1. Accounting Policies

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the 2010 Form 10-K for Target Corporation (Target or the Corporation). The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. See the notes in our Form 10-K for the fiscal year ended January 29, 2011, for those policies. In the opinion of management, all adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature.

Assets and liabilities of operations with functional currencies other than the U.S. dollar are translated at period-end exchange rates. Income statement accounts are translated using exchange rates prevailing during the period. Translation adjustments are reflected within accumulated other comprehensive income in shareholders’ equity. Gains and losses from foreign currency transactions are included in net earnings. During the nine months ended October 29, 2011 the value of  $1.00 ranged from C $0.94 (Canadian dollars) to C $1.05 and averaged C $0.98. On October 29, 2011,  $1.00 was equivalent to C $0.99.

Due to the seasonal nature of our business, quarterly revenues, expenses, earnings and cash flows are not necessarily indicative of the results that may be expected for the full year. All amounts are in U.S. dollars unless otherwise stated.

3. Canadian Leasehold Acquisition

In January 2011, we entered into an agreement to purchase the leasehold interests in up to 220 sites in Canada currently operated by Zellers Inc. (Zellers), in exchange for C $1,825 million. We have completed this real estate acquisition with the selection of 84 additional Zellers sites, bringing the total number of sites selected to 189, which includes the initial group of 105 sites selected in the second quarter of 2011. We believe this transaction will allow us to open 125 to 135 Target stores in Canada, primarily during 2013. We sold our right to acquire the leasehold interests in 54 sites to third party retailers and landlords, for a total of  $225 million.  These transactions resulted in a final net purchase price of  $1,636 million, which is included in expenditures for property and equipment in the Consolidated Statement of Cash Flows.

We recorded the acquired assets in our Canadian Segment at their estimated fair values.

(a) Amortization period of acquired intangible assets range from 3 to 13 years.

The acquired sites are being subleased back to Zellers for terms through March 2013, or earlier, at our option.

4. Fair Value Measurements

Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

The following table presents financial assets and liabilities measured at fair value on a recurring basis:

Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The fair value measurements related to long-lived assets in the following table were determined using available market prices at the measurement date based on recent investments or pending transactions of similar assets, third-party independent appraisals, valuation multiples or public comparables, less cost to sell where appropriate. We classify these measurements as Level 2.

(a)            Primarily relates to real estate and buildings intended for sale in the future but not currently meeting the held for sale criteria.

The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Consolidated Statements of Financial Position. The fair value of marketable securities is determined using available market prices at the reporting date. The fair value of debt is generally measured using a discounted cash flow analysis based on our current market interest rates for similar types of financial instruments.

(a)       Held-to-maturity investments that are held to satisfy the regulatory requirements of Target Bank and Target National Bank.

(b)       Represents the sum of nonrecourse debt collateralized by credit card receivables and unsecured debt and other borrowings excluding unamortized swap valuation adjustments and capital lease obligations.

Based on various inputs and assumptions, including discussions with third parties, we believe the gross balance of our credit card receivables approximates fair value at October 29, 2011. The carrying amounts of accounts payable and certain accrued and other current liabilities also approximate fair value at October 29, 2011.

6. Commitments and Contingencies

As a result of our second and third quarter 2011 acquisition of leases from Zellers, we have assumed additional future minimum lease payments of  $3.5 billion, with a net present value of  $1.3 billion, at October 29, 2011.

We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of the currently identified claims or litigation will be material to our results of operations, cash flows or financial condition.

7. Notes Payable and Long-Term Debt

We obtain short-term financing from time to time under our commercial paper program, a form of notes payable. As of October 29, 2011,  $1,211 million was outstanding under this program. There were no amounts outstanding under our commercial paper program at January 29, 2011 or October 30, 2010. During the three and nine months ended October 29, 2011 the maximum amount outstanding was  $1,211 million and the average amount outstanding was  $351 million and  $227 million, respectively. There were no amounts outstanding under our commercial paper program at any time during the three or nine months ended October 30, 2010.

In July 2011, we issued  $350 million of unsecured fixed rate debt at 1.125% and  $650 million of unsecured floating rate debt at three-month LIBOR plus 17 basis points that matures in July 2014. Proceeds from this issuance were used for general corporate purposes.

In October 2011, we entered into a five-year  $2.25 billion unsecured revolving credit facility with a group of banks. The new facility replaced our existing credit agreement and will expire in October 2016. No balances were outstanding at any time during the first three quarters of 2011 or 2010 under this or previously existing revolving credit facilities.

In addition, TR LLC has made payments to JPMC to reduce its interest in our credit card receivables as described in Note 5, Credit Card Receivables.

8. Derivative Financial Instruments

Derivative financial instruments are reported at fair value on the Consolidated Statements of Financial Position. Historically our derivative instruments have primarily consisted of interest rate swaps. We use these derivatives to mitigate our interest rate risk. We have counterparty credit risk resulting from our derivative instruments. This risk lies primarily with large global financial institutions. We monitor this concentration of counterparty credit risk on an ongoing basis.

During 2008, we terminated or de-designated certain interest rate swaps that were accounted for as hedges. Total net gains amortized into net interest expense for terminated or de-designated swaps were  $10 million and  $11 million during the three months ended October 29, 2011 and October 30, 2010, respectively. Total net gains amortized into net interest expense for terminated or de-designated swaps were  $31 million and  $34 million during the nine months ended October 29, 2011 and October 30, 2010, respectively. The amount remaining on unamortized hedged debt valuation gains from terminated or de-designated interest rate swaps that will be amortized into earnings over the remaining lives of the underlying debt totaled  $122 million,  $152 million and  $164 million, at October 29, 2011, January 29, 2011 and October 30, 2010, respectively.

Periodic payments, valuation adjustments and amortization of gains or losses from the termination or de-designation of derivative contracts are summarized below:

In July 2011, in conjunction with the  $350 million fixed rate debt issuance, we entered into an interest rate swap with a notional amount of  $350 million, under which we pay a variable rate and receive a fixed rate. This swap has been designated as a fair value hedge, and there was no ineffectiveness recognized related to this hedge during the three or nine months ended October 29, 2011. There were no derivative instruments designated as hedges as of October 30, 2010. See Note 4, Fair Value Measurements, for a description of the fair value measurement of derivative contracts and their classification on the Consolidated Statements of Financial Position.

9. Income Taxes

We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2010 and, with few exceptions, are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2003.

We accrue for the effects of uncertain tax positions and the related potential penalties and interest.

During the third quarter of 2010, we recorded a reduction to income tax expense of  $45 million due to the favorable resolution of various state income tax matters.

Subsequent to the end of the third quarter of 2011, we favorably resolved various state income tax matters, which will be recorded as a reduction to income tax expense of approximately  $50 million in our fourth quarter 2011 Statement of Operations.

10. Share Repurchase

We repurchase shares primarily through open market transactions under a  $10 billion share repurchase plan authorized by our Board of Directors in November 2007.

Of the shares reacquired, a portion was delivered upon settlement of prepaid forward contracts as follows:

(a) These contracts are among the investment vehicles used to reduce our economic exposure related to our nonqualified deferred compensation plans. The details of our positions in prepaid forward contracts have been provided in Note 11.

(b) At their respective settlement dates.

11. Pension, Postretirement Health Care and Other Benefits

We have qualified defined benefit pension plans covering team members who meet age and service requirements, including in certain circumstances, date of hire. We also have unfunded, nonqualified pension plans for team members with qualified plan compensation restrictions. Eligibility for, and the level of, these benefits varies depending on team members’ date of hire, length of service and/or team member compensation. Upon early retirement and prior to Medicare eligibility, team members also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost. Effective January 1, 2009, our qualified defined benefit pension plan was closed to new participants, with limited exceptions.

Even though we are not required by law to make any contributions, we may elect to make contributions depending on investment performance and the pension plan funded status in 2011.

Our unfunded, nonqualified deferred compensation plan is offered to approximately 3,500 current and retired team members whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional 2 percent per year to the accounts of all active participants, excluding members of our management executive committee, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering substantially fewer than 100 participants, most of whom are retired. In this plan, deferred compensation earns returns tied to market levels of interest rates plus an additional 6 percent return, with a minimum of 12 percent and a maximum of 20 percent, as determined by the plan’s terms.

We mitigate some of our risk of offering the nonqualified plans through investing in vehicles, including company-owned life insurance and prepaid forward contracts in our own common stock, that offset a substantial portion of our economic exposure to the returns of these plans. These investment vehicles are general corporate assets and are marked to market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur.

The total change in fair value for contracts indexed to our own common stock recognized in earnings was a pretax gain of  $6 million and  $1 million during the three months ended October 29, 2011 and October 30, 2010, respectively, and a pretax gain of  $3 million and  $1 million for the nine months ended October 29, 2011 and October 30, 2010, respectively. For the nine months ended October 29, 2011 and October 30, 2010, we invested approximately  $44 million and  $26 million, respectively, in such investment instruments. This activity is included in the Consolidated Statements of Cash Flows within other investing activities. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock when settling the forward contracts, as described in Note 10.

At October 29, 2011, January 29, 2011 and October 30, 2010, our outstanding interest in contracts indexed to our common stock was as follows:

12. Segment Reporting

Our Canadian Segment was initially reported in our first quarter 2011 financial results, in connection with entering into an agreement to purchase leasehold interests in Canada.

Our segment measure of profit is used by management to evaluate the return we are achieving on our investment and to make operating decisions.