Kohl's 2014 Annual Report Download - page 30

Table of Contents
The most significant estimates used by management in accounting for property leases and the impact of these estimates are as follows:
•—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.
•—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.
•—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.

All of our long-term debt at year-end 2014 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.
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 cannot be
reasonably estimated at this time.

The financial statements are included in this report beginning on page F-3.

None
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