Starbucks 2005 Annual Report Download - page 39

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Equity Security Price Risk
The Company has minimal exposure to price fluctuations on equity mutual funds within its trading portfolio.
The trading securities approximate a portion of the Company's liability under the Management Deferred
Compensation Plan (""MDCP''). A corresponding liability is included in ""Accrued compensation and related
costs'' on the consolidated balance sheets. These investments are recorded at fair value with unrealized gains
and losses recognized in ""Interest and other income, net'' in the consolidated statements of earnings. The
offsetting changes in the MDCP liability are recorded in ""General and administrative expenses.''
Interest Rate Risk
The Company's available-for-sale securities comprise a diversified portfolio consisting mainly of fixed income
instruments. The primary objectives of these investments are to preserve capital and liquidity. Available-for-
sale securities are investment grade and are recorded on the balance sheet at fair value with unrealized gains
and losses reported as a separate component of ""Accumulated other comprehensive income/(loss).'' The
Company does not hedge the interest rate exposure on its available-for-sale securities. The Company
performed a sensitivity analysis based on a 10% change in the underlying interest rate of its interest bearing
financial instruments, including its short-term borrowings and long-term debt, as of the end of fiscal 2005, and
determined that such a change would not have a significant effect on the fair value of these instruments.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Historically, significant portions of the Company's
net revenues and profits were, and may continue to be realized during the first quarter of the Company's fiscal
year, which includes the December holiday season. In addition, quarterly results are affected by the timing of
the opening of new stores, and the Company's rapid growth may conceal the impact of other seasonal
influences. Because of the seasonality of the Company's business, results for any quarter are not necessarily
indicative of the results that may be achieved for the full fiscal year.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that management believes are both most important to the portrayal of
the Company's financial condition and results, and require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain. Judgments and uncertainties affecting the application of those policies may result in materially
different amounts being reported under different conditions or using different assumptions.
Starbucks considers its policies on impairment of long-lived assets and accounting for self insurance reserves
to be the most critical in understanding the judgments that are involved in preparing its consolidated financial
statements.
Impairment of Long-Lived Assets
When facts and circumstances indicate that the carrying values of long-lived assets may be impaired, an
evaluation of recoverability is performed by comparing the carrying values of the assets to projected future
cash flows, in addition to other quantitative and qualitative analyses. For goodwill and other intangible assets,
impairment tests are performed annually and more frequently if facts and circumstances indicate goodwill
carrying values exceed estimated reporting unit fair values and if indefinite useful lives are no longer
appropriate for the Company's trademarks. Upon indication that the carrying values of such assets may not be
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