Sears 2010 Annual Report Download - page 44

believes that the position will be sustained upon examination by the taxing authorities. Further, we record the
largest amount of the unrecognized tax benefit that is greater than 50% likely of being realized upon settlement.
Management evaluates each position based solely on the technical merits and facts and circumstances of the
position, assuming the position will be examined by a taxing authority having full knowledge of all relevant
information. Significant management judgment is required to determine whether the recognition threshold has
been met and, if so, the appropriate amount of unrecognized tax benefits to be recorded in the Consolidated
Financial Statements. Management reevaluates tax positions each period in which new information about
recognition or measurement becomes available.
Significant management judgment is required in determining our provision for income taxes, deferred tax
assets and liabilities and the valuation allowance recorded against our net deferred tax assets, if any. In assessing
the likelihood of realization of deferred tax assets, management considers estimates of the amount and character
of future taxable income. Our actual effective tax rate and income tax expense could vary from estimated
amounts due to the future impacts of various items, including changes in income tax laws, tax planning and the
Company’s forecasted financial condition and results of operations in future periods. Although management
believes current estimates are reasonable, actual results could differ from these estimates.
Domestic and foreign tax authorities periodically audit our income tax returns. These audits include
questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of
income among various tax jurisdictions. In evaluating the exposures associated with our various tax filing
positions, we record reserves in accordance with accounting standards for uncertain tax positions. A number of
years may elapse before a particular matter, for which we have established a reserve, is audited and fully
resolved. Management’s estimates at the date of the financial statements reflect our best judgment, giving
consideration to all currently available facts and circumstances. As such, these estimates may require adjustment
in the future, as additional facts become known or as circumstances change. For further information, see Note 11
of Notes to Consolidated Financial Statements.
Goodwill and Intangible Asset Impairment Assessments
At January 29, 2011 and January 30, 2010, we had goodwill and intangible asset balances of $4.5 billion and
$4.6 billion, respectively. Holdings evaluates the carrying value of goodwill and intangible assets for possible
impairment under accounting standards governing goodwill and other intangible assets. The majority of our
goodwill and intangible assets relate to Kmart’s acquisition of Sears, Roebuck and Co. in March 2005. We
allocated goodwill, which is defined as the total purchase price less the fair value of all assets and liabilities
acquired, to reporting units at the acquisition date. As required by accounting standards, we perform annual
goodwill and intangible impairment tests in the fourth quarter and update the tests between annual tests if events
or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying
amount.
A significant amount of judgment is involved in determining if an indicator of impairment has occurred.
Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained,
significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in
the business climate; unanticipated competition; and the testing for recoverability of a significant asset group
within a reporting unit. Any adverse change in these factors could have a significant impact on the recoverability
of these assets and could have a material impact on our consolidated financial statements.
Goodwill Impairment Assessments
Our goodwill resides in multiple reporting units. The goodwill impairment test involves a two-step process.
The first step is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value
using the best information available, using both a market participant approach, as well as a discounted cash flow
model, commonly referred to as the income approach. The market participant approach determines the value of a
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