Nordstrom 2005 Annual Report Download - page 42

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34
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Amounts in thousands except per share amounts
The private label securitizations are accounted for as a secured borrowing (on-balance sheet) while the VISA securitization qualifies for sale
treatment (off-balance sheet).
NORDSTROM PRIVATE LABEL RECEIVABLES (ON-BALANCE SHEET)
We transfer these receivables to a third-party trust (“Private Label Trust”) that issues two Nordstrom private label receivable backed securitizations,
which are described below in Note 10: Long-term Debt.
Total principal receivables of the securitized private label portfolio at the end of 2005 and 2004 were $549,962 and $566,967, and receivables
more than 30 days past due were $11,265 and $13,099. Net charged-off receivables for 2005, 2004, and 2003 were $22,845, $25,370, and $28,703.
CO-BRANDED NORDSTROM VISA RECEIVABLES (OFF-BALANCE SHEET)
In order to enhance our cost-effective capital sources, we have in place a securitized asset structure. This allows us to reduce our investment
in the co-branded Nordstrom VISA credit card receivables, so we can deploy our capital resources to greater-value opportunities.
We transfer our co-branded Nordstrom VISA credit card receivables to a third-party trust (“VISA Trust”) that issues VISA receivable backed securities.
In May 2002, the VISA Trust issued $200,000 of certificated Class A and Class B notes to third-party investors (“2002 Class A & B Notes”) and a
certificated, subordinate Class C note to us. The receivables transferred to the VISA Trust exceed the face value of the issued notes. This excess
creates a certificated, non-subordinated asset called the Transferor’s Interest, which was also conveyed to us. In addition, we hold a non-certificated
Interest Only Strip, which results when the estimated value of projected cash inflows related to the notes exceeds the projected cash outflows.
We do not record the $200,000 in debt related to the VISA securitization or the receivables transferred to the VISA Trust on our consolidated
financial statements. However, we do hold the 2002 Class C note, the Transferor’s Interest and the Interest Only Strip. These assets are included
in the consolidated balance sheets as investment in asset backed securities and accounted for as investments in “available-for-sale” debt securities.
As such, we record the investment in asset backed securities at its estimated fair value in our consolidated balance sheets.
We recognize gains or losses on the sale of the co-branded Nordstrom VISA receivables to the VISA Trust based on the difference between the face
value of the receivables sold and the estimated fair value of the assets created in the securitization process. The receivables sold to the VISA Trust
are then allocated between the various interests in the VISA Trust based on those interests’ relative fair market values. The fair values of the assets
are calculated as the present value of their expected future cash flows. The unrealized gains and losses, as well as any adjustments to fair value of
the investment in asset backed securities, are recorded as a component of accumulated other comprehensive earnings.
In addition, we record interest income related to the investment in asset backed securities based upon their carrying value and their discount rate.
The gain on sales of receivables and the interest income earned on the beneficial interests are included in other income including finance charges,
net in our consolidated statements of earnings.
Accounts Receivable
Accounts receivable consist primarily of our Nordstrom private label receivables that serve as collateral for our Private Label Securitization.
We record the face value of the principal, plus any earned finance charges, late fees, or cash advance fees.
We report accounts receivable net of an allowance for doubtful accounts. Our allowance for doubtful accounts represents our best estimate of the
losses inherent in our customer accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience
and expectations of future performance.
We recognize finance charges on delinquent accounts until the account is written off or when an account is placed into a debt management program.
Payments received for these accounts are recorded in the same manner as other accounts. Our approach for resuming accrual of interest on these
accounts is made on an account by account basis. Delinquent accounts are written off when they are determined to be uncollectible, usually after
the passage of 151 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy
or other circumstances making further collection unlikely.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, using the retail method (first-in, first-out basis).