Sears 2012 Annual Report Download - page 75

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
75
Trade Creditor Matters
We have ongoing discussions concerning our liquidity and financial position with the vendor community and
third parties that offer various credit protection services to our vendors. The topics discussed have included such
areas as pricing, payment terms and ongoing business arrangements. As of the date of this report, we have not
experienced any significant disruption in our access to merchandise or our operations.
NOTE 4—DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL GUARANTEES
We primarily use derivatives as a risk management tool to decrease our exposure to fluctuations in the foreign
currency market. We are exposed to fluctuations in foreign currency exchange rates as a result of our net investment
in Sears Canada. Further, Sears Canada is exposed to fluctuations in foreign currency exchange rates due to
inventory purchase contracts denominated in U.S. dollars.
Earnings Effects of Derivatives on the Statements of Operations
For derivatives that were designated as hedges of our net investment in Sears Canada, we assess effectiveness
based on changes in forward currency exchange rates. Changes in forward rates on the derivatives are recorded in
the currency translation adjustments line in accumulated other comprehensive loss and will remain there until we
substantially liquidate or sell our holdings in Sears Canada.
Changes in the fair value of any derivatives that are not designated as hedges are recorded in earnings each
period. 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 the Company's 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.
Sears Canada Hedges of Merchandise Purchases
Sears Canada had no outstanding foreign currency collar contracts at February 2, 2013 or January 28, 2012. As
discussed previously, these collar contracts were 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 record the earnings impact of mark-to-market and settlement adjustments for foreign currency collar
contracts in other income (loss) at the end of each period. We recorded no mark-to-market and settlement gains on
these contracts for the year ended February 2, 2013. 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 embedded derivatives under relevant accounting rules) at the end of
each period. We recorded no assets at February 2, 2013, and assets of $1 million at January 28, 2012 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 income (loss) at the end of each period. We recorded mark-
to-market and settlement gains of $2 million for the year ended February 2, 2013. We recorded mark-to-market and
settlement losses of $5 million and $1 million for the years ended January 28, 2012 and January 29, 2011,
respectively.
We recorded total mark-to-market gains and settlements of $2 million in other loss for the year ended
February 2, 2013. We recorded total mark-to-market losses and settlements of $1 million and $15 million in other
loss for the years ended January 28, 2012 and January 29, 2011, respectively. At February 2, 2013, we had no
derivative mark-to-market assets related to the embedded derivatives, and at January 28, 2012, we had total
derivative mark-to-market assets related to the collar contracts and embedded derivatives of $1 million. See Note 5