Costco 2012 Annual Report Download - page 40

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
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 Note 1 to the consolidated financial statements included in this Report for a detailed description of
recent accounting pronouncements. We do not expect these recently issued accounting
pronouncements to have a material impact on our results of operations, financial condition or liquidity
in future periods.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to financial market risk results from fluctuations in interest rates 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 securities, Federal
Deposit Insurance Corporation insured corporate bonds, 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. Our Board of Directors have approved a policy that limits
investments in the U.S. to direct U.S. government and government agency obligations, repurchase
agreements collateralized by U.S. government and government agency obligations, and U.S.
government and government agency money market funds.
The investment policies of our subsidiaries are consistent with our primary objective to preserve
principal and secondarily to generate yields. Our wholly-owned captive insurance subsidiary invests in
U.S. government and government agency obligations, corporate notes and bonds, and asset and
mortgage-backed securities with a minimum overall portfolio average credit rating of AA+. All of our
foreign subsidiaries’ investments are primarily in money market funds, investment grade securities,
bankers’ acceptances, bank certificates of deposit and term deposits, all denominated in their local
currencies. Additionally, our Canadian subsidiary may invest a portion of its investments in U.S. dollar
investment grade securities and bank term deposits to meet current U.S. dollar obligations.
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