The Gap 2009 Annual Report Download - page 61

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Prepaid catalog expense consists of the cost to prepare, print, and distribute catalogs. Such costs are amortized
over their expected period of future benefit, which is approximately five to seven months.
Share-Based Compensation
Share-based compensation expense for all share-based compensation 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 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 other stock awards, 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 experience as well
as expected future behavior. The 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 or stock awards. See Note 10 of Notes to Consolidated Financial Statements.
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 (“breakage”). 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, the likelihood of gift cards, gift
certificates, and credit vouchers remaining unredeemed can be determined three years after issuance. When
breakage is recorded, a liability is recognized for any legal obligation to remit the unredeemed portion to relevant
jurisdictions. Our gift cards, gift certificates, and credit vouchers do not have expiration dates. Beginning in the
third quarter of fiscal 2009, we changed our estimate of the elapsed time for recording breakage income
associated with unredeemed gift certificates and credit vouchers to three years from our prior estimate of five
years. This change in estimate did not have a material impact on the Consolidated Statement of Income for
fiscal 2009.
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 one of our brands 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 one of our brands and can be used everywhere VISA credit cards
are accepted. A third-party financing company is the sole owner of the accounts issued under the Credit Card
programs, and this third party absorbs the losses associated with non-payment by the cardholder and a portion of
any fraudulent usage of the accounts. We receive cash from the third-party financing company in accordance with
the Agreements and based on usage of the Credit Cards. We also receive cash from Visa U.S.A. Inc. in accordance
with the Agreements and based on 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 income is recorded in other income, which
is a component of operating 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 certificates is accrued as the rewards are
earned by the cardholder and is recorded in cost of goods sold and occupancy expenses in the Consolidated
Statements of Income.
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