The Gap 2010 Annual Report Download - page 39

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We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or
assumptions we use to calculate our breakage income. However, if the actual rate of redemption for gift cards, gift
certificates, and credit vouchers increases significantly, our operating results could be adversely affected. We have
not made any material changes in the accounting methodology used to estimate breakage income in the past
three fiscal years other than noted above.
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 income, taxable income, and the mix of income 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 income, 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 being audited by various taxing authorities.
To the extent 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. 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.
We believe the judgments and estimates discussed above are reasonable. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Recent Accounting Pronouncements
See Item 8, Financial Statements and Supplementary Data, Note 1 of Notes to 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.
32 Gap Inc. Form 10-K