The Gap 2011 Annual Report Download - page 60

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, which is recorded in operating expenses in the Consolidated Statements of Income. The
estimated fair value of the asset or asset group is based on 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 assumptions and judgment, including forecasting future sales and expenses and estimating useful lives
of the assets.
Goodwill and Intangible Assets
We review the carrying amount of goodwill and other indefinite-lived intangible assets for impairment annually
and whenever events or changes in circumstances indicate 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. We assess potential
impairment by considering present economic conditions as well as future expectations.
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 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. In connection with our
acquisition of Athleta in September 2008, 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.
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, which requires management to make assumptions and to apply judgment, including
forecasting future sales, expenses, discount rates, and royalty rates.
Goodwill and other indefinite-lived intangible assets, including the trade name, are recorded in other long-term
assets in the Consolidated Balance Sheets.
Lease Losses
The decision to close a store, corporate facility, or distribution center can result in accelerated depreciation and
amortization over the revised remaining useful lives of the associated long-lived assets. In addition, upon exiting
46 Gap Inc. Form 10-K