Starbucks 2007 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 No. 123(R), “Share-Based Payment.” The Company uses the Black-Scholes-Merton option pricing model
which requires the input of 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 could materially affect the
estimate of fair value of stock-based compensation; however based on an analysis using changes in certain
assumptions that could be reasonably possible in the near term, management believes the effect on the expense
recognized for fiscal 2007 would not have been material.
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 could be significantly affected if future occur-
rences and claims differ from these assumptions and historical trends.
Income Taxes
Starbucks accounts for income taxes in accordance with Statement of SFAS No. 109, “Accounting for Income
Taxes,” which recognizes deferred tax assets and liabilities based on the differences between the financial statement
37