The Gap 2008 Annual Report Download - page 55

Asset Retirement Obligations
We account for asset retirement obligations in accordance with SFAS 143, “Accounting for Asset Retirement
Obligations,” and the FASB Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143.” 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 fair value. 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 a FIFO 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 in
accordance with the provisions of Staff Accounting Bulletin No. (“SAB”) 101, “Revenue Recognition in Financial
Statements,” as amended by SAB 104, “Revenue Recognition.” 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 was $4 million as of January 31, 2009 and February 2, 2008. Amounts related to
shipping and handling that are billed to customers are reflected in net sales and the related costs are reflected in
cost of goods sold and occupancy expenses in the Consolidated Statements of Earnings. Revenues are presented
net of any taxes collected from customers and remitted to governmental authorities.
Allowances for estimated returns are recorded based on estimated gross profit 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 classified as net
sales and the related cost of goods sold is classified as cost of goods sold and occupancy expenses in the
Consolidated Statements of Earnings. 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 classified as net sales in the
Consolidated Statements of Earnings.
Classification of Expenses
Cost of goods sold and occupancy expenses include:
• the cost of merchandise;
• inventory shortage and valuation adjustments;
• freight charges;
• costs associated with our sourcing operations, including payroll and related benefits;
• production costs;
• insurance costs related to merchandise; and
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