Starbucks 2005 Annual Report Download - page 48

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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 flows for that company. Declines in fair value below the Company's carrying value
deemed to be other than temporary are charged against earnings. For further information on investments, see
Notes 4 and 7. The carrying value of short-term and long-term debt approximates fair value.
Derivative Instruments
The Company manages its exposure to various risks within the consolidated financial statements according to
an umbrella risk management policy. Under this 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.
The Company follows 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 flow 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 flow 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 flow hedges are generally not removed until maturity unless an anticipated transaction
is no longer likely to occur. Discontinued or derecognized cash flow hedges are immediately settled with
counterparties, and the related accumulated derivative gains or losses are recognized into net earnings in
""Interest and other income, net'' on the consolidated statements of earnings.
Forward contract effectiveness for cash flow 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. Under this method, the change in fair value
of the forward contract attributable to the changes in spot exchange rates (the effective portion) is reported in
other comprehensive income. The remaining change in fair value of the forward contract (the ineffective
portion) is reclassified into net earnings. Any ineffectiveness is recognized immediately in ""Interest and other
income, net'' on the consolidated statements of earnings.
Allowance for doubtful accounts
Allowance for doubtful accounts is calculated based on historical experience and application of the specific
identification method.
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. As of October 2, 2005 and October 3, 2004, inventory reserves were
$8.3 million and $5.7 million, respectively.
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