2. Revenue Recognition

Effective February 4, 2018, we adopted Revenue from Contracts with Customers (ASC Topic 606) as required. We adopted the new standard using the full retrospective method. The standard eliminated the transaction- and industry-specific revenue recognition guidance under prior U.S. GAAP and replaced it with a principles-based approach for revenue recognition and disclosures. Under the standard, revenue is recognized when a 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.

Net Sales

Net sales include revenue from the sale of merchandise and shipping revenues. Net sales are recognized when merchandise is received by the customer and we have fulfilled all performance obligations. We do not have any sales that are recorded as commissions.

The following table summarizes net sales by line of business for the periods ended August 4, 2018 and July 29, 2017:

	Three Months Ended				Six Months Ended
(Dollars in Millions)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Women's	$	1,439	$	1,398	$	2,694	$	2,633
Men's		955		890		1,745		1,625
Home		678		679		1,369		1,320
Children's		464		426		919		904
Footwear		445		415		871		815
Accessories		329		339		665		665
Net Sales	$	4,310	$	4,147	$	8,263	$	7,962

We maintain various rewards programs whereby customers earn rewards based on their spending and other promotional activities. The rewards are typically in the form of dollar off discounts which can be used on future purchases. These programs create performance obligations which require us to defer a portion of the original sale until the rewards are redeemed. Sales are recorded net of returns. At the end of each reporting period, we record a reserve based on historical return rates and patterns which reverses sales that we expect to be returned in the following period. Revenue from the sale of Kohl's gift cards is recognized when the gift card is redeemed. Liabilities for performance obligations resulting from our rewards programs, return reserves, and unredeemed gift cards and merchandise return cards totaled $358 million as of August 4, 2018, $422 million as of February 3, 2018 and $343 million as of July 29, 2017.

Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales taxes.

Other Revenue

Other revenue consists primarily of revenue from our credit card operations, unused gift and merchandise return cards (breakage), and other non-merchandise revenues.

Revenue from credit card operations includes our share of the finance charges and interest fees, less charge-offs of the Kohl’s credit card pursuant to the Private Label Credit Card Program Agreement. Expenses related to our credit card operations are reported in SG&A.

Income from unused gift cards and merchandise return cards (breakage) is recorded in proportion and over the time period the cards are actually redeemed.

The following tables summarize the impact of adoption of the new standard by financial statement line item:

Three Months Ended July 29, 2017 (Dollars in Millions, Except per Share Data)	As Previously Reported		New Standard Adjustment		Adjusted
Net sales	$	4,144	$	3	$	4,147
Other revenue				248		248
Total revenue				251		4,395
Cost of merchandise sold		2,511		14		2,525
Gross margin		1,633
Operating expenses:
Selling, general and administrative		983		237		1,220
Depreciation and amortization		243		-		243
Operating income		407		-		407
Interest expense, net		75		-		75
Income before income taxes		332		-		332
Provision for income taxes		124		-		124
Net income	$	208	$	-	$	208
Net income per share:
Basic	$	1.24	$	-	$	1.24
Diluted	$	1.24	$	-	$	1.24

Six Months Ended July 29, 2017 (Dollars in Millions, Except per Share Data)	As Previously Reported		New Standard Adjustment			Adjusted
Net sales	$	7,987	$	(25	)	$	7,962
Other revenue				498			498
Total revenue				473			8,460
Cost of merchandise sold		4,956		(3	)		4,953
Gross margin		3,031
Operating expenses:
Selling, general and administrative		1,958		476			2,434
Depreciation and amortization		482		-			482
Operating income		591		-			591
Interest expense, net		150		-			150
Income before income taxes		441		-			441
Provision for income taxes		167		-			167
Net income	$	274	$	-		$	274
Net income per share:
Basic	$	1.62	$	-		$	1.62
Diluted	$	1.62	$	-		$	1.62

July 29, 2017 (Dollars in Millions)	As Previously Reported		New Standard Adjustment			Adjusted
Assets
Current assets:
Cash and cash equivalents	$	552	$	-		$	552
Merchandise inventories		3,853		-			3,853
Other		335		46			381
Total current assets		4,740		46			4,786
Property and equipment, net		8,068		-			8,068
Other assets		230		-			230
Total assets	$	13,038	$	46		$	13,084

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	1,370	$	-		$	1,370
Accrued liabilities		1,069		56			1,125
Income taxes payable		43		-			43
Current portion of capital lease and financing obligations		133		-			133
Total current liabilities		2,615		56			2,671
Long-term debt		2,796		-			2,796
Capital lease and financing obligations		1,637		-			1,637
Deferred income taxes		271		(3	)		268
Other long-term liabilities		691		-			691
Total shareholders’ equity		5,028		(7	)		5,021
Total liabilities and shareholders’ equity	$	13,038	$	46		$	13,084

February 3, 2018 (Dollars in Millions)	As Previously Reported		New Standard Adjustment			Adjusted
Assets
Current assets:
Cash and cash equivalents	$	1,308	$	-		$	1,308
Merchandise inventories		3,542		-			3,542
Other		481		49			530
Total current assets		5,331		49			5,380
Property and equipment, net		7,773		-			7,773
Other assets		236		-			236
Total assets	$	13,340	$	49		$	13,389

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	1,271	$	-		$	1,271
Accrued liabilities		1,155		58			1,213
Income taxes payable		99		-			99
Current portion of capital lease and financing obligations		126		-			126
Total current liabilities		2,651		58			2,709
Long-term debt		2,797		-			2,797
Capital lease and financing obligations		1,591		-			1,591
Deferred income taxes		213		(2	)		211
Other long-term liabilities		662		-			662
Total shareholders’ equity		5,426		(7	)		5,419
Total liabilities and shareholders’ equity	$	13,340	$	49		$	13,389

The adoption of the new standard had no impact on our basic or diluted earnings per share or our net cash provided by (used in) operating, financing, or investing activities.