Starbucks 2011 Annual Report Download - page 44

The following table summarizes the potential impact as of October 2, 2011 to Starbucks future net earnings and
other comprehensive income (“OCI”) from changes in the fair value of these derivative financial instruments due in
turn to a change in the value of the US dollar as compared to the level of foreign exchange rates. The information
provided below relates only to the hedging instruments and does not represent the corresponding changes in the
underlying hedged items (in millions):
Increase/(Decrease) to Net Earnings Increase/(Decrease) to OCI
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate
Foreigncurrencyhedges ............... $35 $(35) $15 $(15)
Equity Security Price Risk
We have minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within
our trading portfolio. The trading securities approximate a portion of our liability under the Management Deferred
Compensation Plan (“MDCP”). A corresponding liability is included in accrued compensation and related costs on
the consolidated balance sheets. These investments are recorded at fair value with unrealized gains and losses
recognized in net interest income and other in the consolidated statements of earnings. The offsetting changes in the
MDCP liability are recorded in general and administrative expenses. We performed a sensitivity analysis based on a
10% change in the underlying equity prices of our investments as of October 2, 2011 and determined that such a
change would not have a significant impact on the fair value of these instruments.
Interest Rate Risk
We utilize short-term and long-term financing and may use interest rate hedges to manage the effect of interest rate
changes on our existing debt as well as the anticipated issuance of new debt. As of October 2, 2011 and October 3,
2010, we did not have any interest rate hedge agreements outstanding.
The following table summarizes the impact of a change in interest rates as of October 2, 2011 on the fair value of
Starbucks debt (in millions):
Change in Fair Value
Fair Value
100 Basis Point Increase in
Underlying Rate
100 Basis Point Decrease in
Underlying Rate
Debt ........................... $648 $(33) $33
Our available-for-sale securities comprise a diversified portfolio consisting mainly of fixed income instruments. The
primary objectives of these investments are to preserve capital and liquidity. Available-for-sale securities are
recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component of
accumulated other comprehensive income. We do not hedge the interest rate exposure on our available-for-sale
securities. We performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of
our available-for-sale securities as of October 2, 2011, and determined that such a change would not have a
significant impact on the fair value of these instruments.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that management believes are both most important to the portrayal of our
financial condition and results and require the most difficult, subjective or complex judgments, often as a result of
the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties
affecting the application of those policies may result in materially different amounts being reported under different
conditions or using different assumptions.
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