Banana Republic 2014 Annual Report Download - page 52

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Merchandise Inventory
We value inventory at the lower of cost or market, with cost determined using the weighted-average cost method.
We record an adjustment when future estimated selling price is less than cost. We review our inventory levels in
order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range
of sizes or colors) and use promotions and markdowns to clear merchandise. In addition, we estimate and accrue
shortage for the period between the last physical count and the balance sheet date.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value in the Consolidated Balance Sheets as other current
assets, other long-term assets, accrued expenses and other current liabilities, or lease incentives and other long-
term liabilities.
For derivative financial instruments that are designated and qualify as cash flow hedges, the effective portion of
the gain or loss on the derivative financial instruments is reported as a component of other comprehensive
income (“OCI”) and is recognized in income in the period in which the underlying transaction impacts the income
statement. For derivative financial instruments that are designated and qualify as net investment hedges, the
effective portion of the gain or loss on the derivative financial instruments is reported as a component of OCI and
is reclassified into income in the period or periods during which the hedged subsidiary is either sold or liquidated
(or substantially liquidated). Gains and losses on the derivative financial instruments representing either hedge
ineffectiveness or hedge components excluded from the assessment of effectiveness, if any, are recognized in
current income. For derivative financial instruments not designated as hedging instruments, the gain or loss on
the derivative financial instruments is recorded in operating expenses in the Consolidated Statements of Income.
Cash flows from derivative financial instruments are classified as cash flows from operating activities in the
Consolidated Statements of Cash Flows.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets.
Estimated useful lives are as follows:
Category Term
Leasehold improvements Shorter of remaining lease term or economic life, up to 15 years
Furniture and equipment Up to 15 years
Buildings and building improvements Up to 39 years
Software 3 to 7 years
When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts,
with any resulting gain or loss recorded in operating expenses in the Consolidated Statements of Income. Costs
of maintenance and repairs are expensed as incurred.
Lease Rights, Key Money, and Favorable Lease Assets
Lease rights are costs incurred to acquire the right to lease a specific property. A majority of our lease rights are
related to premiums paid to landlords, lease buy-out costs, and broker fees. Key money is the amount of funds
paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease. These rights can
be subsequently sold by us to a new tenant or the amount of key money paid can potentially be recovered from
the landlord should the landlord refuse to allow the automatic right of renewal to be exercised. Lease rights and
key money are recorded at cost and are amortized over the corresponding lease term. Lease rights and key
money are recorded in other long-term assets in the Consolidated Balance Sheets, net of related amortization.