Starbucks 2012 Annual Report Download - page 52

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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 September 30, 2012, 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.
We consider financial reporting and disclosure practices and accounting policies quarterly to ensure that they
provide accurate and transparent information relative to the current economic and business environment. We
believe that of our significant accounting policies, the following policies involve a higher degree of judgment
and/or complexity:
Asset Impairment
When facts and circumstances indicate that the carrying values of long-lived assets may not be recoverable, we
evaluate long-lived assets for impairment. We first compare the carrying value of the asset to the asset’s estimated
future undiscounted cash flows. If the estimated future cash flows are less than the carrying value of the asset, we
measure an impairment loss based on the asset’s estimated fair value. For retail assets, the impairment test is
performed at the individual store asset group level. The fair value of a store’s assets is estimated using a
discounted cash flow model based on internal projections. Key assumptions used in this calculation include
revenue growth, operating expenses and a discount rate that we believe a buyer would assume when determining a
purchase price for the store. Estimates of revenue growth and operating expenses are based on internal projections
and consider a store’s historical performance, local market economics and the business environment impacting the
store’s performance. These estimates are subjective and can be significantly impacted by changes in the business
or economic conditions. For non-retail assets, fair value is determined using an approach that is appropriate based
on the relevant facts and circumstances, which may include discounted cash flows, comparable transactions, or
comparable company analyses.
Our impairment loss calculations contain uncertainties because they require management to make assumptions
and to apply judgment to estimate future cash flows and asset fair values, including forecasting asset useful lives.
Further, our ability to realize undiscounted cash flows in excess of the carrying values of our assets is affected by
factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions, and
changes in operating performance. During the past three fiscal years, we have not made any material changes in
the accounting methodology that we use to assess long-lived asset impairment loss. For the foreseeable future, we
do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions
that we use to calculate long-lived asset impairment losses. However, as we periodically reassess estimated future
cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material
impairment charges in the future.
Goodwill Impairment
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. When evaluating goodwill for impairment, we first
perform a qualitative assessment to determine if the fair value of the reporting unit is more likely than not greater
than the carrying amount. If not, we calculate the implied estimated fair value of the reporting unit. If the carrying
amount of goodwill exceeds the implied estimated fair value, an impairment charge is recorded to reduce the
carrying value to the implied estimated fair value. The fair value of each of our reporting units is the price a