Fair Value Measurements

3 Months Ended

May 02, 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 purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen weeks ended May 2, 2020 or May 4, 2019. There were no transfers of financial assets or liabilities into or out of level 1, level 2, and level 3 during the thirteen weeks ended May 2, 2020 and May 4, 2019.

Financial Assets and Liabilities

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



			Fair Value Measurements at Reporting Date Using
($ in millions)	May 2, 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	$	139	$	—	$	139	$	—
Short-term investments	51		—		51		—
Derivative financial instruments	36		—		36		—
Deferred compensation plan assets	47		47		—		—
Other assets	2		—		—		2
Total	$	275	$	47	$	226	$	2
Liabilities:
Derivative financial instruments	$	5	$	—	$	5	$	—
			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)	May 4, 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	$	222	$	13	$	209	$	—
Short-term investments	272		129		143		—
Derivative financial instruments	27		—		27		—
Deferred compensation plan assets	51		51		—		—
Other assets	2		—		—		2
Total	$	574	$	193	$	379	$	2
Liabilities:
Derivative financial instruments	$	6	$	—	$	6	$	—

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 May 2, 2020 and May 4, 2019, the Company held $51 million and $272 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 Condensed Consolidated Balance Sheets. In addition, as of May 2, 2020 and May 4, 2019, the Company held $1 million and $35 million 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 Condensed Consolidated Balance Sheets. Unrealized gains and losses on available-for-sale debt securities included within accumulated other comprehensive income were immaterial as of May 2, 2020 and May 4, 2019.

The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen weeks ended May 2, 2020 and May 4, 2019, the Company did not consider any of its securities to be other-than-temporarily impaired and, accordingly, did not recognize any impairment loss.

Derivative financial instruments primarily include foreign exchange forward contracts. The fair value of the Company’s derivative financial instruments is determined using pricing models based on current market rates. See Note 5 of Notes to Condensed 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 Condensed Consolidated Balance Sheets.

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 Operations. 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.

The impact of the COVID-19 pandemic resulted in a qualitative indication of impairment related to our store long-lived assets. For store locations, we analyzed our store asset recoverability. During the thirteen weeks ended May 2, 2020, the Company recorded an impairment of store assets of $124 million, and impairment of operating lease assets of $360 million. The impairment of the store assets reduced the carrying amount of the applicable long-lived assets of $127 million to their fair value of $3 million. The impairment of the operating lease assets reduced the carrying amount of the applicable long-lived assets of $1,358 million to their fair value of $998 million. The impairment charges were recorded in operating expenses on the Condensed Consolidated Statement of Operations.

During the thirteen weeks ended May 4, 2019, there were no material impairment charges recorded for long-lived 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 it is more likely than not that the carrying amount may not be recoverable.

There were no impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen weeks ended May 2, 2020 or May 4, 2019.