Sears 2009 Annual Report Download - page 61

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
designated hedged item that is attributable to the hedged risk, are recognized in the consolidated statements of
income in the same account as the hedged item, as a component of interest expense. Changes in the fair value of
interest rate swaps and caps that do not qualify as hedges are recognized currently as a component of interest
expense. The foreign currency forward contracts are recorded on the consolidated balance sheet at fair value and,
to the extent they have been designated and qualify for hedge accounting treatment, an offsetting amount is
recorded as a component of other comprehensive income, net of income tax effects. Changes in the fair value of
those forward contracts for which hedge accounting is not applied are recorded in the consolidated statement of
income as a component of other income. Certain of our currency forward contracts require collateral to be posted
in the event our liability under such contracts reaches a predetermined threshold. Cash collateral posted under
these contracts is recorded as part of our restricted cash balance.
Other Financial Instruments
We have, from time to time, invested 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. Changes in the fair value of the total return swaps are recognized as a
component of interest and investment income in our consolidated statements of income as they occur. We had no
investments in total return swaps as of January 30, 2010 or January 31, 2009.
Counterparty Credit Risk
We actively manage the risk of nonpayment by our derivative counterparties by limiting our exposure to
individual counterparties based on credit ratings, value at risk and maturities. The counterparties to these
instruments are major financial institutions with credit ratings of single-A or better as of January 30, 2010 and
January 31, 2009.
Fair Value of Financial Instruments
We determine the fair value of financial instruments in accordance with standards pertaining to fair value
measurements. Such standards define fair value and establish a framework for measuring fair value in GAAP.
Under fair value measurement accounting standards, fair value is considered to be the exchange price in an
orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. We
report the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting
standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair
value into three levels. See Note 4 to the consolidated financial statements for further information regarding our
derivative positions.
Financial instruments that potentially subject Holdings to concentration of credit risk consist principally of
temporary cash investments, accounts receivable and derivative financial instruments. We place our cash and
cash equivalents in investment-grade, short-term instruments with high quality financial institutions and, by
policy, limit the amount of credit exposure in any one financial instrument. We use high credit quality
counterparties to transact our derivative transactions.
Cash and cash equivalents, accounts receivable, merchandise payables, credit facility borrowings and
accrued liabilities are reflected in the consolidated balance sheet at cost, which approximates fair value due to the
short-term nature of these instruments. The fair value of our debt is disclosed in Note 3 to the consolidated
financial statements.
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