The Gap 2008 Annual Report Download - page 64

The Facility and letter of credit agreements contain financial and other covenants, including, but not limited to,
limitations on liens and subsidiary debt as well as the maintenance of two financial ratios—a fixed charge
coverage ratio and a leverage ratio. A violation of these covenants could result in a default under the Facility and
letter of credit agreements, which would permit the participating banks to terminate our ability to access the
Facility for letters of credit and advances, terminate our ability to request letters of credit under the letter of credit
agreements, require the immediate repayment of any outstanding advances under the Facility, and require the
immediate posting of cash collateral in support of any outstanding letters of credit under the letter of
credit agreements.
Note 7. Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157 are
as follows:
Fair Value Measurements at Reporting Date Using
($ in millions) January 31, 2009
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
Derivative financial instruments ............ $ 87 $— $ 87 $—
Deferred compensation plan assets ......... 18 18 — —
Total ......................................... $105 $ 18 $ 87 $—
Liabilities
Derivative financial instruments ............ $ 52 $— $ 52 $—
Derivative financial instruments primarily include foreign exchange forward contracts for the purchase of U.S.
dollars, Euro, British pounds, Japanese yen, and Canadian dollars. The fair value of the Company’s derivative
financial instruments is determined using pricing models based on current market rates. Derivative financial
instruments in an asset position are included in other current assets or other long-term assets in the Consolidated
Balance Sheets. Derivative financial instruments in a liability position are included in accrued expenses and other
current liabilities or lease incentives and other long-term liabilities in the Consolidated Balance Sheets.
We maintain deferred compensation plans which allow eligible employees and non-employee members of the
Board of Directors to defer compensation up to a maximum amount. Plan investments are recorded at market
value and are designated for the deferred compensation plans. The Company’s deferred compensation plan assets
are determined based on quoted market prices and are included in other long-term assets in the Consolidated
Balance Sheets.
In addition, we have highly liquid investments classified as cash equivalents as of January 31, 2009. These
investments are classified as held-to-maturity based on our positive intent and ability to hold the securities to
maturity. Our cash and cash equivalents are placed primarily in treasury and prime money market funds, domestic
commercial paper, and bank securities. These securities are stated at amortized cost, which approximates fair
market value due to the short maturities of these investments and are recorded based on quoted market prices.
Note 8. Derivative Financial Instruments
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 are U.S. dollars, Euro,
British pounds, Japanese yen, and Canadian dollars. We do not enter into derivative financial contracts for trading
purposes. Our derivative financial instruments are recorded in the Consolidated Balance Sheets at fair value
determined using pricing models based on current market rates. Cash flows from derivative financial instruments
are classified as cash flows from operating activities in the Consolidated Statements of Cash Flows.
52 Gap Inc. Form 10-K