Banana Republic 2009 Annual Report Download - page 62

Earnings per Share
Basic earnings per share are computed as net income divided by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share are computed as net income divided by the weighted-average
number of common shares outstanding for the period plus common stock equivalents. Common stock equivalents
consist of shares subject to stock options and other stock awards with exercise prices less than the average market
price of common stock for the period, to the extent their inclusion would be dilutive.
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 recorded in accumulated OCI 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 Income. The amounts of gains and losses included in the Consolidated Statements of
Income were a loss of $6 million, a loss of $13 million, and a gain of $4 million in fiscal 2009, 2008, and 2007,
respectively, and included a loss of $4 million, a gain of $51 million, and a gain of $25 million in fiscal 2009, 2008,
and 2007, respectively, for changes in the fair value and the settlements of certain derivative financial instruments.
Comprehensive Income
Comprehensive income is comprised of net income and other gains and losses affecting equity that are excluded
from net income. The components of OCI consist of foreign currency translation gains and losses and changes in
the fair value of derivative financial instruments, net of tax.
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. 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.
On February 4, 2007, the Company adopted the provisions of FASB Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (currently FASB ASC 740). The
cumulative effects of the adoption of FIN 48 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 interest related
to unrecognized tax benefits in interest expense and penalties related to unrecognized tax benefits in operating
expenses in the Consolidated Statements of Income. See Note 12 of Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements
In January 2010, the FASB issued an accounting standards update to amend and clarify existing guidance related to fair
value measurements and disclosures. This guidance adds new requirements for disclosures related to transfers into
and out of level 1 and level 2 and requires separate disclosure of purchases, sales, issuances, and settlements related to
level 3 measurements. It also clarifies guidance around disaggregation and disclosures of inputs and valuation
techniques used to measure fair value. The update is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the requirement to disclose purchases, sales, issuances, and settlements related to level
3 measurements, which will be effective for fiscal years beginning after December 15, 2010. We will adopt the disclosure
requirements in the first quarter of fiscal 2010.
46 Gap Inc. Form 10-K