Kohl's 2014 Annual Report Download - page 29

Table of Contents
could also have an impact on estimated reserves. Historically, our actuarial estimates have not been materially different from actual results.
We are fully self-insured for employee-related health care benefits, a portion of which is paid by our associates. We use a third-party actuary to estimate
the liability for incurred, but not reported, health care claims. This estimate uses historical claims information as well as estimated health care trends. As of
January 31, 2015, we had recorded approximately $14 million for medical, pharmacy and dental claims which were incurred in 2014 and expected to be paid
in 2015. Historically, our actuarial estimates have not been materially different from actual results.
Impairment of Assets
As of January 31, 2015, our investment in buildings and improvements, before accumulated depreciation, was $10 billion. We review these buildings
and improvements for impairment when an event or changes in circumstances, such as decisions to close a store or significant operating losses, indicate the
carrying value of the asset may not be recoverable.
For operating stores, a potential impairment has occurred if the fair value of a specific store is less than the net carrying amount of the assets. If required,
we would record an impairment loss equal to the amount by which the carrying amount of the asset exceeds its fair value.
Identifying impaired assets and quantifying the related impairment loss, if any, requires significant estimates by management. The most significant of
these estimates is the cash flow expected to result from the use and eventual disposition of the asset. When determining the stream of projected future cash
flows associated with an individual store, management estimates future store performance including sales growth rates, gross margin and controllable
expenses, such as store payroll and occupancy expense. Projected cash flows must be estimated for future periods throughout the remaining life of the
property, which may be as many as 40 years in the future. The accuracy of these estimates will be impacted by a number of factors including general
economic conditions, changes in competitive landscape and our ability to effectively manage the operations of the store.
We have not historically experienced any significant impairment of long-lived assets. Additionally, impairment of an individual building and related
improvements, net of accumulated depreciation, would not generally be material to our financial results.
Income Taxes
We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal and state filings by considering
all relevant facts, circumstances and information available to us. If we believe it is more likely than not that our position will be sustained, we recognize a
benefit at the largest amount which we believe is cumulatively greater than 50% likely to be realized. Our unrecognized tax benefit, excluding accrued
interest and penalties, was $123 million as of January 31, 2015.
Unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various
income tax audits and our particular facts and circumstances. Also, as audits are completed or statutes of limitations lapse, it may be necessary to record
adjustments to our taxes payable, deferred tax assets, tax reserves or income tax expense. Although we believe we have adequately reserved for our uncertain
tax positions, no assurance can be given that the final tax outcome of these matters will not be different.
Operating Leases
As of January 31, 2015, 749 of our 1,162 retail stores were subject to either a ground or building lease. Accounting for leased properties requires
compliance with technical accounting rules and significant judgment by management. Application of these accounting rules and assumptions made by
management will determine whether we are considered the owner for accounting purposes or whether the lease is accounted for as a capital or operating lease
in accordance with ASC 840, “Leases.”
If we are considered the owner for accounting purposes or the lease is considered a capital lease, we record the property and a related financing or
capital lease obligation on our balance sheet. The asset is then depreciated over its expected lease term. Rent payments for these properties are recognized as
interest expense and a reduction of the financing or capital lease obligation.
If the lease is considered an operating lease, it is not recorded on our balance sheet and rent expense is recognized on a straight-line basis over the
expected lease term.
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