Costco 2006 Annual Report Download - page 69

The special committee and management do not believe that the net effects of this adjustment were
material, either quantitatively or qualitatively, in any of the years covered by the review. In reaching that
determination, the following quantitative measures were considered:
Year
Net after-tax
effect of
adjustment Reported net income(1)
Percent of
reported net
income
2005 ................................ $ 3,954 $1,063,092 0.37%
2004 ................................ 6,430 882,393 0.73%
2003 ................................ 9,092 721,000 1.26%
2002 ................................ 14,872 699,983 2.12%
1996-2001 ........................... 81,809 2,769,678 2.95%
Total ............................. $116,157 $6,136,146 1.89%
(1) Excludes cumulative effect of accounting change related to membership fees of $118,023 (net of
tax), reported in fiscal 1999.
Accounting for Reinsurance Agreements
The Company adjusted its beginning retained earnings for fiscal 2006 related to a correction in the
historical accounting treatment of certain finite risk arrangements. Because of the limited amount of risk
transfer included in the agreements, historical premium payments should have been accounted for as
a deposit asset rather than expensed over the policy term.
Deferred Tax Liability Adjustment
The Company also adjusted its beginning retained earnings for fiscal 2006 for a historical misstatement
in deferred taxes related to unreconciled differences in the detailed records supporting the deferred tax
liability for depreciation of property and equipment. These differences had accumulated over a period
of several years. This resulted in an overstatement of the tax basis and a corresponding
understatement of the Company’s net deferred tax liability.
Impact of Adjustments
The impact of each of the items noted above, net of tax, on fiscal 2006 beginning balances are
presented below:
Cumulative Effect as of August 29, 2005
Stock option
grant practices
Income tax
reserve for excess
compensation Deposit accounting Deferred taxes Total
Deferred income taxes and
other current assets ..... $ — $ — $16,427 $ — $ 16,427
Other current liabilities ..... — (1,701) — — (1,701)
Deferred income taxes and
other liabilities .......... 31,480 — (6,383) (31,667) (6,570)
Additional paid-in-capital . . . (147,637) — — — (147,637)
Retained earnings ........ 116,157 1,701 (10,044) 31,667 139,481
Total ............... $ — $ — $ — $ — $ —
Note 12—Segment Reporting
The Company and its subsidiaries are principally engaged in the operation of membership warehouses
in the United States, Canada, Japan and the United Kingdom and through majority owned subsidiaries
67