Banana Republic 2012 Annual Report Download - page 44

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Our significant accounting policies can be found in Item 8, Financial Statements and Supplementary Data, Note 1 of
Notes to Consolidated Financial Statements. The policies and estimates discussed below include the financial statement
elements that are either judgmental or involve the selection or application of alternative accounting policies and are
material to our financial statements. Management has discussed the development and selection of these critical
accounting policies and estimates with the Audit and Finance Committee of our Board of Directors, which has reviewed
our disclosure relating to critical accounting policies and estimates in this annual report on Form 10-K.
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 or colors) and we primarily use markdowns to clear merchandise. We record an
adjustment to inventory when future estimated selling price is less than cost. Our LCM adjustment calculation requires
management to make assumptions to estimate the selling price and 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 amount of long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset or asset group 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 amount. For impaired assets, we recognize a loss equal to the
difference between the carrying amount of the asset or asset group and its estimated fair value. The estimated fair value
of the asset or asset group is based on estimated 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, which for retail stores is at the store level. 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 a charge for the impairment of long-
lived assets of $8 million, $16 million, and $8 million for fiscal 2012, 2011, and 2010, respectively.
We also review the carrying amount of goodwill and other indefinite-lived intangible assets for impairment annually and
whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount 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.
In connection with the acquisitions of Athleta in September 2008 and Intermix in December 2012, we allocated $99 million
and $85 million of the respective purchase prices to goodwill. The carrying amount of goodwill was $184 million as of
February 2, 2013. We review goodwill for impairment by first assessing qualitative factors to determine whether it is more
likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill, as a basis for
determining whether it is necessary to perform the two-step goodwill impairment test. If it is determined that it is not more
likely than not that the fair value of the reporting unit is less than its carrying amount, it is 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.
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