Costco 2013 Annual Report Download - page 58

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Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits
and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences and carry-forwards are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance is established when necessary
to reduce deferred tax assets to amounts expected to be realized.
The determination of the Company’s 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 of uncertain tax positions are recorded in the Company’s consolidated financial
statements only after determining a more-likely-than-not probability that the uncertain tax positions will
withstand challenge, if any, from tax authorities. When facts and circumstances change, the Company
reassesses these probabilities and records any changes in the consolidated financial statements as
appropriate. See Note 9 for additional information.
Net Income per Common Share Attributable to Costco
The computation of basic net income per share uses the weighted average number of shares that were
outstanding during the period. The computation of diluted net income per share uses the weighted average
number of shares in the basic net income per share calculation plus the number of common shares that
would be issued assuming exercise and vesting to the participant of all potentially dilutive common shares
outstanding using the treasury stock method for shares subject to stock options and restricted stock units
and the “if converted” method for the convertible note securities.
Stock Repurchase Programs
Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation
Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price
over par value is deducted from additional paid-in capital and retained earnings. See Note 6 for additional
information.
Recently Adopted Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued guidance that eliminated the option
to report other comprehensive income and its components in the statement of changes in equity. Instead,
an entity is required to present either a continuous statement of net income and other comprehensive income
or to present the information in two separate but consecutive statements. The new guidance must be applied
retrospectively and was effective for fiscal years and interim periods within those years beginning after
December 15, 2011. The Company adopted this guidance at the beginning of its first quarter of 2013.
In September 2011, the FASB issued guidance to amend the rules related to testing goodwill for impairment.
The revised guidance allows an initial qualitative evaluation, based on the entity’s events and circumstances,
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. The results of this qualitative assessment determine whether it is necessary to perform further
impairment tests. The new guidance was effective for annual and interim goodwill impairment tests performed
for fiscal years beginning after December 15, 2011. The Company adopted this guidance at the beginning
of its first quarter of 2013. Adoption of this guidance had no impact on the consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In February 2013, the FASB issued guidance related to reclassifications out of accumulated other
comprehensive income. An entity will be required to disclose the net income line items impacted by significant