Costco 2010 Annual Report Download - page 40

Membership fee revenue represents annual membership fees paid by our members. We account for
membership fee revenue, net of estimated refunds, on a deferred basis, whereby revenue is
recognized ratably over the one-year membership period.
Our Executive members qualify for a 2% reward (which can be redeemed only at Costco warehouses),
up to a maximum of $500 per year, on qualified purchases made at Costco. We account 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.
Investments
Investments are reviewed quarterly for indicators of other-than-temporary impairment. This
determination requires significant judgment. We employ a methodology that considers available
quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost
of an investment exceeds its fair value, we evaluate, among other factors, general market conditions,
the duration and extent to which the fair value is less than cost, and our intent and ability to hold the
investment. We also consider specific adverse conditions related to the financial health of and
business outlook for the issuer, including industry and sector performance, operational and financing
cash flow factors, and rating agency actions. Once a decline in fair value is determined to be other-
than-temporary, an impairment charge is recorded and a new cost basis in the investment is
established. If market, industry, and/or issuer conditions deteriorate, we may incur future impairments.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail
inventory method of accounting, and are stated using the last-in, first-out (LIFO) method for
substantially all U.S. merchandise inventories. Merchandise inventories for all foreign operations are
primarily valued by the retail inventory method of accounting and are stated using the first-in, first-out
(FIFO) method. We believe the LIFO method more fairly presents the results of operations by more
closely matching current costs with current revenues. We record an adjustment each quarter, if
necessary, for the expected annual effect of inflation, and these estimates are adjusted to actual
results determined at year-end. At the end of 2008, due to overall net inflationary trends, merchandise
inventories valued at LIFO were lower than the FIFO value, resulting in a $32 charge to merchandise
costs. During 2009, due to overall deflationary trends, we recorded a $32 benefit to merchandise costs
to adjust inventories valued at LIFO. At the end of 2010 and 2009, merchandise inventories valued at
LIFO approximated FIFO after considering the lower of cost or market principle.
We provide for estimated inventory losses (shrink) between physical inventory counts as a percentage
of net sales. The provision is adjusted periodically to reflect results of the actual physical inventory
counts, which generally occur in the second and fourth quarters of the year.
Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as we
progress toward earning those rebates, provided they are probable and reasonably estimable. Other
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 facility. 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.
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