The Gap 2014 Annual Report Download - page 65

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53
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 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 foreign currencies 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 British pounds and Euro. 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 24 months.
There were no material amounts recorded in income for fiscal 2014, 2013, or 2012 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.
There were no material amounts recorded in income for fiscal 2014, 2013, or 2012 as a result of hedge
ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of net
investment hedges.
Other Derivatives Not Designated as Hedging Instruments
We use foreign exchange forward contracts to hedge our market risk exposure associated with foreign currency
exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional
currency of the entity with the intercompany balance. The gain or loss on the derivative financial instruments, as
well as the remeasurement of the underlying intercompany balances, is recorded in operating expenses in the
Consolidated Statements of Income in the same period and generally offset. We generally enter into foreign
exchange forward contracts as needed to hedge intercompany balances that bear foreign exchange risk.
Outstanding Notional Amounts
As of January 31, 2015 and February 1, 2014, we had foreign exchange forward contracts outstanding in the
following notional amounts:
(notional amounts in millions) January 31,
2015 February 1,
2014
U.S. dollars (1) $ 1,395 $ 1,309
Canadian dollars C$ 14 C$ 8
Euro € 1 € 25
__________
(1) The principal currencies hedged against changes in the U.S. dollar were British pounds, Canadian dollars, Euro, and Japanese yen.
Contingent Features
We had no derivative financial instruments with credit-risk-related contingent features underlying the agreements
as of January 31, 2015 or February 1, 2014.