Costco 2009 Annual Report Download - page 63

Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax consequences
attributed to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences and carry-forwards are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is established when necessary to
reduce deferred tax assets to amounts expected to be realized.
The determination of the Company’s 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 the
Company’s 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, the Company reassess these probabilities and records any changes in the
consolidated financial statements as appropriate. See Note 9 for additional information.
Net Income per Common Share
The computation of basic net income per share is based on the weighted average number of shares
that were outstanding during the period. The computation of diluted net income per share is based on
the weighted average number of shares used in the basic net income per share calculation plus the
number of common shares that would be issued assuming exercise of all potentially dilutive common
shares outstanding using the treasury stock method for shares subject to stock options and restricted
stock units and the “if converted” method for the convertible note securities.
Stock Repurchase Programs
Shares repurchased are retired, in accordance with the Washington Business Corporation Act. The par
value of repurchased shares is deducted from common stock and the excess repurchase price over
par value is deducted from additional paid-in capital and retained earnings. See Note 6 for additional
information.
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”
(“SFAS 168”), which establishes the FASB Accounting Standards Codification as the source of
authoritative U.S. generally accepted accounting principles (GAAP) (other than guidance issued by the
SEC) to be used in the preparation of financial statements. SFAS 168 is effective prospectively for
financial statements issued for interim and annual periods ending after September 15, 2009. The
Company must adopt these new requirements in its first quarter of fiscal 2010, which will result in
expanded disclosure.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46R” (SFAS
167), which revises the approach to determine the primary beneficiary of a variable interest entity (VIE)
and requires companies to more frequently reassess whether they must consolidate a VIE. SFAS 167
applies prospectively starting with the first interim financial period of the annual reporting period
beginning after November 15, 2009. The Company must adopt these new requirements in its first
quarter of fiscal 2011. The Company does not expect the adoption of SFAS 167 to have a material
impact on its consolidated financial statements.
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