Business and Summary of Accounting Policies

Business

As of February 1, 2014, Kohl’s Corporation operated 1,158 family-oriented department stores and a website (www.Kohls.com) that feature exclusive and national brand apparel, footwear, accessories, soft home products and housewares targeted to middle-income customers. Our stores are located in 49 states.

Our authorized capital stock consists of 800 million shares of $0.01 par value common stock and 10 million shares of $0.01 par value preferred stock.

Consolidation

The consolidated financial statements include the accounts of Kohl’s Corporation and its subsidiaries including Kohl’s Department Stores, Inc., its primary operating company. All intercompany accounts and transactions have been eliminated.

Accounting Period

Our fiscal year ends on the Saturday closest to January 31^st each year. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. The following fiscal periods are presented in this report.



Fiscal year	Ended	Number of Weeks
2013	February 1, 2014	52
2012	February 2, 2013	53
2011	January 28, 2012	52

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

In addition to money market investments, cash equivalents include commercial paper and certificates of deposit with original maturities of three months or less. We carry these investments at cost which approximates fair value.

Also included in cash and cash equivalents are amounts due from credit card transactions with settlement terms of less than five days. Credit and debit card receivables included within cash were $89 million at February 1, 2014 and $84 million at February 2, 2013.

Long-term Investments

Long-term investments consist of investments in auction rate securities (“ARS”) which are classified as available-for-sale securities and recorded at fair value.

Merchandise Inventories

Merchandise inventories are valued at the lower of cost or market with cost determined on the first-in, first-out (“FIFO”) basis using the retail inventory method (“RIM”). Under RIM, the valuation of inventory at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value inventory. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of RIM will result in inventory being valued at the lower of cost or market since permanent markdowns are currently taken as a reduction of the retail value of inventory. We record an additional reserve if the future estimated selling price is less than cost.

1. Business and Summary of Accounting Policies (continued)

Property and Equipment

Property and equipment consist of the following:



	Feb 1, 2014			Feb 2, 2013
	(Dollars In Millions)
Land	$	1,095		$	1,089
Buildings and improvements:
Owned	7,713			7,575
Leased	1,845			1,820
Store fixtures and equipment	2,147			2,517
Computer hardware and software	1,033			779
Construction in progress	291			200
Total property and equipment, at cost	14,124			13,980
Less accumulated depreciation	(5,379		)	(5,108		)
Property and equipment, net	$	8,745		$	8,872

Construction in progress includes land, building and improvements, and computer hardware and software which is not ready for its intended use.

Property and equipment is recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leased property and improvements to leased property are amortized on a straight-line basis over the term of the lease or useful life of the asset, whichever is less.

The annual provisions for depreciation and amortization generally use the following ranges of useful lives:




Buildings and improvements	5-40 years
Store fixtures and equipment	3-15 years
Computer hardware and software	3-8 years

Long-Lived Assets

All property and equipment and other long-lived assets are reviewed when events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If such indicators are present, it is determined whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. No material impairments were recorded in 2013, 2012, or 2011 as a result of the tests performed.

Accrued Liabilities

Accrued liabilities consist of the following:



	Feb 1, 2014		Feb 2, 2013
	(Dollars In Millions)
Various liabilities to customers	$	296	$	275
Payroll and related fringe benefits	112		101
Sales, property and use taxes	166		153
Credit card liabilities	109		120
Other	455		337
Accrued liabilities	$	1,138	$	986

The various liabilities to customers include gift cards and merchandise return cards that have been issued but not presented for redemption.

1. Business and Summary of Accounting Policies (continued)

Self-Insurance

We use a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability, and employee-related health care benefits, a portion of which is paid by our associates. Liabilities associated with these losses include estimates of both reported losses and losses incurred but not yet reported. We use a third-party actuary, which considers historical claims experience, demographic factors, severity factors and other actuarial assumptions, to estimate the liabilities associated with these risks. Total estimated liabilities for workers’ compensation, general liability and employee-related health benefits were approximately $47 million at February 1, 2014 and $42 million at February 2, 2013. Although these amounts are actuarially determined based on analysis of historical trends, the amounts that we will ultimately disburse could differ from these estimates.

As of January 1, 2014, our self insurance exposure differs based on the type of claim. For catastrophic claims like earthquakes, floods and windstorms, we are self insured for 5% of the insurance claim. For other standard claims like fire and building damages, we are self insured for the first $250,000 of property loss claims plus10% of additional losses up to $30 million.

Treasury Stock

We account for repurchases of common stock and shares withheld in lieu of taxes when restricted stock vests using the cost method with common stock in treasury classified in the Consolidated Balance Sheets as a reduction of shareholders’ equity.

Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)

Accumulated other comprehensive loss consists of the following:



	Unrealized Gains (Losses) on Investments			Loss on Interest Rate Derivatives			Accumulated Other Comprehensive Loss
	(Dollars In Millions)
Balance at January 28, 2012	$	(24	)	$	(29	)	$	(53	)
Other comprehensive income	5			3			8
Balance at February 2, 2013	(19		)	(26		)	(45		)
Other comprehensive income	8			3			11
Balance at February 1, 2014	$	(11	)	$	(23	)	$	(34	)

The tax effects of each component of other comprehensive income (loss) are as follows:



	2013			2012			2011
	(Dollars In Millions)
Unrealized gains on investments:
Before-tax amounts	$	12		$	9		$	21
Tax expense	(4		)	(4		)	(8		)
After-tax amounts	8			5			13
Interest rate derivatives:
Before-tax amounts	5			5			(47		)
Tax (expense) benefit	(2		)	(2		)	18
After-tax amounts	3			3			(29		)
Other comprehensive income (loss)	$	11		$	8		$	(16	)

1. Business and Summary of Accounting Policies (continued)

Revenue Recognition

Revenue from the sale of merchandise at our stores is recognized at the time of sale, net of any returns. Sales of merchandise shipped to our customers are recorded based on estimated receipt of merchandise by the customer. Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales taxes.

Revenue from Kohl's gift card sales is recognized when the gift card is redeemed. Gift card breakage revenue is based on historical redemption patterns and represents the balance of gift cards for which we believe the likelihood of redemption by a customer is remote.

Cost of Merchandise Sold and Selling, General and Administrative Expenses

The following table illustrates the primary costs classified in Cost of Merchandise Sold and Selling, General and Administrative Expenses:



Cost of Merchandise Sold		Selling, General and Administrative Expenses
• Total cost of products sold including product development costs, net of vendor payments other than reimbursement of specific, incremental and identifiable costs • Inventory shrink • Markdowns • Freight expenses associated with moving merchandise from our vendors to our distribution centers • Shipping and handling expenses of E-Commerce sales • Terms cash discount		• Compensation and benefit costs including: • Stores • Corporate headquarters, including buying and merchandising • Distribution centers • Occupancy and operating costs of our retail, distribution and corporate facilities • Net revenues from the Kohl’s credit card program • Freight expenses associated with moving merchandise from our distribution centers to our retail stores, and among distribution and retail facilities • Advertising expenses, offset by vendor payments for reimbursement of specific, incremental and identifiable costs • Other administrative revenues and expenses

The classification of these expenses varies across the retail industry.

Vendor Allowances

We receive consideration for a variety of vendor-sponsored programs, such as markdown allowances, volume rebates and promotion and advertising support. The vendor consideration is recorded as earned either as a reduction of inventory costs or Selling, General and Administrative (“SG&A”) expenses based on the application of Accounting Standards Codification (“ASC”) No. 605, Subtopic 50, “Customer Payments and Incentives.” Promotional and advertising allowances are intended to offset our advertising costs to promote vendors’ merchandise. Markdown allowances and volume rebates are recorded as a reduction of inventory costs.

1. Business and Summary of Accounting Policies (continued)

Leases

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.

Advertising

Advertising costs, which include primarily television and radio broadcast, direct mail, digital, and newspaper circulars, are expensed when the advertisement is first seen. Advertising costs, net of related vendor allowances, were as follows:



	2013			2012			2011
	(Dollars In Millions)
Gross advertising costs	$	1,185		$	1,163		$	1,123
Vendor allowances	(172		)	(170		)	(161		)
Net advertising costs	$	1,013		$	993		$	962
Net advertising costs as a percent of net sales	5.3		%	5.2		%	5.1		%

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recorded based on differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. Deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We establish valuation allowances for deferred tax assets when we believe it is more likely than not that the asset will not be realizable for tax purposes.

We recognize interest and penalty expense related to unrecognized tax benefits in our provision for income tax expense.

1. Business and Summary of Accounting Policies (continued)

Net Income Per Share

Basic net income per share is net income divided by the average number of common shares outstanding during the period. Diluted net income per share includes incremental shares assumed to be issued upon exercise of stock options.

The information required to compute basic and diluted net income per share is as follows:



	2013		2012		2011
	(In Millions, Except per Share Data)
Numerator—net income	$	889	$	986	$	1,167
Denominator—weighted average shares
Basic	218		235		270
Impact of dilutive employee stock options (a)	2		2		1
Diluted	220		237		271
Net income per share:
Basic	$	4.08	$	4.19	$	4.33
Diluted	$	4.05	$	4.17	$	4.30


(a)	Excludes 10 million share-based awards for 2013, 14 million share-based awards for 2012 and 11 million share-based awards for 2011 as the impact of such awards was antidilutive.

Share-Based Awards

Stock-based compensation expense, including stock options and nonvested stock awards, is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant.

Reclassifications

To conform to the current year presentation in our Consolidated Statements of Changes in Shareholders' Equity, we reclassed shares withheld for taxes on vested restricted shares from "Treasury stock purchases" to "Stock options and rewards, net of tax." The reclass was $9 million for 2012 and $5 million for 2011.