Lesson 5 of 7
Obligations not called debt
Cisco's balance sheet carries 19,372 million dollars of long-term debt and 1,652 million of operating lease liabilities. One of those was a footnote until 2019.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A debt-like item is a fixed obligation to pay cash that is not labelled debt, and leases are the largest example on most balance sheets.
- ASC 842 brought operating leases onto the balance sheet for fiscal years beginning after 15 December 2018, so any ratio with liabilities in it is not comparable across that transition.
- Cisco carried 1,652 million dollars of operating lease liabilities and 19,372 million of long-term debt at 25 July 2026, and the lease figure did not exist as a balance sheet line ten years ago.
The debt line is a label, not a definition. What matters to a normalised figure is the set of obligations that must be paid in a fixed amount at a fixed time, whatever the balance sheet calls them.
Cisco's fixed obligations, as reported at 25 July 2026
Labelled debt
- Long-term debt, excluding current portion$19,372m92%
- Operating lease liabilities, non-current$1,248m5.9%
- Operating lease liabilities, current$404m1.9%
Not labelled debt
Total$21,024m
What qualifies
Three tests, all of which a lease passes. The amount is fixed or determinable in advance. The timing is fixed. And non-payment has a consequence beyond losing a supplier, because the counterparty has a contractual claim.
By those tests, operating lease liabilities are debt-like. Unfunded pension obligations are debt-like. Purchase commitments with take-or-pay terms are debt-like. A trade payable is not, because its amount and timing follow the trading relationship rather than a schedule agreed in advance.
The line that moved in 2019
Before ASC 842, an operating lease was a footnote: a table of future minimum payments with no liability on the face of the balance sheet. The standard is effective for public business entities in fiscal years beginning after 15 December 2018, and from then on the obligation sits on the balance sheet as a lease liability with a matching right-of-use asset.
The consequence for a ten-year normalisation is direct. Any ratio with liabilities or assets in it, which means debt to equity, return on assets and every version of return on invested capital, is computed on two different bases across that transition. The earlier years understate the obligation relative to the later ones, and the gap is not an improvement in the business.
The double count to avoid
Adding a lease liability to debt while leaving the earnings figure untouched charges the same obligation twice when the earnings figure is an operating profit that already carries the lease expense.
The consistent pairings are the dull ones. Either use a debt figure that includes leases alongside an earnings figure computed before lease costs, or use a debt figure without leases alongside an earnings figure after them. What fails is mixing the two, and it fails by a large amount at an asset-heavy company.
What to write down
For each debt-like item: the amount, the balance sheet line or note it came from, and whether the earnings figure you are pairing it with already carries its cost. That third column is the one that prevents the double count, and it is the one nobody writes.
Check yourself
What makes an obligation debt-like?
- That it is owed to a bank
- A fixed or determinable amount, at a fixed time, with a contractual consequence for non-payment
- That it appears in the non-current section
Show the answer
Answer: B.
The label does not decide it. A lease passes all three tests; a trade payable, whose amount and timing follow the trading relationship, does not.What did ASC 842 change for a ten-year comparison?
- Nothing: leases were always on the balance sheet
- Operating leases moved from a footnote onto the balance sheet for fiscal years beginning after 15 December 2018, so ratios using assets or liabilities are on two bases across the decade
- It removed lease costs from the income statement
Show the answer
Answer: B.
The obligation existed before and was disclosed in a note. What changed is where it is recognised, which moves every ratio built on the balance sheet.Which pairing double counts a lease?
- Debt including leases, against an earnings figure computed before lease costs
- Debt including leases, against an operating profit that already carries the lease expense
- Debt excluding leases, against an operating profit after lease costs
Show the answer
Answer: B.
If the earnings figure is already reduced by the lease cost, adding the liability to debt charges the same obligation a second time.Sources
- Cisco Systems, Inc., Form 10-K for the fiscal year ended 25 July 2026, filed 2026-09-02, accession 0000858877-26-000132: long-term debt and operating lease liabilities on the consolidated balance sheet.
- ASC 842, Leases: effective for public business entities in fiscal years beginning after 15 December 2018, bringing operating leases onto the balance sheet as a right-of-use asset and a lease liability.
What this leaves out
- The figure of 19,372 million dollars excludes the current portion of long-term debt, which is a separate balance sheet line. The total of all interest-bearing obligations is therefore higher than the figure used here.
- This lesson does not compute a lease-adjusted earnings figure. It states the pairing rule, and the arithmetic belongs to the valuation courses.
- Cisco appears as a source of filed figures and nothing here says anything about its financing decisions.
- Nothing here is advice about any security.