Banana Republic 2011 Annual Report Download - page 45

unnecessary to perform the two-step goodwill impairment test. If it is determined that it is more likely than not
that the fair value of the reporting unit is less than its carrying amount, the first step of the two-step goodwill
impairment test is required to compare the fair value of the reporting unit to its carrying amount, including
goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the two-step
goodwill impairment test is required to measure the goodwill impairment loss. The second step includes
hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been
acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the
carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair
value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the
carrying amount.
A reporting unit is an operating segment or a business unit one level below that operating segment, for which
discrete financial information is prepared and regularly reviewed by segment management. We have deemed
Athleta to be a component of our Direct operating segment, as it is the level at which segment management
regularly reviews operating results and makes resource allocation decisions. However, as Athleta is aggregated
with other components of the Direct operating segment due to the components having similar economic
characteristics, we have deemed our Direct operating segment to be the single reporting unit at which goodwill is
tested for impairment. During the fourth quarter of fiscal 2011, we completed our annual impairment testing of
goodwill and did not recognize any impairment charges. We determined that as of the date of our annual
impairment review, the fair value of goodwill significantly exceeded its carrying amount, and it is not more likely
than not that the fair value of the Direct reporting unit is less than its carrying amount.
In connection with the acquisition of Athleta in September 2008, we allocated $54 million of the purchase price to
the trade name. The carrying amount of the trade name was $54 million as of January 28, 2012 and January 29, 2011.
The trade name is considered impaired if the estimated fair value of the trade name is less than the carrying
amount. If the trade name is considered impaired, we recognize a loss equal to the difference between the carrying
amount and the estimated fair value of the trade name. The fair value of the trade name is determined using the
relief from royalty method. During the fourth quarter of fiscal 2011, we completed our annual impairment review of
the trade name. The fair value of the trade name significantly exceeded its carrying value as of the date of our
annual impairment review, and we did not recognize any impairment charges.
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.
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.
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