Summary of Significant Accounting Policies

Business. Ross Stores, Inc. and its subsidiaries (the “Company”) is an off-price retailer of first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family. At the end of fiscal 2018, the Company operated 1,480 Ross Dress for Less^® (“Ross”) locations in 38 states, the District of Columbia, and Guam, and 237 dd’s DISCOUNTS^® stores in 18 states. The Ross and dd’s DISCOUNTS stores are supported by six distribution centers. The Company’s headquarters, one buying office, three operating distribution centers, three warehouses, and 23% of its stores are located in California.

Segment reporting. The Company has one reportable segment. The Company’s operations include only activities related to off-price retailing in stores throughout the United States.

Basis of presentation and fiscal year. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany transactions and accounts have been eliminated. The Company follows the National Retail Federation fiscal calendar and utilizes a 52-53 week fiscal year whereby the fiscal year ends on the Saturday nearest to January 31. The fiscal years ended February 2, 2019, February 3, 2018 and January 28, 2017 are referred to as fiscal 2018, fiscal 2017, and fiscal 2016, respectively. Fiscal 2017 was a 53-week year. Fiscal 2018 and 2016 were each 52-week years.

Use of accounting estimates. The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant accounting estimates include valuation reserves for inventory shortage, packaway inventory costs, useful lives of fixed assets, insurance reserves, reserves for uncertain tax positions, and legal claims.

Purchase obligations. As of February 2, 2019, the Company had purchase obligations of approximately $2.6 billion. These purchase obligations primarily consist of merchandise inventory purchase orders, commitments related to construction projects, store fixtures and supplies, and information technology services, transportation, and maintenance contracts.

Cash and cash equivalents. Cash equivalents consist of highly liquid, fixed income instruments purchased with an original maturity of three months or less.

Restricted cash, cash equivalents, and investments. Restricted cash, cash equivalents, and investments serve as collateral for certain insurance obligations of the Company. These restricted funds are invested in bank deposits, money market mutual funds, U.S. Government and agency securities, and corporate securities and cannot be withdrawn from the Company’s account without the prior written consent of the secured parties. The classification between current and long-term is based on the timing of expected payments of the insurance obligations.

The following table provides a reconciliation of cash, cash equivalents, restricted cash and cash equivalents in the Consolidated Balance Sheets that reconcile to the amounts shown on the Consolidated Statements of Cash Flows:



($000)	2018		2017		2016
Cash and cash equivalents	$	1,412,912	$	1,290,294	$	1,111,599
Restricted cash and cash equivalents included in:
Prepaid expenses and other	11,402		9,412		12,936
Other long-term assets	53,765		53,566		51,645
Total restricted cash and cash equivalents	65,167		62,978		64,581
Total cash, cash equivalents and restricted cash and equivalents	$	1,478,079	$	1,353,272	$	1,176,180

In addition to the restricted cash and equivalents in the table above, the Company has restricted investments included in the Consolidated Balance Sheets as shown below:



Restricted Assets ($000)	2018		2017
Prepaid expenses and other	$	400	$	2,435
Other long-term assets	—		403
Total restricted investments	$	400	$	2,838

Estimated fair value of financial instruments. The carrying value of cash and cash equivalents, short- and long-term investments, restricted cash and cash equivalents, restricted investments, accounts receivable, other long-term assets, accounts payable, and other long-term liabilities approximates their estimated fair value. See Note B and Note D for additional fair value information.

Cash and cash equivalents were $1,412.9 million and $1,290.3 million, at February 2, 2019 and February 3, 2018, respectively, and include bank deposits and money market funds for which the fair value was determined using quoted prices for identical assets in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosures guidance.

Investments. The Company’s investments are comprised of various debt securities. At February 2, 2019 and February 3, 2018, these investments were classified as available-for-sale and are stated at fair value. Investments are classified as either short- or long-term based on their maturity dates and the Company’s intent. Investments with a maturity of less than one year are classified as short-term. See Note B for additional information.

Merchandise inventory. Merchandise inventory is stated at the lower of cost (determined using a weighted average basis) or net realizable value. The Company purchases inventory that can either be shipped to stores or processed as packaway merchandise with the intent that it will be warehoused and released to stores at a later date. The timing of the release of packaway inventory to the stores is principally driven by the product mix and seasonality of the merchandise, and its relation to the Company’s store merchandise assortment plans. As such, the aging of packaway varies by merchandise category and seasonality of purchase, but typically packaway remains in storage less than six months. Merchandise inventory includes acquisition, processing, and storage costs related to packaway inventory. The cost of the Company’s merchandise inventory is reduced by valuation reserves for shortage based on historical shortage experience from the Company’s physical merchandise inventory counts and cycle counts.

Cost of goods sold. In addition to product costs, the Company includes in cost of goods sold its buying, distribution, and freight expenses as well as occupancy costs, and depreciation and amortization related to the Company’s retail stores, buying, and distribution facilities. Buying expenses include costs to procure merchandise inventories. Distribution expenses include the cost of operating the Company’s distribution centers and warehouse facilities.

Property and equipment. Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, typically ranging from three to 12 years for equipment, 20 to 40 years for land improvements and buildings, and three to seven years for computer software costs incurred in developing or obtaining software for internal use. The cost of leasehold improvements is amortized over the useful life of the asset or the applicable lease term, whichever is less. Depreciation and amortization expense on property and equipment was $330.4 million, $313.2 million, and $302.5 million for fiscal 2018, 2017, and 2016, respectively. The Company capitalizes interest during the construction period and during the development and implementation phase of software projects. Interest capitalized was $2.5 million, $0.7 million and $0.0 million in fiscal 2018, 2017, and 2016, respectively. As of February 2, 2019, February 3, 2018, and January 28, 2017 the Company had $33.7 million, $24.3 million, and $25.7 million, respectively, of property and equipment purchased but not yet paid. These purchases are included in Property and Equipment and in Accounts payable and Accrued expenses and other in the accompanying Consolidated Balance Sheets.

Other long-term assets. Other long-term assets as of February 2, 2019 and February 3, 2018 consisted of the following:



($000)	2018		2017
Deferred compensation (Note B)	$	124,558	$	120,613
Restricted cash and investments	53,765		53,969
Other	16,023		13,136
Total	$	194,346	$	187,718

Property and other long-term assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Intangible assets that are not subject to amortization, including goodwill, are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Based on the Company’s evaluation during fiscal 2018, 2017, and 2016, no impairment charges were recorded.

Store closures. The Company continually reviews the operating performance of individual stores. For stores that are closed, the Company records a liability for future minimum lease payments net of estimated sublease recoveries and related ancillary costs at the time the liability is incurred. The lease loss liability was $0.2 million and $0.6 million, as of February 2, 2019 and February 3, 2018, respectively. Operating costs, including depreciation, of stores to be closed are expensed during the period they remain in use. In fiscal 2018, the Company closed four stores. In fiscal 2017, the Company closed seven stores.

Accounts payable. Accounts payable represents amounts owed to third parties at the end of the period. Accounts payable includes book cash overdrafts (checks issued under zero balance accounts not yet presented for payment) in excess of cash balances in such accounts of approximately $83.2 million and $74.5 million at February 2, 2019 and February 3, 2018, respectively. The Company includes the change in book cash overdrafts in operating cash flows.

Insurance obligations. The Company uses a combination of insurance and self-insurance for a number of risk management activities, including workers’ compensation, general liability, and employee-related health care benefits. The self-insurance and deductible liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. Self-insurance and deductible reserves as of February 2, 2019 and February 3, 2018 consisted of the following:



($000)	2018		2017
Workers’ compensation	$	89,993	$	94,430
General liability	42,877		40,763
Medical plans	6,515		6,725
Total	$	139,385	$	141,918

Workers’ compensation and self-insured medical plan liabilities are included in Accrued payroll and benefits and accruals for general liability are included in Accrued expenses and other in the accompanying Consolidated Balance Sheets.

Other long-term liabilities. Other long-term liabilities as of February 2, 2019 and February 3, 2018 consisted of the following:



($000)	2018		2017
Income taxes (Note F)	$	77,872	$	120,660
Deferred compensation (Note G)	124,558		120,613
Deferred rent	81,442		73,059
Tenant improvement allowances	25,418		21,668
Other	12,423		12,541
Total	$	321,713	$	348,541

Lease accounting. When a lease contains “rent holidays” or requires fixed escalations of the minimum lease payments, the Company records rental expense on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and the amount payable under the lease is recorded as deferred rent. The Company begins recording rent expense on the lease possession date. Tenant improvement allowances are amortized over the lease term. Changes in deferred rent and tenant improvement allowances are included as a component of operating activities in the Consolidated Statements of Cash Flows.

Revenue recognition. The Company recognizes revenue at the point of sale, net of sales taxes collected and an allowance for estimated future returns. As a result of adopting ASU No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification "ASC" 606), the Company recognizes allowances for estimated sales returns on a gross basis as a reduction to sales. This resulted in an asset recorded for the expected recovery of merchandise inventory of $10.2 million and a liability recorded for the refund due to the customer of $19.8 million as of February 2, 2019. Prior to the adoption of ASC 606, the Company recognized allowances for sales returns on a net margin basis, which was $9.9 million and $8.4 million as of February 3, 2018 and January 28, 2017, respectively. Sales taxes collected that are outstanding and the allowance for estimated future returns are included in Accrued expenses and other and the asset for expected recovery of merchandise is included in Prepaid expenses and other in the Consolidated Balance Sheets.

Sales of stored value cards are deferred until they are redeemed for the purchase of Company merchandise. The Company’s stored value cards do not have expiration dates. Based upon historical redemption rates, a small percentage of stored value cards will never be redeemed, which represents breakage. As a result of adopting ASC 606, breakage is estimated and recognized as revenue based upon the historical pattern of customer redemptions. In prior periods, breakage was recorded as a reduction of operating expense when customer redemption was considered remote. Breakage was not material to the consolidated financial statements in fiscal 2018, 2017, and 2016.

The following sales mix table disaggregates revenue by merchandise category for fiscal 2018, 2017, and 2016:



	2018		2017		2016
Ladies	26	%	27	%	28	%
Home Accents and Bed and Bath	26	%	26	%	25	%
Men’s	14	%	13	%	13	%
Accessories, Lingerie, Fine Jewelry, and Fragrances	13	%	13	%	13	%
Shoes	13	%	13	%	13	%
Children’s	8	%	8	%	8	%
Total	100	%	100	%	100	%

Store pre-opening. Store pre-opening costs are expensed in the period incurred.

Advertising. Advertising costs are expensed in the period incurred and are included in Selling, general and administrative expenses. Advertising costs for fiscal 2018, 2017, and 2016 were $79.9 million, $76.4 million, and $73.0 million, respectively.

Stock-based compensation. The Company recognizes compensation expense based upon the grant date fair value of all stock-based awards, typically over the vesting period. See Note C for more information on the Company’s stock-based compensation plans.

Taxes on earnings. The Company accounts for income taxes in accordance with ASC 740, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than changes in the tax law or tax rates. ASC 740 clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s consolidated financial statements. ASC 740 prescribes a recognition threshold of more-likely-than-not, and a measurement standard for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the consolidated financial statements. See Note F.

Treasury stock. The Company records treasury stock at cost. Treasury stock includes shares purchased from employees for tax withholding purposes related to vesting of restricted stock grants.

Earnings per share (“EPS”). The Company computes and reports both basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the total potential dilution that could occur from outstanding equity plan awards, including unexercised stock options and unvested shares of both performance and non-performance based awards of restricted stock.

In fiscal 2018, 2017, and 2016 there were 23,700, 2,800, and 2,500 weighted average shares, respectively, that were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for those years.

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:



Shares in (000s)	Basic EPS		Effect of dilutive common stock equivalents			Diluted EPS
2018
Shares	369,533		3,145			372,678
Amount	$	4.30	$	(0.04	)	$	4.26
2017
Shares	381,174		3,155			384,329
Amount	$	3.58	$	(0.03	)	$	3.55
2016
Shares	392,124		2,834			394,958
Amount	$	2.85	$	(0.02	)	$	2.83

Comprehensive income. Comprehensive income includes net earnings and components of other comprehensive income (loss), net of tax, consisting of unrealized investment gains or losses.

Recently issued accounting standards. In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), as amended. The ASU requires balance sheet recognition for all leases with lease terms greater than one year including a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company plans to adopt the new leases standard effective February 3, 2019 using the optional transition method on a modified retrospective basis by recognizing a cumulative-effect adjustment to the opening balance of retained earnings and does not plan to restate comparative periods. In addition, the Company does not plan to elect the transitional package of practical expedients or the use of hindsight upon adoption. Upon the adoption of the ASU, the Company does not expect to record a right-of-use asset and related lease liability for leases with an initial term of 12 months or less, and plans to account for lease and non-lease components as a single lease component.

The Company is finalizing the expected effect adoption of this new guidance will have on its consolidated financial statements. The Company’s current estimate of lease liabilities based on the present value of the remaining minimum rental payments, using discount rates as of the effective date, and the corresponding right-of-use assets, is approximately $2.9 billion. The expected cumulative-effect adjustment to beginning retained earnings is a decrease of approximately $20 million primarily related to the write-off of previously capitalized initial direct costs that are no longer capitalized under the ASU, partially offset by the write-off of the deferred gain on a previous sale-leaseback transaction that meets the sale definition under the ASU. The Company does not believe adoption of this ASU will have a significant impact to its consolidated statements of earnings, stockholders’ equity, and cash flows.

Recently adopted accounting standards. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification "ASC" 606) which, along with subsequent amendments, supersedes the revenue recognition requirements in “Revenue Recognition (ASC 605).” This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires entities to recognize revenue when the customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company adopted ASC 606 as of February 4, 2018, using the modified retrospective method. Results for reporting periods beginning on or after February 4, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with ASC 605. Upon adoption of ASC 606, the Company recorded a cumulative-effect adjustment to increase beginning retained earnings by $20 million as of February 4, 2018, primarily due to the change in the timing of the recognition of stored value card breakage. The impact of applying ASC 606 was not material to the Company's consolidated financial statements for the year ended February 2, 2019.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts on the statement of cash flows. The standard also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. The Company adopted ASU 2016-18 as of February 4, 2018, using the retrospective method.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share based payment awards will be recognized as income tax benefit or expense in the reporting period in which they occur (previously such amounts were recognized in additional paid-in capital); 2) excess tax benefits will be classified as an operating activity in the statement of cash flows; and 3) the option to elect to estimate forfeitures or account for them when they occur. The impact of recording excess tax benefits in income taxes in the Company's consolidated statement of earnings may be material, depending upon the Company's future stock price on vest date in relation to the fair value of awards on grant date and the future grants of stock-based compensation.

The Company adopted ASU 2016-09 in the first quarter of fiscal 2017, and elected to apply this adoption prospectively, except for forfeitures which it adopted on a modified retrospective basis. Accordingly, prior periods have not been adjusted. As a result of adoption, for the fiscal year ended February 3, 2018, the Company recognized $16.3 million of excess tax benefits related to stock-based payments as a reduction to its provision for income taxes. These items were historically recorded in additional paid-in capital. The Company also presented cash flows related to excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows and elected to account for forfeitures as incurred beginning on January 29, 2017. The impact of this accounting policy election for forfeitures was a cumulative-effect adjustment to decrease retained earnings by $1.1 million as of January 29, 2017.