Costco 2010 Annual Report Download - page 58

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, net of estimated refunds,
on a deferred basis, whereby revenue is recognized ratably over the one-year membership period. As
previously disclosed, effective with renewals occurring on and after March 1, 2009, the Company
changed an element of its membership renewal policy. Memberships renewed within two months after
expiration of the current membership year are extended for twelve months from the expiration date.
(Under the previous policy, renewals within six months of the expiration date were extended for twelve
months from the expiration date.) Memberships renewed more than two months after such expiration
date are extended for twelve months from the renewal date. This change has had an immaterial effect
of deferring recognition of certain membership fees paid by late-renewing members.
The Company’s Executive Members qualify for a 2% reward (up to a maximum of five hundred dollars
per year on qualified purchases made at Costco), which can be redeemed at Costco warehouses. 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 was
$688, $610, and $571 in 2010, 2009, and 2008, respectively.
Merchandise Costs
Merchandise costs consist of the purchase price of inventory sold, inbound shipping charges and all
costs related to the Company’s depot operations, including freight from depots to selling warehouses,
and are reduced by vendor consideration received. Merchandise costs also include salaries, benefits
and depreciation on production equipment in certain fresh foods and ancillary departments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits and workers’
compensation costs for warehouse employees, other than fresh foods departments and certain
ancillary businesses, as well as all regional and home office employees, including buying personnel.
Selling, general and administrative expenses also include utilities, bank charges, rent and substantially
all building and equipment depreciation, as well as other operating costs incurred to support
warehouse operations.
Marketing and Promotional Expenses
Costco’s policy is generally to limit marketing and promotional expenses to new warehouse openings,
occasional direct mail marketing to prospective new members and direct mail marketing programs to
existing members promoting selected merchandise. Marketing and promotional costs are expensed as
incurred and are included in selling, general and administrative expenses in the accompanying
consolidated statements of income.
Stock-Based Compensation
Compensation expense for all stock-based awards granted is recognized using the straight-line
method. The fair value of restricted stock units (RSUs) is calculated as the market value of the
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