Kohl's 2014 Annual Report Download - page 50

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ASC No. 820, “Fair Value Measurements and Disclosures,” requires fair value measurements be classified and disclosed in one of the following pricing
categories:
Level 1: Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2: Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial
instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with
similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable
at commonly quoted intervals.
Level 3: Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if
any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation
techniques.
We carry our current assets and liabilities at cost, which approximate fair value.
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We lease certain property and equipment used in our operations.
We are often involved extensively in the construction of leased stores. In many cases, we are responsible for construction cost over runs or non-standard
tenant improvements (e.g. roof or HVAC systems). As a result of this involvement, we are deemed the “owner” for accounting purposes during the
construction period, so are required to capitalize the construction costs on our Balance Sheet. Upon completion of the project, we perform a sale-leaseback
analysis pursuant to ASC 840, “Leases,” to determine if we can remove the assets from our Balance Sheet. In many of our leases, we are reimbursed a portion
of the construction costs via adjusted rental payments and/or cash payments or have terms which fix the rental payments for a significant percentage of the
leased asset’s economic life. These items generally are considered “continuing involvement” which precludes us from derecognizing the assets from our
Balance Sheet when construction is complete. In conjunction with these leases, we also record financing obligations equal to the cash proceeds or fair market
value of the assets received from the landlord. At the end of the lease term, including exercise of any renewal options, the net remaining financing obligation
over the net carrying value of the fixed asset will be recognized as a non-cash gain on sale of the property. We do not report rent expense for the properties
which are owned for accounting purposes. Rather, rental payments under the lease are recognized as a reduction of the financing obligation and interest
expense.
Some of our property and equipment is held under capital leases. These assets are included in property and equipment and depreciated over the term of
the lease. We do not report rent expense for capital leases. Rather, rental payments under the lease are recognized as a reduction of the capital lease obligation
and interest expense.
All other leases are considered operating leases in accordance with ASC 840. Assets subject to an operating lease and the related lease payments are not
recorded on our balance sheet. Rent expense is recognized on a straight-line basis over the expected lease term.
The lease term for all types of leases begins on the date we become legally obligated for the rent payments or we take possession of the building or
land, whichever is earlier. The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty.
Failure to exercise such options would result in the recognition of accelerated depreciation expense of the related assets.
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