Costco 2006 Annual Report Download - page 68

Note 11—Staff Accounting Bulletin No. 108
As discussed under Recent Accounting Pronouncements in Note 1, in September 2006, the SEC
released SAB 108. The transition provisions of SAB 108 permit the Company to adjust for the
cumulative effect on retained earnings of immaterial errors relating to prior years. SAB 108 also
requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for
the effects of such errors on the quarters when the information is next presented. Such adjustments do
not require previously filed reports with the SEC to be amended. Effective the beginning of the fiscal
year ended September 3, 2006, the Company elected to early-adopt SAB 108. In accordance with SAB
108, the Company has adjusted beginning retained earnings for fiscal 2006 in the accompanying
consolidated financial statements for the items described below. The Company considers these
adjustments to be immaterial to prior periods.
Review of Stock Option Grant Practices
Following publicity regarding the granting of stock options, the Company initiated an internal review of
its historical stock option grant practices to determine whether the stated grant dates of options were
supported by the Company’s books and records. As a result of this preliminary review, a special
committee of independent directors was formed. The Company filed a Form 8-K dated October 12,
2006, which provides details regarding the special committee’s review. The special committee
engaged independent counsel and forensics experts, and comprehensively reviewed all equity grants
made during the years 1996 through 2005. In late September 2006, the special committee reported its
conclusions and recommendations to the board of directors, which, after further review, adopted these
conclusions and recommendations. The review identified no evidence of fraud, falsification of records,
concealment of actions or documentation, or intentional deviation from generally accepted accounting
principles. The review indicated that, in several instances, it was impossible to determine with precision
the appropriate measurement date for specific grants. For these grants it was feasible only to identify a
range of dates that included the appropriate measurement dates, where some dates in the range were
after the recorded grant date.
The subject grants were made to over one thousand of the Company’s employees, including, among
others, the Company’s warehouse managers and buyers. None of the options in which the review
identified imprecision in the grant process were issued to the Company’s chief executive officer,
chairman, or non-employee directors, except in April 1997 both the chief executive officer and the
chairman received, as part of a broad grant to hundreds of employees, one grant subject to imprecision
that may have benefited each by up to approximately $200. Other grants subject to imprecision were
made to a director who serves as executive vice president and chief financial officer and to a director
who had no role in the determination of any grant date, but who serves as senior executive vice
president and chief operating officer.
Given the lack of historical documentation, it was not possible to precisely determine the amount of the
adjustments that should be made. Based on the recommendation of the special committee, which was
based on the documentation that was available, the Company has recorded an adjustment to transfer
$116,157 from retained earnings to paid-in capital, representing previously unrecorded after-tax
compensation expense, and to increase the deferred tax asset account by $31,480. In those cases
where the committee was unable to identify the likely grant date of the options, the latest date on which
the decision could have been made was used. The Company also recorded $1,701 for the estimated
federal income tax consequences stemming from the probable disallowance of compensation
deductions claimed related to the subject option grants. The Company has informed the SEC of the
special committee’s investigation and conclusions and will cooperate fully in the event of any inquiry.
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