Costco 2012 Annual Report Download - page 55

Insurance/Self-Insurance Liabilities
The Company uses a combination of insurance and self-insurance mechanisms, including a wholly-
owned captive insurance subsidiary and participation in a reinsurance pool, to provide for potential
liabilities for workers’ compensation, general liability, property damage, directors’ and officers’ liability,
vehicle liability, and employee health care benefits. The reinsurance agreement is one year in duration
and new agreements are entered into by each participant at their discretion at the commencement of
the next fiscal year. Liabilities associated with the risks that are retained by the Company 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. As of the end of 2012 and 2011, these insurance liabilities were $688 and $595 in the
aggregate, respectively, and were included in accounts payable, accrued salaries and benefits, and
other current liabilities on the consolidated balance sheets, classified based on their nature.
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 2012 and 2011:
2012 2011
Insurance-related liabilities ..................................... $308 $276
Deferred sales ............................................... 159 141
Cash card liability ............................................. 133 116
Other current liabilities ......................................... 104 112
Tax-related liabilities .......................................... 88 122
Sales return reserve ........................................... 86 74
Vendor consideration liabilities .................................. 57 46
Interest payable .............................................. 30 51
Other Current Liabilities .................................... $965 $938
Asset Retirement Obligations
The Company’s asset retirement obligations (ARO) are related to leasehold improvements that at the
end of a lease must be removed in order to comply with the lease agreement. These obligations are
recorded as a liability with an offsetting capital asset at the inception of the lease term based upon the
estimated fair market value of the costs to remove the leasehold improvements. These liabilities,
included in deferred income taxes and other liabilities, are accreted over time to the projected future
value of the obligation using the Company’s incremental borrowing rate. The capitalized ARO assets
are depreciated using the same depreciation convention as the respective leasehold improvement
assets and are included with buildings and improvements.
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