The Gap 2010 Annual Report Download - page 37

Merchandise Inventory
We value inventory at the lower of cost or market (“LCM”), with cost determined using the weighted-average cost
method. We review our inventory levels in order to identify slow-moving merchandise and broken assortments
(items no longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. We record an
adjustment when future estimated selling price is less than cost. Our LCM adjustment calculation requires
management to make assumptions to estimate the amount of slow-moving merchandise and broken assortments
subject to markdowns, which is dependent upon factors such as historical trends with similar merchandise,
inventory aging, forecasted consumer demand, and the promotional environment. In addition, we estimate and
accrue shortage for the period between the last physical count and the balance sheet date. Our shortage estimate
can be affected by changes in merchandise mix and changes in actual shortage trends. Historically, actual shortage
has not differed materially from our estimates.
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 LCM or inventory shortage adjustments. However, if estimates regarding
consumer demand are inaccurate or actual physical inventory shortage differs significantly from our estimate, our
operating results could be affected. We have not made any material changes in the accounting methodology used
to calculate our LCM or inventory shortage adjustments in the past three fiscal years.
Impairment of Long-Lived Assets, Goodwill, and Intangible 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 management to make assumptions and to apply judgment,
including forecasting future sales and expenses and estimating useful lives of the assets. These estimates can be
affected by factors such as future store results, real estate demand, and economic conditions that can be difficult
to predict. We have not made any material changes in the methodology to assess and calculate impairment of
long-lived assets in the past three fiscal years. We recorded charges for the impairment of long-lived assets of
$8 million, $14 million, and $5 million for fiscal 2010, 2009, and 2008, respectively.
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. The carrying values of goodwill and the trade name were $99 million
and $54 million, respectively, as of January 29, 2011 and January 30, 2010 and were allocated to the Direct reportable
segment. 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. We have deemed the Direct reportable segment to be
the reporting unit for goodwill acquired through the acquisition of Athleta. The fair value of the Direct reporting
unit used to test goodwill for impairment is estimated using the income approach. During the fourth quarter of
fiscal 2010, we completed our annual impairment review of goodwill and did not recognize any impairment
charges. The fair value of the Direct reporting unit significantly exceeded its carrying value as of the date of our
annual impairment review.
The fair value of the trade name is determined using the relief from royalty method. During the fourth quarter of fiscal
2010, we completed our annual impairment review of the trade name and did not recognize any impairment charges.
30 Gap Inc. Form 10-K