The Gap 2014 Annual Report Download - page 53

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In connection with our acquisition of Intermix in December 2012, we acquired favorable lease assets as a result of
leases with terms that were considered favorable relative to market terms for similar leases as of the date of
acquisition. The favorable lease assets are recorded in other long-term assets in the Consolidated Balance
Sheets and recognized as rent expense in cost of goods sold and occupancy expenses in the Consolidated
Statements of Income over the remaining term of the leases.
Insurance and Self-Insurance
We retain a portion of the risk for certain losses related to employee health and welfare, workers’ compensation,
and general liability claims. Undiscounted liabilities associated with these programs are estimated based primarily
on actuarially-determined amounts and are accrued in part by considering historical claims experience,
demographic factors, severity factors, and other actuarial assumptions. These insurance liabilities are recorded in
accrued expenses and other current liabilities and lease incentives and other long-term liabilities in the
Consolidated Balance Sheets.
Asset Retirement Obligations
An asset retirement obligation represents a legal obligation associated with the retirement of a tangible long-lived
asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived
asset. The Company’s asset retirement obligations are primarily associated with leasehold improvements that we
are contractually obligated to remove at the end of a lease to comply with the lease agreement. We recognize
asset retirement obligations at the inception of a lease with such conditions if a reasonable estimate of fair value
can be made. The asset retirement obligation is recorded in accrued expenses and other current liabilities and
lease incentives and other long-term liabilities in the Consolidated Balance Sheets and is subsequently adjusted
for changes in estimated asset retirement obligations. The associated estimated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life.
Treasury Stock
We previously accounted for treasury stock under the cost method, using the first-in, first-out flow assumption,
and we included treasury stock as a component of stockholders’ equity. As of March 1, 2014, the Company retired
all existing treasury stock. All common stock repurchased subsequent to March 1, 2014 is immediately retired.
Revenue Recognition
Revenue is recognized for sales transacted at stores when the customer receives and pays for the merchandise
at the register. For sales where we ship the merchandise to the customer from the distribution center or store,
revenue is recognized at the time the customer receives the product. Amounts related to shipping and handling
that are billed to customers are recorded in net sales, and the related costs are recorded in cost of goods sold
and occupancy expenses in the Consolidated Statements of Income. Revenues are presented net of estimated
returns and any taxes collected from customers and remitted to governmental authorities. Allowances for
estimated returns are recorded based on estimated margin using our historical return patterns.
We sell merchandise to franchisees under multi-year franchise agreements. We recognize revenue from sales to
franchisees at the time merchandise ownership is transferred to the franchisee, which generally occurs when the
merchandise reaches the franchisee’s predesignated turnover point. These sales are recorded in net sales, and
the related cost of goods sold is recorded in cost of goods sold and occupancy expenses in the Consolidated
Statements of Income. We also receive royalties from franchisees based on a percentage of the total
merchandise purchased by the franchisee, net of any refunds or credits due them. Royalty revenue is recognized
when merchandise ownership is transferred to the franchisee and is recorded in net sales in the Consolidated
Statements of Income.
Classification of Expenses
Cost of goods sold and occupancy expenses include the following:
• the cost of merchandise;
• inventory shortage and valuation adjustments;