Costco 2012 Annual Report Download - page 41

We performed a sensitivity analysis to determine the impact an assumed 100 basis point change in
interest rates would have on the value of our investment portfolio. At the end of 2012 and 2011, the
incremental change in the fair market value was immaterial. For those investments that are classified
as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and
interest rates are reflected within stockholders’ equity in accumulated other comprehensive income.
The nature and amount of our long-term debt may vary as a result of future business requirements,
market conditions and other factors. As of the end of 2012, the majority of our fixed-rate long-term debt
included $1,100 of 5.5% Senior Notes carried at $1,097. Fluctuations in interest rates may affect the
fair value of the fixed-rate debt and may affect the interest expense related to the variable rate debt.
See Note 4 to the consolidated financial statements included in this Report for more information on our
long-term debt.
Foreign Currency-Exchange Risk
Our foreign subsidiaries conduct certain transactions in their non-functional currencies, which exposes
us to fluctuations in exchange rates. We manage 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 non-functional foreign-currency. The
contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory
expenditures made by our international subsidiaries whose functional currency is other than the U.S.
dollar. Currently, these contracts do not qualify for derivative hedge accounting. We seek to mitigate
risk with the use of these contracts and do not intend to engage in speculative transactions. These
contracts do not contain any credit-risk-related contingent features.
We seek to manage counterparty risk associated with these contracts by limiting transactions to
counterparties with which we have established banking relationships. There can be no assurance,
however, that this practice effectively mitigates counterparty risk. These contracts are limited to less
than one year in duration. See Note 1 and Note 3 in this Report for additional information on the fair
value of open, unsettled forward foreign-exchange contracts at the end of 2012 and 2011. A
hypothetical 10% strengthening of the functional currency compared to the non-functional currency
exchange rates at September 2, 2012 and August 28, 2011, would have decreased the fair value of the
contracts by $28 and $25, respectively.
Commodity Price Risk
We are exposed to fluctuations in prices for energy that we consume, particularly electricity and natural
gas, which we seek to partially mitigate through the use of fixed-price contracts for certain of our
warehouses and other facilities, primarily in the U.S. and Canada. We also enter into variable-priced
contracts for some purchases of natural gas, in addition to fuel for our gas stations, on an index basis.
These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal
purchases or normal sales” exception under authoritative guidance and, thus, require no
mark-to-market adjustment.
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