Sears 2012 Annual Report Download - page 66

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
66
Hedges of Foreign Currency
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 Statements of Operations as a
component of other income (loss). 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.
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. We had no derivative
instruments at February 2, 2013.
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 the Company 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.