Starbucks 2006 Annual Report Download - page 39

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 recoverable, the Company recognizes an impairment loss as a charge against
current operations. Property, plant and equipment assets are grouped at the lowest level for which there are identifiable
cash flows when assessing impairment. Cash flows for retail assets are identified at the individual store level. Long-lived
assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell.
Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company
to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the
ongoing maintenance and improvements of the assets, changes in economic conditions and changes in operating
performance. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets,
these factors could cause the Company to realize material impairment charges.
STOCK-BASED COMPENSATION
Starbucks accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS 123R.
The Company uses the Black-Scholes-Merton option pricing model which requires the input of highly subjective
assumptions. These assumptions include estimating the length of time employees will retain their stock options before
exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term
and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the
subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the
related amount recognized on the consolidated statements of earnings.
OPERATING LEASES
Starbucks leases retail stores, roasting and distribution facilities and office space under operating leases. The Company
provides for an estimate of asset retirement obligation (“ARO”) expense at the lease inception date for operating leases
with requirements to remove leasehold improvements at the end of the lease term. Estimating AROs involves subjective
assumptions regarding both the amount and timing of actual future retirement costs. Future actual costs could differ
significantly from amounts initially estimated. In addition, the large number of operating leases, and the significant
number of international markets in which the Company has operating leases, adds administrative complexity to the
calculation of ARO expense as well as to the other technical accounting requirements of operating leases such as
contingent rent.
SELF INSURANCE RESERVES
The Company uses a combination of insurance and self-insurance mechanisms, including a wholly owned captive
insurance entity and participation in a reinsurance pool, to provide for the potential liabilities for workers’ compensation,
healthcare benefits, general liability, property insurance, director and officers’ liability insurance and vehicle liability.
Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by
considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The
estimated accruals for these liabilities, portions of which are calculated by third party actuarial firms, could be
significantly affected if future occurrences and claims differ from these assumptions and historical trends.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109,” which seeks to reduce the diversity in practice associated with the accounting
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