Banana Republic 2005 Annual Report Download - page 50

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48 gap inc. 2005 annual report
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter
4.” SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material and requires that
these items be recognized as current period charges. SFAS 151 applies only to inventory costs incurred during periods beginning after the effective
date and also requires that the allocation of fixed production overhead to conversion costs be based on the normal capacity of the production facili-
ties. SFAS 151 is effective for fiscal 2006. We do not believe the adoption of SFAS 151 will have a material impact on our financial position, cash
flows, or results of operations.
In December 2004, the FASB issued SFAS 123(R) which is effective for us at the beginning of fiscal 2006. SFAS 123(R) requires an entity to recognize
compensation expense in an amount equal to the fair value of share-based payments granted to employees. We will apply the standard using the
modified prospective method, which requires compensation expense to be recorded for new and modified awards. For any unvested portion of
previously issued and outstanding awards compensation expense is required to be recorded based on the previously disclosed SFAS 123 methodol-
ogy and amounts. Prior periods presented are not required to be restated. We estimate the impact on our fiscal 2006 results of operations upon the
adoption of SFAS 123(R) to be about $45 million before tax. Because this estimate is based on assumptions including anticipated levels of new
awards to be granted, changes in stock price, forfeitures of awards and employee exercise behaviors, the actual impact of earnings may differ from
this estimate.
In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) 107, “Share-Based Payment.” SAB 107 provides guidance regarding the interaction
between SFAS 123(R) and certain SEC rules and regulations, including guidance related to valuation methods, the classification of compensation
expense, non-GAAP financial measures, the accounting for income tax effects of share-based payment arrangements, disclosures in Management’s
Discussion and Analysis subsequent to adoption of SFAS 123(R), and modifications of options prior to the adoption of SFAS 123(R). We are cur-
rently assessing the guidance in SAB 107 as part of our evaluation of the adoption of SFAS 123(R).
In March 2005, the FASB issued FASB Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143.” This Interpretation clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control
of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method
of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of
the liability can be reasonably estimated. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate
the fair value of an asset retirement obligation. We adopted FIN 47 in the fourth quarter of fiscal 2005 and this adoption did not have a material effect
on our financial position, cash flows or results of operations.
In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections - a Replacement of APB Opinion No. 20 and FASB Statement
No. 3.” SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, voluntary changes
in accounting principles were generally required to be recognized by way of a cumulative effect adjustment within net earnings during the period of
the change. SFAS 154 requires retrospective application to prior period financial statements, unless it is impracticable to determine either the period-
specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December
15, 2005; however, the statement does not change the transition provisions of any existing accounting pronouncements. We do not believe the
adoption of SFAS 154 will have a material effect on our financial position, cash flows or results of operations.
In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 05-06, “Determining the Amortization Period for Lease-
hold Improvements.” EITF 05-06 provides guidance for determining the amortization period used for leasehold improvements acquired in a business
combination or purchased after the inception of a lease, collectively referred to as subsequently acquired leasehold improvements. EITF 05-06 pro-
vides that the amortization period used for the subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired
leasehold improvements’ useful lives, or (b) a period that reflects renewals that are reasonably assured upon the acquisition or the purchase. EITF
05-06 is effective on a prospective basis for subsequently acquired leasehold improvements purchased or acquired in periods beginning after the
date of the FASB’s ratification, which was on June 29, 2005. We adopted EITF 05-06 in the third quarter of fiscal 2005 and this adoption did not have
a material effect on our financial position, cash flows or results of operations.