Costco 2013 Annual Report Download - page 53

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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. The Company believes the LIFO
method more fairly presents the results of operations by more closely matching current costs with current
revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect
of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, when
actual inflation rates and inventory levels have been determined.
Due to net deflationary trends in 2013, a benefit of $27 was recorded to merchandise costs, to reduce the
cumulative LIFO valuation on merchandise inventories. Due to net inflationary trends in 2012 and 2011,
merchandise inventories valued at LIFO were lower than FIFO, resulting in a charge to merchandise costs
of $21 and $87, respectively. At the end of 2013 and 2012, the cumulative impact of the LIFO valuation on
merchandise inventories was $81 and $108, respectively.
The Company provides for estimated inventory losses between physical inventory counts as a percentage
of net sales, using estimates based on the Company’s experience. The provision is adjusted periodically to
reflect the results of the actual physical inventory counts, which generally occur in the second and fourth
fiscal quarters of the fiscal year. Inventory cost, where appropriate, is reduced by estimates of vendor rebates
when earned or as the Company progresses towards earning those rebates, provided that they are probable
and reasonably estimable.
Property and Equipment
Property and equipment are stated at cost. In general, new building additions are separated into components,
each with its own estimated useful life, generally five to fifty years for buildings and improvements and three
to twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the
straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made
after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of
the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date
the leasehold improvements are made.
Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and
improvements that add to or change the way an asset functions or that extend the useful life of an asset are
capitalized. Assets that were removed during the remodel, refurbishment or improvement are retired. Assets
classified as held for sale were not material at the end of 2013 or 2012.
The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a
facility, or when events or changes in circumstances occur that may indicate the carrying amount of the asset
group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used,
including warehouses to be relocated, the carrying value of the asset group is considered recoverable when
the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset
group exceed the group’s net carrying value. In the event that the carrying value is not considered recoverable,
an impairment loss would be recognized for the asset group to be held and used equal to the excess of the
carrying value above the estimated fair value of the asset group. For asset groups classified as held for sale
(disposal group), the carrying value is compared to the disposal group’s fair value less costs to sell. The
Company estimates fair value by obtaining market appraisals from third party brokers or other valuation
techniques. Impairment charges, included in selling, general and administrative expenses on the
consolidated statements of income, in 2013, 2012, and 2011 were immaterial.
The Company capitalizes certain computer software and software development costs incurred in connection
with developing or obtaining computer software for internal use. These costs are included in equipment and
fixtures, and amortized on a straight-line basis over the estimated useful lives of the software, generally
three to seven years.