Costco 2004 Annual Report Download - page 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
demographic factors, severity factors and other actuarial assumptions. The estimated accruals for these liabilities
could be significantly affected if future occurrences and claims differ from these assumptions and historical
trends.
Derivatives
The Company has limited involvement with derivative financial instruments and uses them only to manage
well-defined interest rate and foreign exchange risks. Short-term forward foreign exchange contracts are used to
hedge the impact of fluctuations of foreign exchange on inventory purchases. The only significant derivative in-
struments the Company holds are interest rate swaps, which the Company uses to manage the interest rate risk
associated with its borrowings and to manage the Company’s mix of fixed and variable-rate debt. As of August
29, 2004, the Company had “fixed-to-floating” interest rate swaps with an aggregate notional amount of
$600,000 and an aggregate fair value of $25,754, which is recorded in other assets. These swaps were entered
into effective November 13, 2001, and March 25, 2002, and are designated and qualify as fair value hedges of the
Company’s $300,000 7
1
⁄ 8 % Senior Notes and the Company’s $300,000 5
1
⁄ 2 % Senior Notes, respectively. As the
terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are
offset by corresponding changes in the fair value recorded on the hedged debt, and result in no net earnings im-
pact.
Equity Investments in Subsidiary
On October 3, 2003, the Company acquired from Carrefour Nederland B.V. its 20% equity interest in
Costco Wholesale UK Limited for cash of $95,153, bringing Costco’s ownership in Costco Wholesale UK Lim-
ited to 100%. In conjunction with this purchase the Company increased the carrying value of the land and build-
ings of Costco Wholesale UK Limited by $12,808 and recorded goodwill of $16,719.
Foreign Currency Translations
The functional currencies of the Company’s international subsidiaries are the local currency of the country
in which the subsidiary is located. Assets and liabilities recorded in foreign currencies, as well as the Company’s
investment in the Costco Mexico joint venture, are translated at the exchange rate on the balance sheet date.
Translation adjustments resulting from this process are charged or credited to other accumulated comprehensive
income (loss). Revenue and expenses of the Company’s consolidated foreign operations are translated at average
rates of exchange prevailing during the year. Gains and losses on foreign currency transactions are included in
expenses and were not significant in either fiscal 2004, 2003, or 2002.
Revenue Recognition
The Company recognizes sales, net of estimated returns, at the time the customer takes possession of mer-
chandise or receives services. When the Company collects payment from customers prior to the transfer of
ownership of merchandise or the performance of services, the amount received is recorded as deferred revenue
on the consolidated balance sheets until the sale or service is completed. The Company provides for estimated
sales returns based on historical returns levels. The reserve for sales returns (sales returns net of merchandise
costs) was $5,524 and $4,869 at August 29, 2004 and August 31, 2003, respectively.
Membership fee revenue represents annual membership fees paid by substantially all of the Company’s
members. The Company accounts for membership fee revenue on a “deferred basis,” whereby membership fee
revenue is recognized ratably over the one-year term of the membership. The Company’s Executive members
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