Sears 2010 Annual Report Download - page 57

Download and view the complete annual report

Please find page 57 of the 2010 Sears annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 112

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
purchase contracts denominated in U.S. dollars. As a result, we primarily use derivatives as a risk management
tool to decrease our exposure to fluctuations in the foreign currency market. We primarily use foreign currency
forward contracts to hedge the foreign currency exposure of our net investment in Sears Canada against adverse
changes in exchange rates and foreign currency collar contracts to hedge against foreign currency exposure
arising from Sears Canada’s inventory purchase contracts denominated in U.S. dollars.
We use derivative financial instruments, including interest rate swaps and caps, to manage our exposure to
movements in interest rates.
Hedges of Net Investment in Sears Canada
When applying hedge accounting treatment to our derivative transactions, we formally document our hedge
relationships, including identification of the hedging instruments and the hedged items, as well as our risk
management objectives and strategies for undertaking the hedge transaction. We also formally assess, both at
inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a
derivative ceases to be a highly effective hedge, we discontinue hedge accounting.
For derivatives that are designated as hedges of our net investment in Sears Canada, we assess effectiveness
based on changes in spot currency exchange rates. Changes in spot rates on the derivatives are recorded in the
currency translation adjustments line in Accumulated Other Comprehensive Income and remain there until such
time that we substantially liquidate or sell our holdings in Sears Canada.
Sears Canada Hedges of Merchandise Purchases
Sears Canada mitigates the risk of currency fluctuations on offshore merchandise purchases denominated in
U.S. currency by purchasing U.S. dollar denominated collar contracts for a portion of its expected requirements.
Since Holdings’ functional currency is the U.S. dollar, we are not directly exposed to the risk of exchange rate
changes due to Sears Canada’s merchandise purchases, and therefore we do not account for these instruments as
a hedge of our foreign currency exposure risk. Changes in the fair value of these contracts are recorded in the
consolidated statement of income as a component of other income each period.
Hedges of Interest Rates and Other Foreign Currency
For interest rate swaps and caps that have been designated and qualify as hedges, both the effective and
ineffective portions of the changes in the fair value of the derivative, along with the offsetting gain or loss on the
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.
57