Starbucks 2011 Annual Report Download - page 59

When ceasing operations in company-operated stores under operating leases, in cases where the lease contract
specifies a termination fee due to the landlord, we record such expense at the time written notice is given to the
landlord. In cases where terms, including termination fees, are yet to be negotiated with the landlord, we will record
the expense upon signing of an agreement with the landlord. In cases where the landlord does not allow us to
prematurely exit the lease, but allows for subleasing, we estimate the fair value of any sublease income that can be
generated from the location and expense the present value of the excess of remaining lease payments to the landlord
over the projected sublease income at the cease-use date.
Asset Retirement Obligations
We recognize a liability for the fair value of required asset retirement obligations (“ARO”) when such obligations
are incurred. Our AROs are primarily associated with leasehold improvements, which, at the end of a lease, we are
contractually obligated to remove in order to comply with the lease agreement. At the inception of a lease with such
conditions, we record an ARO liability and a corresponding capital asset in an amount equal to the estimated fair
value of the obligation. The liability is estimated based on a number of assumptions requiring management’s
judgment, including store closing costs, cost inflation rates and discount rates, and is accreted to its projected future
value over time. The capitalized asset is depreciated using the same depreciation convention as leasehold
improvement assets. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability
and the actual retirement costs incurred is recognized as an operating gain or loss in the consolidated statements of
earnings. As of October 2, 2011 and October 3, 2010, our net ARO asset included in property, plant and equipment
was $11.8 million and $13.7 million, respectively, and our net ARO liability included in other long-term liabilities
was $50.1 million and $47.7 million, respectively.
Stock-based Compensation
We maintain several equity incentive plans under which we may grant non-qualified stock options, incentive stock
options, restricted stock, restricted stock units (“RSUs”) or stock appreciation rights to employees, non-employee
directors and consultants. We also have employee stock purchase plans (“ESPP”). RSUs issued by us are equivalent
to nonvested shares under the applicable accounting guidance. We record stock-based compensation expenses based
on the fair value of stock awards at the grant date and recognize the expense over the related service period
following a graded vesting expense schedule. For stock option awards we use the Black-Scholes-Merton option
pricing model to measure fair value. For restricted stock units, fair value is calculated using the stock price at the
date of grant.
Foreign Currency Translation
Our international operations generally use their local currency as their functional currency. Assets and liabilities are
translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the
average monthly exchange rates during the year. Resulting translation adjustments are recorded as a component of
accumulated other comprehensive income on the consolidated balance sheets.
Income Taxes
We compute income taxes using the asset and liability method, under which deferred income taxes are provided for
the temporary differences between the financial statement carrying amounts and the tax basis of our assets and
liabilities. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a
valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be
realized. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the relevant taxing authorities, based on the technical merits of our
position. The tax benefits recognized in the financial statements from such a position are measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Starbucks
recognizes interest and penalties related to income tax matters in income tax expense.
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