TARGET CORP | 2013 | FY | 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).

Fair Value Measurements – Recurring Basis
 
 
 
 
 
 
 
Fair Value at February 1, 2014
 
Fair Value at February 2, 2013
(millions)
Level 1

Level 2

Level 3

 
Level 1

Level 2

Level 3

Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Short-term investments
$
3

$
—

$
—

 
$
130

$
—

$
—

Other current assets
 
 
 
 
 
 
 
Interest rate swaps (a)
—

1

—

 
—

4

—

 Prepaid forward contracts
73

—

—

 
73

—

—

 Beneficial interest asset (b)
—

—

71

 
—

—

—

Other noncurrent assets
 
 
 
 
 
 
 
Interest rate swaps (a)
—

62

—

 
—

85

—

Company-owned life insurance investments (c)
—

305

—

 
—

269

—

 Beneficial interest asset (b)
—

—

56

 
—

—

—

Total
$
76

$
368

$
127

 
$
203

$
358

$
—

Liabilities
 
 
 
 
 
 
 
Other current liabilities
 
 
 
 
 
 
 
Interest rate swaps (a)
$
—

$
—

$
—

 
$
—

$
2

$
—

Other noncurrent liabilities
 
 
 
 
 
 
 
Interest rate swaps (a)
$
—

$
39

$
—

 
$
—

$
54

$
—

Total
$
—

$
39

$
—

 
$
—

$
56

$
—

(a) 
There was one interest rate swap designated as an accounting hedge at February 1, 2014 and February 2, 2013. See Note 19 for additional information on interest rate swaps.
(b) 
A rollforward of the Level 3 beneficial interest asset is included in Note 6.
(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 $790 million at February 1, 2014 and $817 million at February 2, 2013.

Valuation Technique
Short-term investments - Carrying value approximates fair value because maturities are less than three months.
Prepaid forward contracts - Initially valued at transaction price. Subsequently valued by reference to the market price of Target common stock.
Interest rate swaps - Valuation models are calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads).
Company-owned life insurance investments - Includes investments in separate accounts that are valued based on market rates credited by the insurer.
Beneficial interest asset - Valued using a cash-flow based economic-profit model, which includes inputs of the forecasted performance of the receivables portfolio and a market-based discount rate. Internal data is used to forecast expected payment patterns and write-offs, revenue, and operating expenses (credit EBIT yield) related to the credit card portfolio. Changes in macroeconomic conditions in the United States could affect the estimated fair value. A one percentage point change in the forecasted EBIT yield would impact our fair value estimate by approximately $20 million. A one percentage point change in the forecasted discount rate would impact our fair value estimate by approximately $4 million. As described in Note 6, this 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. As the asset is reduced over time, changes in the forecasted credit EBIT yield and the forecasted discount rate will have a similar impact on the estimated fair value.



The carrying amount and estimated fair value of debt, a significant financial instrument not measured at fair value in the Consolidated Statements of Financial Position, was $11,758 million and $13,184 million, respectively, at February 1, 2014, and $15,618 million and $18,143 million, respectively, at February 2, 2013.  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. These amounts exclude unamortized swap valuation adjustments and capital lease obligations.
As of February 2, 2013, our consumer credit card 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 our consumer credit card portfolio to be approximately $6.3 billion using a cash flow-based, economic-profit model using Level 3 inputs, including the forecasted performance of the portfolio and a market-based discount rate. We used internal data to forecast expected payment patterns and write-offs, revenue, and operating expenses (credit EBIT yield) related to the credit card portfolio. Refer to Note 6 for more information on our credit card receivables transaction.
The carrying amounts of accounts payable and certain accrued and other current liabilities approximate fair value due to their short terms.

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