Sears 2011 Annual Report Download - page 73

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Sears Canada Hedges of Merchandise Purchases
Sears Canada had no outstanding foreign currency collar contracts at January 28, 2012. Sears Canada had
entered into foreign currency collar contracts with a total notional value of $372 million at January 29, 2011. As
discussed previously, these collar contracts are used to hedge Sears Canada’s purchase of inventory under U.S.
dollar denominated contracts. We record mark-to-market adjustments based on the total notional value of these
outstanding collar contracts at the end of each period. We recorded mark-to-market liabilities related to the
foreign currency collar contracts of $3 million at January 29, 2011.
We record the earnings impact of mark-to-market and settlement adjustments for foreign currency collar
contracts in other loss at the end of each period. We recorded mark-to-market and settlement gains on these
contracts of $4 million in other loss for the year ended January 28, 2012 and mark-to-market and settlement
losses on these contracts of $14 million in other loss for the year ended January 29, 2011.
Sears Canada’s above noted foreign currency collar contracts were entered into as a hedge of merchandise
purchase contracts denominated in U.S. currency. We also record mark-to-market adjustments for the value of
the merchandise purchase contracts (considered to be embedded derivatives under relevant accounting rules) at
the end of each period. We recorded assets of $1 million at January 28, 2012 and $2 million at January 29, 2011
related to the fair value of these embedded derivatives.
We record the earnings impact of mark-to-market and settlement adjustments related to the embedded
derivative in the merchandise purchase contracts in other loss at the end of each period. We recorded net
mark-to-market and settlement losses of $5 million for the year ended January 28, 2012 and $1 million for the
year ended January 29, 2011.
At January 28, 2012, we had total mark-to-market assets related to the collar contracts and embedded
derivatives of $1 million. We recorded total net mark-to-market losses and settlements of $1 million in other loss
for the year ended January 28, 2012. At January 29, 2011, we had total derivative mark-to-market liabilities
related to the collar contracts and embedded derivatives of $1 million. We recorded total net mark-to-market
losses and settlements of $15 million in other loss for the year ended January 29, 2011. See Note 5 for further
information regarding fair value of these collar and merchandise purchase contracts and the respective balance
sheet classifications at January 28, 2012 and January 29, 2011.
Hedges of Net Investment in Sears Canada
At January 28, 2012 and January 29, 2011, we had a foreign currency forward contract outstanding with a
Canadian notional value of $629 million, and with a weighted-average remaining life of 0.1 years at January 28,
2012 and 0.5 years at January 29, 2011. These contracts were designated and qualified as hedges of the foreign
currency exposure of our net investment in Sears Canada. Accordingly, the aggregate fair value of the forward
contract outstanding at January 28, 2012 of approximately $(6) million was recorded as a liability on our
Consolidated Balance Sheet and the fair value of the forward contract outstanding at January 29, 2011 of
approximately $1 million was recorded as an asset on our Consolidated Balance Sheet. The decline in fair value
of approximately $7 million related to these forward contracts, net of tax, was recorded as a component of other
comprehensive loss for the year ended January 28, 2012.
We settled foreign currency forward contracts during 2010 and paid a net amount of $3 million relative to
these contract settlements. As hedge accounting was applied to such contracts, an offsetting amount was recorded
as a component of other comprehensive loss.
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