Costco 2013 Annual Report Download - page 36

34
available to be purchased under our approved plan was $3,055 at the end of 2013. Purchases are made
from time-to-time, as conditions warrant, in the open market or in block purchases and pursuant to plans
under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business
Corporation Act.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. generally accepted
accounting principles requires that we make estimates and judgments. We continue to review our accounting
policies and evaluate our estimates, including those related to revenue recognition, investments,
merchandise inventory valuation, impairment of long-lived assets, insurance/self-insurance liabilities, and
income taxes. We base our estimates on historical experience and on assumptions that we believe to be
reasonable. For further information on key accounting policies, see discussion in Note 1 to the consolidated
financial statements included in this Report.
Revenue Recognition
We generally recognize sales, which include shipping fees where applicable, net of estimated returns, at
the time the member takes possession of merchandise or receives services. When we collect payment from
customers prior to the transfer of ownership of merchandise or the performance of services, the amount
received is generally recorded as deferred revenue on the consolidated balance sheets until the sale or
service is completed. We provide for estimated sales returns based on historical trends in merchandise
returns, net of the estimated net realizable value of merchandise inventories to be returned and any estimated
disposition costs. Amounts collected from members that under common trade practices are referred to as
sales taxes are recorded on a net basis.
We evaluate whether it is appropriate to record the gross amount of merchandise sales and related costs
or the net amount earned as commissions. Generally, when we are the primary obligor, subject to inventory
risk, have latitude in establishing prices and selecting suppliers, influence product or service specifications,
or have several but not all of these indicators, revenue and related shipping fees are recorded on a gross
basis. If we are not the primary obligor and do not possess other indicators of gross reporting as noted above,
we record the net amounts as commissions earned, which is reflected in net sales.
We account for membership fee revenue, net of estimated refunds, on a deferred basis, whereby revenue
is recognized ratably over the one-year membership period. Our Executive members qualify for a 2% reward
(up to a maximum of approximately $750 per year), which can be redeemed only at Costco warehouses on
qualified purchases made at Costco warehouses. We account for this reward as a reduction in sales. The
sales reduction and corresponding liability are computed after giving effect to the estimated impact of non-
redemptions based on historical data.
Investments
Investments are reviewed quarterly for indicators of other-than-temporary impairment. This determination
requires significant judgment. We employ a methodology that considers available quantitative and qualitative
evidence. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general
market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability
to hold the investment. We also consider specific adverse conditions related to the financial health of and
business outlook for the issuer, including industry and sector performance, operational and financing cash
flow factors, and rating agency actions. Once a decline in fair value is determined to be other-than-temporary,
an impairment charge is recorded and a new cost basis in the investment is established. If market, industry,
or issuer conditions deteriorate, we may incur future impairments.