Costco 2003 Annual Report Download - page 35

Note 1—Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation
The Company adopted the fair value based method of recording stock options consistent with SFAS No. 123
“Accounting for Stock-Based Compensation,” for all employee stock options granted subsequent to fiscal year
end 2002. Specifically, the Company adopted SFAS No. 123 using the “prospective method” with guidance pro-
vided from SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure.” All
employee stock option grants made in fiscal 2003 and in future years will be expensed over the stock option vest-
ing period based on the fair value at the date the options are granted. Prior to fiscal 2003 the Company applied
Accounting Principles Board Opinion (APB) No. 25 and related interpretations in accounting for stock options.
Because the Company granted stock options to employees at exercise prices equal to fair market value on the
date of grant, accordingly, no compensation cost was recognized for option grants.
Had compensation costs for the Company’s stock-based compensation plans been determined based on the
fair value at the grant dates for awards made prior to fiscal 2003, under those plans and consistent with SFAS
No. 123, the Company’s net income and net income per share would have been reduced to the pro forma amounts
indicated below:
Fiscal Year Ended
August 31,
2003
September 1,
2002
September 2,
2001
Net income, as reported ........................................ $721,000 $699,983 $602,089
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects ................. 7,513 — —
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related tax effects ....................................... (70,257) (75,743) (65,077)
Pro-forma net income .......................................... $658,256 $624,240 $537,012
Earnings per share:
Basic—as reported ........................................ $ 1.58 $ 1.54 $ 1.34
Basic—pro-forma ......................................... $ 1.44 $ 1.38 $ 1.19
Diluted—as reported ...................................... $ 1.53 $ 1.48 $ 1.29
Diluted—pro-forma ....................................... $ 1.40 $ 1.32 $ 1.15
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents, short-term
investments and receivables approximate fair value due to their short-term nature or variable interest rates. The
fair value of fixed rate debt at August 31, 2003 and September 1, 2002 was $1,415,252 and $1,382,569,
respectively.
Reorganization of Canadian Administrative Operations
On January 17, 2001, the Company announced plans to reorganize and consolidate the administration of its
operations in Canada. Total costs related to the reorganization were $26,765 pre-tax, of which $7,765 pre-tax
($4,775 after-tax, or $.01 per diluted share) was expensed in fiscal 2002 and $19,000 pre-tax ($11,400 after-tax,
or $.02 per diluted share) was expensed in fiscal 2001 and reported as part of the provision for impaired assets
and closing costs. These costs consisted primarily of employee severance, implementation and consolidation of
support systems and employee relocation. The reorganization was completed in the first quarter of fiscal 2002.
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