Banana Republic 2015 Annual Report Download - page 53

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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 data 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. 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
income is recorded, a liability is recognized for any legal obligation to remit the unredeemed portion to relevant
jurisdictions. Substantially all of our gift cards, gift certificates, and credit vouchers have no expiration dates.
Credit Cards
We have credit card agreements (the “Agreements”) with third parties to provide our customers with private label
credit cards and/or co-branded credit cards (collectively, the “Credit Cards”). Each private label credit card bears
the logo of Gap, Banana Republic, Old Navy, or Athleta and can be used at any of our U.S. or Canadian store
locations and online. The co-branded credit card is a VISA credit card bearing the logo of Gap, Banana Republic,
Old Navy, or Athleta and can be used everywhere VISA credit cards are accepted. A third-party financing
company is the sole owner of the accounts and underwrites the credit issued under the Credit Card programs. We
receive cash in accordance with the Agreements based on usage of the Credit Cards or specified transactional
fees. We recognize income for such cash receipts when the amounts are fixed or determinable and collectibility is
reasonably assured, which is generally the time at which the actual usage of the Credit Cards or specified
transaction occurs. The majority of the income is recorded in other income, which is a component of operating
expenses in our Consolidated Statements of Income, and the remaining portion of income is recognized as a
reduction to cost of goods sold and occupancy expenses in our Consolidated Statements of Income.
The Credit Card programs offer incentives to cardholders in the form of reward certificates upon the cumulative
purchase of an established amount. The cost associated with reward points and certificates is accrued as the
rewards are earned by the cardholder and is recorded in accrued expenses and other current liabilities in the
Consolidated Balance Sheets and in cost of goods sold and occupancy expenses in the Consolidated Statements
of Income. Other administrative costs related to the Credit Card programs, including payroll, marketing expenses,
and other direct costs, are recorded in operating expenses in the Consolidated Statements of Income.