The Gap 2012 Annual Report Download - page 68

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50
Derivative financial instruments primarily include foreign exchange forward contracts. The principal currencies hedged
against changes in the U.S. dollar are British pounds, Canadian dollars, Euro, and Japanese yen. The fair value of the
Company’s derivative financial instruments is determined using pricing models based on current market rates. Derivative
financial instruments in an asset position are recorded in other current assets or other long-term assets in the
Consolidated Balance Sheets. Derivative financial instruments in a liability position are recorded in accrued expenses and
other current liabilities or lease incentives and other long-term liabilities in the Consolidated Balance Sheets.
We maintain the Gap Inc. Deferred Compensation Plan (“DCP”), which allows eligible employees to defer compensation
up to a maximum amount. Plan investments are recorded at market value and are designated for the DCP. The fair value
of the Company’s DCP assets is determined based on quoted market prices, and the assets are recorded in other long-
term assets in the Consolidated Balance Sheets.
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 $8 million, $16 million, and $8 million in fiscal 2012, 2011, and 2010, respectively. The impairment charge
reduced the then carrying amount of the applicable long-lived assets of $11 million, $21 million, and $12 million to their fair
value of $3 million, $5 million, and $4 million during fiscal 2012, 2011, and 2010, 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 2 of Notes of Consolidated Financial Statements, we acquired favorable lease assets in connection
with our acquisition of Intermix. There were no impairment charges recorded for favorable lease assets in fiscal 2012. The
fair value of the favorable lease assets was determined using the with-and-without method, with inputs that included
discount rates and annual market rent escalation factors (level 3 inputs).
As discussed in Note 4 of Notes to Consolidated Financial Statements, there were no impairment charges recorded for
goodwill or other indefinite-lived intangible assets for fiscal 2012, 2011, or 2010.
Note 8. 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 portion of our transactions related to merchandise purchases for
foreign operations and certain intercompany transactions using foreign exchange forward contracts. The principal
currencies hedged against changes in the U.S. dollar are British pounds, Canadian dollars, Euro, and Japanese yen.
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 and related costs denominated primarily in U.S. dollars made by our international
subsidiaries whose functional currencies are their local currencies; (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; and (3) forward contracts used to hedge forecasted intercompany revenue transactions
related to merchandise sold from our regional purchasing entity, whose functional currency is the U.S. dollar, to certain
international subsidiaries in their local currencies of Euro and British pounds. The foreign exchange forward contracts
entered into to hedge forecasted merchandise purchases and related costs, intercompany royalty payments, and
intercompany revenue transactions generally have terms of up to 18 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 the 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 2012, 2011, or 2010 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.
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