L03 E4-30.Adjusting for Off-Balance Sheet Liabilities ANALYST ADJUSTMENTS 4.2 Fitch 's current analytical approach views operating leases as a debt-like form of funding and their analysts adjust core leverage and coverage ratios using a multiple to create a debt-equivalent for a ll companies that have not yet adopted the new lease standard. Fitch believes a standard Sx multiple is appropriate for assets with a long economic life, such as property leases. Specifically, Fitch multiplies the annual operating lease payments by 8 and adds that amount to debt prior to calculating ratios.

In its 2018 annual report, Kohl 's reports the following amounts. Note: Kohl's had not yet adopted the new lease standard.

$millions Liabilities ..... ......... .. .. .. •... • ..•.. • ... . . .......

Total debt .. .. ......... .. .. .. • ...•.. • .. • .... • .. • .. ..

Equity ................ .. ....• . .. .. . . . •. . • ....... • ..

Cash from operations .............. .. . .... ..... ...... .

Operating lease payments (annual) ... • .. . .. • .... . .. . ....

Required Feb.2, 2019 Feb.3,2018

$6,942 3,499 5,527 2,107 301

$7,970 4,514 5,419 1,691 293

a. Why would Fitch make this sort of adjustment prior to calculating credit-risk ratios?

b. Compute Liabilities to equity and Cash from operations to debt for both years using the numbers as reported by Kohl 's.

c. Adjust Kohl's total liabilities and debt for the 8x multiple and recalculate both ratios. Does the adjustment make a material difference for these ratios?