Banana Republic 2005 Annual Report Download - page 31

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services agreement both for cause and for convenience (subject, in the case of termination for convenience, to our payment of a termination fee).
IBM also has certain termination rights in the event of our material breach of the agreement and failure to cure.
Amounts Reflected in Consolidated Balance Sheets
We have other commercial commitments, not reflected in the table above, that were incurred in the normal course of business to support our op-
erations, including standby letters of credit, surety bonds and bank guarantees. Amounts outstanding at January 28, 2006 relating to our standby
letters of credit, surety bonds and bank guarantees were $43 million (of which $28 million was issued under the revolving credit facility lines), $54
million and $3 million, respectively.
We have other long-term liabilities reflected in the Consolidated Balance Sheets, including deferred income taxes. The payment obligations associ-
ated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. Therefore, the timing of these payments
cannot be determined, except for amounts estimated to be paid in fiscal 2006 that are included in current liabilities.
Other Cash Obligations Not Reflected in Consolidated Balance Sheets
The majority of our contractual obligations are made up of operating leases for our stores. Commitments for operating leases represent future mini-
mum lease payments under non-cancelable leases. In accordance with accounting principles generally accepted in the United States, our operating
leases are not recorded in the Consolidated Balance Sheets; however, the minimum lease payments related to these leases are disclosed in Note D
to the accompanying Consolidated Financial Statements.
We have applied the measurement and disclosure provisions of FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Re-
quirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,” to our agreements that contain guarantee and certain
indemnification clauses. FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of
the obligation it assumes under the guarantee. As of January 28, 2006, we did not have any material guarantees that were issued or modified sub-
sequent to December 31, 2002.
However, we are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters.
These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements and various
other agreements. Under these contracts we may provide certain routine indemnifications relating to representations and warranties (e.g., owner-
ship of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not
be explicitly defined.
Generally, the maximum obligation under such indemnifications is not explicitly stated and, as a result, the overall amount of these obligations cannot
be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss
in any of these matters, the loss would not have a material effect on our financial condition or results of operations.
As party to a reinsurance pool for workers’ compensation, general liability and automobile liability, we have guarantees with a maximum exposure
of $76 million, of which $10 million has already been cash collateralized. We are currently in the process of winding down our participation in the
reinsurance pool. Our maximum exposure and cash collateralized balance are expected to decrease in the future as our participation in the reinsur-
ance pool diminishes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires man-
agement to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the
application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements
of a large, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances
and the receipt of new or better information.