Costco 2006 Annual Report Download - page 51

employees will retain their vested stock options before exercising them (“expected term”), the
estimated volatility of the Company’s common stock price over the expected term (“volatility”), the risk-
free interest rate and the dividend yield. Changes in the subjective assumptions can materially affect
the estimate of fair value of stock-based compensation.
The Company adopted SFAS 123R using the modified prospective method, which requires the
Company to recognize stock options granted prior to its adoption of SFAS 123 under the fair value
method and expense these amounts over the remaining vesting period of the stock options. This
resulted in the Company expensing $13,192 in fiscal 2006 for stock options granted in fiscal 2001 and
fiscal 2002. Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from
the exercise of stock options as operating cash inflows in the consolidated statement of cash flows, in
accordance with the provision of the Emerging Issues Task Force (EITF) Issue No. 00-15,
“Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company
upon Exercise of a Nonqualified Employee Stock Option.” SFAS 123R requires, on a prospective
basis, the benefits of tax deductions in excess of the compensation cost recognized for those options
to be classified as financing cash inflows rather than operating cash inflows. This amount is shown as
excess tax benefit from exercise of stock options on the consolidated statements of cash flows.
The following table presents the impact of the Company’s adoption of SFAS 123R on selected line
items from its consolidated financial statements for fiscal 2006:
Fiscal 2006
As Reported Pro-forma under SFAS 123
Income before income taxes ......................... $1,751,417 $ 1,764,609
Net income ....................................... $1,103,215 $ 1,112,050
Net income per share:
Basic ........................................ $ 2.35 $ 2.37
Diluted ....................................... $ 2.30 $ 2.32
Cash flows from operating activities ................... $1,827,290 $ 1,858,586
Cash flows from financing activities ................... $(1,233,227) $(1,264,523)
Had compensation costs for the Company’s stock-based compensation been determined based on the
fair value at the grant dates for awards made prior to fiscal 2003, consistent with SFAS No. 123R, the
Company’s net income and net income per share would have been adjusted to the proforma amounts
indicated below:
Fiscal Year Ended
August 28,
2005 August 29, 2004
Net income, as reported ............................... $1,063,092 $882,393
Add: Stock-based compensation expense included in
reported net income, net of related tax effects ........ 43,344 23,000
Deduct: Total stock-based compensation expense
determined under fair value-based methods for all
awards, net of related tax effects .................. (63,012) (58,388)
Pro-forma net income ................................. $1,043,424 $847,005
Net Income per share:
Basic—as reported ............................... $ 2.24 $ 1.92
Basic—pro-forma ................................. $ 2.20 $ 1.84
Diluted—as reported .............................. $ 2.18 $ 1.85
Diluted—pro-forma ................................ $ 2.12 $ 1.78
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