Costco 2009 Annual Report Download - page 43

consideration received from vendors is generally recorded as a reduction of merchandise costs upon
completion of contractual milestones, terms of agreement, or other systematic and rational
approaches.
Impairment of Long-Lived Assets and Warehouse Closing costs
We periodically evaluate our long-lived assets for indicators of impairment, such as a decision to
relocate or close a warehouse location. Our judgments are based on existing market and operational
conditions. Future events could cause us to conclude that impairment factors exist, requiring a
downward adjustment of these assets to their then-current fair market value.
We provide estimates for warehouse closing costs for both leased and owned locations to be closed or
relocated. A considerable amount of judgment is involved in determining any impairment or our net
liability, particularly related to the estimated sales price of owned locations and the potential sublease
income at leased locations. These estimates are based on real estate conditions in the markets and
our experience in those markets. We make assumptions about the average period of time it would take
to sublease the location and the amount of potential sublease income for each leased location. We
reassess our liability each quarter and adjust our liability accordingly when our estimates change.
Insurance/Self Insurance Liabilities
We use a combination of insurance and self-insurance mechanisms, including a wholly-owned captive
insurance entity and participation in a reinsurance pool, to provide for potential liabilities for workers’
compensation, general liability, property damage, director and officers’ liability, vehicle liability, and
employee health care benefits. Liabilities associated with the risks that we retain are not discounted
and are estimated, in part, by considering historical claims experience, demographic factors, severity
factors and other actuarial assumptions. The estimated accruals for these liabilities could be
significantly affected if future occurrences and claims differ from these assumptions and historical
trends.
Income Taxes
We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109” (FIN 48), which sets out criteria for the use of judgment in
assessing the timing and amounts of deductible and taxable items, at the beginning of 2008. The
determination of our provision for income taxes requires significant judgment, the use of estimates, and
the interpretation and application of complex tax laws. Significant judgment is required in assessing the
timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax
positions. The benefits of uncertain tax positions are recorded in our consolidated financial statements
only after determining a more-likely-than-not probability that the uncertain tax positions will withstand
challenge, if any, from tax authorities. When facts and circumstances change, we reassess these
probabilities and record any changes in the consolidated financial statements as appropriate.
Recent Accounting Pronouncements
See discussion of Recent Accounting Pronouncements in Note 1 to the consolidated financial
statements included on page 61 of this Report.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risk resulting from fluctuations in interest and foreign currency
exchange rates. We do not engage in speculative or leveraged transactions, nor hold or issue financial
instruments for trading purposes. The current condition of the financial markets, however, has
rendered identifiable risks less predictable, and liquidity concerns and credit risks have increased.
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