Banana Republic 2010 Annual Report Download - page 36

Other Cash Obligations Not Reflected in the Consolidated Balance Sheet (Off-Balance Sheet Arrangements)
The majority of our contractual obligations are made up of operating leases for our stores. Commitments for
operating leases represent future minimum lease payments under non-cancelable leases. In accordance with
accounting principles generally accepted in the United States of America, our operating leases are not recorded in
the Consolidated Balance Sheet; however, the minimum lease payments related to these leases are disclosed in
Note 9 of Notes to Consolidated Financial Statements.
Purchase obligations include our non-exclusive services agreement with IBM to operate certain aspects of our
information technology structure. The services agreement expires in March 2016, and we have the right to renew it
for up to three additional years. We have various options to terminate the agreement, and we pay IBM under a
combination of fixed and variable charges, with the variable charges fluctuating based on our actual consumption
of services. IBM also has certain termination rights in the event of our material breach of the agreement and
failure to cure. Based on the current projection of service needs, we expect to pay approximately $486 million to
IBM over the remaining term of the contract.
We have assigned certain store and corporate facility leases to third parties as of January 29, 2011. Under these
arrangements, we are secondarily liable and have guaranteed the lease payments of the new lessees for the
remaining portion of our original lease obligation. The maximum potential amount of future lease payments we
could be required to make is approximately $21 million as of January 29, 2011. There was no liability recorded for the
guarantees as of January 29, 2011.
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., ownership 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 $14 million. We are currently in the process of winding down our
participation in the reinsurance pool.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the
United States of America requires management 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.
Our significant accounting policies can be found in Item 8, Financial Statements and Supplementary Data, Note 1
of Notes to Consolidated Financial Statements. The policies and estimates discussed below include the financial
statement elements that are either judgmental or involve the selection or application of alternative accounting
policies and are material to our financial statements. Management has discussed the development and selection
of these critical accounting policies and estimates with the Audit and Finance Committee of our Board of Directors,
which has reviewed our disclosure relating to critical accounting policies and estimates in this annual report on
Form 10-K.
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