Sears 2007 Annual Report Download - page 70

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
There is no impact to financial statements prior to 2005, as Sears Canada was not included in the Company’s
consolidated results prior to the Merger. See Note 21 for the impact of this change to the Company’s quarterly
results of operations for 2007 and 2006.
Accounting For Certain Indirect Buying, Warehousing and Distribution Costs
Effective January 27, 2005, we changed our method of accounting for certain indirect buying, warehousing
and distribution costs. Prior to this change, we had included indirect buying, warehousing and distribution costs
as inventoriable costs. Beginning in fiscal 2005, such costs have been expensed as incurred, which is the method
of accounting previously followed by Sears. We believe that this change provides a better measurement of
operating results in light of changes to our supply chain to realize cost savings from the Merger, the closure of
certain facilities and the combined capacity of the existing distribution and headquarters facilities. In accordance
with Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes,” changes in accounting
policy to conform the acquirer’s policy to that of the acquired entity are treated as a change in accounting
principle. The indirect buying, warehousing and distribution costs that were capitalized to inventory as of
January 26, 2005 have been reflected in the fiscal 2005 consolidated statement of income as a cumulative effect
of a change in accounting principle in the amount of $90 million, net of income taxes of $58 million.
Change in Measurement Date for Defined Benefit Programs
In fiscal 2005, we changed the measurement date of our benefit programs from the last Wednesday in
January to December 31. We believe the one-month change of the measurement date is a preferable change as it
allows more time for management to plan and execute its review of the completeness and accuracy of its benefit
programs results. The change did not have a material effect on retained earnings as of January 27, 2005, and
income from continuing operations, net income, and related per share amounts for fiscal 2005. Accordingly, all
amounts reported in Footnote 10 for balances as of February 2, 2008, February 3, 2007 and January 28, 2006 are
based on a measurement date of December 31, 2007, December 31, 2006 and December 31, 2005, respectively.
NOTE 4—ACQUISITION OF MINORITY INTEREST IN SEARS CANADA
During fiscal 2006, we increased our majority interest in Sears Canada from 54% to 70% by acquiring
17.8 million common shares of Sears Canada pursuant to our take-over bid for Sears Canada, first announced in
December 2005. We paid a total of $282 million for the additional 17.8 million common shares acquired and
have accounted for the acquisition of additional interest in Sears Canada as a purchase business combination for
accounting purposes. The total amount paid for shares acquired has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values as of the respective acquisition dates. Total consideration
for the additional interest acquired exceeded the associated proportionate pre-acquisition carrying value for Sears
Canada by approximately $188 million. We allocated the excess to real property ($5 million), trademarks and
other identifiable intangible assets ($55 million), goodwill ($167 million) and other assets and liabilities (-$39
million). The acquisition of the additional interest in Sears Canada was not material to our consolidated results of
operations or financial position.
NOTE 5—SALE OF SEARS CANADA’S CREDIT AND FINANCIAL SERVICES OPERATIONS
On November 15, 2005, Sears Canada completed the sale of substantially all of the assets (principally net
credit card receivables of $1.3 billion and customer relationship intangibles of $0.4 billion) and liabilities of its
Credit and Financial Services operations to JPMorgan Chase & Co. (“JPMorgan Chase”) for approximately
$2.0 billion in cash proceeds, net of securitized receivables and other related costs and taxes.
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