How does Costco account for its $2.68 billion in membership fees?

Costco Wholesale Corporation (NASDAQ: COST) recently reported strong results for the second quarter of its fiscal year 2026. Through the first 24 weeks of fiscal 2026, Costco collected $2.68 billion in membership fees from its 81.4 million paid households worldwide. Membership fee revenue grew approximately 14% in the second quarter alone, driven by both new sign-ups and the company’s first fee increase in seven years, which took effect on September 1, 2024. A basic Gold Star or Business membership now costs $65 per year, while an Executive membership costs $130 per year.

The accounting treatment of these membership fees is interesting. When a member hands over $65 or $130 to renew, Costco does not recognize the full amount as revenue right away. Under GAAP, revenue is recognized when the seller has satisfied its performance obligation to the customer. Because Costco is promising its members access to the warehouse for a full 12 months, it must recognize the membership fee as revenue evenly over the one-year membership period. In its own financial statements, Costco says it accounts for membership fee revenue “on a deferred basis, recognized ratably over the one-year membership period.” The portion of the fee that has not yet been earned is reported on the balance sheet as a liability commonly called deferred membership fees (more broadly known as unearned revenue).

View a quick tutorial video about unearned revenue at this link and then answer the following questions.

Discussion Questions

1. When a member pays Costco $130 for a one-year Executive membership, why does Costco not immediately recognize the entire $130 as revenue? What performance obligation does Costco still owe the member?
2. How does Costco’s deferred (unearned) membership fee balance affect the amount of total liabilities reported on its balance sheet, and how could this balance change over the course of a fiscal year?
3. Costco has 81.4 million paid households who sign up or renew at different times throughout the year. How does this staggered renewal pattern affect Costco’s monthly membership fee revenue and its deferred membership fee balance?
4. Suppose Costco began offering a two-year Executive membership for a discounted prepaid price. How would that change the way Costco accounts for the fee, and how would the balance sheet presentation differ from a one-year membership?
5. If a company that sells annual subscriptions were to recognize all of its cash collections as revenue on the day it received the cash, how could that mislead lenders, investors, or regulators who rely on the financial statements?