Starbucks 2006 Annual Report Download - page 38

Based on the foreign exchange contracts outstanding as of October 1, 2006, a 10% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract as of October 1, 2006, would result in a
reduced fair value of these derivative financial instruments of approximately $44 million, of which $22 million may
reduce the Company’s future earnings. Conversely, a 10% appreciation of the U.S. dollar would result in an increase in
the fair value of these instruments of approximately $38 million, of which $20 million may increase the Company’s future
earnings. Consistent with the nature of the economic hedges provided by these foreign exchange contracts, increases or
decreases in their fair value would be mostly offset by corresponding decreases or increases in the dollar value of the
Company’s foreign investment, future foreign currency royalty fee payments and product purchases that would occur
within the hedging period.
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 instru-
ments. 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.” 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 2006, 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. Significant portions of the Company’s net revenues and
profits are realized during the first quarter of the Company’s fiscal year, which includes the 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, accounting for self insurance reserves, stock-based
compensation and accounting for operating leases to be the most critical in understanding the judgments that are
involved in preparing its consolidated financial statements.
34 STARBUCKS CORPORATION, FORM 10-K