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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the
accounts of Sears, Roebuck and Co. and all majority-owned domestic and
international companies ("the Company"). Investments in companies in which
the Company exercises significant influence, but not control, are
accounted for using the equity method of accounting. Investments in
companies in which the Company has less than a 20% ownership interest, and
does not exercise significant influence, are accounted for at cost.
The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
reclassifications have been made in the 1998 and 1997 financial statements
to conform with the current year presentation.
The Company's fiscal year ends on the Saturday nearest December
31. Unless otherwise stated, references to years in this report relate to
fiscal years rather than to calendar years.
Revenues from merchandise sales and services are net
of estimated returns and allowances and exclude sales tax. Included in
merchandise sales and services are gross revenues of licensees of $1.69,
$1.74 and $1.85 billion for 1999, 1998 and 1997, respectively. In December
1999 the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", which
effectively changes previous guidance related to the recording of licensed
business revenues for retail companies. In the year 2000, the Company will
change its method of recording licensed business revenue. This change will
reduce reported revenue and reported expenses, but have no impact on
The Company sells extended service contracts with terms of
coverage generally between 12 and 36 months. Revenues and incremental
direct acquisition costs from the sale of these contracts are deferred and
amortized over the lives of the contracts. Costs related to performing the
services under the contracts are expensed as incurred.
Costs associated with the opening of new stores are
expensed as incurred.
Earnings Per Common
Basic earnings per common share is computed by dividing net
income available to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per common share also includes
the dilutive effect of potential common shares (dilutive stock options)
outstanding during the period.
Cash and Cash
Cash equivalents include all highly liquid investments
with maturities of three months or less at the date of
in Transferred Credit Card Receivables
As part of its domestic
credit card securitizations, the Company transfers credit card receivables
to a Master Trust ("Trust") in exchange for certificates representing
undivided interests in such receivables. Effective January 3, 1998, the
Company reclassified, for all periods presented, its retained interest in
transferred credit card receivables to a separate balance sheet account
and presented the related charge-offs of transferred credit card
receivables as a reduction of credit revenues. Subsequent to January 3,
1998, amounts transferred from the Company's credit card portfolio to the
Trust become securities upon transfer. Accounts are transferred net of the
related allowance for uncollectible accounts and income is recognized
generally on an effective yield basis over the collection period of the
transferred balances. The retained interest consists of investor
certificates held by the Company and the seller's certificate, which
represents both contractually required seller's interest and excess
seller's interest in the credit card receivables in the Trust. The
contractually required seller's interest represents the dollar amount of
credit card receivables that, according to the terms of the Company's
securitization agreements, must be included in the Trust in addition to
the amount of receivables which back the securities sold to third parties.
The excess seller's interest is the dollar amount of receivables that
exist in the Trust to provide for future securitizations, but is not
contractually required to be in the Trust. Retained interests are as
The Company intends to
hold the investor certificates and contractually required seller's
interest to maturity. The excess seller's interest is considered available
for sale. Due to the revolving nature of the underlying credit card
receivables, the carrying value of the Company's retained interest in
transferred credit card receivables approximates fair value and is
classified as a current asset.
Credit card receivables arise primarily under open-end
revolving credit accounts used to finance purchases of merchandise and
services offered by the Company. These accounts have various billing and
payment structures, including varying minimum payment levels and finance
charge rates. Based on historical payment patterns, the full receivable
balance will not be repaid within one year.
receivables are shown net of an allowance for uncollectible accounts. The
Company provides an allowance for uncollectible accounts based on impaired
accounts, historical charge-off patterns and management
In 1997 and 1998 under
the Company's proprietary credit system, uncollectible accounts were
generally charged off automatically when the customer's past due balance
was eight times the scheduled minimum monthly payment, except that
accounts could be charged off sooner in the event of customer bankruptcy.
However, in the fourth quarter of 1998, the Company converted 12% of its
managed portfolio of credit card receivables to a new credit processing
system. The remaining 88% of accounts on the proprietary credit system
were then converted to the new system in the first and second quarters of
1999. Under the new system, the Company charges off an account
automatically when a customer has failed to make a required payment in
each of the eight billing cycles following a missed payment. Under both
systems, finance charge revenue is recorded until an account is charged
off, at which time uncollected finance charge revenue is recorded as a
reduction of credit revenues.
The Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" in 1997. SFAS No. 125 requires that the Company recognize
gains on its credit card securitizations which qualify as sales and that
an allowance for uncollectible accounts not be maintained for receivable
balances which are sold. Prior to adoption of SFAS No. 125, the Company
maintained an allowance for uncollectible sold accounts as a recourse
liability and did not recognize gains on securitizations. Accordingly, the
adoption of SFAS No. 125 increased operating income by $58 million in 1998
and $222 million in 1997 versus the operating income that would have been
recognized under the previous accounting method. In 1999, the effects of
the change in accounting related to SFAS No. 125, compared to our previous
accounting method, were not material.
Approximately 87% of merchandise inventories are
valued at the lower of cost (using the last-in, first-out or "LIFO"
method) or market using the retail method. To estimate the effects of
inflation on inventories, the Company utilizes internally developed price
The LIFO adjustment to
cost of sales was a credit of $73, $34 and $17 million in 1999, 1998 and
1997, respectively. Partial liquidation of merchandise inventories valued
under the LIFO method resulted in a credit of $2 million in 1997. No layer
liquidation occurred in 1999 and 1998. If the first-in, first-out ("FIFO")
method of inventory valuation had been used instead of the LIFO method,
merchandise inventories would have been $595 and $679 million higher at
January 1, 2000, and January 2, 1999, respectively.
inventories of International operations, operations in Puerto Rico, and
certain Sears Automotive Store formats, which in total represent
approximately 13% of merchandise inventories, are recorded at the lower of
cost or market based on the FIFO method.
Property and equipment is stated at cost less
accumulated depreciation. Depreciation is provided principally by the
straight-line method over the estimated useful lives of the related
assets, generally 2 to 10 years for furniture, fixtures and equipment, and
15 to 50 years for buildings and building improvements.
Long-lived assets, identifiable intangibles and goodwill
related to those assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets
may not be recoverable.
Included in other assets is the excess of purchase price over net
assets of businesses acquired ("goodwill"), which is amortized using the
straight-line method over periods ranging from 10 to 40 years. The Company
periodically assesses the recoverability of the carrying value and the
appropriateness of the remaining life of goodwill.
Costs for newspaper, television, radio and
other media advertising are expensed the first time the advertising
occurs. The total cost of advertising charged to expense was $1.63, $1.67
and $1.59 billion in 1999, 1998 and 1997, respectively.
The Company direct markets insurance (credit protection,
life and health), clubs and services memberships, merchandise through
specialty catalogs, and impulse and continuity merchandise. For insurance
and clubs and services, deferred revenue is recorded when the member is
billed (upon expiration of any free trial period), and revenue is
recognized over the insurance or membership period. For specialty catalog,
impulse and continuity merchandise, revenue is recognized when merchandise
and renewal costs, which primarily relate to membership solicitations, are
capitalized since such direct-response advertising costs result in future
economic benefits. Such costs are amortized over the shorter of the
program's life or five years, primarily in proportion to when revenues are
recognized. For specialty catalogs, costs are amortized over the life of
the catalog, not to exceed one year. The consolidated balance sheets
include deferred direct-response advertising costs of $180 and $131
million at January 1, 2000, and January 2, 1999, respectively. The current
portion is included in prepaid expenses and deferred charges, the long
term portion in other assets.
The Company utilizes various off-balance
sheet financial instruments to manage the interest rate and foreign
currency risk associated with its borrowings. The counterparties to these
instruments generally are major financial institutions with credit ratings
of single-A or better.
Interest rate swap
agreements modify the interest characteristics of a portion of the
Company's debt. Any differential to be paid or received is accrued and is
recognized as an adjustment to interest expense in the statement of
income. The related accrued receivable or payable is included in other
assets or liabilities. The fair values of the swap agreements are not
recognized in the financial statements.
Gains or losses on
terminations of interest rate swaps are deferred and amortized to interest
expense over the remaining life of the original swap period to the extent
the related debt remains outstanding.
used as hedges must be effective at reducing the type of risk associated
with the exposure being hedged and must be designated as hedges at
inception of the hedge contract. Accordingly, changes in market values of
financial instruments must be highly correlated with changes in market
values of the underlying items being hedged. Any financial instrument
designated but ineffective as a hedge would be marked to market and
recognized in earnings immediately.
Effect of New
In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In May 1999, the FASB voted to delay
the adoption of SFAS No. 133 by one year. This statement is now required
to be adopted in years beginning after June 15, 2000. The Company is
currently evaluating the effect this statement might have on the
consolidated financial position and results of operations of the