Banana Republic 2009 Annual Report Download - page 46

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 reserves. 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 reserves 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. For long-lived assets that are identified as potentially being impaired, if the undiscounted future cash flows
of the asset or asset group are less than the carrying value, we recognize a loss equal to the difference between the
carrying value of the asset group and its fair value. The fair value of the asset group is estimated based on
discounted future cash flows of the 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 $14 million, $5 million, and $42 million
for fiscal 2009, 2008, and 2007, respectively. The impairment charge in fiscal 2007 included $29 million related to
the discontinued operation of Forth & Towne.
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 30, 2010 and January 31, 2009 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. The fair value
of the trade name is determined using the relief from royalty method. These analyses require management to
make assumptions and to apply judgment, including forecasting future sales, expenses, discount rates, and royalty
rates, which can be affected by economic conditions and other factors that can be difficult to predict.
During the fourth quarter of fiscal 2009, we completed our annual impairment review of our goodwill and the
trade name 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.
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
30 Gap Inc. Form 10-K