Costco 2013 Annual Report Download - page 37

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Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail
inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S.
merchandise inventories. Merchandise inventories for all foreign operations are primarily valued by the retail
inventory method and are stated using the first-in, first-out (FIFO) method. We believe the LIFO method
more fairly presents the results of operations by more closely matching current costs with current revenues.
We record an adjustment each quarter, if necessary, for the estimated effect of inflation or deflation, and
these estimates are adjusted to actual results determined at year-end.
We provide for estimated inventory losses (shrink) between physical inventory counts as a percentage of
net sales. The provision is adjusted periodically to reflect results of the actual physical inventory counts,
which generally occur in the second and fourth quarters of the year.
Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as we progress
toward earning those rebates, provided they are probable and reasonably estimable. Other consideration
received from vendors is generally recorded as a reduction of merchandise costs upon completion of
contractual milestones, terms of agreement, or other systematic and rational approaches.
Impairment of Long-Lived Assets
We periodically evaluate our long-lived assets for indicators of impairment, such as a decision to relocate
or close a warehouse facility. Our judgments are based on existing market and operational conditions. Future
events could cause us to conclude that impairment factors exist, requiring a downward adjustment of these
assets to their then-current fair market value.
Insurance/Self-Insurance Liabilities
We use 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. 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 accounting pronouncements to have a material impact
on our results of operations, financial condition or liquidity in future periods.