Banana Republic 2010 Annual Report Download - page 49

money are recorded at cost and are amortized over the corresponding lease term. Lease rights and key money are
recorded in other long-term assets in the Consolidated Balance Sheets, net of related amortization.
Insurance and Self-Insurance
We use a combination of insurance and self-insurance for a number of risk management activities including
workers’ compensation, general liability, and employee related health care benefits, a portion of which is paid by
our employees. Liabilities associated with these risks are estimated based primarily on actuarially-determined
amounts and accrued in part by considering historical claims experience, demographic factors, severity factors, and
other actuarial assumptions.
Asset Retirement Obligations
An asset retirement obligation represents a legal obligation associated with the retirement of a tangible long-lived
asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived
asset. The Company’s asset retirement obligations are primarily associated with leasehold improvements, which at
the end of a lease we are contractually obligated to remove in order to comply with the lease agreement. We
recognize asset retirement obligations at the inception of a lease with such conditions if a reasonable estimate of
fair value can be made. The asset retirement obligation is recorded in lease incentives and other long-term
liabilities in the Consolidated Balance Sheets and is subsequently adjusted for changes in estimated disposal costs.
The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived
asset and depreciated over its useful life.
Treasury Stock
We account for treasury stock under the cost method, using the first-in, first-out flow assumption, and include
treasury stock as a component of stockholders’ equity.
Revenue Recognition
We recognize revenue and the related cost of goods sold at the time the products are received by the customers.
Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register. For
sales from our online and catalog business, we estimate and defer revenue and the related product costs for
shipments that are in-transit to the customer. Revenue is recognized at the time we estimate the customer
receives the product, which is typically within a few days of shipment. Deferred revenue related to online and
catalog sales was $6 million and $5 million as of January 29, 2011 and January 30, 2010, respectively. Amounts
related to shipping and handling that are billed to customers are recorded in net sales, and the related costs are
recorded in cost of goods sold and occupancy expenses in the Consolidated Statements of Income. Revenues are
presented net of any taxes collected from customers and remitted to governmental authorities.
Allowances for estimated returns are recorded based on estimated margin using our historical return patterns.
We sell merchandise to franchisees under multi-year franchise agreements. We recognize revenue from sales to
franchisees at the time merchandise ownership is transferred to the franchisee. These sales are recorded in net
sales, and the related cost of goods sold is recorded in cost of goods sold and occupancy expenses in the
Consolidated Statements of Income. We also receive royalties from these franchisees based on a percentage of the
total merchandise purchased by the franchisee, net of any refunds or credits due them. Royalty revenue is
recognized when merchandise ownership is transferred to the franchisee and is recorded in net sales in the
Consolidated Statements of Income.
Classification of Expenses
Cost of goods sold and occupancy expenses include:
• the cost of merchandise;
• inventory shortage and valuation adjustments;
42 Gap Inc. Form 10-K