Banana Republic 2011 Annual Report Download - page 61

leased premises, we record a charge and corresponding lease loss reserve equal to the incremental amount of the
present value of the net future obligation greater than the remaining rent-related deferred balances. The net
future obligation is determined as the remaining contractual rent obligations less the amount for which we are
able to or expect to be able to sublease the properties. We estimate the amount for which we expect to be able to
sublease the properties based on the status of our efforts to sublease vacant office space and stores, a review of
real estate market conditions, our projections for sublease income, and our assumptions regarding sublease
commencement. Lease losses are recorded in operating expenses in the Consolidated Statements of Income.
Pre-Opening Costs
Pre-opening and start-up activity costs, which include rent and occupancy, supplies, advertising, and payroll
expenses incurred prior to the opening of a new store or other facility, are expensed in the period in which they
occur.
Advertising
Costs associated with the production of advertising, such as writing, copy, printing, and other costs, are expensed
as incurred. Costs associated with communicating advertising that has been produced, such as television and
magazine costs, are expensed when the advertising event takes place. Advertising expense was $548 million,
$516 million, and $513 million in fiscal 2011, 2010, and 2009, respectively, and is recorded in operating expenses in
the Consolidated Statements of Income.
Prepaid catalog expense consists of the cost to prepare, print, and distribute catalogs. Such costs are amortized
over their expected period of future benefit, which is approximately one to five months.
Share-Based Compensation
Share-based compensation expense for stock options and other stock awards is determined based on the grant-
date fair value. We use the Black-Scholes-Merton option-pricing model to determine the fair value of stock options,
which requires the input of subjective assumptions regarding the expected term, expected volatility, dividend
yield, and risk-free interest rate. For units granted whereby one share of common stock is issued for each unit as
the unit vests (“Stock Units”), the fair value is determined based on the Company’s stock price on the date of grant
less future expected dividends during the vesting period. For stock options and Stock Units, we recognize share-
based compensation cost net of estimated forfeitures and revise the estimates in subsequent periods if actual
forfeitures differ from the estimates. We estimate the forfeiture rate based on historical experience as well as
expected future behavior. Share-based compensation expense is recorded primarily in operating expenses in the
Consolidated Statements of Income over the period during which the employee is required to provide service in
exchange for stock options and Stock Units.
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. Based on our historical information, three years after the gift card, gift
certificate, or credit voucher is issued, we can determine the portion of the liability where redemption is remote.
When breakage is recorded, a liability is recognized for any legal obligation to remit the unredeemed portion of gift
certificates and credit vouchers to relevant jurisdictions. Our gift cards, gift certificates, and credit vouchers do not
have expiration dates. 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.
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