Costco 2012 Annual Report Download - page 56

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 non-functional 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, whose functional currency is not 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 open, unsettled forward foreign-exchange contracts were $284 and $247 at the end of
2012 and 2011, 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 at the end of 2012 and 2011.
The unrealized gains or (losses) recognized in interest income and other, net in the accompanying
consolidated statements of income relating to the net changes in the fair value of open, unsettled
forward foreign-exchange contracts were immaterial in 2012, 2011, and 2010.
The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity
and natural gas, which it seeks to partially mitigate through the use of fixed-price contracts for certain
of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into
variable-priced contracts for some purchases of natural gas, in addition to fuel for its 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.
Foreign Currency
The functional currencies of the Company’s international subsidiaries are the local currency of the
country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are
translated at the exchange rate on the balance sheet date. Translation adjustments resulting from this
process are recorded in accumulated other comprehensive income. Revenues and expenses of the
Company’s consolidated foreign operations are translated at average rates of exchange prevailing
during the year.
The Company recognizes foreign-currency transaction gains and losses related to revaluing all
monetary assets and revaluing or settling monetary liabilities denominated in currencies other than the
functional currency (generally the U.S. dollar cash and cash equivalents and the U.S. dollar payables
of consolidated subsidiaries to their functional currency) in interest income and other, net in the
accompanying condensed consolidated statements of income. Also included are realized foreign-
currency gains or losses from all settlements of forward foreign-exchange contracts. These items
resulted in a net gain of $41, $8 and $13 in 2012, 2011, and 2010, respectively.
Revenue Recognition
The Company generally recognizes sales, which include shipping fees where applicable, net of
estimated returns, at the time the member takes possession of merchandise or receives services.
When the Company collects payments from customers prior to the transfer of ownership of
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