Sears 2013 Annual Report Download - page 82

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
82
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, and do not use derivative financial instruments for trading or speculative purposes. 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. The recorded amounts and corresponding gains on the hedging activity were not
material as of February 1, 2014 and February 2, 2013 or for fiscal years 2013, 2012 and 2011.
Hedges of Net Investment in Sears Canada
During the fourth quarter of 2013, we entered into a foreign currency forward contract with a total Canadian
notional value of $43 million, and with a remaining life of 0.1 years at February 1, 2014. This contract was
designated and qualified as a hedge of the foreign currency exposure of our net investment in Sears Canada.
For derivatives that are 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.
We settled foreign currency forward contracts during 2013 and 2012 and received net amounts of $9 million
and $6 million, respectively, 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.
Sears Canada Hedges of Merchandise Purchases
At February 1, 2014, Sears Canada had $90 million notional amount of foreign exchange forward contracts.
Sears Canada had no outstanding foreign currency forward contracts at February 2, 2013. These forward contracts
are used to reduce the foreign exchange risk with respect to U.S. dollar denominated assets and liabilities and
purchases of goods or services.
Sears Canada has merchandise purchase contracts denominated in U.S. currency. The merchandise purchase
contracts are considered embedded derivatives under relevant accounting rules.
We record mark-to-market adjustments for the fair value of forward contracts and embedded derivatives at the
end of each period. 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 foreign currency exchange rates by entering into foreign
exchange forward contracts. 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 contracts, and therefore we do not account for these
instruments as a hedge of our foreign currency exposure risk.
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 investment grade credit ratings or better at February 1, 2014 and February 2,
2013.