Target 2008 Annual Report Download - page 40

Critical Accounting Estimates
Our analysis of operations and financial condition is based on our consolidated financial statements,
prepared in accordance with U.S. generally accepted accounting principles (GAAP). Preparation of these
consolidated financial statements requires us to make estimates and assumptions affecting the reported
amounts of assets and liabilities at the date of the consolidated financial statements, reported amounts of
revenues and expenses during the reporting period and related disclosures of contingent assets and
liabilities. In the Notes to Consolidated Financial Statements, we describe the significant accounting policies
used in preparing the consolidated financial statements. Our estimates are evaluated on an ongoing basis
and are drawn from historical experience and other assumptions that we believe to be reasonable under the
circumstances. Actual results could differ under different assumptions or conditions. Our senior management
has discussed the development and selection of our critical accounting estimates with the Audit Committee of
our Board of Directors. The following items in our consolidated financial statements require significant
estimation or judgment:
Inventory and cost of sales We use the retail inventory method to account for substantially our entire
inventory and the related cost of sales. Under this method, inventory is stated at cost using the last-in, first-out
(LIFO) method as determined by applying a cost-to-retail ratio to each merchandise grouping’s ending retail
value. Cost includes the purchase price as adjusted for vendor income. Since inventory value is adjusted
regularly to reflect market conditions, our inventory methodology reflects the lower of cost or market. We
reduce inventory for estimated losses related to shrink and markdowns. Our shrink estimate is based on
historical losses verified by ongoing physical inventory counts. Historically our actual physical inventory count
results have shown our estimates to be reliable. Markdowns designated for clearance activity are recorded
when the salability of the merchandise has diminished. Inventory is at risk of obsolescence if economic
conditions change. Relevant economic conditions include changing consumer demand, changing consumer
credit markets or increasing competition. We believe these risks are largely mitigated because our inventory
typically turns in less than six months. Inventory is further described in Note 11.
Vendor income receivable Cost of sales and SG&A expenses are partially offset by various forms of
consideration received from our vendors. This ‘‘vendor income’’ is earned for a variety of vendor-sponsored
programs, such as volume rebates, markdown allowances, promotions and advertising, as well as for our
compliance programs. We establish a receivable for the vendor income that is earned but not yet received.
Based on the agreements in place, this receivable is computed by estimating when we have completed our
performance and the amount earned. The majority of all year-end vendor income receivables are collected
within the following fiscal quarter. Vendor income is described further in Note 4.
Allowance for doubtful accounts When receivables are recorded, we recognize an allowance for doubtful
accounts in an amount equal to anticipated future write-offs. This allowance includes provisions for
uncollectible finance charges and other credit-related fees. We estimate future write-offs based on historical
experience of delinquencies, risk scores, aging trends and industry risk trends. Substantially all accounts
continue to accrue finance charges until they are written off. Accounts are automatically written off when they
become 180 days past due. Management believes the allowance for doubtful accounts is adequate to cover
anticipated losses in our credit card accounts receivable under current conditions; however, unexpected,
significant deterioration in any of the factors mentioned above or in general economic conditions could
materially change these expectations. We believe that the allowance recorded at January 31, 2009 is sufficient
to cover currently anticipated losses. Credit card receivables are described in Note 10.
Analysis of long-lived and intangible assets for impairment We review assets at the lowest level for which
there are identifiable cash flows, usually at the store level. An impairment loss on a long-lived and identifiable
intangible asset would be recognized when estimated undiscounted future cash flows from the operation and
disposition of the asset are less than the asset carrying amount. Goodwill is tested for impairment by
comparing its carrying value to a fair value estimated by discounted future cash flows. No material
impairments were recorded in 2008, 2007 or 2006 as a result of the tests performed.
Insurance/self-insurance We retain a substantial portion of the risk related to certain general liability,
workers’ compensation, property loss and team member medical and dental claims. Liabilities associated
with these losses include estimates of both claims filed and losses incurred but not yet reported. We estimate
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