Sears 2011 Annual Report Download - page 74

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Our currency forward contracts require collateral 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
accounts receivable balance. We had $5 million and $3 million of cash collateral posted under these contracts at
January 28, 2012 and January 29, 2011, respectively.
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 at January 28, 2012.
Financial Guarantees
We issue various types of guarantees in the normal course of business. We had the following guarantees
outstanding at January 28, 2012:
millions
Bank
Issued
SRAC
Issued Other Total
Standby letters of credit .............................................. $632 $ 24 $— $656
Commercial letters of credit ........................................... 9 115 — 124
Secondary lease obligations ........................................... — — 16 16
The secondary lease obligations relate to certain store leases of previously divested Sears businesses and
certain Sears franchise locations. We remain secondarily liable if the primary obligor defaults.
NOTE 5—FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
We determine fair value of financial assets and liabilities based on the following fair value hierarchy, which
prioritizes the inputs to valuation techniques used to measure fair value into three levels:
Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that we have
the ability to access. An active market for the asset or liability is one in which transactions for the asset or
liability occur with sufficient frequency and volume to provide ongoing pricing information.
Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either
directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices
for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in
markets that are not active and inputs other than quoted market prices that are observable for the asset or
liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities,
credit risk and default rates.
Level 3 inputs—unobservable inputs for the asset or liability.
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