The Gap 2008 Annual Report Download - page 45

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which is a component of operating expenses in the Consolidated Statements of Earnings when it can be
determined that the likelihood of redemption is remote and there is no legal obligation to remit the unredeemed
portion to relevant jurisdictions. During fiscal 2006, we changed our estimate of the elapsed time for recording
breakage income associated with unredeemed gift cards to three years from our prior estimate of five years and, as
a result, recorded $31 million of other income in fiscal 2006. For gift certificates and vouchers, we recognize
breakage income after five years.
Income Taxes
We record a valuation allowance against our deferred tax assets arising from certain net operating losses when it
is more likely than not that some portion or all of such net operating losses will not be realized. In determining the
need for a valuation allowance, management is required to make assumptions and to apply judgment, including
forecasting future earnings, taxable income, and the mix of earnings in the jurisdictions in which we operate. Our
effective tax rate in a given financial statement period may also be materially impacted by changes in the mix and
level of earnings, changes in the expected outcome of audits or changes in the deferred tax valuation allowance.
At any point in time, many tax years are subject to or in the process of audit by various taxing authorities. To the
extent that our estimates of settlements change or the final tax outcome of these matters is different from the
amounts recorded, such differences will impact the income tax provision in the period in which such
determinations are made. Our income tax expense includes changes in our estimated liability for exposures
associated with our various tax filing positions, in accordance with FIN 48. Determining the income tax expense for
these potential assessments requires management to make assumptions that are subject to factors such as
proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations, and
resolution of tax audits.
Recent Accounting Pronouncements
See Note 1 of Notes to the Consolidated Financial Statements for recent accounting pronouncements, including
the expected dates of adoption and estimated effects on our financial position, statement of cash flows and
results of operations.
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