Starbucks 2006 Annual Report Download - page 46

Cash Management
The Company’s cash management system provides for the reimbursement of all major bank disbursement accounts on a
daily basis. Checks issued but not presented for payment to the bank are reflected as a reduction of cash and cash
equivalents on the consolidated financial statements.
Short-term and Long-term Investments
The Company’s short-term and long-term investments consist primarily of investment-grade marketable debt securities
as well as bond and equity mutual funds, all of which are classified as trading or available-for-sale. Trading securities are
recorded at fair value with unrealized holding gains and losses included in net earnings. Available-for-sale securities are
recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a separate component of
accumulated other comprehensive income. Available-for-sale securities with remaining maturities of less than one year
and those identified by management at time of purchase for funding operations in less than one year are classified as short-
term, and all other available-for-sale securities are classified as long-term. Unrealized losses are charged against net
earnings when a decline in fair value is determined to be other than temporary. Management reviews several factors to
determine whether a loss is other than temporary, such as the length of time a security is in an unrealized loss position, the
extent to which fair value is less than amortized cost, the impact of changing interest rates in the short and long term, the
financial condition and near term prospects of the issuer and the Company’s intent and ability to hold the security for a
period of time sufficient to allow for any anticipated recovery in fair value. Realized gains and losses are accounted for on
the specific identification method. Purchases and sales are recorded on a trade date basis.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those
instruments. The fair value of the Company’s investments in marketable debt and equity securities, as 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 net 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.
42 STARBUCKS CORPORATION, FORM 10-K