The Gap 2011 Annual Report Download - page 44

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 use markdowns to clear merchandise. We
record an adjustment 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 $16 million, $8 million, and $14 million for fiscal 2011, 2010, and 2009, 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. Goodwill and other indefinite-lived intangible assets are allocated to the Direct reportable segment.
In connection with the acquisition of Athleta in September 2008, we allocated $99 million of the purchase price to
goodwill. The carrying amount of goodwill was $99 million as of January 28, 2012 and January 29, 2011. Effective
October 30, 2011, we adopted an accounting standards update to simplify the testing of goodwill for impairment.
As such, 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
30 Gap Inc. Form 10-K