Costco 2008 Annual Report Download - page 60

operations are translated at average rates of exchange prevailing during the year. Gains and losses on
foreign currency transactions are included in interest income and other and were not significant in
2008, 2007, or 2006.
Revenue Recognition
The Company generally recognizes sales, net of estimated returns, at the time the member takes
possession of merchandise or receives services. When the Company collects payments from
customers prior to the transfer of ownership of merchandise or the performance of services, the
amounts received are generally 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
merchandise returns levels. Amounts collected from members, which under common trade practices
are referred to as sales taxes, are recorded on a net basis.
During 2007, in connection with changes to its consumer electronic returns policy, the Company
developed more detailed operational data regarding member return patterns. The data indicated a
longer timeframe over which returns are received than was previously estimated. Accordingly, during
2007 the Company increased the estimated sales returns reserve balance and recorded an adjustment
to sales of $452,553 and a pretax charge to income of $95,263 for the related gross margin and
disposition costs.
The Company evaluates the criteria of the 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 revenue is recognized ratably over the one-year membership period. In 2007, the Company
performed a detailed analysis of the timing of recognition of membership fees based on each
member’s specific renewal date, as this methodology represented an improvement over the historical
method, which was based on the period in which the fee was collected. This review resulted in a
$56,183 reduction to membership fee revenue in 2007 and a corresponding increase to deferred
membership fees on the Company’s consolidated balance sheet. This adjustment included both a
change in method of applying an accounting principle to a preferable method and a correction for
cumulative timing errors. The adjustment for the change in method and for the correction was recorded
in full in the 2007 consolidated statement of income as the Company concluded the impact to the
current and historical financial statements was not material.
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 2008, 2007, and 2006, and the related liability as of the end of those years were as follows:
2008 2007 2006
Two-percent reward sales reduction .......... $570,720 $487,877 $418,466
Two-percent unredeemed reward liability ...... $422,114 $363,399 $299,519
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