The Gap 2013 Annual Report Download - page 68

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Impairment of Long-Lived 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 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, 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 and largely independent of the cash flows of other groups of assets, which for
our retail stores is primarily at the store level.
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.
We review goodwill for impairment, as appropriate, 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 more likely than not that the fair value of the reporting unit is less than its carrying amount, the two-step
test is performed to identify potential goodwill impairment. 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. Based on certain circumstances, we may elect to bypass the qualitative assessment
and proceed directly to performing the first step of the two-step goodwill impairment test. The first step of the two-
step goodwill impairment test compares the fair value of the reporting unit to its carrying amount, including
goodwill. 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 trade name is considered impaired if the estimated fair value of the trade name is less than the carrying
amount. If a 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 a trade name is determined using the
relief from royalty method, which requires management to make assumptions and to apply judgment, including
forecasting future sales and expenses, and selecting appropriate discount rates and royalty rates.
Goodwill and other indefinite-lived intangible assets, including the trade names, 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
leased premises, we record a charge and corresponding lease loss reserve equal to the incremental amount of
the present value of the net future obligation greater than the remaining rent-related deferred balances. The net
future obligation is determined as the remaining contractual rent obligations less the amount for which we are able
to or expect to be able to sublease the properties. We estimate the amount for which we expect to be able to
sublease the properties based on the status of our efforts to sublease vacant office space and stores, a review of
real estate market conditions, our projections for sublease income, and our assumptions regarding sublease
commencement. Lease losses are recorded in operating expenses in the Consolidated Statements of Income.