The Gap 2008 Annual Report Download - page 44

In connection with the acquisition of Athleta in September 2008, we allocated $99 million of the purchase price to
goodwill and $54 million to trade name. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” 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 considering
present economic conditions as well as future expectations. The fair value of the reporting unit used to test
goodwill for impairment and the fair value of the trade name are estimated using the income approach. This
approach requires management to make assumptions and to apply judgment, including forecasting future sales
and expenses which can be affected by economic conditions and other factors that can be difficult to predict. We
did not recognize any impairment charges for our goodwill or other intangible assets in fiscal 2008, 2007, or 2006.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or
assumptions we use to calculate impairment losses of long-lived assets, goodwill, and intangible assets. However,
if actual results are not consistent with our estimates and assumptions used in the calculations, we may be
exposed to losses that could be material.
Insurance and Self-Insurance
We use a combination of insurance and self-insurance for a number of risk management activities including
workers’ compensation, general liability, and employee related health care benefits, a portion of which is paid by
our employees. Liabilities associated with these risks are estimated based primarily on actuarially determined
amounts, and accrued in part by considering historical claims experience, demographic factors, severity factors,
and other actuarial assumptions. Any actuarial projection of losses is subject to a high degree of variability. Among
the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends,
legal interpretations, benefit level changes, health care costs, and claim settlement patterns. Historically, actual
results for estimated losses have not differed materially from our estimates.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or
assumptions we use to calculate our insurance liabilities. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to losses or gains that could be material.
Revenue Recognition
While revenue recognition does not involve significant judgment, it represents an important accounting policy for
the Company. We recognize revenue and the related cost of goods sold at the time the products are received by the
customers. For store sales, revenue is recognized when the customer receives and pays for the merchandise at the
register, primarily with either cash or credit card. For sales from our online and catalog business, revenue is
recognized at the time we estimate the customer receives the merchandise. We record an allowance for estimated
returns based on estimated gross profit using our historical return patterns and various other assumptions that
management believes to be reasonable. We do not believe there is a reasonable likelihood that there will be a
material change in the future estimates or assumptions we use to calculate our sales return reserve. However, if
the actual rate of sales returns increases significantly, our operating results could be adversely affected. We have
not made any material changes in the accounting methodology used to estimate future sales returns in the past
three fiscal years.
Unredeemed Gift Cards, Gift Certificates, and Vouchers
Upon the purchase of a gift card or issuance of a gift certificate or 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 (“breakage”). We determine breakage income for gift cards, gift
certificates, and vouchers based on historical redemption patterns. Breakage income is recorded as other income,
32 Gap Inc. Form 10-K