Costco 2007 Annual Report Download - page 77

The subject grants were made to over one thousand of the Company’s employees, including, among
others, the Company’s warehouse managers and buyers. None of the options in which the review
identified imprecision in the grant process were issued to the Company’s chief executive officer,
chairman, or non-employee directors, except in April 1997 both the chief executive officer and the
chairman received, as part of a broad grant to hundreds of employees, one grant subject to imprecision
that may have benefited each by up to approximately $200. Other grants subject to imprecision were
made to a director who serves as executive vice president and chief financial officer and to a director
who had no role in the determination of any grant date, but who serves as senior executive vice
president and chief operating officer.
Given the lack of historical documentation, it was not possible to precisely determine the amount of the
adjustments that should be made. Based on the recommendation of the special committee, which was
based on the documentation that was available, the Company, as of the end of fiscal 2006, recorded
an adjustment to transfer $116,157 from retained earnings to paid-in capital, representing previously
unrecorded after-tax compensation expense, and to increase the deferred tax asset account by
$31,480. In those cases where the committee was unable to identify the likely grant date of the options,
the latest date on which the decision could have been made was used. The Company also recorded
$1,701 for the estimated federal income tax consequences stemming from the probable disallowance
of compensation deductions claimed related to the subject option grants. The Company informed the
SEC of the special committee’s investigation and conclusions. A grand jury investigation concerning
the review is ongoing. See Note 10 for additional information.
The special committee and management do not believe that the net effects of this adjustment were
material, either quantitatively or qualitatively, in any of the years covered by the review. In reaching that
determination, the following quantitative measures were considered:
Year
Net after tax
effect of
adjustment
Reported net
income(1)
Percent of
reported net
income
2005 ................................ $ 3,954 $1,063,092 0.37%
2004 ................................ 6,430 882,393 0.73%
2003 ................................ 9,092 721,000 1.26%
2002 ................................ 14,872 699,983 2.12%
1996-2001 ........................... 81,809 2,769,678 2.95%
Total ............................. $116,157 $6,136,146 1.89%
(1) Excludes cumulative effect of accounting change related to membership fees of $118,023 (net of
tax) reported in fiscal 1999.
Accounting for Reinsurance Agreements
The Company adjusted its beginning retained earnings for fiscal 2006 related to a correction in the
historical accounting treatment of certain finite risk arrangements. Because of the limited amount of risk
transfer included in the agreements, historical premium payments should have been accounted for as
a deposit asset rather than expensed over the policy term.
Deferred Tax Liability Adjustment
The Company also adjusted its beginning retained earnings for fiscal 2006 for a historical misstatement
in deferred taxes related to unreconciled differences in the detailed records supporting the deferred tax
liability for depreciation of property and equipment. These differences had accumulated over a period
of several years. This resulted in an overstatement of the tax basis and a corresponding
understatement of the Company’s net deferred tax liability.
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