Starbucks 2011 Annual Report Download - page 55

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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 net interest income and other on the consolidated statements of
earnings.
We also enter into certain foreign currency forward contracts, commodity swap contracts, and futures 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 net interest income and other 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 October 2, 2011, October 3, 2010, and September 27, 2009, the allowance
for doubtful accounts was $3.3 million, $3.3 million, and $5.0 million respectively.
Inventories
Inventories are stated at the lower of cost (primarily moving average cost) or market. We record inventory reserves
for obsolete and slow-moving inventory 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 2, 2011, October 3, 2010, and September 27, 2009, inventory reserves were $19.5 million,
$18.1 million, and $21.1 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 15 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 our option, we generally use 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 us, we 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 recognized in net earnings.
Goodwill
We test goodwill for impairment on an annual basis during our third fiscal quarter, or more frequently if
circumstances, such as material deterioration in performance or a significant number of store closures, indicate
reporting unit carrying values may exceed their fair values. If the carrying amount of goodwill exceeds the implied
estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the
implied estimated fair value.
As a part of our ongoing operations, we may close certain stores within a reporting unit containing goodwill due to
underperformance of the store or inability to renew our lease, among other reasons. We abandon certain assets
associated with a closed store including leasehold improvements and other non-transferrable assets. Under GAAP,
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