Costco 2006 Annual Report Download - page 53

Significant judgment is required in determining income tax provisions and evaluating tax positions. The
Company establishes reserves for income taxes when, despite the belief that its tax positions are fully
supportable, there remain certain positions that are not probable of being sustained. The consolidated
tax provision and related accruals include the impact of such reasonably estimable losses and related
interest as deemed appropriate. To the extent that the probable tax outcome of these matters changes,
such changes in estimate will impact the income tax provision in the period in which such
determination is made.
Net Income per Common Share
The computation of basic net income per share is based on the weighted average number of shares
that were outstanding during the period. The computation of diluted earnings per share is based on the
weighted average number of shares used in the basic net income per share calculation plus the
number of common shares that would be issued assuming exercise of all potentially dilutive common
shares outstanding using the treasury stock method, consisting of certain shares subject to stock
options, restricted stock units and convertible notes.
Stock Repurchase Programs
Share repurchases are not displayed separately as treasury stock on the consolidated balance sheets
or consolidated statements of stockholders’ equity in accordance with the Washington Business
Corporation Act, which requires the retirement of repurchased shares. The par value of repurchased
shares is deducted from common stock and the remaining excess repurchase price over par value is
deducted from additional paid-in capital and retained earnings. See Note 5 for additional information.
Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission (SEC) issued SAB No. 108, which
addresses how the effects of prior-year uncorrected misstatements should be considered when
quantifying misstatements in current-year financial statements. SAB 108 requires an entity to quantify
misstatements using a balance sheet and income-statement approach and to evaluate whether either
approach results in quantifying an error that is material in light of relevant quantitative and qualitative
factors. The Company early-adopted SAB 108 as of August 29, 2005, the beginning of our fiscal year.
See Note 11 for further discussion.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair-value measurements required under other accounting pronouncements, but does not change
existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for
the Company’s fiscal year 2008. The Company is currently evaluating the impact of adopting
SFAS 157.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109.” 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. The Company is
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
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