The Gap 2011 Annual Report Download - page 59

• costs associated with our sourcing operations, including payroll and related benefits;
• production costs;
• insurance costs related to merchandise; and
• rent, occupancy, depreciation, and amortization related to our store operations, distribution centers, and certain
corporate functions.
Operating expenses include the following:
• payroll and related benefits (for our store operations, field management, distribution centers, and
corporate functions);
• marketing;
• general and administrative expenses;
• costs to design and develop our products;
• merchandise handling and receiving in distribution centers;
• distribution center general and administrative expenses;
• rent, occupancy, depreciation, and amortization for our corporate facilities; and
• 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 $224 million, $226 million, and $237 million in fiscal 2011, 2010, and 2009, 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 store 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
45