Costco 2010 Annual Report Download - page 41

We provide estimates for warehouse closing costs for 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
At the beginning of 2008, we adopted authoritative guidance related to uncertain tax positions, which
sets out criteria for the use of judgment in assessing the timing and amounts of deductible and taxable
items. 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 associated with uncertain tax positions are recorded in our
consolidated financial statements only after determining a more-likely-than-not probability that the
positions will withstand challenge 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 in 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 or hold or issue financial
instruments for trading purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings
that are diversified among money market funds, U.S. Government and Agency debt securities, Federal
Deposit Insurance Corporation (FDIC) insured corporate notes, and corporate notes and bonds with
effective maturities of generally three months to five years at the date of purchase. The primary
objective of our investment activities is to preserve principal and secondarily to generate yields. The
majority of our short-term investments are in fixed interest rate securities. These securities are subject
to changes in fair value due to interest rate fluctuations. A revised investment policy was approved in
December 2007 by our Board of Directors, limiting future investments to direct U.S. Government and
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