The Gap 2008 Annual Report Download - page 56

• rent, occupancy, depreciation, amortization, common area maintenance, real estate taxes, and utilities related to
our store operations, distribution centers, and certain corporate functions.
Operating expenses include:
• payroll and related benefits (for our store operations, field management, distribution centers, and
corporate functions);
• advertising;
• general and administrative expenses;
• costs to design and develop our products;
• merchandise handling and receiving in distribution centers and stores;
• distribution center general and administrative expenses;
• rent, occupancy, depreciation, and amortization for corporate facilities; and
• other expense (income).
The classification of the expenses noted above varies across the retail industry.
Rent Expense
Minimum rental expenses are recognized over the term of the lease. We recognize minimum rent starting when
possession of the property is taken from the landlord, which normally includes a construction period prior to store
opening. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent
expense on a straight-line basis and record the difference between the recognized rental expense and the amounts
payable under the lease as a short-term or long-term deferred rent liability. We also receive tenant allowances upon
entering into certain store leases which are recorded as a short-term or long-term tenant allowance liability and
amortized as a reduction to rent expense over the term of the lease. Future payments for maintenance, insurance,
and taxes to which the Company is obligated are excluded from minimum lease payments.
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are
primarily based on a percentage of sales that are in excess of a predetermined level. These amounts are excluded
from minimum rent and are included in the determination of rent expense when it is probable that the expense
has been incurred and the amount is reasonably estimable.
Impairment of Long-Lived Assets
In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review the
carrying value of long-lived assets, including lease rights, key money, and intangible assets subject to amortization,
for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not
be recoverable. Events that result in an impairment review include the decision to close a store, corporate facility,
or distribution center, or a significant decrease in the operating performance of the long-lived asset. Assets are
considered impaired if the estimated undiscounted future cash flows of the long-lived assets are less than the
carrying value. For an impaired asset, we recognize a loss equal to the difference between the carrying value and
the asset’s estimated fair value. The fair value of the assets is based on discounted future cash flows of the assets
using a discount rate commensurate with the risk. Our estimate of future cash flows requires assumptions and
judgment, including forecasting future sales and expenses and estimating useful lives of the assets.
Goodwill and Trade Name
In connection with the acquisition of Athleta in September 2008, we allocated $99 million of the purchase price to
goodwill and $54 million to trade name. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,”
44 Gap Inc. Form 10-K