Costco 2014 Annual Report Download - page 54

The Company accounts for membership fee revenue, net of refunds, on a deferred basis, whereby
revenue is recognized ratably over the one-year membership period. The Company's Executive members
qualify for a 2% reward on qualified purchases (up to a maximum of approximately $750 per year), which
can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in
sales. The sales reduction and corresponding liability (classified as accrued member rewards in the
consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions
based on historical data. The net reduction in sales was $1,051, $970, and $900 in 2014, 2013, and 2012,
respectively.
Merchandise Costs
Merchandise costs consist of the purchase price of inventory sold, inbound and outbound shipping
charges and all costs related to the Company’s depot operations, including freight from depots to selling
warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits,
utilities, and depreciation on production equipment in fresh foods and certain ancillary departments.
Vendor Consideration
The Company has agreements with vendors to receive funds for volume rebates, certain promotional
activities, and other vendor consideration. Volume rebates or other purchase discounts are evidenced by
signed agreements that are reflected in the carrying value of the inventory when earned or as the
Company progresses towards earning the rebate or discount, and as a component of merchandise costs
as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of
merchandise costs upon completion of contractual milestones, terms of the related agreement, or by
another systematic approach.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits and workers’
compensation costs for warehouse employees, other than fresh foods departments and certain ancillary
businesses, as well as all regional and home office employees, including buying personnel. Selling,
general and administrative expenses also include substantially all building and equipment depreciation,
bank charges, utilities, and stock-based compensation expense as well as other operating costs incurred
to support warehouse operations.
Retirement Plans
The Company has a 401(k) Retirement Plan available to all U.S. employees who have completed 90 days
of employment. The plan allows pre-tax deferrals, a portion of which the Company matches. In addition,
the Company provides each eligible participant an annual discretionary contribution. The Company also
has a defined contribution plan for Canadian employees and contributes a percentage of each
employee's salary. Certain Other International operations have defined benefit and defined contribution
plans that are not material. Amounts expensed under all plans were $436, $409, and $382 for 2014,
2013, and 2012, respectively, and included in selling, general and administrative expenses and
merchandise costs in the accompanying consolidated statements of income.
Stock-Based Compensation
Restricted stock units (RSUs) granted to employees generally vest over five years, all grants allow for
quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of
the grant date in the event of retirement or voluntary termination. The Company does not reduce stock-
based compensation for an estimate of forfeitures because the estimate is inconsequential in light of
historical experience and considering the awards vest on a quarterly basis. The impact of actual
forfeitures arising in the event of termination is recognized as actual forfeitures occur.
Compensation expense for all stock-based awards granted is predominantly recognized using the
straight-line method over the requisite service period for the entire award. The terms of the Company’s
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