Kohl's 2009 Annual Report Download - page 32

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Table of Contents
used in the retail industry due to its practicality. Under RIM, the valuation of inventories at cost and the resulting gross margins are calculated by applying a
cost-to-retail ratio to the retail value of the inventories. The use of RIM will result in inventories being valued at the lower of cost or market as markdowns are
currently taken as a reduction of the retail value of inventories.
Based on a review of historical clearance markdowns, current business trends, expected vendor funding and discontinued merchandise categories, an
adjustment to inventory is recorded to reflect additional markdowns which are estimated to be necessary to liquidate existing clearance inventories and reduce
inventories to the lower of cost or market. Management believes that our inventory valuation approximates the net realizable value of clearance inventory and
results in carrying inventory at the lower of cost or market.
Vendor Allowances
We record vendor allowances and discounts in the income statement when the purpose for which those monies were designated is fulfilled. Allowances
provided by vendors generally relate to profitability of inventory recently sold and, accordingly, are reflected as reductions to cost of merchandise sold as
negotiated. Vendor allowances received for advertising or fixture programs reduce our expense or expenditure for the related advertising or fixture program when
appropriate. Vendor allowances will fluctuate based on the amount of promotional and clearance markdowns necessary to liquidate the inventory. See also Note
1 to the consolidated financial statements, “Business and Summary of Accounting Policies.”
Insurance Reserve Estimates
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. 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. A change in claims frequency and severity of
claims from historical experience as well as changes in state statutes and the mix of states in which we operate could result in a change to the required reserve
levels. We retain the initial risk of $500,000 per occurrence under our workers’ compensation insurance policy and $250,000 per occurrence under our general
liability policy. We also have a lifetime medical payment limit of $1.5 million per plan participant.
Impairment of Assets and Closed Store Reserves
We have a significant investment in property and equipment and favorable lease rights. The related depreciation and amortization is computed using
estimated useful lives of up to 50 years. We review our long-lived assets held for use (including favorable lease rights, goodwill and trademarks) for
impairment whenever an event or change in circumstances, such as decisions to close a store, indicates the carrying value of the asset may not be recoverable.
We have historically not experienced any significant impairment of long-lived assets or closed store reserves. Decisions to close a store can also result in
accelerated depreciation over the revised useful life. When operations at a leased store are discontinued, a reserve is established for the discounted difference
between the rent and the expected sublease rental income. A significant change in cash flows, market valuation, demand for real estate or other factors, could
result in an increase or decrease in the reserve requirement or impairment charge.
Income Taxes
We pay income taxes based on tax statutes, regulations and case law of the various jurisdictions in which we operate. At any one time, multiple tax years
are subject to audit by the various taxing authorities. Our effective income tax rate was 37.6% in 2009, 37.9% in 2008 and 37.8% in 2007. The effective rate is
impacted by changes in law, location of new stores, level of earnings and the result of tax audits.
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