The Gap 2012 Annual Report Download - page 59

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A trade name is considered impaired if the estimated fair value of the trade name is less than the carrying amount. If a
trade name is considered impaired, we recognize a loss equal to the difference between the carrying amount and the
estimated fair value of the trade name. The fair value of a trade name is determined using the relief from royalty method,
which requires management to make assumptions and to apply judgment, including forecasting future sales and
expenses, and selecting appropriate discount rates and royalty rates.
Goodwill and other indefinite-lived intangible assets, including the trade names, are recorded in other long-term assets in
the Consolidated Balance Sheets.
Lease Losses
The decision to close a store, corporate facility, or distribution center can result in accelerated depreciation and
amortization over the revised remaining useful lives of the associated long-lived assets. In addition, upon exiting leased
premises, we record a charge and corresponding lease loss reserve equal to the incremental amount of the present value
of the net future obligation greater than the remaining rent-related deferred balances. The net future obligation is
determined as the remaining contractual rent obligations less the amount for which we are able to or expect to be able to
sublease the properties. We estimate the amount for which we expect to be able to sublease the properties based on the
status of our efforts to sublease vacant office space and stores, a review of real estate market conditions, our projections
for sublease income, and our assumptions regarding sublease commencement. Lease losses are recorded in operating
expenses in the Consolidated Statements of Income.
Pre-Opening Costs
Pre-opening and start-up activity costs, which include rent and occupancy, supplies, advertising, and payroll expenses
incurred prior to the opening of a new store or other facility, are expensed in the period in which they occur.
Advertising
Costs associated with the production of advertising, such as writing, copy, printing, and other costs, are expensed as
incurred. Costs associated with communicating advertising that has been produced, such as television and magazine
costs, are expensed when the advertising event takes place. Advertising expense was $653 million, $548 million, and
$516 million in fiscal 2012, 2011, and 2010, respectively, and is recorded in operating expenses in the Consolidated
Statements of Income.
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 one to five months.
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 experience 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 of gift certificates and credit vouchers to relevant
jurisdictions. Our gift cards, gift certificates, and credit vouchers do not have expiration dates.
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