1. Accounting Policies

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the 2012 Form 10-K for Target Corporation (Target). The same accounting policies are followed in preparing quarterly and annual financial data. See the notes in our 2012 Form 10-K 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.

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.

2. Credit Card Receivables Transaction

On October 22, 2012, we reached an agreement to sell our entire U.S. consumer credit card portfolio to TD Bank Group (TD) for cash consideration equal to the gross (par) value of the outstanding receivables at the time of closing. Historically, our credit card receivables were recorded at par value less an allowance for doubtful accounts. Following this agreement, our receivables were classified as held for sale and recorded at the lower of cost (par) or fair value.

On March 13, 2013, we completed the sale of our entire U.S. consumer credit card portfolio to TD Bank Group (TD) for cash consideration of $5.7 billion, equal to the gross (par) value of the outstanding receivables at the time of closing. This transaction was accounted for as a sale, and the receivables are no longer reported in our Consolidated Statements of Financial Position. Concurrent with the sale of the portfolio, we repaid the nonrecourse debt collateralized by credit card receivables (2006/2007 Series Variable Funding Certificate) at par of $1.5 billion, resulting in net cash proceeds of $4.2 billion.

TD now underwrites, funds and owns Target Credit Card and Target Visa consumer receivables in the U.S. TD controls risk management  policies  and  oversees  regulatory  compliance,  and  we  perform  account  servicing  and  primary  marketing functions. We earn a substantial portion of the profits generated by the Target Credit Card and Target Visa portfolios. Income from the TD profit-sharing arrangement and our related account servicing expenses are classified within SG&A expenses in the U.S. Segment.

In the first quarter of 2013, we recognized a gain on sale of $391 million related to consideration received in excess of the recorded amount of the receivables. Consideration received included cash of $5.7 billion and a $225 million beneficial interest asset. The beneficial interest asset effectively represents a receivable for the present value of future profit-sharing we expect to receive on the receivables sold. As a result, a portion of the profit-sharing payments we receive from TD will reduce the beneficial interest asset and will not be recorded as income in our Consolidated Statements of Operations. Based on historical payment patterns, we estimate that the beneficial interest asset will be reduced over a four-year period, with larger reductions in the early years.

During the three months ended May 4, 2013, the U.S. Segment earned credit card revenues prior to the close of the transaction and $105 million of profit-sharing income from TD after the close of the transaction. On a consolidated basis, this profit-sharing income is offset by a $17 million reduction in the beneficial interest asset, for a net $88 million impact. These amounts are classified within SG&A expenses in the Consolidated Statements of Operations.

The $225 million beneficial interest asset was reduced during the quarter ended May 4, 2013 by $15 million of profit-sharing payments related to sold receivables, and it was also reduced by a $2 million income statement charge due to revaluing the remaining asset. As of May 4, 2013, $208 million of a beneficial interest asset remains and is recorded within other current assets and other noncurrent assets in our Consolidated Statements of Financial Position.

3. Fair Value Measurements

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).

(a) There was one interest rate swap designated as an accounting hedge in all periods presented. See Note 5 for additional information on interest rate swaps.

(b) A rollforward of the Level 3 beneficial interest asset is included in Note 2.

(c) Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of nonrecourse loans that are secured by some of these policies. These loan amounts were $782 million at May 4, 2013, $817 million at February 2, 2013 and $677 million at April 28, 2012.

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 and would be classified as Level 1. The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments and would be classified as Level 2.

(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.

Prior to the March 13, 2013 sale described in Note 2, we owned a portfolio of consumer credit card receivables. As of February 2, 2013, the receivables were recorded at the lower of cost (par) or fair value because they were classified as held for sale. We estimated the fair value of the receivables to be approximately $6.3 billion as of February 2, 2013. As of April 28, 2012, we estimated that the fair value of our credit card receivables approximated par value.

The carrying amounts of accounts payable and certain accrued and other current liabilities approximate fair value due to their short-term nature.

4. 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.

Concurrent with the sale of our credit card receivables portfolio, we repaid $1.5 billion of nonrecourse debt collateralized by credit card receivables (the 2006/2007 Series Variable Funding Certificate). We also used $1.4 billion of proceeds from the transaction to repurchase at market value an additional $970 million of debt during the first quarter of 2013. We recognized a loss on this early retirement of $445 million, which was recorded in net interest expense in our Consolidated Statements of Operations. Refer to Note 2 for more information on our credit card receivables transaction.

5. Derivative Financial Instruments

Historically our derivative instruments have primarily consisted of interest rate swaps used to mitigate interest rate risk. We have counterparty credit risk with large global financial institutions resulting from our derivative instruments. We monitor this concentration of counterparty credit risk on an ongoing basis. See Note 3 for a description of the fair value measurement of our derivative instruments and their classification on the Consolidated Statements of Financial Position.

As of May 4, 2013 and April 28, 2012, one swap was designated as a fair value hedge for accounting purposes, and no ineffectiveness was recognized during the three months ended May 4, 2013 or April 28, 2012.

Periodic payments, valuation adjustments and amortization of gains or losses on our derivative contracts had the following effect on our Consolidated Statements of Operations:

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 $69 million, $75 million and $102 million, at May 4, 2013, February 2, 2013 and April 28, 2012, respectively.

6. Share Repurchase

We repurchase shares primarily through open market transactions under a $5 billion share repurchase program authorized by our Board of Directors in January 2012. During the first quarter of 2012, we completed a $10 billion share repurchase program that was 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 are provided in Note 7.

(b) At their respective settlement dates.

7. Pension, Postretirement Health Care and Other Benefits

Pension and Postretirement Health Care Benefits

We have qualified defined benefits pension plans, unfunded nonqualified pension plans and provide certain post-retirement health care benefits to eligible team members.

Other Benefits

We offer unfunded nonqualified deferred compensation plans to certain team members. We mitigate some of our risk of these 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 pretax income of $11 million for both the three months ended May 4, 2013 and April 28, 2012. For the three months ended May 4, 2013, we made no investments in prepaid forward contracts in our own common stock. For the three months ended April 28, 2012, we invested $7 million in such investment instruments, and 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 6. The settlement dates of these instruments are regularly renegotiated with the counterparty.

8. Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated other comprehensive income (AOCI) by component, net of tax, for the three months ended May 4, 2013.

(a) Represents gains and losses on cash flow hedges, net of $1 million of taxes, which are recorded in net interest expense on the Consolidated Statements of Operations.

(b) Represents amortization of pension and other benefit liabilities, net of $8 million of taxes, which is recorded in SG&A expenses on the Consolidated Statements of Operations. See Note 7 for additional information.

9. Segment Reporting

Through fiscal 2012, we operated as three business segments: U.S. Retail, U.S. Credit Card and Canadian. Following the sale of our credit card receivables portfolio described in Note 2, we operate as two segments: U.S. and Canadian. Our segment measure of profit is used by management to evaluate the return on our investment and to make operating decisions.

Note: The sum of the segment amounts may not equal the total amounts due to rounding.

Note: Prior period segment results have been revised to reflect the combination of our historical U.S. Retail Segment and U.S. Credit Card Segment into one U.S. Segment.

(a) For the three months ended May 4, 2013, the U.S. Segment recognizes within SG&A all amounts related to the profit-sharing arrangement with TD and related servicing expenses. For purposes of consolidated results, a portion of the profit-sharing is recognized as a reduction to the beneficial interest asset. As a result, SG&A expenses for the U.S. and Canadian Segments of $3,573 million plus the reduction of the beneficial interest asset of $17 million equals consolidated SG&A expenses. For the three months ended April 28, 2012, the combination of SG&A expenses and credit card expenses, less credit card revenues, in our Consolidated Statements of Operations equals total SG&A as reported in our business segment results, as revised.

Note: Prior period segment results have been revised to reflect the combination of our historical U.S. Retail Segment and U.S. Credit Card Segment into one U.S. Segment.

(a)  Represents the beneficial interest asset for the period ended May 4, 2013. For the period ended February 2, 2013, represents the net adjustment to eliminate our allowance for doubtful accounts and record our credit card receivables at lower of cost (par) or fair value.

(a) There was one interest rate swap designated as an accounting hedge in all periods presented. See Note 5 for additional information on interest rate swaps.

(b) A rollforward of the Level 3 beneficial interest asset is included in Note 2.

(c) Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of nonrecourse loans that are secured by some of these policies. These loan amounts were $782 million at May 4, 2013, $817 million at February 2, 2013 and $677 million at April 28, 2012.