The Gap 2008 Annual Report Download - page 65

Forward contracts used to hedge forecasted merchandise purchases are designated as cash flow hedges. These
forward contracts are used to hedge forecasted merchandise purchases generally over approximately 12 to 18
months. Changes in the fair value of the forward contracts are recorded as a component of accumulated other
comprehensive earnings within stockholders’ equity, to the extent they are effective, and are recognized in cost of
goods sold and occupancy expenses in the period which approximates the time the underlying transaction occurs.
At January 31, 2009 and February 2, 2008, we had an unrealized gain, net of tax, of $18 million and an unrealized
loss, net of tax, of $24 million, respectively. Substantially all of the unrealized gain of $18 million at January 31, 2009
will be recognized in cost of goods sold and occupancy expenses over the next 12 months at the then current
values, which can be different from fiscal year-end values. There were no material amounts recorded in fiscal 2008,
2007, or 2006 resulting from hedge ineffectiveness. At January 31, 2009, the fair value of these forward contracts
was $60 million in other current assets, $20 million in accrued expenses and other current liabilities, and $11 million
in lease incentives and other long-term liabilities in the Consolidated Balance Sheet. At February 2, 2008, the fair
value of these forward contracts was $1 million in other current assets and $33 million in accrued expenses and
other current liabilities in the Consolidated Balance Sheet.
We use forward contracts to hedge forecasted intercompany royalty payments and these forward contracts are
designated as cash flow hedges. These forward contracts are used to hedge intercompany royalty payments
generally over approximately 12 to 15 months. Changes in the fair value of the forward contracts are recorded as a
component of accumulated other comprehensive earnings within stockholders’ equity, to the extent they are
effective, and are recognized in operating expenses in the period which approximates the time the royalty
payment is made. We had an unrealized loss, net of tax, of $2 million as of January 31, 2009 and February 2, 2008.
There were no material amounts recorded in fiscal 2008, 2007, or 2006 resulting from hedge ineffectiveness. At
January 31, 2009 and February 2, 2008, the fair value of these forward contracts was zero and $0.3 million,
respectively, in other current assets and $3 million and $3 million, respectively, in accrued expenses and other
current liabilities in the Consolidated Balance Sheets.
We also use 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. At January 31, 2009 and February 2, 2008, the fair value of these forward
contracts was $28 million and $0.5 million, respectively, in other current assets and $0.8 million and $0.3 million,
respectively, in accrued expenses and other current liabilities in the Consolidated Balance Sheets. These forward
contracts are not designated as hedging instruments therefore changes in the fair value of these foreign currency
contracts, as well as the remeasurement of the underlying intercompany balances, are recognized in operating
expenses in the same period and generally offset.
Beginning in fiscal 2007, we used 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. We
designated the hedge as a net investment hedge and changes in fair value were recorded as a component of
accumulated other comprehensive earnings within stockholders’ equity to offset the foreign currency translation
adjustments on the investment. As of January 31, 2009, all of our net investment hedge forward contracts had
matured. At January 31, 2009 and February 2, 2008 we had a loss of $12 million and $10 million, respectively,
recorded in accumulated other comprehensive earnings. At February 2, 2008, the fair value of these forward
contracts was $4 million in other current assets and $14 million in accrued expenses and other current liabilities in
the Consolidated Balance Sheet.
In addition, we used a cross-currency interest rate swap to swap the interest and principal payable of $50 million
debt of our Japanese subsidiary, Gap (Japan) KK, from a fixed interest rate of 6.25 percent, payable in U.S. dollars, to
6.1 billion Japanese yen with a fixed interest rate of 2.43 percent. We designated such swap as a cash flow hedge to
hedge the total variability in functional currency. At January 31, 2009, the fair value of the swap was $17 million and
was included in accrued expenses and other current liabilities in the Consolidated Balance Sheet. The fair value of
the swap as of February 2, 2008 was $6 million and was included in lease incentives and other long-term liabilities
in the Consolidated Balance Sheet. In connection with the maturity of the $50 million debt, the cross-currency
interest rate swap was settled in March 2009.
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