Costco 2005 Annual Report Download - page 44

Note 1—Summary of Significant Accounting Policies (Continued)
its eventual disposition with the asset’s reported net carrying value. The Company recorded pre-tax, non-cash
charges of $3,893, $2,592 and $4,697 in fiscal 2005, 2004 and 2003, respectively, reflecting its estimate of im-
pairment relating to real property. The charge reflects the difference between the carrying value and fair value,
which was based on estimated market valuations for those assets whose carrying value is not currently antici-
pated to be recoverable through future cash flows.
Goodwill
Goodwill, net of accumulated amortization, resulting from certain business combinations is included in
other assets, and totaled $71,848 at August 28, 2005 and $65,721 at August 29, 2004. The increase in goodwill
was primarily due to the Company acquiring the remaining 4% interest in CWC Travel Inc, bringing Costco’s
ownership in this entity to 100% in the fourth quarter of fiscal 2005. The Company follows Statement of Finan-
cial Accounting Standards (SFAS) No. 142, “Accounting for Goodwill and Other Intangibles,” which specifies
that goodwill and some intangible assets should no longer be amortized, but instead will be subject to periodic
impairment testing. Accordingly, the Company reviews previously reported goodwill for impairment on an
annual basis, or more frequently if circumstances dictate. No impairment of goodwill has been incurred to date.
Accounts Payable
The Company’s banking system provides for the daily replenishment of major bank accounts as checks are
presented. Accordingly, included in accounts payable at August 28, 2005 and August 29, 2004 are $527,920 and
$438,025, respectively, representing the excess of outstanding checks over cash on deposit at the banks on which
the checks were drawn.
Insurance/Self Insurance Liabilities
The Company uses a combination of insurance and self-insurance mechanisms to provide for workers’
compensation, general liability, property damage, director and officers’ liability, vehicle liability and employee
health care benefits. Liabilities associated with the risks that are retained by the Company are not discounted and
are estimated, in part, by considering historical claims experience and outside expertise, 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. Forward foreign exchange contracts are used to hedge the
impact of fluctuations of foreign exchange on inventory purchases and typically have very short terms. The ag-
gregate amount of foreign exchange contracts outstanding at August 28, 2005 and August 29, 2004, was $42,466
and $30,495, respectively. The majority of the forward foreign exchange contracts were entered into by the Com-
pany’s wholly-owned United Kingdom subsidiary primarily to hedge U.S. dollar merchandise inventory pur-
chases. The Company monitors its foreign currency exposures to ensure the overall effectiveness of its foreign
currency hedge positions. The only other derivative instruments 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-rate and variable-rate debt. As of August 28, 2005, the Company had “fixed-to-floating” interest rate
swaps with an aggregate notional amount of $300,000 and an aggregate fair value of $7,688, which is recorded in
other assets on the Company’s consolidated balance sheet. These swaps were entered into effective March 25,
2002, and are designated and qualify as fair value hedges of the Company’s $300,000 5
1
⁄ 2 % Senior Notes. As the
terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are off-
set by corresponding changes in the carrying amount of the hedged debt and result in no net earnings impact. As
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