Starbucks 2008 Annual Report Download - page 54

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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 income and other, net” on the consolidated statements of
earnings.
The Company also entered into foreign currency forward contracts that are not designated as hedging instruments
for accounting purposes. These contracts are recorded at fair value, with the changes in fair value recognized in
“Interest income and other, 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. As of September 28, 2008 and September 30, 2007, the allowance for doubtful
accounts was $4.5 million and $3.2 million, respectively.
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 September 28, 2008 and September 30, 2007, inventory reserves were
$25.5 million and $14.9 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 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 or other intangible assets in fiscal 2008, 2007 and 2006. 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 undiscounted future cash
flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying values of such
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