Kohl's 2008 Annual Report Download - page 53

KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Long-term Investments
As of January 31, 2009, the par value of our ARS was $407 million and the estimated fair value was $332
million. Our ARS portfolio consists entirely of highly-rated, insured student loan backed securities. Substantially
all of the principal and interest is insured by the federal government and the remainder is insured by highly-rated
insurance companies. Approximately $217 million of our ARS (at fair value) are rated “AAA” by Moody’s,
Standard & Poor’s and/or Fitch Ratings. The remaining ARS investments have ratings equivalent to the Standard
and Poor’s “AA” and “A” ratings.
Beginning in February 2008, liquidity issues in the global credit markets resulted in the failure of auctions
for substantially all of our ARS. A “failed” auction occurs when the amount of securities submitted for sale in the
auction exceeds the amount of purchase bids. As a result, holders are unable to liquidate their investment through
the auction. A failed auction is not a default of the debt instrument, but does set a new interest rate in accordance
with the terms of the debt instrument. A failed auction limits liquidity for holders until there is a successful
auction, another market for ARS develops or the debt matures. ARS are generally callable by the issuer at any
time. Scheduled auctions continue to be held until the ARS matures or is called. Since February 2008, $17
million of ARS were called at par.
To date, we have collected all interest payable on outstanding ARS when due and expect to continue to do
so in the future. At this time, we have no reason to believe that any of the underlying issuers of our ARS or their
insurers are presently at risk. While the auction failures limit our ability to liquidate these investments, we
believe that the ARS failures will have no significant impact on our ability to fund ongoing operations and
growth initiatives.
We intend to hold these ARS until their fair value once again equals their par value and believe we have the
ability to do so based on other sources of liquidity. Therefore, impairment charges are considered temporary and
have been included in Accumulated Other Comprehensive Loss within our Consolidated Balance Sheet at
January 31, 2009. In certain cases, holding the investments until recovery may mean until maturity, which ranges
from 2015 to 2056. The weighted-average maturity date is 2036. As a result of the persistent failed auctions and
the uncertainty of when these investments could be successfully liquidated at par, we have recorded all of our
ARS as Long-term Investments within the Consolidated Balance Sheet at January 31, 2009.
SFAS No. 157, “Fair Value Measurements,” requires fair value measurements be classified and disclosed in
one of the following three categories:
Level 1: Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2: Financial instruments lacking unadjusted, quoted prices from active market exchanges,
including over-the-counter traded financial instruments. The prices for the financial
instruments are determined using prices for recently traded financial instruments with
similar underlying terms as well as directly or indirectly observable inputs, such as interest
rates and yield curves that are observable at commonly quoted intervals.
Level 3: Financial instruments that are not actively traded on a market exchange. This category
includes situations where there is little, if any, market activity for the financial instrument.
The prices are determined using significant unobservable inputs or valuation techniques.
The fair value for our ARS is based on third-party pricing models and is classified as a Level 3 pricing
category. We utilized a discounted cash flow model to estimate the current fair market value for each of the
securities we owned as there was no recent activity in the secondary markets in these types of securities. This
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