Banana Republic 2012 Annual Report Download - page 57

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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 we 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 recognition of 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;
• costs associated with our sourcing operations, including payroll and related benefits;
• production costs;
• insurance costs related to merchandise; and
• rent, occupancy, depreciation, and amortization related to our store operations, distribution centers, and certain
corporate functions.
Operating expenses include the following:
• payroll and related benefits (for our store operations, field management, distribution centers, and corporate functions);
• marketing;
• general and administrative expenses;
• costs to design and develop our products;
• merchandise handling and receiving in distribution centers;
• distribution center general and administrative expenses;
• rent, occupancy, depreciation, and amortization for our corporate facilities; and
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