Starbucks 2003 Annual Report Download - page 15

26฀ Fiscal฀2003฀Annual฀Report
Fiscal฀2003฀Annual฀Report฀ 27
NOTES฀TO฀CONSOLIDATED฀FINANCIAL฀STATEMENTS
Years฀ended฀September฀28,฀2003,฀September฀29,฀2002,฀and฀
September฀30,฀2001
Note฀1:฀Summary฀of฀Significant฀Accounting฀Policies
Description฀of฀Business
Starbucks฀ Corporation฀ (together฀ with฀ its฀ subsidiaries,฀
“Starbucks”฀or฀the฀“Company”)฀ purchases฀ and฀roasts฀high-
quality฀whole฀bean฀coffees฀and฀sells฀them,฀along฀with฀fresh,฀
rich-brewed฀ coffees,฀ Italian-style฀ espresso฀ beverages,฀ cold฀
blended฀ beverages,฀ a฀ variety฀ of฀ complementary฀ food฀ items,฀
coffee-related฀ accessories฀ and฀ equipment,฀ a฀ selection฀ of฀
premium฀teas฀and฀a฀line฀of฀compact฀discs฀primarily฀through฀
its฀Company-operated฀retail฀stores.฀Starbucks฀sells฀coffee฀and฀
tea฀ products฀ through฀ other฀ channels,฀ and,฀ through฀ certain฀
of฀ its฀ equity฀ investees,฀ Starbucks฀ also฀ produces฀ and฀ sells฀
bottled฀ Frappuccino®฀ and฀ Starbucks฀ DoubleShot™฀ coffee฀
drinks฀ and฀ a฀ line฀ of฀ premium฀ ice฀ creams.฀ These฀ non-retail฀
channels฀ are฀ collectively฀ known฀ as฀ “Specialty฀ Operations.”฀
The฀Company’s฀objective฀is฀to฀establish฀Starbucks฀as฀the฀most฀
recognized฀and฀respected฀brand฀in฀the฀world.฀To฀achieve฀this฀
goal,฀ the฀ Company฀ plans฀ to฀ continue฀ rapid฀ expansion฀ of฀
its฀ retail฀ operations,฀ to฀ grow฀ its฀ Specialty฀ Operations฀ and฀
to฀ selectively฀ pursue฀ other฀ opportunities฀ to฀ leverage฀ the฀
Starbucks฀ brand฀ through฀ the฀ introduction฀ of฀ new฀ products฀
and฀the฀development฀of฀new฀channels฀of฀distribution.฀
Principles฀of฀Consolidation
The฀consolidated฀f inancial฀statements฀ref lect฀the฀financial฀
position฀and฀operating฀results฀of฀Starbucks,฀which฀includes฀
wholly฀ owned฀ subsidiaries฀ and฀ investees฀ controlled฀ by฀
the฀Company.฀
Investments฀in฀entities฀which฀the฀Company฀does฀not฀control,฀
but฀ has฀ the฀ ability฀ to฀ exercise฀ significant฀ inf luence฀ over฀
operating฀and฀financial฀policies,฀are฀accounted฀for฀under฀the฀
equity฀ method.฀ Investments฀ in฀ entities฀ in฀ which฀ Starbucks฀
does฀not฀have฀the฀ability฀to฀exercise฀significant฀inf luence฀are฀
accounted฀for฀under฀the฀cost฀method.฀
All฀ significant฀ intercompany฀ transactions฀ have฀ been฀
eliminated.
Fiscal฀Year-End
The฀ Company’s฀ fiscal฀ year฀ ends฀ on฀ the฀ Sunday฀ closest฀ to฀
September฀ 30.฀ The฀ fiscal฀ years฀ ended฀ September฀ 28,฀ 2003,฀
September฀29,฀2002,฀and฀September฀30,฀2001,฀each฀included฀
52฀weeks.฀The฀fiscal฀ year฀ending฀on฀October฀3,฀2004,฀will฀
include฀53฀weeks.
Estimates฀and฀Assumptions
The฀ preparation฀ of฀ financial฀ statements฀ in฀ conformity฀ with฀
accounting฀ principles฀ generally฀ accepted฀ in฀ the฀ United฀
States฀ of฀ America฀ requires฀ management฀ to฀ make฀ estimates฀
and฀ assumptions฀ that฀ affect฀ the฀ reported฀ amounts฀ of฀ assets,฀
liabilities,฀ revenues฀ and฀ expenses.฀ Actual฀ results฀ may฀ differ฀
from฀these฀estimates.฀
Cash฀and฀Cash฀Equivalents
The฀Company฀considers฀all฀highly฀liquid฀instruments฀with฀a฀
maturity฀of฀three฀months฀or฀less฀at฀the฀time฀of฀purchase฀to฀be฀
cash฀equivalents.
Cash฀Management
The฀ Company’s฀ cash฀ management฀ system฀ provides฀ for฀ the฀
reimbursement฀of฀all฀major฀bank฀disbursement฀accounts฀on฀a฀
daily฀basis.฀Checks฀issued฀but฀not฀presented฀for฀payment฀to฀the฀
bank฀are฀reflected฀as฀a฀reduction฀of฀cash฀and฀cash฀equivalents฀
on฀the฀accompanying฀consolidated฀financial฀statements.฀
Short -term฀and฀Long- term฀Investments
The฀ Company’s฀ short-term฀ and฀ long-term฀ investments฀
consist฀ primarily฀ of฀ investment-grade฀ marketable฀ debt฀ and฀
equity฀securities฀as฀well฀as฀bond฀and฀equity฀mutual฀funds,฀all฀
of฀which฀are฀classified฀as฀trading฀or฀available-for-sale.฀Trading฀
securities฀are฀recorded฀at฀fair฀value฀with฀unrealized฀holding฀
gains฀and฀losses฀included฀in฀net฀earnings.฀Available-for-sale฀
securities฀ are฀ recorded฀ at฀ fair฀ value,฀and฀unrealized฀holding฀
gains฀and฀losses฀are฀recorded,฀net฀of฀tax,฀as฀a฀separate฀component฀
of฀accumulated฀other฀comprehensive฀income.฀Available-for-
sale฀ securities฀ with฀ remaining฀ maturities฀ less฀ than฀ one฀ year฀
are฀ classified฀ as฀ short-term,฀ and฀ all฀ other฀ available-for-sale฀
securities฀ are฀ classified฀ as฀ long-term.฀ Unrealized฀ losses฀ are฀
charged฀against฀net฀earnings฀when฀a฀decline฀in฀fair฀value฀is฀
determined฀to฀be฀other฀than฀temporary.฀Realized฀gains฀and฀
losses฀are฀accounted฀for฀on฀the฀specific฀identification฀method.฀
Purchases฀and฀sales฀are฀recorded฀on฀a฀trade฀date฀basis.฀
Fair฀Value฀of฀Financial฀Instruments
The฀carrying฀value฀of฀cash฀and฀cash฀equivalents฀approximates฀
fair฀ value฀ because฀ of฀ the฀ short-term฀ maturity฀ of฀ those฀
instruments.฀ The฀ fair฀ value฀ of฀ the฀ Company’s฀ investments฀
in฀marketable฀debt฀and฀equity฀securities฀as฀well฀as฀bond฀and฀
equity฀mutual฀funds฀is฀based฀upon฀the฀quoted฀market฀price฀
on฀the฀last฀business฀day฀of฀the฀fiscal฀year.฀For฀equity฀securities฀
of฀companies฀that฀are฀privately฀held,฀or฀where฀an฀observable฀
quoted฀market฀price฀does฀not฀exist,฀the฀Company฀estimates฀
fair฀ value฀ using฀ a฀ variety฀ of฀ valuation฀ methodologies.฀ Such฀
methodologies฀include฀comparing฀the฀security฀with฀securities฀
of฀ publicly฀ traded฀ companies฀ in฀ similar฀ lines฀ of฀ business,฀
applying฀ revenue฀ multiples฀ to฀ estimated฀ future฀ operating฀
results฀ for฀ the฀ private฀ company฀ and฀ estimating฀ discounted฀
cash฀ f lows฀ for฀ that฀ company.฀ For฀ further฀ information฀ on฀
investments,฀see฀Notes฀4฀and฀7.฀The฀carrying฀value฀of฀long-
term฀debt฀approximates฀fair฀value.฀
Derivative฀Instruments
The฀Company฀manages฀its฀exposure฀to฀foreign฀currency฀risk฀
within฀ the฀ consolidated฀ financial฀ statements฀ according฀ to฀ a฀
hedging฀policy.฀ Under฀the฀policy,฀Starbucks฀may฀engage฀ in฀
transactions฀ involving฀ various฀ derivative฀ instruments฀ with฀
maturities฀ generally฀ not฀ longer฀ than฀ five฀ years,฀ to฀ hedge฀
assets,฀ liabilities,฀ revenues฀ and฀ purchases฀ denominated฀ in฀
foreign฀currencies.฀
The฀ Company฀ follows฀ Statement฀ of฀ Financial฀ Accounting฀
Standards฀ (“SFAS”)฀ No.฀ 133,฀ “Accounting฀ for฀ Derivative฀
Instruments฀ and฀ Hedging฀ Activities,”฀ as฀ amended฀ and฀
interpreted,฀ which฀ requires฀ that฀ all฀ derivatives฀ be฀ recorded฀
on฀the฀balance฀sheet฀at฀fair฀value.฀For฀a฀cash฀f low฀hedge,฀the฀
effective฀ portion฀ of฀ the฀ derivative’s฀ gain฀ or฀ loss฀ is฀ initially฀
reported฀ as฀ a฀ component฀ of฀ other฀ comprehensive฀ income฀
(“OCI”)฀and฀subsequently฀reclassified฀into฀net฀earnings฀when฀
the฀hedged฀exposure฀affects฀net฀earnings.฀For฀a฀net฀investment฀
hedge,฀the฀effective฀portion฀of฀the฀derivative’s฀gain฀or฀loss฀is฀
reported฀as฀a฀component฀of฀OCI.฀
Cash฀ f low฀ hedges฀ related฀ to฀ anticipated฀ transactions฀ are฀
designated฀ and฀ documented฀ at฀ the฀ inception฀ of฀ each฀ hedge฀
by฀ matching฀ the฀ terms฀ of฀ the฀ contract฀ to฀ the฀ underlying฀
transaction.฀ The฀ Company฀ classifies฀ the฀ cash฀ flows฀ from฀
hedging฀ transactions฀ in฀ the฀ same฀ categories฀ as฀ the฀ cash฀
flows฀ from฀ the฀ respective฀ hedged฀ items.฀ Once฀ established,฀
cash฀ f low฀ hedges฀ are฀ generally฀ not฀ removed฀ until฀ maturity฀
unless฀an฀anticipated฀transaction฀is฀no฀longer฀likely฀to฀occur.฀
Discontinued฀cash฀flow฀hedges฀are฀immediately฀settled฀with฀
counterparties,฀and฀the฀related฀accumulated฀derivative฀gains฀
or฀losses฀are฀recognized฀in฀“Interest฀and฀other฀income,฀net”฀
on฀the฀consolidated฀statements฀of฀earnings.฀
Forward฀ contract฀ effectiveness฀ for฀ cash฀ f low฀ hedges฀ is฀
calculated฀ by฀ comparing฀ the฀ fair฀ value฀ of฀ the฀ contract฀ to฀
the฀ change฀ in฀ value฀ of฀ the฀ anticipated฀ transaction฀ using฀
forward฀rates฀on฀a฀monthly฀basis.฀For฀net฀investment฀hedges,฀
the฀ spot-to-spot฀ method฀ is฀ used฀ to฀ calculate฀ effectiveness.฀
Any฀ ineffectiveness฀ is฀ recognized฀ immediately฀ in฀ “Interest฀
and฀ other฀ income,฀ net”฀ on฀ the฀ accompanying฀ consolidated฀
statements฀of฀earnings.฀
Inventories
Inventories฀ are฀ stated฀ at฀ the฀ lower฀ of฀ cost฀ (primarily฀
moving฀ average฀ cost)฀ or฀ market.฀ The฀ Company฀ records฀
inventory฀ reserves฀ for฀ obsolete฀ and฀ slow-moving฀ items฀
and฀ for฀ estimated฀ shrinkage฀ between฀ physical฀ inventory฀
counts.฀Inventory฀reserves฀are฀based฀on฀inventory฀turnover฀
trends,฀ historical฀ experience฀ and฀ application฀ of฀ the฀ specific฀
identification฀method.
Property,฀Plant฀and฀Equipment
Property,฀ plant฀ and฀ equipment฀ are฀ carried฀ at฀ cost฀ less฀
accumulated฀ depreciation.฀ Depreciation฀ of฀ property,฀ plant฀
and฀equipment,฀which฀includes฀assets฀under฀capital฀leases,฀is฀