Abercrombie & Fitch 2010 Annual Report Download - page 69

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Table of Contents
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
technology; outside services such as legal and consulting; relocation, as well as recruiting; samples and travel expenses.
OTHER OPERATING INCOME, NET
Other operating income consists primarily of: income related to gift card balances whose likelihood of redemption has been
determined to be remote; gains and losses on foreign currency transactions; and the net impact of the change in valuation associated
with the other-than-temporary gains and losses on auction rate securities. See Note 5, "Investments."
WEBSITE AND ADVERTISING COSTS
Website and advertising costs are expensed as incurred as a component of Stores and Distribution Expense on the Consolidated
Statements of Operations and Comprehensive Income.
LEASES
The Company leases property for its stores under operating leases. Lease agreements may contain construction allowances, rent
escalation clauses and/or contingent rent provisions.
For construction allowances, the Company records a deferred lease credit on the Consolidated Balance Sheets and amortizes the
deferred lease credit as a reduction of rent expense on the Consolidated Statements of Operations and Comprehensive Income over the
terms of the leases. For scheduled rent escalation clauses during the lease terms, the Company records minimum rental expenses on a
straight-line basis over the terms of the leases on the Consolidated Statements of Operations and Comprehensive Income. The term of
the lease over which the Company amortizes construction allowances and minimum rental expenses on a straight-line basis begins on
the date of initial possession.
Certain leases provide for contingent rents, which are determined as a percentage of gross sales. The Company records a
contingent rent liability in accrued expenses on the Consolidated Balance Sheets and the corresponding rent expense on the
Consolidated Statements of Operations and Comprehensive Income when management determines that achieving the specified levels
during the fiscal year is probable.
Under GAAP, the Company is considered to be the owner of certain store locations, primarily related to flagships, in which the
Company is deemed to be involved in structural construction and has substantially all of the risks of ownership during construction of
the leased property. Accordingly, the Company records a construction-in-progress asset which is included in Property and Equipment,
Net and a related lease financing obligation which is included in Long-Term Debt on the Consolidated Balance Sheets. Once
construction is complete, the Company determines if the asset qualifies for sale-leaseback accounting treatment. If the arrangement
does not qualify for sale-leaseback treatment, the Company continues to amortize the obligation over the lease term and depreciates
the asset over its useful life.
STORE PRE-OPENING EXPENSES
Pre-opening expenses related to new store openings are charged to operations as incurred.
66