Sears 2007 Annual Report Download - page 67

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
statement of financial position. As a result, upon adoption of this Statement, Holdings will reclassify its
noncontrolling interest in Sears Canada and OSH (which represents 30% and 19.9% of the subsidiaries’
ownership, respectively) from its current classification within the long-term liabilities section of Holdings’
consolidated balance sheet to classification within the shareholders’ equity section. See Note 18 for the amount
of Holdings’ noncontrolling interest in Sears Canada and OSH (reported as Minority Interest) at February 2, 2008
and February 3, 2007.
In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This Interpretation
prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. We adopted the provisions of FIN 48 effective February 4, 2007. The impact upon adoption was to
decrease our beginning retained earnings by approximately $6 million. See Note 14 for further information
regarding the impact of adopting FIN 48.
FIN 48 prescribes that a company shall recognize the benefit associated with a previously unrecognized tax
position when management determines the position has been effectively settled. The FASB issued FASB Staff
Position (“FSP”) FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,” in May 2007 in order to
clarify that assessing whether a tax position has been effectively settled is a matter of judgment. Furthermore, the
FASB noted that a tax position could be effectively settled prior to the completion of an examination or audit by
a taxing authority. FSP FIN 48-1 provides a set of conditions that must be evaluated when determining whether a
tax position has been effectively settled. We contemplated the provisions of FSP FIN 48-1 upon the initial
adoption of FIN 48.
NOTE 2—THE MERGER
On March 24, 2005, Kmart and Sears completed the Merger pursuant to the Agreement and Plan of Merger,
dated as of November 16, 2004 (the “Merger Agreement”). Upon consummation of the Merger, Kmart and Sears
became wholly-owned subsidiaries of Holdings.
Under the terms of the Merger Agreement, Kmart shareholders received one share of Holdings’ common
stock for each Kmart share owned. Approximately 94.9 million shares of Holdings’ common stock were issued
in exchange for all outstanding common stock of Kmart based on the one-for-one ratio. Sears’ shareholders had
the right to elect to receive $50 in cash or 0.5 of a share of Holdings’ common stock for each Sears’ share owned.
Sears’ shareholder elections were prorated to ensure that, in the aggregate, 55 percent of Sears’ shares were
converted into Holdings’ shares and 45 percent of Sears’ shares were converted to cash. Shares of Sears’
restricted common stock were converted into Holdings’ common stock on a 0.5 for 1 basis. In aggregate,
62.2 million shares of Holdings’ common stock were issued to Sears’ shareholders at a value of approximately
$6.5 billion (based on the average closing price of $104.33 of Kmart’s common stock during the period from
November 15, 2004 through November 19, 2004, two business days before and after the date the Merger was
announced). In addition, approximately $5.4 billion in cash was paid in consideration for (i) all outstanding
shares of common stock of Sears, based upon the proration provisions of the Merger Agreement, and (ii) all
outstanding stock options of Sears. Including transaction costs of approximately $18 million, the total
consideration paid was approximately $11.9 billion.
In accordance with SFAS No. 141, “Business Combinations,” the Merger was treated as a purchase business
combination for accounting purposes, with Kmart designated as the acquirer. In identifying Kmart as the
acquiring entity, the companies took into account the relative share ownership of Holdings after the Merger, the
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