Costco 2014 Annual Report Download - page 37

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 evaluate our 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. 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 for certain risks, 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (amounts in millions)
Our exposure to financial market risk results from fluctuations in interest rates and foreign currency
exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial
instruments for trading purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that
are diversified among various instruments considered to be cash equivalents as defined in Note 1 to the
consolidated financial statements included in this Report, as well as short-term investments in
government and agency securities, and asset and mortgage-backed securities with effective maturities of
generally three months to five years at the date of purchase. The primary objective of our investment
activities is to preserve principal and secondarily to generate yields. The majority of our short-term
investments are in fixed interest rate securities. These securities are subject to changes in fair value due
to interest rate fluctuations.
Our Board of Directors have approved a policy that limits investments in the U.S. to direct U.S.
government and government agency obligations, repurchase agreements collateralized by U.S.
government and government agency obligations, and U.S. government and government agency money
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