Costco 2006 Annual Report Download - page 36

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in a company’s financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in an income tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective beginning in fiscal 2008. We are currently evaluating the impact of adopting FIN 48.
In June 2006, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) Issue
No. 06-03, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (that is, Gross Versus Net Presentation).” The EITF
reached a consensus that the presentation of taxes on either a gross or net basis is an accounting
policy decision that requires disclosure. EITF 06-03 is effective for the first interim or annual reporting
period beginning after December 15, 2006. Amounts collected from our members, which under
common trade practices are referred to as sales taxes, are and have been recorded on a net basis. We
have no intention of modifying this accounting policy. Therefore, the adoption of EITF 06-03 will not
have any effect on our financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
Replacement of Accounting Principles Board Opinion No. 20, and FASB Statement No. 3.” SFAS 154
requires retrospective application to prior periods’ financial statements for changes in accounting
principles, unless it is impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 also requires that retrospective application of a change in accounting
principle be limited to the direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154 also requires that a
change in depreciation, amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS
154 is effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We will adopt the provisions of SFAS 154 beginning in fiscal 2007. We do not
believe the adoption will have a significant effect on our future consolidated financial statements.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risk resulting from changes in interest and foreign currency rates.
As a policy, we do not engage in speculative or leveraged transactions, nor hold or issue financial
instruments for trading purposes.
The nature and amount of our long and short-term debt can be expected to vary as a result of future
business requirements, market conditions and other factors. As of September 3, 2006, our fixed rate
long-term debt included $129 million principal amount at maturity Zero Coupon Subordinated Notes
carried at $88 million and additional notes and capital lease obligations totaling $135 million. Our debt
also includes $300 million 5
1
⁄ 2 % Senior Notes carried at $301 million. We entered into “fixed-to-floating”
interest rate swaps on the Senior Notes, effectively converting these fixed interest rate securities to
variable rate securities. As of September 3, 2006 and August 28, 2005, we had “fixed-to-floating” interest
rate swaps with an aggregate notional amount of $300 million and an aggregate fair value of $1 million
and $8 million, respectively. Fluctuations in interest rates may affect the fair value of the fixed rate debt
and may affect the interest expense related to the variable rate debt.
We hold interest-bearing instruments that are classified as cash and cash equivalents and short-term
investments. Our investment policy is to manage our cash and cash equivalents and short-term
investments balances to preserve principal and liquidity, while seeking to maximize the return on our
investment portfolio through the full investment of available funds. We diversify our investment portfolio
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