Banana Republic 2011 Annual Report Download - page 70

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Nonfinancial Assets
As discussed in Note 2 of Notes to Consolidated Financial Statements, we recorded a charge for the impairment of
long-lived assets of $16 million, $8 million, and $14 million for fiscal 2011, 2010, and 2009, respectively. The
impairment charge reduced the then carrying amount of the applicable long-lived assets of $21 million, $12 million,
and $16 million to their fair value of $5 million, $4 million, and $2 million during fiscal 2011, 2010, and 2009,
respectively. The fair value of the long-lived assets was determined using level 3 inputs and the valuation
techniques discussed in Note 1 of Notes to Consolidated Financial Statements.
As discussed in Note 3 of Notes to Consolidated Financial Statements, there were no impairment charges recorded
for goodwill or other indefinite-lived intangible assets for fiscal 2011, 2010, or 2009.
Note 7. 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 against changes in the
U.S. dollar are Euro, British pounds, Japanese yen, and Canadian dollars. Until March 2009, we also used a cross-
currency interest rate swap to swap the interest and principal payable of the $50 million debt of our Japanese
subsidiary, Gap (Japan) KK. In connection with the maturity of the debt, the swap was settled in March 2009.
We do not enter into derivative financial contracts for trading purposes.
Cash Flow Hedges
We designate the following foreign exchange forward contracts as cash flow hedges: (1) forward contracts used to
hedge forecasted merchandise purchases denominated primarily in U.S. dollars made by our international
subsidiaries whose functional currencies are their local currencies; and (2) forward contracts used to hedge
forecasted intercompany royalty payments denominated in Japanese yen and Canadian dollars received by entities
whose functional currencies are U.S. dollars. We enter into foreign exchange forward contracts to hedge
forecasted merchandise purchases and related costs generally occurring in 12 to 18 months. We make
intercompany royalty payments on a quarterly basis, and we enter into foreign exchange forward contracts to
hedge intercompany royalty payments generally occurring in 9 to 15 months.
During fiscal 2011, we entered into and settled treasury rate lock agreements in anticipation of issuing our 5.95
percent fixed-rate Notes of $1.25 billion in April 2011. Prior to the issuance of our Notes, we were subject to changes
in interest rates, and we therefore locked into fixed-rate coupons to hedge against the interest rate fluctuations.
The gain related to the treasury lock agreements is reported as a component of OCI and is recognized in income
over the life of the Notes.
There were no material amounts recorded in income for fiscal 2011, 2010, or 2009 as a result of hedge
ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of cash
flow hedges because the forecasted transactions were no longer probable.
Net Investment Hedges
We also use foreign exchange 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.
There were no amounts recorded in income for fiscal 2011, 2010, or 2009 as a result of hedge ineffectiveness, hedge
components excluded from the assessment of effectiveness, or the discontinuance of net investment hedges.
Not Designated as Hedging Instruments
In addition, we use foreign exchange 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. The gain or loss on the derivative financial
56 Gap Inc. Form 10-K