.Analysis of Income Taxes
Difficulty: Advanced
Income Tax Accounting Policy
Costco accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized.
The determination of Costco's provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in Costco's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, Costco reassesses these probabilities and records any changes as appropriate. Certain of Costco's cumulative foreign undistributed earnings were considered by Costco to be indefinitely reinvested as of September 3, 2017. These earnings would be subject to U.S. income tax if Costco changed its position and could result in a U.S. tax liability. Although Costco has historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, it may repatriate such earnings to the extent it can do so without an adverse tax consequence.
Source: Costco Wholesale Corp., Annual Report
Income Tax Expense (Benefit)
Costco Wholesale Corp., income tax expense (benefit), continuing operations
USD $ in millions
| 12 months ended | Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | |
|---|---|---|---|---|---|---|---|
| | Federal | ||||||
| | State | ||||||
| | Foreign | ||||||
| | Current | ||||||
| | Federal | ||||||
| | State | ||||||
| | Foreign | ||||||
| | Deferred | ||||||
| | Provision for income taxes |
Source: Based on data from Costco Wholesale Corp. Annual Reports
| Item | Description | The company |
|---|---|---|
| Current | The component of income tax expense for the period representing amounts of income taxes paid or payable (or refundable) for the period for all income tax obligations as determined by applying the provisions of relevant enacted tax laws to relevant amounts of taxable income (loss) from continuing operations. | Costco Wholesale Corp.'s current declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
| Deferred | The component of income tax expense for the period representing the net change in the entity's deferred tax assets and liabilities pertaining to continuing operations. | Costco Wholesale Corp.'s deferred increased from 2015 to 2016 but then slightly declined from 2016 to 2017 not reaching 2015 level. |
| Provision for income taxes | The sum of the current income tax expense (benefit) and the deferred income tax expense (benefit) pertaining to pretax income (loss) from continuing operations; income tax expense (benefit) may include interest and penalties on tax uncertainties based on the entity's accounting policy. | Costco Wholesale Corp.'s provision for income taxes increased from 2015 to 2016 and from 2016 to 2017. |
Effective Income Tax Rate (EITR)
Costco Wholesale Corp., effective income tax rate (EITR) reconciliation
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Statutory tax rate | % | % | % | % | % | % |
| | State taxes, net | % | % | % | % | % | % |
| | Foreign taxes, net | % | % | % | % | % | % |
| | Employee stock ownership plan (ESOP) | % | % | % | % | % | % |
| | Other | % | % | % | % | % | % |
| | Effective tax rate | % | % | % | % | % | % |
Source: Based on data from Costco Wholesale Corp. Annual Reports
| Item | Description | The company |
|---|---|---|
| Effective tax rate | A ratio calculated by dividing the reported amount of income tax expense attributable to continuing operations for the period by GAAP-basis pretax income from continuing operations. | Costco Wholesale Corp.'s effective tax rate increased from 2015 to 2016 but then declined significantly from 2016 to 2017. |
Components of Deferred Tax Assets and Liabilities
Costco Wholesale Corp., components of deferred tax assets and liabilities
USD $ in millions
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Equity compensation | ||||||
| | Deferred income/membership fees | ||||||
| | Accrued liabilities and reserves | ||||||
| | Other | ||||||
| | Deferred tax assets | ||||||
| | Property and equipment | ||||||
| | Merchandise inventories | ||||||
| | Deferred tax liabilities | ||||||
| | Net deferred tax assets (liabilities) |
Source: Based on data from Costco Wholesale Corp. Annual Reports
| Item | Description | The company |
|---|---|---|
| Deferred tax assets | The aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; net of deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. | Costco Wholesale Corp.'s deferred tax assets increased from 2015 to 2016 and from 2016 to 2017. |
| Net deferred tax assets (liabilities) | For entities that net deferred tax assets and tax liabilities, represents the unclassified net amount of deferred tax assets and liabilities as of the balance sheet date, which result from applying the applicable enacted tax rate to net temporary differences and carryforwards pertaining to assets or liabilities. A temporary difference is a difference between the tax basis of an asset or liability and its carrying amount in the financial statements prepared in accordance with generally accepted accounting principles that will reverse in ensuing periods. | Costco Wholesale Corp.'s net deferred tax assets (liabilities) declined from 2015 to 2016 but then slightly increased from 2016 to 2017. |
Deferred Tax Assets and Liabilities, Classification
Costco Wholesale Corp., deferred tax assets and liabilities, classification
USD $ in millions
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Current deferred income tax assets (included in Other current assets) | ||||||
| | Non-current deferred income tax assets (included in Other assets) | ||||||
| | Non-current deferred income tax liabilities (included in Other liabilities) |
Source: Based on data from Costco Wholesale Corp. Annual Reports
| Item | Description | The company |
|---|---|---|
| Current deferred income tax assets (included in Other current assets) | The current portion of the aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. An unrecognized tax benefit that is directly related to a position taken in a tax year that results in a net operating loss carryforward should be presented as a reduction of the related deferred tax asset. | |
| Non-current deferred income tax assets (included in Other assets) | The noncurrent portion as of the balance sheet date of the aggregate carrying amount of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after the valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. | Costco Wholesale Corp.'s non-current deferred income tax assets (included in Other assets) increased from 2015 to 2016 and from 2016 to 2017. |
| Non-current deferred income tax liabilities (included in Other liabilities) | Represents the noncurrent portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A noncurrent taxable temporary difference is a difference between the tax basis and the carrying amount of a noncurrent asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. | Costco Wholesale Corp.'s non-current deferred income tax liabilities (included in Other liabilities) declined from 2015 to 2016 but then slightly increased from 2016 to 2017. |
Analyst Adjustments: Removal of Deferred Taxes
Costco Wholesale Corp., adjustments to financial data
USD $ in millions
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| Adjustment to Current Assets | |||||||
| | Current assets (as reported) | ||||||
| | Less: Current deferred tax assets, net | ||||||
| | Current assets (adjusted) | ||||||
| Adjustment to Total Assets | |||||||
| | Total assets (as reported) | ||||||
| | Less: Current deferred tax assets, net | ||||||
| | Less: Noncurrent deferred tax assets, net | ||||||
| | Total assets (adjusted) | ||||||
| Adjustment to Total Liabilities | |||||||
| | Total liabilities (as reported) | ||||||
| | Less: Noncurrent deferred tax liabilities, net | ||||||
| | Total liabilities (adjusted) | ||||||
| Adjustment to Total Costco Stockholders' Equity | |||||||
| | Total Costco stockholders' equity (as reported) | ||||||
| | Less: Net deferred tax assets (liabilities) | ||||||
| | Total Costco stockholders' equity (adjusted) | ||||||
| Adjustment to Net Income Attributable To Costco | |||||||
| | Net income attributable to Costco (as reported) | ||||||
| | Add: Deferred income tax expense (benefit) | ||||||
| | Net income attributable to Costco (adjusted) | ||||||
Adjusted Ratios: Removal of Deferred Taxes (Summary)
Costco Wholesale Corp., adjusted ratios
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| Current Ratio | |||||||
| | Reported current ratio | ||||||
| | Adjusted current ratio | ||||||
| Net Profit Margin | |||||||
| | Reported net profit margin | % | % | % | % | % | % |
| | Adjusted net profit margin | % | % | % | % | % | % |
| Total Asset Turnover | |||||||
| | Reported total asset turnover | ||||||
| | Adjusted total asset turnover | ||||||
| Financial Leverage | |||||||
| | Reported financial leverage | ||||||
| | Adjusted financial leverage | ||||||
| Return on Equity (ROE) | |||||||
| | Reported ROE | % | % | % | % | % | % |
| | Adjusted ROE | % | % | % | % | % | % |
| Return on Assets (ROA) | |||||||
| | Reported ROA | % | % | % | % | % | % |
| | Adjusted ROA | % | % | % | % | % | % |
| Ratio | Description | The company |
|---|---|---|
| Adjusted current ratio | A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. | Costco Wholesale Corp.'s adjusted current ratio deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by total revenue. | Costco Wholesale Corp.'s adjusted net profit margin improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Costco Wholesale Corp.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017. |
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
Costco Wholesale Corp.'s adjusted financial leverage declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | Costco Wholesale Corp.'s adjusted ROE deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Costco Wholesale Corp.'s adjusted ROA improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
Adjusted Current Ratio
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Current assets (USD $ in millions) | ||||||
| | Current liabilities (USD $ in millions) | ||||||
| | Current ratio1 | ||||||
| Adjusted for Deferred Taxes | |||||||
| | Adjusted current assets (USD $ in millions) | ||||||
| | Adjusted current ratio2 | ||||||
2017 Calculations
1 Current ratio = Current assets ÷ Current liabilities
= ÷ =
2 Adjusted current ratio = Adjusted current assets ÷ Current liabilities
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted current ratio | A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. | Costco Wholesale Corp.'s adjusted current ratio deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
Adjusted Net Profit Margin
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net income attributable to Costco (USD $ in millions) | ||||||
| | Net sales (USD $ in millions) | ||||||
| | Net profit margin1 | % | % | % | % | % | % |
| Adjusted for Deferred Taxes | |||||||
| | Adjusted net income attributable to Costco (USD $ in millions) | ||||||
| | Adjusted net profit margin2 | % | % | % | % | % | % |
2017 Calculations
1 Net profit margin = 100 × Net income attributable to Costco ÷ Net sales
= 100 × ÷ = %
2 Adjusted net profit margin = 100 × Adjusted net income attributable to Costco ÷ Net sales
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by total revenue. | Costco Wholesale Corp.'s adjusted net profit margin improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
Adjusted Total Asset Turnover
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net sales (USD $ in millions) | ||||||
| | Total assets (USD $ in millions) | ||||||
| | Total asset turnover1 | ||||||
| Adjusted for Deferred Taxes | |||||||
| | Adjusted total assets (USD $ in millions) | ||||||
| | Adjusted total asset turnover2 | ||||||
2017 Calculations
1 Total asset turnover = Net sales ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Costco Wholesale Corp.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017. |
Adjusted Financial Leverage
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Total assets (USD $ in millions) | ||||||
| | Total Costco stockholders' equity (USD $ in millions) | ||||||
| | Financial leverage1 | ||||||
| Adjusted for Deferred Taxes | |||||||
| | Adjusted total assets (USD $ in millions) | ||||||
| | Adjusted total Costco stockholders' equity (USD $ in millions) | ||||||
| | Adjusted financial leverage2 | ||||||
2017 Calculations
1 Financial leverage = Total assets ÷ Total Costco stockholders' equity
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total Costco stockholders' equity
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
Costco Wholesale Corp.'s adjusted financial leverage declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Adjusted Return on Equity (ROE)
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net income attributable to Costco (USD $ in millions) | ||||||
| | Total Costco stockholders' equity (USD $ in millions) | ||||||
| | ROE1 | % | % | % | % | % | % |
| Adjusted for Deferred Taxes | |||||||
| | Adjusted net income attributable to Costco (USD $ in millions) | ||||||
| | Adjusted total Costco stockholders' equity (USD $ in millions) | ||||||
| | Adjusted ROE2 | % | % | % | % | % | % |
2017 Calculations
1 ROE = 100 × Net income attributable to Costco ÷ Total Costco stockholders' equity
= 100 × ÷ = %
2 Adjusted ROE = 100 × Adjusted net income attributable to Costco ÷ Adjusted total Costco stockholders' equity
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | Costco Wholesale Corp.'s adjusted ROE deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level. |
Adjusted Return on Assets (ROA)
| Sep 3, 2017 | Aug 28, 2016 | Aug 30, 2015 | Aug 31, 2014 | Sep 1, 2013 | Sep 2, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net income attributable to Costco (USD $ in millions) | ||||||
| | Total assets (USD $ in millions) | ||||||
| | ROA1 | % | % | % | % | % | % |
| Adjusted for Deferred Taxes | |||||||
| | Adjusted net income attributable to Costco (USD $ in millions) | ||||||
| | Adjusted total assets (USD $ in millions) | ||||||
| | Adjusted ROA2 | % | % | % | % | % | % |
2017 Calculations
1 ROA = 100 × Net income attributable to Costco ÷ Total assets
= 100 × ÷ = %
2 Adjusted ROA = 100 × Adjusted net income attributable to Costco ÷ Adjusted total assets
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Costco Wholesale Corp.'s adjusted ROA improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
