NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Accounting Policies Revenues Consideration Received from Vendors Buying and Occupancy Expenses Organization Target Corporation (the Corporation) is a general merchandise retailer, comprised of three operating segments: Target, MervynGLYPH<213>s and Marshall FieldGLYPH<213>s. Our segments are primarily determined by the nature of the products and services offered to our guests. Target, an upscale discount chain located in 47 states, contributed 86 percent of our 2003 total revenues. MervynGLYPH<213>s, a middle-market promotional department store located in 14 states in the West, South and Midwest, contributed 7 percent of total revenues. Marshall FieldGLYPH<213>s (including stores formerly named DaytonGLYPH<213>s and HudsonGLYPH<213>s), a traditional department store located in 8 states in the upper Midwest, contributed 5 percent of total revenues. Management measures segment performance based on pre-tax segment profit, which includes credit card operations. Credit card operations drive revenue growth at each segment and are considered an integral component of our retail operations. Business segment comparisons are presented on page 38. Consolidation The financial statements include the balances of the Corporation and its subsidiaries after elimination of material intercompany balances and transactions. All material subsidiaries are wholly owned. Use of Estimates The preparation of our financial statements, in conformity with accounting principles generally accepted in the United States (GAAP), requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates. Fiscal Year Our fiscal year ends on the Saturday nearest January 31. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. Fiscal years 2003, 2002 and 2001 each consisted of 52 weeks. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Stock-based Compensation In 2003, we adopted Statement of Financial Accounting Standards (SFAS) No. 123, GLYPH<210>Accounting for Stock-Based Compensation,GLYPH<211> in accordance with the prospective transition method prescribed in SFAS No. 148, GLYPH<210>Accounting for Stock-Based CompensationGLYPH<209>Transition and DisclosureGLYPH<211> and began recognizing compensation expense for stock options granted during the year. Compensation expense is reflected in selling, general and administrative expenses. Prior to 2003, we accounted for stock option awards under the intrinsic value method prescribed in Accounting Principles Board (APB) No. 25, GLYPH<210>Accounting for Stock Issued to EmployeesGLYPH<211> which resulted in no compensation expense because the exercise price of the stock options was equal to the fair market value of the underlying stock on the grant date. The pro forma impact of accounting for those awards at fair value is disclosed on page 35. Revenue from retail sales is recognized at the time of sale. Com- missions earned on sales generated by leased departments are included within sales and were $38 million in 2003, $33 million in 2002 and $37 million in 2001. Net credit card revenues are comprised of finance charges and late fees from credit card holders, as well as third-party merchant fees earned from the use of our Target Visa credit card. Net credit card revenues are recognized according to the contractual provisions of each applicable credit card agreement. If an account is written-off, any uncollected finance charges or late fees are recorded as a reduction of credit card revenue. The amount of our retail sales charged to our credit cards was $5.3 billion, $5.4 billion and $5.6 billion in 2003, 2002 and 2001, respectively. Prior to August 22, 2001, net credit card revenues are net of the payments made to holders of publicly held receivable-backed securities. We collect vendor income primarily as a result of our promotional, advertising and compliance programs. Promotional and advertising allowances are intended to offset our costs of promoting and selling the vendorGLYPH<213>s merchandise in our stores and are recognized when we incur the cost or complete the promotion. Under our compliance programs, vendors are charged for merchandise shipments that do not meet our requirements, such as late or incomplete shipments, and we record these allowances when the violation occurs. Vendor income either reduces our inventory costs or our operating expenses based on the requirements of Emerging Issues Task Force (EITF) Issue No. 02-16, GLYPH<210>Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a VendorGLYPH<211> as discussed below. In the first quarter of 2003, we adopted EITF No. 02-16. In accordance with EITF No. 02-16, certain vendor income items have been reclassified from operating expenses to inventory purchases and recognized into income as the vendorsGLYPH<213> merchandise is sold. The guidance was applied on a prospective basis only as required by EITF No. 02-16. This reclassification had no material impact on sales, cash flows or financial position for any period, and had a slight negative impact on net earnings. In the fourth quarter of 2003, we adopted EITF No. 03-10, GLYPH<210>Application of Issue 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers,GLYPH<211> which amends EITF No. 02-16. The adoption of EITF No. 03-10 did not have a material impact on net earnings, cash flows or financial position. The requirements of EITF No. 02-16 and EITF No. 03-10 are discussed in ManagementGLYPH<213>s Discussion and Analysis on pages 24-25. Buying expenses primarily consist of salaries and expenses incurred by the CorporationGLYPH<213>s merchandising operations, while our occupancy expenses primarily consist of rent, depreciation, property taxes and other operating costs of our retail and distribution facilities. Buying and occupancy expenses classified in selling, general and administrative expenses were $1.5 billion, $1.4 billion and $1.2 billion in 2003, 2002 and 2001, respectively. In addition, we recorded $1 billion, $934 million and $814 million of depreciation expense for our retail and distribution facilities in 2003, 2002 and 2001, respectively. 30