance sheet with a
related capital lease or financing obligation, the incremental borrowing rate is also used in allocating our rental
payments between interest expense and a reduction of the outstanding obligation.
• Fair market value of leased asset—The fair market value of leased retail property is generally estimated based on
comparable market data as provided by third-party appraisers or consideration received from the landlord. Fair market
value is used in determining whether the lease is accounted for as an operating lease or a capital lease. A lease is
considered a capital lease if the net present value of the lease payments is greater than 90% of the fair market value of
the property. Increasing the fair market value reduces the probability that a lease will be considered a capital lease.
Fair market value is also used in determining the amount of property and related financing obligation to be recognized
on our balance sheet for certain leased properties which are considered owned for accounting purposes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
All of our long-term debt at year-end 2012 is at fixed interest rates and, therefore, is not affected by changes in interest
rates. When our long-term debt instruments mature, we may refinance them at then existing market interest rates, which may be
more or less than interest rates on the maturing debt.
Cash equivalents and long-term investments earn interest at variable rates and are affected by changes in interest rates.
During 2012, average investments were $900 million and average yield was 0.3%. If interest rates on the average 2012 variable
rate cash equivalents and long-term investments increased by 100 basis points, our annual interest income would also increase
by approximately $9 million assuming comparable investment levels.
We share in the net risk-adjusted revenue of the Kohl’s credit card portfolio as defined by the sum of finance charges, late
fees and other revenue less write-offs of uncollectible accounts. We also share the costs of funding the outstanding receivables
if interest rates were to exceed defined rates. As a result, our share of profits from the credit card portfolio may be negatively
impacted by increases in interest rates. The reduced profitability, if any, will be impacted by various factors, including our
ability to pass higher funding costs on to the credit card holders and the outstanding receivable balance, and can not be
reasonably estimated at this time.
Item 8. Financial Statements and Supplementary Data
The financial statements are included in this report beginning on page F-3.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures
None