Sears 2007 Annual Report Download - page 62

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Changes in the carrying amount of goodwill by segment during fiscal years 2006 and 2007 are as follows:
Sears
Domestic
Sears
Canada Total
millions
Balance, January 28, 2006 .............................................. $1,585 $ 99 $1,684
Finalization of purchase accounting(1) ................................. 37 — 37
Acquisition of additional interest in Sears Canada ........................ — 167 167
Tax settlements affecting Merger-related goodwill ....................... (188) (8) (196)
Balance, February 3, 2007 .............................................. $1,434 $258 $1,692
Tax adjustments and other items affecting Merger-related goodwill .......... (6) — (6)
Balance, February 2, 2008 .............................................. $1,428 $258 $1,686
(1) We completed the purchase price allocation for the Merger during the first quarter of fiscal 2006. As a
result, goodwill attributable to the Merger increased by approximately $37 million, primarily based on the
receipt of additional information regarding the fair values of certain properties and certain pre-Merger legal
contingencies.
As the result of reaching various tax audit settlements during fiscal 2006 pertaining to pre-Merger periods,
we reduced approximately $196 million of tax liabilities with an offsetting credit recorded to goodwill. In
accordance with SFAS No. 109, “Accounting for Income Taxes,” resolution of these matters results in a direct
credit to Merger-related goodwill.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but
requires testing for potential impairment, at a minimum on an annual basis, or when indications of potential
impairment exist. The impairment test for goodwill utilizes a fair value approach. The impairment test for
identifiable intangible assets not subject to amortization is also performed annually or when impairment
indications exist, and consists of a comparison of the fair value of the intangible asset with its carrying amount.
Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar
to that used to evaluate other long-lived assets. Our impairment analysis is performed as of the last day of our
November accounting period each year.
Financial Instruments and Hedging Activities
From time to time, we use derivative financial instruments, including interest rate swaps and caps to manage
our exposure to movements in interest rates, and foreign currency forward contracts to hedge the foreign
currency exposure of our net investment in Sears Canada against adverse changes in exchange rates. In addition,
we entered into total return swaps during fiscal 2007 and 2006 as a means for investing a portion of our surplus
cash. We recognize all derivative instruments at fair value within either other assets or other liabilities on our
consolidated balance sheet.
When applying hedge accounting treatment to our derivative transactions, we formally document our hedge
relationships, including identification of the hedging instruments and the hedged items, as well as our risk
management objectives and strategies for undertaking the hedge transaction. We also formally assesses, both at
inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a
derivative ceases to be a highly effective hedge, we discontinue hedge accounting.
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