Banana Republic 2011 Annual Report Download - page 58

Insurance and Self-Insurance
We use a combination of insurance and self-insurance for a number of risk management activities including
workers’ compensation, general liability, and employee-related health care benefits, a portion of which is paid by
our employees. Undiscounted liabilities associated with these risks are estimated based primarily on actuarially-
determined amounts and are accrued in part by considering historical claims experience, demographic factors,
severity factors, and other actuarial assumptions.
Asset Retirement Obligations
An asset retirement obligation represents a legal obligation associated with the retirement of a tangible long-lived
asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived
asset. The Company’s asset retirement obligations are primarily associated with leasehold improvements that we
are contractually obligated to remove at the end of a lease to comply with the lease agreement. We recognize
asset retirement obligations at the inception of a lease with such conditions if a reasonable estimate of fair value
can be made. The asset retirement obligation is recorded in accrued expenses and other current liabilities and
lease incentives and other long-term liabilities in the Consolidated Balance Sheets and is subsequently adjusted for
changes in estimated asset retirement obligations. The associated estimated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset and depreciated over its useful life.
Treasury Stock
We account for treasury stock under the cost method, using the first-in, first-out flow assumption, and include
treasury stock as a component of stockholders’ equity.
Revenue Recognition
We recognize revenue and the related cost of goods sold at the time the products are received by the customers.
Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register. For
sales through online and catalog orders, we estimate and defer revenue and the related product costs for
shipments that are in-transit to the customer. Revenue is recognized at the time we estimate the customer
receives the product, which is typically within a few days of shipment. Amounts related to shipping and handling
that are billed to customers are recorded in net sales, and the related costs are recorded in cost of goods sold and
occupancy expenses in the Consolidated Statements of Income. Revenues are presented net of estimated returns
and any taxes collected from customers and remitted to governmental authorities. Allowances for estimated
returns are recorded based on estimated margin using our historical return patterns.
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. These sales are recorded in net sales, and the
related cost of goods sold is recorded in cost of goods sold and occupancy expenses in the Consolidated
Statements of Income. 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 and is recorded in net sales in the Consolidated
Statements of Income.
Classification of Expenses
Cost of goods sold and occupancy expenses include the following:
• the cost of merchandise;
• inventory shortage and valuation adjustments;
• freight charges;
• shipping and handling costs;
44 Gap Inc. Form 10-K