Sears 2012 Annual Report Download - page 76

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
76
for further information regarding fair value of these collar and merchandise purchase contracts and the respective
balance sheet classifications.
Hedges of Net Investment in Sears Canada
We had no foreign currency forward contracts outstanding at February 2, 2013. At January 28, 2012, we had a
foreign currency forward contract outstanding with a total Canadian notional value of $629 million, and with a
weighted-average remaining life of 0.1 years. This contract was designated and qualified as a hedge of the foreign
currency exposure of our net investment in Sears Canada. Accordingly, we recorded no liability related to the
forward contracts at February 2, 2013, and 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. The
change in fair value of approximately $6 million related to these forward contracts, net of tax, was recorded as a
component of other comprehensive loss for the year ended February 2, 2013.
We settled foreign currency forward contracts during 2012 and 2011 and received net amounts of $6 million
and $0.1 million, respectively, relative to these contract settlements. We settled foreign currency forward contracts
during 2010 and paid net amounts of $3 million relative to these contract settlements. As hedge accounting was
applied to these contracts, an offsetting amount was recorded as a component of other comprehensive loss.
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 no cash collateral posted under these contracts at February 2, 2013 and $5 million at
January 28, 2012.
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.
Financial Guarantees
We issue various types of guarantees in the normal course of business. We had the following guarantees
outstanding at February 2, 2013:
millions Bank
Issued SRAC
Issued Other Total
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 774 $ 47 $ — $ 821
Commercial letters of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 133 — 141
Secondary lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 77 77
The secondary lease obligations related to certain store leases of previously divested Sears businesses. 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