Banana Republic 2007 Annual Report Download - page 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 52 Weeks Ended February 2, 2008 (Fiscal 2007), 53 Weeks Ended February 3, 2007 (Fiscal 2006)
and 52 Weeks Ended January 28, 2006 (Fiscal 2005)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Gap, Inc. (the “Company,” “we,” “our”), a Delaware Corporation, is a specialty retailer selling casual apparel,
accessories and personal care products for men, women and children under a variety of brand names including
Gap, Banana Republic, Old Navy, and Piperlime. We operate stores in the United States, Canada, the United
Kingdom, France, Ireland, and Japan, while our independent third-party franchisees own and operate stores in
Asia, Europe and the Middle East under the Gap and Banana Republic brand names. Our U.S. customers can
shop online at www.gap.com, www.bananarepublic.com, www.oldnavy.com, and www.piperlime.com.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All
intercompany transactions and balances have been eliminated.
Fiscal Year
Our fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2007 and 2005
consisted of 52 weeks. Fiscal 2006 consisted of 53 weeks, and the additional week contributed approximately
$200 million of net sales. Net sales and operating expenses for the last fiscal month of fiscal 2006, which was a
five-week period, were accounted for as a regular five-week month.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents, Short-Term Investments, and Restricted Cash
Amounts in-transit from banks for customer credit card, debit card and electronic benefit transfer transactions that
process in less than seven days are classified as cash and cash equivalents in our Consolidated Balance Sheets.
The banks process the majority of these amounts within one to two business days.
All highly liquid investments with maturities of 91 days or less at the date of purchase are classified as cash
equivalents. Highly liquid investments with maturities greater than 91 days and less than one year at the date of
purchase are classified as short-term investments. Our short-term and cash equivalent investments are classified
as held-to-maturity based on our positive intent and ability to hold the securities to maturity. Primarily all securities
held are U.S. government and agency securities, domestic commercial paper, and bank securities and are stated
at amortized cost, which approximates fair market value due to the short maturities of these instruments. Income
related to these securities is reported as a component of interest income in our Consolidated Statements of
Earnings.
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Merchandise Inventory
In fiscal 2005, we implemented a new inventory system and effective January 29, 2006 (the beginning of fiscal
2006), we changed our inventory flow assumption from the first-in, first-out (“FIFO”) method to the weighted-
average cost method. The change in inventory accounting method did not have a material impact on the fiscal
2006 Consolidated Financial Statements and, because the effect on prior periods presented is not material, they
have not been restated as would be required by Statement of Financial Accounting Standards No. (“SFAS”) 154,
“Accounting Changes and Error Corrections.”
We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no
longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. We value inventory at the
lower of cost or market and record a reserve when future estimated selling price is less than cost. In addition, we
estimate and accrue shortage for the period between the last physical count and the balance sheet date. Our
shortage estimate can be affected by changes in merchandise mix and changes in actual shortage trends.
Derivative Financial Instruments
We apply SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which
establishes the accounting and reporting standards for derivative instruments and hedging activities. We record
all derivative instruments in our Consolidated Balance Sheets at fair value. See Note 7 of Notes to the
Consolidated Financial Statements.
Property and Equipment
Depreciation is 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, up to 15 years
Furniture and equipment . . . . . . . . . . . . . Up to 15 years
Buildings .......................... 39years
Software .......................... 3to7years
The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with
any resulting gain or loss included in operating expenses in the accompanying Consolidated Statements of
Earnings. Maintenance and repairs are charged to expenses as incurred.
Interest costs related to assets under construction are capitalized during the construction period.
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. 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 located in France. These rights can be
subsequently sold by us to a new tenant or the amount of key money paid can potentially be recovered from the
landlord should the landlord refuse to allow the automatic right of renewal to be exercised. Lease rights and key
money are recorded at cost and are amortized over the corresponding lease term.
Prior to fiscal 2005, we considered key money an indefinite life intangible asset that was not amortized. In fiscal 2005,
we determined that key money should more appropriately be amortized over the corresponding lease term and
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. 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.
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