Costco 2005 Annual Report Download - page 45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
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. In addition to the Company’s swap on the 5
1
⁄ 2 % Senior Notes
noted above, the Company had entered into a swap on its $300,000 7
1
⁄ 8 % Senior Notes effective November 13,
2001, which was designated and qualified as a fair value hedge. The $300,000 7
1
⁄ 8 % Senior Notes matured and
were repaid on June 15, 2005. Concurrent to this transaction, the related swap agreement expired.
Equity Investments in Subsidiary and Joint Ventures
On June 30, 2005, the Company acquired the remaining 4% equity interest in CWC Travel Inc for cash of
$3,961, bringing Costco’s ownership in this entity to 100%. In conjunction with this purchase the Company re-
corded goodwill of $3,440. In addition, during fiscal 2005 the Company contributed an additional $15,000 to its
investment in Costco Mexico (a 50%-owned joint venture), which did not impact its percentage ownership as the
joint venture partner made a like investment. On October 3, 2003, the Company acquired from Carrefour Neder-
land B.V. its 20% equity interest in Costco Wholesale UK Limited for cash of $95,153, bringing Costco’s
ownership in Costco Wholesale UK Limited to 100%. In conjunction with this purchase the Company increased
the carrying value of the land and buildings 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 fiscal 2005, 2004, or 2003.
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 allowance for sales returns (sales returns net of merchandise
costs) was $8,240 and $5,524 at August 28, 2005 and August 29, 2004, respectively.
The Company evaluates the criteria of the Financial Accounting Standards Board (FASB) Emerging Issues
Task Force (EITF) 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” in determining
whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount
earned as commissions. Generally, when the Company is the primary obligor, is subject to inventory risk, has lat-
itude in establishing prices and selecting suppliers, influence product or service specifications, or has several but
not all of these indicators, revenue is recorded gross. If the Company is not the primary obligor and does not pos-
sess other indicators of gross reporting as noted above, it records the net amounts as commissions earned.
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
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