The Gap 2010 Annual Report Download - page 50

• freight charges;
• shipping and handling costs;
• costs associated with our sourcing operations, including payroll and related benefits;
• production costs;
• insurance costs related to merchandise; and
• rent, occupancy, depreciation, and amortization 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);
• marketing;
• general and administrative expenses;
• costs to design and develop our products;
• merchandise handling and receiving in distribution centers;
• distribution center general and administrative expenses;
• rent, occupancy, depreciation, and amortization for corporate facilities; and
• other expense (income).
The classification of expenses varies across the apparel retail industry. Accordingly, our cost of goods sold and
occupancy expenses and operating expenses may not be comparable to those of other companies. Merchandise
handling and receiving expenses and distribution center general and administrative expenses recorded in
operating expenses were $226 million, $237 million, and $253 million in fiscal 2010, 2009, and 2008, respectively.
Rent Expense
Minimum rent expense is 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 rent 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. A co-tenancy failure by
our landlord during the lease term may result in a reduction of future cash payments and is recorded as a
reduction to rent expense. Future payments for common area maintenance, insurance, real estate taxes, and other
occupancy costs 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 and/or rent increase based on
a change in the consumer price index or fair market value. 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 can be reasonably estimated.
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