Sears 2007 Annual Report Download - page 76

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
As of February 3, 2007, we had a series of foreign currency forward contracts outstanding with a total
Canadian notional value of $400 million and with a weighted-average remaining life of 0.4 years. These
contracts were designated and qualified as hedges of the foreign currency exposure of our net investment in Sears
Canada. The aggregate fair value of the forward contracts as of February 3, 2007, $26 million, was recorded as
an asset on our consolidated balance sheet, with an offsetting amount recorded as a component of other
comprehensive income.
We settled certain foreign currency forward contracts during both fiscal 2007 and fiscal 2006. During fiscal
2007, we paid a net amount of $12 million relative to contract settlements and, as hedge accounting was applied
to such contracts, an offsetting amount was recorded as a component of other comprehensive income. During
fiscal 2006, we paid a net amount of $42 million relative to such settlements. For those contracts for which hedge
accounting had been applied, we recorded an offsetting amount of $48 million as a component of other
comprehensive income. We recorded a gain of $6 million during fiscal 2006 for the remaining contracts that
were settled, for which hedge accounting was not applied. This gain has been classified as part of other income
within the consolidated statement of income for the fiscal year ended February 3, 2007.
Total Return Swaps
We, from time to time, invest our surplus cash in various securities and financial instruments, including total
return swaps, which are derivative instruments designed to synthetically replicate the economic return
characteristics of one or more underlying marketable equity securities. Such investments may be highly
concentrated and involve substantial risks. We recognized investment losses of $14 million on total return swaps
during fiscal 2007. During fiscal 2006, we recognized $74 million of investment income, consisting of realized
gains of $84 million and unrealized losses of $2 million less $8 million of interest cost. We had no total return
swaps outstanding as of February 2, 2008. As of February 3, 2007, our investments in total return swaps had an
aggregate notional amount of $375 million and a fair value of $5 million. The aggregate fair value of total return
swaps was recorded as a current receivable in the consolidated balance sheet at February 3, 2007.
Under the terms of the transactions with the respective counterparties, we were required to post cash
collateral of up to 25 percent of the notional amount of the underlying total return swap position, plus the amount
of any unrealized losses on the positions. At February 3, 2007, the collateral balance held by our counterparties
based on our total return swaps’ aggregate notional amount of $375 million was $80 million and was recorded as
a current receivable in our consolidated balance sheet. As there were no total return swaps outstanding at
February 2, 2008, we did not have any collateral posted at that date.
Financial Guarantees
We issue various types of guarantees in the normal course of business. We had the following guarantees
outstanding as of February 2, 2008:
millions
Bank
Issued
SRAC
Issued Other Total
Standby letters of credit ............................................ $1,722 $119 $— $1,841
Commercial letters of credit ......................................... 66 104 — 170
Secondary lease obligations and performance guarantee ................... — — 55 55
The secondary lease obligations relate to certain store leases of previously divested Sears businesses. We
remain secondarily liable if the primary obligor defaults. As of February 2, 2008, we had an $11 million liability
recorded in other liabilities, which represents our current estimate of potential obligations related to these leases.
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