The Gap 2009 Annual Report Download - page 69

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In addition, as of January 30, 2010 and January 31, 2009, we had highly liquid investments classified as cash and
cash equivalents and short-term investments measured using level 1 inputs. These investments are placed
primarily in money market funds, domestic commercial paper, U.S. treasury bills, and bank deposits, and are
classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. These
investments are stated at amortized cost, which approximates market value due to their short maturities.
Nonfinancial Assets
Effective February 1, 2009, we adopted enhanced disclosure requirements for nonfinancial assets and liabilities
measured at fair value on a nonrecurring basis.
As discussed in Note 2 of Notes to Consolidated Financial Statements, we recorded a charge for the impairment of
long-lived assets of $14 million for fiscal 2009, which was recorded in operating expenses in the Consolidated
Statement of Income. The impairment charge reduced the carrying amount of the applicable long-lived assets of
$16 million to their fair value of $2 million as of January 30, 2010. 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.
Note 8. Derivative Financial Instruments
Effective February 1, 2009, we adopted enhanced disclosure requirements for derivative financial instruments and
hedging activities.
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. Our derivative financial instruments are
recorded in the Consolidated Balance Sheets at fair value determined using pricing models based on current
market rates. Cash flows from derivative financial instruments are classified as cash flows from operating activities
in the Consolidated Statements of Cash Flows.
Cash Flow Hedges
We designate the following foreign exchange forward contracts as cash flow hedges: 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 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.
There were no material amounts recorded in income for fiscal 2009, 2008, or 2007 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.
We make merchandise purchases on a monthly basis, and we enter into foreign exchange forward contracts to
hedge forecasted merchandise purchases 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 12 to 15 months.
At January 30, 2010, we had foreign exchange forward contracts outstanding to buy the notional amount of
$671 million and 21 million British pounds and to sell various currencies related to our forecasted merchandise
purchases and forecasted intercompany royalty payments.
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