Fair Value Measurements

12 Months Ended

Feb. 01, 2020

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.

There were no material purchases, sales, issuances, or settlements related to recurring level 3 measurements during fiscal 2019 or 2018. There were no transfers of financial assets or liabilities into or out of level 1, level 2, and level 3 during fiscal 2019 or 2018.

Financial Assets and Liabilities

Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents held at amortized cost are as follows:



			Fair Value Measurements at Reporting Date Using
($ in millions)	February 1, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	311	$	19	$	292	$	—
Short-term investments	290		117		173		—
Derivative financial instruments	10		—		10		—
Deferred compensation plan assets	51		51		—		—
Other assets	2		—		—		2
Total	$	664	$	187	$	475	$	2
Liabilities:
Derivative financial instruments	$	10	$	—	$	10	$	—



			Fair Value Measurements at Reporting Date Using
($ in millions)	February 2, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	373	$	26	$	347	$	—
Short-term investments	288		125		163		—
Derivative financial instruments	20		—		20		—
Deferred compensation plan assets	48		48		—		—
Other assets	2		—		—		2
Total	$	731	$	199	$	530	$	2
Liabilities:
Derivative financial instruments	$	11	$	—	$	11	$	—

We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits, money market funds, and commercial paper. With the exception of our available-for-sale investments noted below, we value these investments at their original purchase prices plus interest that has accrued at the stated rate.

Our available-for-sale securities are comprised of investments in debt securities. These securities are recorded at fair value using market prices. As of February 1, 2020 and February 2, 2019, the Company held $290 million and $288 million, respectively, of available-for-sale debt securities with maturity dates greater than three months and less than two years within short-term investments on the Consolidated Balance Sheets. In addition, as of February 1, 2020 and February 2, 2019, the Company held $23 million and $16 million, respectively, of available-for-sale debt securities with maturities of less than three months at the time of purchase within cash and cash equivalents on the Consolidated Balance Sheets. Unrealized gains or losses on available-for-sale debt securities included in accumulated other comprehensive income were immaterial as of February 1, 2020 and February 2, 2019.

The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. The Company did not consider any of its securities to be other-than-temporarily impaired and, accordingly, did not recognize any impairment loss during the fiscal years ended February 1, 2020 or February 2, 2019.

Derivative financial instruments primarily include foreign exchange forward contracts. See Note 8 of Notes to Consolidated Financial Statements for information regarding currencies hedged against the U.S. dollar.

We maintain the Gap, Inc., Deferred Compensation Plan (“DCP”), which allows eligible employees to defer base compensation and bonus up to a maximum percentage, and non-employee directors to defer receipt of a portion of their Board fees. Plan investments are directed by participants and are recorded at market value and 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 on the Consolidated Balance Sheets.

See Note 14 of Notes to Consolidated Financial Statements for information regarding employee benefit plans.

Nonfinancial Assets

Long-lived assets, which for us primarily consist of store assets and operating lease assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. 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 at the store level. 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 on the Consolidated Statements of Income. For operating lease assets, the Company determines the fair value of the assets by discounting the estimated market rental rates over the remaining term of the lease. These estimates can be affected by factors such as future store results, real estate demand, store closure plans, property specific discount rate and economic conditions that can be difficult to predict. These fair value measurements qualify as level 3 measurements in the fair value hierarchy.

See Note 1 of Notes to Consolidated Financial Statements for further information regarding the impairment of long-lived assets.

For our specialty flagship stores, we have historically assessed for impairment at the company-wide level. We historically treated flagships in this manner because we believed in their strategic importance to the brands and the store fleet by providing broad visibility and increased brand awareness both regionally and globally. In fiscal 2019, as a result of our work around specialty fleet rationalization, we reassessed our operating strategy for flagship stores including an evaluation of whether to exit or sublease certain flagship store locations. Due to this shift in strategy, the Company determined that, for flagship stores, the individual store represents the lowest level of independent identifiable cash flows. As a result, during fiscal 2019 we recorded an impairment charge of store assets and operating lease assets related to our flagship stores that indicated impairment of $73 million and $223 million, respectively, which was recorded in operating expenses on the Consolidated Statement of Income. The impairment change is primarily related to our New York specialty flagship store locations in Times Square for Old Navy Global and Gap Global after a formal decision was made in the fourth quarter of fiscal 2019 to pursue exiting those locations.

In total and inclusive of the above, we recorded the following long-lived asset impairment charges included in operating expenses in the Consolidated Statements of Income:



	Fiscal Year
($ in millions)	2019		2018		2017
Operating lease assets:
Flagship stores	$	223	$	—	$	—
Specialty fleet restructuring	2		—		—
Other	14		—		—
Total impairment charges of operating lease assets (1)	$	239	$	—	$	—
Store assets:
Flagship stores	$	73	$	—	$	—
Specialty fleet restructuring	11		—		—
Other	14		14		28
Total impairment charges of store assets (2)	$	98	$	14	$	28
Other indefinite-lived intangible assets	$	—	$	—	$	—
Goodwill	$	—	$	—	$	—
Total impairment charges of long-lived assets	$	337	$	14	$	28

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(1)	The impairment charge of operating lease assets reduced the then carrying amount of the applicable operating lease assets of $865 million to their fair value of $626 million during fiscal 2019.

(2)

The impairment charge reduced the then carrying amount of the applicable store assets of $99 million, $15 million, and $30 million to their fair value of $1 million, $1 million, and $2 million during fiscal 2019, 2018, and 2017, respectively.