The Gap 2006 Annual Report Download - page 60

Foreign Currency Translation
Our international subsidiaries use local currencies as the functional currency and translate their assets and
liabilities at the current rate of exchange in effect at the balance sheet date. Revenue and expenses from these
operations are translated using the monthly average exchange rates in effect for the period in which the items
occur. The resulting gains and losses from translation are included as accumulated other comprehensive earnings
in the Consolidated Statements of Stockholders’ Equity. Transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the local functional currency are included
in the Consolidated Statements of Income and were a loss of approximately $4 million and $13 million in fiscal
2006 and fiscal 2005, respectively, and a gain of approximately $1 million in fiscal 2004. Cumulative currency
translation adjustments in accumulated other comprehensive earnings were $63 million, $54 million, and
$79 million at February 3, 2007, January 28, 2006, and January 29, 2005, respectively.
Treasury Stock
We account for treasury stock under the cost method (FIFO method) and include treasury stock as a
component of Stockholders’ Equity.
Revenue Recognition
We recognize revenue and the related cost of goods sold (including shipping costs) at the time the products
are received by the customers in accordance with the provisions of Staff Accounting Bulletin No. (“SAB”) 101,
“Revenue Recognition in Financial Statements” as amended by SAB 104, “Revenue Recognition.” Revenue is
recognized for store sales when the customer receives and pays for the merchandise at the register with either
cash or credit card. For online sales, we estimate and defer revenue and the related product costs for shipments
that are in-transit to the customer. Revenue is recognized at the time we estimate the customer receives the
product. Customers typically receive goods within a few days of shipment. Such amounts were immaterial as of
February 3, 2007, January 28, 2006, and January 29, 2005. Amounts related to shipping and handling that are
billed to customers are reflected in net sales and the related costs are reflected in cost of goods sold and
occupancy expenses.
Allowances for estimated returns are recorded based on estimated gross profit using our historical return
patterns. A summary of activity in the sales return allowance account is as follows:
($ in millions)
February 3,
2007
January 28,
2006
January 29,
2005
Balance at beginning of year ..................................... $ 18 $ 19 $ 19
Additions ..................................................... 672 704 714
Returns ...................................................... (669) (705) (714)
Balance at end of year ........................................... $ 21 $ 18 $ 19
Upon the purchase of a gift card or issuance of a gift certificate, a liability is established for the cash value
of the gift card or gift certificate. The liability is relieved and income is recorded as net sales upon redemption.
Over time, some portion of the gift cards issued is not redeemed. This amount is recorded as other income, which
is a component of operating expenses. Beginning with the second quarter of 2006, we changed our estimate of
the elapsed time for recording income associated with unredeemed gift cards to three years from our prior
estimate of five years. The liability for gift cards and gift certificates is recorded in accounts payable on the
Consolidated Balance Sheets and was $337 million at February 3, 2007 and $356 million at January 28, 2006.
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