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Operating Leases Accounting Policy

Costco leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2064, with the exception of one lease in Costco's U.K. subsidiary, which expires in 2151. These leases generally contain one or more of the following options, which Costco can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-party purchase offer.

Costco accounts for its lease expense with free rent periods and step-rent provisions on a straight-line basis over the original term of the lease and any extension options that Costco more likely than not expects to exercise, from the date Costco has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume.

Costco has capital leases for certain warehouse locations, expiring at various dates through 2054. Capital lease assets are included in land and buildings and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income.

Costco records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent Costco is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, Costco assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If Costco continues to be the deemed owner, it accounts for the arrangement as a financing lease.

Costco's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are recorded as a liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the leasehold improvements. These liabilities are accreted over time to the projected future value of the obligation using Costco's incremental borrowing rate. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases were immaterial at the end of 2017 and 2016, respectively, and are included in other liabilities in the accompanying consolidated balance sheets.

Source: Costco Wholesale Corp., Annual Report

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Present Value of Future Operating Lease Payments

Costco Wholesale Corp., future operating lease payments

 
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Total undiscounted future operating lease payments1 (USD $ in millions)
Discount rate2 % % % % % %
Total present value of future operating lease payments (USD $ in millions)

1 Source: Costco Wholesale Corp. Annual Reports

2 Internal rate of return on capital leases

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2018 2018
2019 2019
2020 2020
2021 2021
2022 2022
2023 and thereafter 2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Total:

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2017 2017
2018 2018
2019 2019
2020 2020
2021 2021
2022 and thereafter 2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Total:

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2016 2016
2017 2017
2018 2018
2019 2019
2020 2020
2021 and thereafter 2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Total:

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2015 2015
2016 2016
2017 2017
2018 2018
2019 2019
2020 and thereafter 2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
Total:

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2014 2014
2015 2015
2016 2016
2017 2017
2018 2018
2019 and thereafter 2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Total:

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2013 2013
2014 2014
2015 2015
2016 2016
2017 2017
2018 and thereafter 2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Total:

1 Source: Costco Wholesale Corp. Annual Reports

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Analyst Adjustments for Operating Leases

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 Total Assets
Total assets (as reported)
Add: Operating leased assets1
Total assets (adjusted)
Adjustment to Total Debt
Total debt (as reported)
Add: Operating lease obligations2
Total debt (adjusted)
Adjustment to Earnings before Interest and Tax (EBIT)
EBIT3 (as reported)
Add-back: Aggregate rental expense4
Less: Depreciation expense, operating leased assets5
EBIT (adjusted)
Adjustment to Interest Expense
Interest expense (as reported)
Add: Interest expense, operating lease obligations6
Interest expense (adjusted)

1, 2 Equal to total present value of future operating lease payments. See Details »

3 See Details »

4 Source: Costco Wholesale Corp. Annual Reports

5 See Details »

6 See Details »

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Adjusted Ratios for Operating Leases (Summary)

Costco Wholesale Corp., adjusted ratios

 
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Total Asset Turnover1
Reported total asset turnover
Adjusted total asset turnover
Debt to Equity2
Reported debt to equity
Adjusted debt to equity
Return on Assets3 (ROA)
Reported ROA % % % % % %
Adjusted ROA % % % % % %
Interest Coverage4
Reported interest coverage
Adjusted interest coverage
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 debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. Costco Wholesale Corp.'s adjusted debt-to-equity improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Costco Wholesale Corp.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted interest coverage A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. Costco Wholesale Corp.'s adjusted interest coverage deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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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 Operating Leases
Net sales (USD $ in millions)
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.

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Adjusted Debt to Equity

 
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
As Reported
Total debt (USD $ in millions)
Total Costco stockholders' equity (USD $ in millions)
Debt to equity1
Adjusted for Operating Leases
Adjusted total debt (USD $ in millions)
Total Costco stockholders' equity (USD $ in millions)
Adjusted debt to equity2

2017 Calculations

1 Debt to equity = Total debt ÷ Total Costco stockholders' equity
= ÷ =

2 Adjusted debt to equity = Adjusted total debt ÷ Total Costco stockholders' equity
= ÷ =

Ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. Costco Wholesale Corp.'s adjusted debt-to-equity improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

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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 Operating Leases
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 × Net income attributable to Costco ÷ Adjusted total assets
= 100 × ÷ = %

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Costco Wholesale Corp.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Interest Coverage

 
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
As Reported
Earnings before interest and tax1 (EBIT) (USD $ in millions)
Interest expense (USD $ in millions)
Interest coverage2
Adjusted for Operating Leases
Adjusted EBIT (USD $ in millions)
Adjusted interest expense (USD $ in millions)
Adjusted interest coverage3

1 See Details »

2017 Calculations

2 Interest coverage = EBIT ÷ Interest expense
= ÷ =

3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= ÷ =

Ratio Description The company
Adjusted interest coverage ratio A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. Costco Wholesale Corp.'s adjusted interest coverage ratio deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Estimation of Depreciation Expense, Operating Leased Assets

USD $ in millions

 
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Aggregate rental expense1
Less: Estimated interest expense, operating lease obligations2
Estimated depreciation expense, operating leased assets

1 Source: Costco Wholesale Corp., Annual Reports

2 See Details »

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Estimation of Interest Expense, Operating Lease Obligations

 
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Operating leased assets, at beginning of year1 (USD $ in millions)
Discount rate2 % % % % % %
Estimated interest expense, operating lease obligations3 (USD $ in millions)

1 See Details »

2 Internal rate of return on capital leases

2017 Calculations

3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= × =

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Present Value of Operating Lease Payments, at Beginning of Year

 
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Total present value of future operating lease payments1 (USD $ in millions)
Aggregate rental expense2 (USD $ in millions)
Discount rate3 % % % % % %
Total present value of operating lease payments, at beginning of year4 (USD $ in millions)

1 Equal to total present value of future operating lease payments. See Details »

2 Source: Costco Wholesale Corp., Annual Reports

3 Internal rate of return on capital leases

2017 Calculations

4 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Aggregate rental expense) ÷ (1 + Discount rate)
= ( + ) ÷ (1 + %) =

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