Banana Republic 2011 Annual Report Download - page 46

Revenue Recognition
While revenue recognition for the Company does not involve significant judgment, it represents an important
accounting policy. We recognize revenue and the related cost of goods sold at the time the products are received
by the customers. For store sales, revenue is recognized when the customer receives and pays for the merchandise
at the register, primarily with either cash, debit card, or credit card. For sales from our online and catalog business,
revenue is recognized at the time we estimate the customer receives the merchandise. We record an allowance for
estimated returns based on our historical return patterns and various other assumptions that management
believes to be reasonable.
We sell merchandise to franchisees under multi-year franchise agreements. We recognize revenue from sales to
franchisees at the time merchandise ownership is transferred to the franchisee, which generally occurs when the
merchandise reaches the franchisee’s pre-designated turnover point. We also receive royalties from franchisees
based on a percentage of the total merchandise purchased by the franchisee, net of any refunds or credits due
them. Royalty revenue is recognized when merchandise ownership is transferred to the franchisee.
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 sales return reserve. However, if the actual rate of sales returns increases
significantly, our operating results could be adversely affected. We have not made any material changes in the
accounting methodology used to estimate future sales returns in the past three fiscal years.
Unredeemed Gift Cards, Gift Certificates, and Credit Vouchers
Upon issuance of a gift card, gift certificate, or credit voucher, a liability is established for its cash value. The liability
is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of these
instruments is not redeemed (“breakage”). We determine breakage income for gift cards, gift certificates, and
credit vouchers based on historical redemption patterns. Breakage income is recorded in other income, which is a
component of operating expenses in the Consolidated Statements of Income, when we can determine the portion
of the liability where redemption is remote, which is three years after the gift certificate or credit voucher is issued.
When breakage is recorded, a liability is recognized for any legal obligation to remit the unredeemed portion to
relevant jurisdictions. Our gift cards, gift certificates, and credit vouchers do not have expiration dates.
During the third quarter of fiscal 2009, we completed an analysis of historical redemption patterns for our gift
certificates and credit vouchers. Based on this analysis, additional data led us to conclude that three years after the
gift certificate or credit voucher is issued, we can determine the portion of the liability where redemption is
remote. As such, beginning in the third quarter of fiscal 2009, we changed our estimate of the elapsed time for
recording breakage income associated with unredeemed gift certificates and credit vouchers to three years from
our prior estimate of five years. This change in estimate did not have a material impact on the Consolidated
Statement of Income for fiscal 2009. For gift cards, we also recognize breakage income after three years.
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 or losses 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 or losses, changes in the expected outcome of audits, or changes in the deferred tax
valuation allowance.
32 Gap Inc. Form 10-K