Banana Republic 2005 Annual Report Download - page 46

G A P I N C . F I N A N C I A L S 2 0 0 5
44 gap inc. 2005 annual report
Property and Equipment
Property and equipment are stated at cost and consists of the following:
The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain
or loss included in net earnings. Maintenance and repairs are charged to expenses as incurred.
Interest costs related to assets under construction are capitalized during the construction period. Interest of $11 million, $10 million and $9 million
was capitalized in fiscal 2005, 2004 and 2003, respectively.
Lease Rights and Key Money
Lease rights are costs incurred to acquire the right to lease a specific property. A majority of our lease rights are related to premiums paid to landlords.
Lease rights are recorded at cost and are amortized over the corresponding lease term. The gross carrying value and accumulated amortization of
lease rights was $108 million and $63 million, respectively, as of January 28, 2006, and $114 million and $68 million, respectively, as of January 29,
2005 and are included in other assets on the Consolidated Balance Sheets. The amortization expense associated with lease rights was $6 million, $9
million and $9 million in fiscal 2005, 2004 and 2003, respectively.
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a property lo-
cated in France. These rights can be subsequently sold by us to a new tenant or the amount of key money paid can be recovered from the landlord
should the landlord refuse to allow the automatic right of renewal to be exercised. Prior to fiscal 2005, we considered key money an indefinite life in-
tangible asset that was not amortized. In fiscal 2005, we determined that key money should more appropriately be amortized over the corresponding
lease term and have recorded $50 million in cost of goods sold and occupancy expenses representing the cumulative impact of amortizing our key
money balance from fiscal 1995 through the end of fiscal 2005. The gross carrying value and accumulated amortization of key money was $62 million
and $50 million, respectively, as of January 28, 2006 and are included in other assets on the Consolidated Balance Sheets. This accounting change did
not have a material impact on our results of operations or financial position for any of the comparable periods presented or prior periods.
Rent Expense
Minimum rental expenses are recognized over the term of the lease. We recognize minimum rent starting when possession of the property is taken
from the landlord, which normally includes a construction period prior to store opening. When a lease contains a predetermined fixed escalation of
the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rental expense
and the amounts payable under the lease as deferred rent liability. Deferred rent liability is included in lease incentives and other liabilities on the
Consolidated Balance Sheets. We also receive tenant allowances, with the short-term portion included in accrued expenses and other current liabil-
Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful
lives are as follows:
Category Term
Leasehold improvements Shorter of lease term or economic life, ranging from 1 to 15 years
Furniture and equipment Up to 10 years
Buildings 39 years
Software 3 to 7 years
($ in millions) January 28, 2006 January 29, 2005
Leasehold improvements $ 2,742 $ 2,636
Furniture and equipment 2,532 2,847
Land and buildings 1,008 1,038
Software 596 417
Construction-in-progress 80 231
Property and equipment, gross 6,958 7,169
Less: Accumulated depreciation and amortization (3,712) (3,793)
Property and equipment, net $ 3,246 $ 3,376