ACCT 635 Week 7 Individual Research Project Paper Example

New Disclosure Standards in a Retailer's Annual Report: How Four Recent FASB Updates Shape Target Corporation's Fiscal 2025 Form 10-K

Abstract

This paper examines how four recent Accounting Standards Updates shape Target Corporation's annual report for the year ended January 31, 2026. It finds that the supplier finance program roll-forward, the segment disclosures required of single-segment companies and the expanded income tax disclosures each give investors information that earlier filings did not, most clearly in the income tax note, where the rate reconciliation now appears in dollars and taxes paid are broken out by jurisdiction. The expense disaggregation update, which Target has not yet adopted, promises the largest change to how a retailer's costs are seen. Evaluated against the conceptual framework and recent research, the updates improve relevance at modest cost, with the evidence strongest for disclosures tied closely to a company's operations.

Introduction

Target Corporation operates nearly 2,000 general merchandise stores in the United States and a large digital business, and in fiscal 2025, the year ended January 31, 2026, it reported net sales of $104.8 billion, operating income of $5.1 billion and net earnings of $3.7 billion (Target Corporation, 2026). A company of that size, with one reportable segment, a large supplier base and substantial income taxes, is a useful test of the FASB's recent disclosure updates, because each update touches a part of its business that matters to investors.

The FASB's agenda over the past several years has emphasized disclosure more than recognition. Rather than changing what appears on the face of the financial statements, the board has asked companies to explain more about amounts already reported: what they owe to banks that pay their suppliers, what costs management reviews, where their income taxes come from and go, and what sits inside broad expense lines. This paper asks what four of those updates now let an investor learn from Target's annual report, and whether, measured by the framework, the filing has become more useful for decisions.

The method is a close reading of the filing against the text of each update. For every standard, the paper identifies the disclosure the update requires, locates it in Target's financial statements and notes for fiscal 2025, compares it where possible with fiscal 2024, and asks what a reader can learn that the earlier rules did not reveal. All company figures are taken from the 10-K as filed, rounded as the filing presents them, and each is attributed to its fiscal year. The paper then evaluates the disclosures against the framework's qualitative characteristics and against published research on how investors use similar information. Because the paper studies one company, its conclusions about the standards are illustrations rather than generalizations, a limitation discussed before the conclusion.

Theory and Evaluative Framework

Reporting exists, the conceptual framework says, to help those who fund an entity, shareholders and creditors alike, decide whether to fund it, and the information that helps them must be relevant and faithfully represented, with its benefits outweighing what it costs to produce (Financial Accounting Standards Board [FASB], 2010). Wolk et al. (2017) add that standard setting takes place in a political and economic environment, where preparers weigh the costs of new requirements and lobby accordingly, and where standards may change behavior as well as reporting.

Two further ideas guide the evaluation. First, recognition and disclosure are not equivalent. Once the lease standard moved operating lease obligations out of the notes and onto the balance sheet, Ai et al. (2025) report, investors priced them more fully and treated them more as risk, because a recognized number is both firmer and simpler to use than a footnote. Disclosure updates, which leave recognition unchanged, must therefore earn their usefulness through clarity and structure. Second, not all detail is equally useful. Blann and Moon (2026) found that voluntary disaggregation of cost of goods sold was decision-useful to investors and analysts, while disaggregation of selling and administrative expense was not. The question for each update is whether it delivers detail of the first kind.

Supplier Finance Programs

What the standard requires

ASU 2022-04 requires a buyer that uses a supplier finance program, an arrangement in which a bank or other intermediary pays the buyer's suppliers early and the buyer pays the intermediary later, to disclose the program's key terms, the amount outstanding at the end of the period, where that amount appears on the balance sheet and, beginning a year after the rest of the update, a roll-forward of the obligation during the period (FASB, 2022). The update did not change how these obligations are measured or classified; it made them visible.

What Target's filing shows

Target reports a supplier finance program obligation of $3.0 billion at January 31, 2026, down from $3.7 billion a year earlier. The roll-forward shows $11.4 billion of invoices confirmed into the program during the year and $12.1 billion settled, which reconciles the two balances (Target Corporation, 2026). For comparison, Target's accounts payable at year-end were $12.6 billion, so the program obligation is roughly a quarter the size of that balance.

What a reader learns

Before the update, an investor could not tell how much of a retailer's payables were owed through bank-intermediated programs, and therefore could not judge how dependent its working capital was on those arrangements. The roll-forward shows that Target's program is large and active, cycling roughly four times the year-end balance through the year, and that the balance declined in fiscal 2025. That matters because supplier finance can stretch payment terms and support operating cash flow; if banks withdrew or terms changed, the effect on cash would be significant. A roll-forward turns a single balance into a story about how much of a company's working capital runs through a bank. The disclosure is relevant and, because it reconciles, faithfully represented. Its cost to a company that already tracks the program is small.

Segment Reporting for a Single-Segment Company

What the standard requires

ASU 2023-07 obliges public companies to set out the large expenses that routinely reach the person who runs the business and that sit inside each segment profit measure, to report and describe a catch-all for other items, and to identify that person by title and explain how the profit measures are used. Companies reporting just one segment are no longer exempt from any of these disclosures (FASB, 2023a). Its effective date, fiscal years beginning after mid-December 2023, meant Target first applied it in the annual report for fiscal 2024.

What Target's filing shows

Target's filing lists a single operating segment, which is also its only reportable segment (Target Corporation, 2026). Before the update, such a company said little more than that. Under the update, Target's segment note must identify its chief operating decision maker, explain how segment profit is used to allocate resources and present the significant expenses that decision maker regularly receives.

What a reader learns

For a single-segment company, the totals in the segment note will largely match the consolidated income statement, so the new information lies in the categories and the explanation. Knowing which expenses management reviews regularly tells an investor how management thinks about the business. Research on the earlier segment standard supports the value of such disclosure: Botosan and Stanford (2005) found that before SFAS 131, managers withheld segment data for profitable businesses in less competitive industries, and Berger and Hann (2003) found that the new segment data revealed information the market had not fully anticipated. Those findings concern multi-segment companies, and the incremental value for Target is likely smaller. The update's benefit here is mainly consistency and accountability, at low cost. The requirement to describe other segment items, the residual between reported revenue less significant expenses and the segment profit measure, adds a further check, because it forces the company to show that the expenses it calls significant, together with everything else, reconcile to the profit figure management uses. For a reader comparing Target with a multi-segment competitor, that reconciliation is a reminder that the categories each company chooses reflect its own management reports rather than a common list.

Income Taxes

What the standard requires

ASU 2023-09 makes public companies show the rate reconciliation twice over, as dollars and as percentages, under prescribed headings such as state and local tax, foreign tax effects, credits and movements in unrecognized tax benefits, and it forces any item reaching 5 percent of the statutory-rate tax onto its own line. It also requires income taxes paid, net of refunds, to be disaggregated by federal, state and foreign jurisdictions, with individual jurisdictions shown when they reach a threshold (FASB, 2023b). Public companies applied it to years starting after the middle of December 2024, so Target's fiscal 2025 report is the first one written under it.

What Target's filing shows

Target reported pretax income of $4,767 million in fiscal 2025. At the 21 percent federal statutory rate, tax would have been $1,001 million. The reconciliation shows state and local income taxes adding $168 million, or 3.5 percentage points, and tax credits reducing tax by $77 million, or 1.6 points, among other items, so that total tax expense came to $1,062 million, an effective rate of 22.3 percent. Cash payments of income tax during the year reached $1,091 million: $781 million federal, $39 million foreign and the remainder to states and localities (Target Corporation, 2026).

What a reader learns

Hanlon (2003) explained why investors had struggled to infer a company's taxable income and cash taxes from financial statements: the tax footnote aggregated items, mixed percentages with amounts and said little about where taxes were paid. Target's new note addresses each of those weaknesses. A reader can now see, in dollars, that state and local taxes are the largest addition to the statutory charge and that credits are the largest reduction, which helps in modeling how changes in state law or in federal credits would affect future tax expense. The taxes-paid breakdown connects expense to cash. It also puts the company's international footprint in proportion: the filing attributes $800 million of fiscal 2025 pretax income to foreign operations, and $39 million of the year's income tax payments went to foreign jurisdictions, figures an investor can now set beside the $781 million paid federally (Target Corporation, 2026). Target's own history shows why that matters: three years before the filing, booked tax and cash tax parted by close to $800 million in one year, while in fiscal 2025 they almost matched (Target Corporation, 2026). An analyst forecasting cash flow from tax expense alone would have badly misjudged that earlier year. The new disaggregation of taxes paid makes such differences easier to trace by jurisdiction.

The update also improves faithful representation. Dollar amounts expose the size of items that a percentage rounded to one decimal place can obscure, and the 5 percent threshold prevents large items from disappearing into an "other" line. For a company that already computes these figures to prepare its returns, the incremental cost is modest.

Expense Disaggregation: The Change Still to Come

What the standard requires

Under ASU 2024-03, each major expense caption on the income statement will be broken down in a note into the inventory it includes, the pay and benefits, the depreciation and the amortization of intangibles, with words describing whatever is left and a total for selling expenses (FASB, 2024). It applies to annual reporting periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027.

What it will mean for Target

Target's income statement reports cost of sales of $75.5 billion and selling, general and administrative expenses of $21.5 billion for fiscal 2025, alongside depreciation and amortization reported in the cash flow statement of about $3.1 billion and advertising expense of $1.5 billion disclosed in the notes (Target Corporation, 2026). Under the update, Target will have to show how much of cost of sales is inventory purchases, employee compensation and depreciation, and the same for selling, general and administrative expense. Because Target's fiscal 2026 began on February 1, 2026, before the effective date, the first annual 10-K under the update will cover the fiscal year that begins in early 2027.

What research predicts

Blann and Moon (2026) found that voluntary disaggregation of cost of goods sold improved how investors and analysts processed expense-related news, while disaggregation of selling and administrative expense did not. For a retailer, cost of sales is dominated by merchandise purchases, but it also includes distribution and freight costs and, for some retailers, labor; seeing that mix would help analysts understand gross margin, which fell from about 28.2 percent in fiscal 2024 to about 27.9 percent in fiscal 2025 by the filing's own figures. Detail inside selling, general and administrative expense, mostly store labor and occupancy, may prove less useful if the research holds. Positive accounting theory would predict that large retailers opposed the update because of its bookkeeping and proprietary costs (Watts & Zimmerman, 1978), and the research suggests that at least part of what they will disclose will be worth those costs.

Lease Accounting as the Earlier Benchmark

The lease standard, adopted by public companies in 2019, is no longer new, but it provides a benchmark for the disclosure updates because it is the most recent major change in recognition. Target's balance sheet at January 31, 2026 carries operating lease liabilities of $3.8 billion and right-of-use assets of $3.7 billion, measured at a weighted average discount rate of 4.61 percent, along with finance lease liabilities of $2.1 billion. Operating lease cost rose from $641 million in fiscal 2024 to $691 million in fiscal 2025 (Target Corporation, 2026). Before 2019, the operating lease obligation would have appeared only in a maturity table in the notes.

The research on that change frames the expectations for the newer updates. Ma and Thomas (2023) found that lessees changed their leasing after the standard, using fewer long-term operating leases and more capital expenditures, without the harms to value or credit standing that managers predicted. Ai et al. (2025) show that investors weighted the recognized obligations more heavily than they had the footnote figures. If recognition improved usefulness that much, disclosure-only updates must work harder: their benefit depends on whether the new notes are clear enough that readers actually use them. That is the standard against which the four updates are judged below.

Evaluation

Taken together, the four updates change Target's 10-K in a consistent direction: they leave recognition alone and add structure and detail to the notes. Judged by the conceptual framework, the income tax update delivers the clearest gain in relevance and faithful representation, because it replaces aggregated percentages with dollar amounts tied to cash. The supplier finance roll-forward adds relevant information about a working capital arrangement that was previously invisible. The segment update adds less for a single-segment company but improves consistency and accountability. The expense disaggregation update promises the largest change, and the research suggests its value will be concentrated in cost of sales.

Ranked by the gain to a reader of Target's filing, the order is clear: income taxes first, because the change is large and tied to cash; supplier finance second, because it reveals an arrangement that was invisible; expense disaggregation third for now, because its benefit is still prospective; and segment reporting last, because a single-segment company has the least to add. A different company would produce a different ranking, which is itself a lesson about principles-based disclosure.

The costs fall mainly on preparers and are modest for a company with Target's systems, since most of the new figures already exist internally. The economic consequences may be more interesting than the costs. Ma and Thomas (2023) found that the lease standard changed how companies leased without the harms managers predicted, and something similar may happen here: visible supplier finance balances may lead some companies to rely on such programs less, and expense detail may change how companies describe their cost structures. Those responses would be consistent with the framework's goal, which is not to change behavior but to report it faithfully.

One more consideration is the reader's capacity. Each update adds pages, and a 10-K that grows every year risks burying the most useful information. The updates mitigate that risk by tying new detail to amounts already reported and, in the segment and expense updates, to information management already uses. For Target, the result is a filing that is longer but more connected: the tax note now links expense to cash, the supplier finance note links payables to a financing arrangement, and the coming expense note will link the income statement's captions to their contents. That connectedness is what makes additional disclosure usable rather than merely additional.

Limitations

This study has three limitations. First, it examines one company, and a retailer with a single segment and mostly domestic operations will experience the updates differently from a diversified multinational; the segment and income tax findings in particular may understate the effect elsewhere. Second, it reads disclosures rather than measuring their use, so its judgments about decision usefulness rely on theory and on research about other companies rather than on evidence from Target's investors. Third, the expense disaggregation update has not yet taken effect, so its section is a prediction. A follow-up study comparing analysts' forecasts for Target and its peers before and after the first disaggregated filing would test that prediction directly.

A Biblical Perspective on Transparency

Writing to the Corinthians about a collection he was handling, Paul said he took care to act honorably before people as well as before God (English Standard Version Bible, 2001/2016, 2 Corinthians 8:21). Each of these updates asks companies to show investors what management already sees: the bank programs behind payables, the costs management reviews, the taxes paid and where. A company that discloses that information clearly practices the kind of transparency Paul describes, accounting for resources entrusted to it in a way others can examine.

Conclusion

Target's fiscal 2025 10-K shows the FASB's recent disclosure agenda working as intended. The income tax note, in its first year under ASU 2023-09, gives the clearest new information; the supplier finance roll-forward and the single-segment disclosures add useful context at low cost; and ASU 2024-03 will soon open the largest expense lines to view. Investors following Target should watch the next filings for the first expense disaggregation, any change in the scale of the supplier finance program and the jurisdictional pattern of taxes paid as federal and state tax policy changes.

References

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Berger, P. G., & Hann, R. (2003). The impact of SFAS No. 131 on information and monitoring. Journal of Accounting Research, 41(2), 163-223. https://doi.org/10.1111/1475-679X.00100

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