Banana Republic 2010 Annual Report Download - page 60

Nonfinancial Assets
As discussed in Note 2 of Notes to Consolidated Financial Statements, we recorded a charge for the impairment of
long-lived assets of $8 million and $14 million for fiscal 2010 and 2009, respectively, which was recorded in
operating expenses in the Consolidated Statement of Income. The impairment charge reduced the then carrying
amount of the applicable long-lived assets of $12 million and $16 million to their fair value of $4 million and $2
million during fiscal 2010 and 2009, respectively. The fair value of the long-lived assets was determined using level
3 inputs and the valuation techniques discussed in Note 1 of Notes to Consolidated Financial Statements.
As discussed in Note 3 of Notes to Consolidated Financial Statements, there were no impairment charges recorded
for goodwill or the trade name for fiscal 2010 and 2009.
Note 6. Derivative Financial Instruments
Effective February 1, 2009, we adopted enhanced disclosure requirements for derivative financial instruments and
hedging activities.
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate
fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for
foreign operations, forecasted intercompany royalty payments, and intercompany obligations that bear foreign
exchange risk using foreign exchange forward contracts. The principal currencies hedged against changes in the
U.S. dollar are Euro, British pounds, Japanese yen, and Canadian dollars. Until March 2009, we also used a cross-
currency interest rate swap to swap the interest and principal payable of the $50 million debt of our Japanese
subsidiary, Gap (Japan) KK. In connection with the maturity of the debt, the swap was settled in March 2009.
We do not enter into derivative financial contracts for trading purposes.
Cash Flow Hedges
We designate the following foreign exchange forward contracts as cash flow hedges: forward contracts used to
hedge forecasted merchandise purchases denominated primarily in U.S. dollars made by our international
subsidiaries whose functional currencies are their local currencies; and forward contracts used to hedge forecasted
intercompany royalty payments denominated in Japanese yen and Canadian dollars received by entities whose
functional currencies are U.S. dollars. We make merchandise purchases on a monthly basis, and we enter into
foreign exchange forward contracts to hedge forecasted merchandise purchases generally occurring in 12 to 18
months. We make intercompany royalty payments on a quarterly basis, and we enter into foreign exchange
forward contracts to hedge intercompany royalty payments generally occurring in 12 to 15 months.
There were no material amounts recorded in income for fiscal 2010, 2009, or 2008 as a result of hedge
ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of cash
flow hedges because the forecasted transactions were no longer probable.
Net Investment Hedges
We also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to offset the
foreign currency translation and economic exposures related to our investment in the subsidiaries.
There were no amounts recorded in income for fiscal 2010, 2009, or 2008 as a result of hedge ineffectiveness, hedge
components excluded from the assessment of effectiveness, or the discontinuance of net investment hedges.
Not Designated as Hedging Instruments
In addition, we use foreign exchange forward contracts to hedge our market risk exposure associated with foreign
currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the
functional currency of the entity with the intercompany balance. The gain or loss on the derivative financial
instruments, as well as the remeasurement of the underlying intercompany balances, is recorded in operating
expenses in the Consolidated Statements of Income in the same period and generally offset.
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