The Gap 2008 Annual Report Download - page 54

Merchandise Inventory
Effective January 29, 2006 (the beginning of fiscal 2006), we changed our inventory flow assumption from the
first-in, first-out (“FIFO”) method to the weighted-average cost method. The change in inventory accounting
method did not have a material impact on the fiscal 2006 Consolidated Financial Statements.
We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no
longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. We value inventory at the
lower of cost or market and record a reserve when future estimated selling price is less than cost. In addition, we
estimate and accrue shortage for the period between the last physical count and the balance sheet date.
Derivative Financial Instruments
We apply Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. (“SFAS”)
133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which establishes the accounting
and reporting standards for derivative instruments and hedging activities. We record all derivative instruments in
our Consolidated Balance Sheets at fair value. See Note 8 of Notes to the Consolidated Financial Statements.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets.
Estimated useful lives are as follows:
Category Term
Leasehold improvements Shorter of lease term or economic life, up to 15 years
Furniture and equipment Up to 15 years
Buildings 39 years
Software 3 to 7 years
The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with
any resulting gain or loss included in operating expenses in the Consolidated Statements of Earnings. Maintenance
and repairs are expensed as incurred.
Interest related to assets under construction is capitalized during the construction period up to the amount of
interest expense actually incurred.
Lease Rights and Key Money
Lease rights are costs incurred to acquire the right to lease a specific property. A majority of our lease rights are
related to premiums paid to landlords. Key money is the amount of funds paid to a landlord or tenant to acquire
the rights of tenancy under a commercial property lease for a property located in France. These rights can be
subsequently sold by us to a new tenant or the amount of key money paid can potentially be recovered from the
landlord should the landlord refuse to allow the automatic right of renewal to be exercised. Lease rights and key
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.
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.
42 Gap Inc. Form 10-K