Banana Republic 2012 Annual Report Download - page 58

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• other expenses (income).
The classification of expenses varies across the apparel retail industry. Accordingly, our cost of goods sold and occupancy
expenses and operating expenses may not be comparable to those of other companies. Merchandise handling and
receiving expenses and distribution center general and administrative expenses recorded in operating expenses were
$231 million, $224 million, and $226 million in fiscal 2012, 2011, and 2010, respectively.
Rent Expense
Minimum rent expense is recognized over the term of the lease. We recognize minimum rent starting when possession of
the property is taken from the landlord, which normally includes a construction period prior to the store opening. When a
lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-
line basis and record the difference between the recognized rent expense and the amounts payable under the lease as a
short-term or long-term deferred rent liability. We also receive tenant allowances upon entering into certain leases, which
are recorded as a short-term or long-term tenant allowance liability and amortized using the straight-line method as a
reduction to rent expense over the term of the lease. A co-tenancy failure by our landlord during the lease term may result
in a reduction of the required cash payments made to the landlord for the duration of the co-tenancy failure and is
recorded as a reduction to rent expense as the reduced cash payments are made. Future payments for common area
maintenance, insurance, real estate taxes, and other occupancy costs the Company is obligated to make are excluded
from minimum lease payments.
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily
based on a percentage of sales that are in excess of a predetermined level and/or rent increase based on a change in the
consumer price index or fair market value. These amounts are excluded from minimum rent and are included in the
determination of rent expense when it is probable that the expense has been incurred and the amount can be reasonably
estimated.
Impairment of Long-Lived Assets
We review the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Events that result in an impairment review include the
decision to close a store, corporate facility, or distribution center, or a significant decrease in the operating performance of
the long-lived asset. Long-lived assets are considered impaired if the estimated undiscounted future cash flows of the
asset or asset group are less than the carrying amount. For impaired assets, we recognize a loss equal to the difference
between the carrying amount of the asset or asset group and its estimated fair value, which is recorded in operating
expenses in the Consolidated Statements of Income. The estimated fair value of the asset or asset group is based on
discounted future cash flows of the asset or asset group using a discount rate commensurate with the risk. The asset
group is defined as the lowest level for which identifiable cash flows are available, which for retail stores is at the store
level.
Goodwill and Intangible Assets
We review the carrying amount of goodwill and other indefinite-lived intangible assets for impairment annually and
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events that
result in an impairment review include significant changes in the business climate, declines in our operating results, or an
expectation that the carrying amount may not be recoverable. We assess potential impairment by considering present
economic conditions as well as future expectations.
We review goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that
the fair value of the reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it
is necessary to perform the two-step goodwill impairment test. If it is determined that it is not more likely than not that the
fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform the two-step goodwill
impairment test. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its
carrying amount, the first step of the two-step goodwill impairment test is required to compare the fair value of the
reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value,
the second step of the two-step goodwill impairment test is required to measure the goodwill impairment loss. The second
step includes hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had
been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the
carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of
the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount.
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