Target Data Breach and Contingent Liabilities Original blog

Target, Data Breach, and Contingent Liabilities Original blog posting (March 27, 2014) Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

10 -K Minute: Target, Data Breach, and Contingent Liabilities • In 4 th quarter 2013, hackers broke into Target’s systems and stole name and credit card information for up to 70 million customers • Data breach ramifications are discussed in the Notes to Financial Statements in Target’s 2013 10 -K Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

Excerpt 1 from 2013 Target 10 -K Notes to Financial Statements “In the fourth quarter of 2013, we recorded $61 million of pretax Data Breach-related expenses, and expected insurance proceeds of $44 million, for net expenses of $17 million ($11 million after tax). . These expenses were included in our Consolidated Statements of Operations as Selling, General and Administrative Expenses (SG&A). . . Expenses include costs to investigate …, provide credit-monitoring services…, increase staffing in our call centers, and procure legal and other professional services. ” Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

Excerpt 2 from 2013 Target 10 -K Notes to Financial Statements “The $61 million of fourth quarter expenses also include an accrual for the estimated probable loss related to the expected payment card networks’ claims by reason of the Data Breach. The ultimate amount of these claims will likely include amounts for incremental counterfeit fraud losses and nonordinary course operating expenses (such as card reissuance costs) that the payment card networks believe they or their issuing banks have incurred… Currently, we can only reasonably estimate a loss associated with settlements of the networks' expected claims for non-ordinary course operating expenses. The year-end accrual does not include any amounts associated with the networks' expected claims for alleged incremental counterfeit fraud losses because the loss. . . , while probable in our judgment, is not reasonably estimable. . . We believe that it is reasonably possible that the ultimate amount paid on payment card network claims could be material. . . ” Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

Excerpt 3 from 2013 Target 10 -K Notes to Financial Statements “…State and federal agencies, including the State Attorneys General, the Federal Trade Commission and the SEC are investigating events related to the Data Breach, including how it occurred, its consequences and our responses. Although we are cooperating in these investigations, we may be subject to fines or other obligations. While a loss from these matters is reasonably possible, we cannot reasonably estimate a range of possible losses. . . we do not believe that a loss from these matters is probable; therefore, we have not recorded a loss contingency liability for litigation, claims and governmental investigations in 2013. ” Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

Contingent liabilities - FASB 1. Accrue if the loss/expense is probable AND the amount can be reasonably estimated. 2. Disclose if it is reasonably possible (less than probable but more than remote) that a loss/expense will occur. 3. If the loss/expense is unlikely to occur, there is no need to report or disclose. Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

Explanation What we see in the excerpts from its 10 -K is that Target Corporation is acknowledging at least three possible liabilities resulting from this data breach: 1. A liability to the credit card companies for the expenses associated with credit card reissuance and other operating expenses; 2. A liability to the credit card companies for the losses resulting from fraudulent use of the stolen credit card information; and 3. A liability for fines or other obligations from regulatory agencies. Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

Credit card reissuance expenses The loss related to credit card reissuance is both “probable” and the amount is reasonably estimable. Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

Fraudulent use of stolen credit card information losses Losses from the fraudulent use of the stolen credit card information are probable, the amount of these losses cannot be reasonably estimated. Therefore no accrual for these potential losses in the fourth quarter of 2014. Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

Fines or other obligations Fines or other penalties from regulatory bodies are reasonably possible but the amount of such penalties is not reasonably estimable. Therefore, Target only discloses the possibility of fines. Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.

For additional news stories to use in the accounting classroom, see the Accounting in the Headlines blog at http: //accountingintheheadlines. com/ Related video resources can be found at http: //www. youtube. com/user/accountingheadlines Questions or comments? Contact Dr. Wendy Tietz at wtietz@kent. edu Copyright © 2014 by Dr. Wendy Tietz. This work is licensed under a Creative Commons Attribution. Non. Commercial 3. 0 Unported License.