Banana Republic 2005 Annual Report Download - page 47

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ities and the long-term portion included in lease incentives and other liabilities on the Consolidated Balance Sheets. Tenant allowances are amortized
as a reduction to rent expense in the Statements of Operations over the term of the lease.
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of sales
that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of rent expense
when it is probable that the expense has been incurred and the amount is reasonably estimable.
Long-lived Assets, Impairment and Excess Facilities
In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review the carrying value of long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Events that result
in an impairment review include decisions to close a store, headquarter facility or distribution center, or a significant decrease in the operating per-
formance of the long-lived asset. For our store assets that are identified as potentially being impaired, if the undiscounted future cash flows of the
long-lived assets are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the asset’s fair value.
The fair value of the store’s long-lived assets is estimated using the discounted future cash flows of the assets based upon a rate that approximates
our weighted-average cost of capital. Our estimate of future cash flows is based upon our experience, knowledge and third-party advice or market
data. However, these estimates can be affected by factors such as future store profitability, real estate demand and economic conditions that can be
difficult to predict. We recorded a charge for the impairment of store assets of $3 million, $5 million and $23 million during fiscal 2005, 2004 and
2003, respectively.
The decision to close or sublease a store, distribution center or headquarter facility space can result in accelerated depreciation over the revised
estimated useful life of the long-lived asset. In addition, we record a charge and corresponding sublease loss reserve for the net present value of the
difference between the contract rent obligations and the rate at which we expect to be able to sublease the properties. We estimate the reserve
based on the status of our efforts to lease vacant office space, including a review of real estate market conditions, our projections for sublease
income and sublease commencement assumptions. Most store closures occur upon the lease expiration. See Note E.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of payroll and related benefits, deferred rent liability and other current liabilities. Accrued payroll
and related benefits were $225 million at January 28, 2006 and $275 million at January 29, 2005.
Insurance/Self-Insurance
We use a combination of insurance and self-insurance for a number of risk management activities including workers’ compensation, general liability,
automobile liability and employee-related health care benefits, a portion of which is paid by our employees. Liabilities associated with these risks are
estimated based on actuarially determined amounts, and accrued in part by considering historical claims experience, demographic factors, severity
factors and other actuarial assumptions.
Comprehensive Earnings
Our comprehensive earnings is comprised of net earnings, adjusted for foreign currency translation and fluctuations in fair market value of financial
instruments related to foreign currency hedging activities, net of tax.
Foreign Currency Translation
Our international subsidiaries use local currencies as the functional currency and translate their assets and liabilities at the current rate of exchange
in effect at the balance sheet date. Revenue and expenses from these operations are translated using the monthly average exchange rates in effect
for the period in which the items occur. The resulting gains and losses from translation are included as accumulated other comprehensive earnings
in the Consolidated Statements of Shareholders’ Equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the local functional currency are included in the Consolidated Statements of Operations and were a loss of
approximately $13 million and $3 million in fiscal 2005 and 2003, respectively, and a gain of approximately $1 million in fiscal 2004. Cumulative cur-
rency translation adjustments in accumulated other comprehensive earnings were $54 million, $79 million and $50 million at January 28, 2006,
January 29, 2005 and January 31, 2004, respectively.