The Gap 2008 Annual Report Download - page 58

logo of one of our brands and can be used at any of our U.S. or Canadian store locations and online. The co-branded
credit card is a VISA credit card bearing the logo of one of our brands and can be used any place that accepts VISA
credit cards. A third-party financing company is the sole owner of the accounts issued under the Credit Card
programs and this third-party absorbs the losses associated with non-payment by the cardholder and a portion of
any fraudulent usage of the accounts. We receive cash from the third-party financing company in accordance with
the Agreements and based on usage of the Credit Cards. We also receive cash from Visa U.S.A. Inc. in accordance
with the Agreements and based on specified transactional fees. We recognize income when the amounts are fixed
or determinable and collectibility is reasonably assured which is generally the time the actual usage of the Credit
Cards or specified transaction occurs. The income is classified as a component of operating expenses in our
Consolidated Statements of Earnings.
The Credit Card programs offer incentives to cardholders in the form of reward certificates upon the cumulative
purchase of an established amount. The cost associated with reward certificates is accrued as the rewards are
earned by the cardholder and is classified as cost of goods sold and occupancy expenses in the Consolidated
Statements of Earnings.
Foreign Currency Translation
Our international subsidiaries primarily use local currencies as the functional currency and translate their assets
and liabilities at the current rate of exchange in effect at the balance sheet date. Revenue and expenses from their
operations are translated using the monthly average exchange rates in effect for the period in which the
transactions occur. The resulting gains and losses from translation are classified as accumulated other
comprehensive earnings in the Consolidated Statements of Stockholders’ Equity. Transaction gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional
currency are included in the Consolidated Statements of Earnings. The amounts of gains and losses included in the
Consolidated Statements of Earnings were a loss of $13 million, a gain of $4 million, and a loss of $4 million in fiscal
2008, 2007, and 2006, respectively, and included a gain of $51 million, a gain of $25 million, and a loss of $15 million
in fiscal 2008, 2007, and 2006, respectively, for changes in the fair value and the settlements of certain derivative
financial instruments.
Comprehensive Earnings
Comprehensive earnings is comprised of net earnings and other gains and losses affecting equity that are
excluded from net earnings. The components of other comprehensive earnings consist of foreign currency
translation gains and losses and changes in the fair value of derivative financial instruments, net of tax.
Income Taxes
Income taxes are accounted for in accordance with SFAS 109, “Accounting for Income Taxes.” Deferred income
taxes are recorded for temporary differences between the tax basis of assets and liabilities and their reported
amounts in the Consolidated Financial Statements. A valuation allowance is established against deferred tax
assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Our income tax expense includes changes in our estimated liability for exposures associated with our various tax
filing positions in accordance with FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB
No. 109.” 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 than
the amounts recorded, such differences will impact the income tax provision in the period in which such
determinations are made.
On February 4, 2007, the Company adopted FIN 48 which prescribes a recognition threshold that a tax position is
required to meet before being recognized in the financial statements and provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition issues.
The cumulative effects of applying this interpretation have been recorded as a decrease of $4 million to opening
retained earnings, an increase of $85 million to short-term and long-term income tax assets and an increase of
$89 million to short-term and long-term income tax liabilities as of February 4, 2007. The Company recognizes
46 Gap Inc. Form 10-K