Kohl's 2012 Annual Report Download - page 50

KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-11
1. Business and Summary of Accounting Policies (continued)
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.
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:
2012 2011 2010
(In Millions)
Gross advertising costs............................................................................................ $1,163 $1,123 $1,017
Vendor allowances.................................................................................................. (170) (161)(148)
Net advertising costs............................................................................................... $ 993 $ 962 $ 869
Net advertising costs as a percent of net sales ........................................................ 5.2% 5.1% 4.7%