Starbucks 2005 Annual Report Download - page 51

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$11.8 million and $5.8 million, respectively, of capitalized advertising costs were recorded in ""Prepaid
expenses and other current assets'' on the consolidated balance sheets.
Store Preopening Expenses
Costs incurred in connection with the start-up and promotion of new store openings are expensed as incurred.
Operating Leases
Starbucks leases retail stores, roasting and distribution facilities and office space under operating leases. Most
lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent escalation
clauses and/or contingent rent provisions. For purposes of recognizing incentives, premiums and minimum
rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial
possession to begin amortization, which is generally when the Company enters the space and begins to make
improvements in preparation of intended use.
For tenant improvement allowances and rent holidays, the Company records a deferred rent liability in
""Accrued occupancy costs'' and ""Other long-term liabilities'' on the consolidated balance sheets and
amortizes the deferred rent over the terms of the leases as reductions to rent expense on the consolidated
statements of earnings.
For premiums paid upfront to enter a lease agreement, the Company records a deferred rent asset in ""Prepaid
expenses and other current assets'' and ""Other assets'' on the consolidated balance sheets and then amortizes
the deferred rent over the terms of the leases as additional rent expense on the consolidated statements of
earnings.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date
other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line
basis over the terms of the leases on the consolidated statements of earnings.
Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of
specified levels. The Company records a contingent rent liability in ""Accrued occupancy costs'' on the
consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or
when management determines that achieving the specified levels during the fiscal year is probable.
Stock-based Compensation
The Company maintains several stock equity incentive plans under which incentive stock options and
nonqualified stock options may be granted to employees, consultants and nonemployee directors. Starbucks
accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles
Board (""APB'') Opinion No. 25, ""Accounting for Stock Issued to Employees,'' and related interpretations.
Accordingly, because the grant price equals the market price on the date of grant, no compensation expense is
recognized by the Company for stock options issued to employees.
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