Starbucks 2006 Annual Report Download - page 47

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 as a component of OCI. 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, customer credit risk 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 1, 2006 and October 2, 2005, inventory reserves were $10.5 million and $8.3 million,
respectively.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation of property, plant and
equipment, which includes assets under capital leases, is provided on the straight-line method over estimated useful lives,
generally ranging from two to seven years for equipment and 30 to 40 years for buildings. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the related lease life, generally 10 years. For leases with renewal
periods at the Company’s option, Starbucks generally uses the original lease term, excluding renewal option periods to
determine estimated useful lives. If failure to exercise a renewal option imposes an economic penalty to Starbucks,
management may determine at the inception of the lease that renewal is reasonably assured and include the renewal
option period in the determination of appropriate estimated useful lives. The portion of depreciation expense related to
production and distribution facilities is included in “Cost of sales including occupancy costs” on the consolidated
statements of earnings. The costs of repairs and maintenance are expensed when incurred, while expenditures for
refurbishments and improvements that significantly add to the productive capacity or extend the useful life of an asset are
capitalized. When assets are retired or sold, the asset cost and related accumulated depreciation are eliminated with any
remaining gain or loss reflected in net earnings.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are tested for impairment annually in June 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. Based on the impairment tests performed, there was no impairment
of goodwill in fiscal 2006, 2005 and 2004. Definite-lived intangibles, which mainly consist of contract-based patents and
copyrights, are amortized over their estimated useful lives. For further information on goodwill and other intangible
assets, see Note 9.
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. Upon indication that the carrying values of such assets may not be recoverable,
the Company recognizes an impairment loss by a charge against current operations. Property, plant and equipment assets
STARBUCKS CORPORATION, FORM 10-K 43