Banana Republic 2010 Annual Report Download - page 51

Impairment of Long-Lived Assets
We review the carrying value of long-lived assets, including lease rights, key money, and intangible assets subject
to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value 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 operating performance of the long-lived
asset. Long-lived assets are considered impaired if the estimated undiscounted future cash flows of the asset or
asset group are less than the carrying value. For impaired assets, we recognize a loss equal to the difference
between the carrying value of the asset or asset group and its estimated fair value. The estimated fair value of the
asset or asset group is based on discounted future cash flows of the asset or asset group using a discount rate
commensurate with the risk. The asset group is defined as the lowest level for which identifiable cash flows are
available. Our estimate of future cash flows requires assumptions and judgment, including forecasting future sales
and expenses and estimating useful lives of the assets.
Goodwill and Trade Name
In connection with the acquisition of Athleta in September 2008, we allocated $99 million of the purchase price to
goodwill and $54 million to the trade name. Goodwill and the trade name have indefinite useful lives, and
accordingly, are not amortized. Instead, we review the carrying value of goodwill and the trade name for
impairment annually and whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. Events that result in an impairment review include significant changes in the business climate,
declines in our operating results, or an expectation that the carrying amount may not be recoverable. We assess
potential impairment by considering present economic conditions as well as future expectations.
The impairment review of goodwill involves comparing the fair value of a reporting unit to its carrying amount,
including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to
measure the goodwill impairment loss. The second step includes hypothetically valuing all the tangible and
intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then,
the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the
carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an
impairment loss in an amount equal to the excess, not to exceed the carrying amount. A reporting unit is an
operating segment or a business unit one level below that operating segment, for which discrete financial
information is prepared and regularly reviewed by segment management. We have deemed our reporting unit of
goodwill to be our Direct operating segment, which is the level at which segment management regularly reviews
operating results and makes resource allocation decisions. The fair value of the reporting unit used to test goodwill
for impairment is estimated using the income approach. This approach requires assumptions and judgment,
including forecasting future sales and expenses.
Effective February 1, 2009, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standards No. (“SFAS”) 141(R), “Business Combinations” (currently FASB Accounting Standards
Codification (“ASC”) 805). The adoption of SFAS 141(R) did not have a material impact on our reporting
unit determination.
The trade name is considered impaired if the estimated fair value of the trade name is less than the carrying value.
If the trade name is considered impaired, we recognize a loss equal to the difference between the carrying value
and the estimated fair value of the trade name. The fair value of the trade name is determined using the relief
from royalty method, which requires management to make assumptions and to apply judgment, including
forecasting future sales, expenses, discount rates, and royalty rates.
Goodwill and the trade name 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
44 Gap Inc. Form 10-K