Costco 2006 Annual Report Download - page 49

ownership as the joint venture partner contributed a like amount. In addition, in fiscal 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 recorded
goodwill of $3,440.
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 accumulated other comprehensive income. 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
2006, 2005, or 2004.
Revenue Recognition
The Company recognizes sales, net of estimated returns, at the time the customer takes possession of
merchandise 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 $13,287 and $8,240 at September 3, 2006
and August 28, 2005, 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 Costco is the primary obligor, is
subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence
product or service specifications, or has several but not all of these indicators, revenue is recorded on
a gross basis. If the Company is not the primary obligor and does not possess other indicators of gross
reporting as noted above, it records the net amounts as commissions earned, which is reflected in net
sales.
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 one year. Membership fees received from
members for fiscal years 2006, 2005 and 2004 were $1,264,929, $1,113,948 and $1,008,836,
respectively. The Company’s Executive members qualify for a 2% reward (which can be redeemed at
Costco warehouses), up to a maximum of $500 per year, on all qualified purchases made at Costco.
The Company accounts for this 2% reward as a reduction in sales, with the related liability being
classified within other current liabilities. The sales reduction and corresponding liability are computed
after giving effect to the estimated impact of non-redemptions based on historical data. The reduction
in sales for the fiscal years ended September 3, 2006, August 28, 2005, and August 29, 2004, and the
related liability as of those dates were as follows:
Fiscal Year Ended
September 3,
2006 August 28, 2005 August 29, 2004
Two-percent reward sales reduction .......... $418,466 $319,336 $244,487
Two-percent unredeemed reward liability ...... $299,519 $229,574 $170,941
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