Sears 2007 Annual Report Download - page 100

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SEARS HOLDINGS CORPORATION
Schedule II—Valuation and Qualifying Accounts
Fiscal Years 2007, 2006 and 2005
millions
Balance at
beginning
of period
Additions
charged to
costs and
expenses
Additions
(deductions)
resulting from
the Merger
charged to
other accounts (Deductions)
Balance at
end of period
Allowance for Doubtful Accounts(1):
Fiscal 2007 ......................... $ 29 $11 $ — $ (3) $ 37
Fiscal 2006 ......................... 35 64 — (70) 29
Fiscal 2005 ......................... 40 71 16 (92) 35
Allowance for Deferred Tax Assets(2):
Fiscal 2007 ......................... 332 58 — (205) 185
Fiscal 2006 ......................... 330 2 — — 332
Fiscal 2005 ......................... 1,249 24 330 (200) 330
(1,073)
(1) Charges to the account are for the purposes for which the reserves were created.
(2) The Predecessor Company recorded a full valuation allowance against its pre-petition deferred tax assets in
accordance with SFAS No. 109, as realization of such assets in future years was uncertain. During fiscal
2005, we recognized reversals of, $1,249 million based on the utilization (or projected utilization) of such
deferred tax assets. As of February 2, 2008, management continues to believe that all of our pre-petition net
deferred tax assets will more likely than not be realized due to the Merger and the actual and forecasted
levels of profitability, and as such the related valuation allowance was reduced to zero at January 28, 2006.
In accordance with SFAS No. 109, the portion of the reversal of the valuation allowance attributable to the
Merger ($1,073 million) was recorded as an adjustment to goodwill attributable to the Merger. In
accordance with SOP 90-7, the remaining portion of the reversal of the valuation allowance is recorded as a
direct credit to capital in excess of par.
In connection with the Merger, deferred tax assets of $350 million were recorded related to state net
operating losses (“NOLs”) of Sears. A valuation allowance of $330 million was originally recorded with
respect to this deferred tax asset. In fiscal 2006, deferred tax assets relating to the NOLs were reduced $3
million to a total of $347 million. A valuation allowance of an additional $2 million was recorded, bringing
the total valuation allowance to $332 million. In fiscal 2007, deferred tax assets related to NOLs of Sears
were adjusted for FIN 48, expiring NOLs and current year additions. The net effect was a reduction in Sears
NOLs of $149 million to a total of $198 million. The valuation allowance was reduced $148 million to a
total Sears valuation allowance of $184 million. The $148 million net reduction consisted of a $205 million
reduction due to the implementation of FIN 48, offset by a $57 million addition due to current year NOL
additions and FIN 48 requirements. We also recorded a $1 million valuation allowance on certain Kmart
state five year net operating loss carryforwards for fiscal 2007.
100