Kohl's 2009 Annual Report Download - page 55

Table of Contents
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As of January 30, 2010, the par value of our long-term investments was $380 million and the estimated fair value was $321 million. Our auction rate
securities (“ARS”) portfolio consists entirely of highly-rated, insured student loan backed securities. Substantially all of the principal and interest is insured
by the federal government and the remainder is insured by highly-rated insurance companies. Approximately $224 million of our ARS (at fair value) are rated
“AAA” by Moody’s, Standard & Poor’s and/or Fitch Ratings.
Beginning in February 2008, liquidity issues in the global credit markets resulted in the failure of auctions for all of our ARS. A “failed” auction occurs
when the amount of securities submitted for sale in the auction exceeds the amount of purchase bids. As a result, holders are unable to liquidate their
investment through the auction. A failed auction is not a default of the debt instrument, but does set a new interest rate in accordance with the terms of the debt
instrument. A failed auction limits liquidity for holders until there is a successful auction or until such time as another market for ARS develops. ARS are
generally callable by the issuer at any time. Scheduled auctions continue to be held until the ARS matures or is called.
To date, we have collected all interest payable on outstanding ARS when due and expect to continue to do so in the future. At this time, we have no reason
to believe that any of the underlying issuers of our ARS or their insurers are presently at risk or that the reduced liquidity has had a significant impact on the
underlying credit quality of the assets backing our ARS. While the auction failures limit our ability to liquidate these investments, we do not believe these
failures will have any significant impact on our ability to fund ongoing operations and growth initiatives.
We intend to hold these ARS until maturity or until we can liquidate them at par value. Based on our other sources of liquidity, we do not believe we will
be required to sell them before recovery of par value. Therefore, impairment charges are considered temporary and have been included in Accumulated Other
Comprehensive Loss within our Consolidated Balance Sheets at January 30, 2010 and January 31, 2009. In certain cases, holding the investments until
recovery may mean until maturity, which ranges from 2015 to 2056. The weighted-average maturity date is 2036. As a result of the persistent failed auctions
and the uncertainty of when these investments could be successfully liquidated at par, we have recorded all of our ARS as Long-term Investments within the
Consolidated Balance Sheet.
ASC No. 820, “Fair Value Measurements and Disclosures,” requires fair value measurements be classified and disclosed in one of the following three
categories:
Level 1: Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2: Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded
financial instruments. The prices for the financial instruments are determined using prices for recently traded financial
instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield
curves that are observable at commonly quoted intervals.
Level 3: Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if
any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation
techniques.
The fair value for our ARS is based on third-party pricing models and is classified as a Level 3 pricing category. We utilized a discounted cash flow
model to estimate the current fair market value for each of the
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