Costco 2011 Annual Report Download - page 58

The Company’s wholly-owned captive insurance subsidiary (the captive) receives direct premiums,
which are netted against the Company’s premium costs in selling, general and administrative
expenses, in the consolidated statements of income. The captive participates in a reinsurance program
that includes other third-party members. The member agreements and practices of the reinsurance
program limit any participating members’ individual risk. Income statement adjustments related to the
reinsurance program and related impacts to the consolidated balance sheets are recognized as
information becomes known. In the event the Company leaves the reinsurance program, the Company
is not relieved of its primary obligation to the policyholders for activity prior to the termination of the
annual agreement.
Other Current Liabilities
Other current liabilities consist of the following at the end of 2011 and 2010:
2011 2010
Accrued member rewards ................................... $ 602 $ 522
Insurance-related liabilities ................................... 276 263
Tax-related liabilities ........................................ 122 79
Cash card liability .......................................... 112 100
Deferred sales ............................................. 141 98
Other current liabilities ...................................... 96 86
Vendor consideration liabilities ................................ 66 57
Sales return reserve ........................................ 74 72
Interest payable ............................................ 51 51
Other Current Liabilities ................................. $1,540 $1,328
Derivatives
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of
business. The Company manages these fluctuations, in part, through the use of forward foreign-
exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on
known future expenditures denominated in a foreign-currency. The contracts are intended primarily to
economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the
Company’s international subsidiaries or other entities whose functional currency is other than the U.S.
dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks
to mitigate risk with the use of these contracts and does not intend to engage in speculative
transactions. These contracts do not contain any credit-risk-related contingent features. The aggregate
notional amounts of forward foreign-exchange contracts were $247 and $225 at the end of 2011 and
2010, respectively.
The Company seeks to manage counterparty risk associated with these contracts by limiting
transactions to counterparties with which the Company has an established banking relationship. There
can be no assurance, however, that this practice effectively mitigates counterparty risk. The contracts
are limited to less than one year in duration. See Note 3 for information on the fair value of open,
unsettled forward foreign-exchange contracts as of August 28, 2011, and August 29, 2010.
The amount of net foreign-currency transaction gains or losses recognized in interest income and
other, net in the accompanying consolidated statements of income relating to forward foreign-
exchange contracts were nominal in 2011, 2010 and 2009. These gains and losses are largely offset
by the impact of revaluing related foreign currency denominated payables, which are also recognized
in interest income and other, net.
56