Sears 2014 Annual Report Download - page 86

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
86
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 used 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 were
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. We had no outstanding derivatives at January 31, 2015. The recorded amounts and
corresponding gains on the hedging activity were not material as of January 31, 2015 and February 1, 2014 or for
fiscal years 2014, 2013 and 2012.
Hedges of Net Investment in Sears Canada
During the third quarter of 2014, we entered into foreign currency forward contracts with a total Canadian
notional value of $300 million. These contracts were originally designated and qualified as hedges of the foreign
currency exposure of our net investment in Sears Canada. On October 16, 2014, we settled foreign currency forward
contracts with a total Canadian notional value of $187 million and de-designated the remaining contracts with a total
Canadian notional value of $113 million as hedges, which were settled on October 27, 2014.
For derivatives that were designated as hedges of our net investment in Sears Canada, we assessed
effectiveness based on changes in forward currency exchange rates. Changes in forward rates on the derivatives
were recorded in the currency translation adjustments line in accumulated other comprehensive loss prior to the de-
consolidation of Sears Canada on October 16, 2014. Subsequent to that date, the change in forward rates on the
remaining derivative contracts that were no longer designated as hedges was recorded in interest and investment
income in the Consolidated Statements of Operations.
We settled foreign currency forward contracts during 2014, 2013 and 2012 and received net amounts of $8
million, $9 million and $6 million, respectively, relative to these contract settlements.
Sears Canada Hedges of Merchandise Purchases
At February 1, 2014, Sears Canada had $90 million notional amount of foreign exchange forward contracts.
These forward contracts were 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
were major financial institutions with investment grade credit ratings or better at February 1, 2014.