Starbucks 2012 Annual Report Download - page 53

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willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow model. 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 reporting unit. Estimates of revenue
growth and operating expenses are based on internal projections considering a reporting unit’s past performance
and forecasted growth, local market economics and the local business environment impacting the reporting unit’s
performance. The discount rate is calculated using an estimated cost of capital for a retail operator to operate the
reporting unit in the region. These estimates are highly subjective judgments and can be significantly impacted by
changes in the business or economic conditions.
Our impairment loss calculations contain uncertainties because they require management to make assumptions in
the qualitative assessment of the reporting unit and require management to apply judgment to estimate the fair
value of our reporting units, including estimating future cash flows, and if necessary, the fair value of a reporting
units’ assets and liabilities. Further, our ability to realize the future cash flows used in our fair value calculations is
affected by factors such as changes in economic conditions, changes in our operating performance, and changes in
our business strategies.
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-transferable assets. Under GAAP,
when a portion of a reporting unit that constitutes a business is to be disposed of, goodwill associated with the
business is included in the carrying amount of the business in determining any loss on disposal. Our evaluation of
whether the portion of a reporting unit being disposed of constitutes a business occurs on the date of
abandonment. Although an operating store meets the accounting definition of a business prior to abandonment, it
does not constitute a business on the closure date because the remaining assets on that date do not constitute an
integrated set of assets that are capable of being conducted and managed for the purpose of providing a return to
investors. As a result, when closing individual stores, we do not include goodwill in the calculation of any loss on
disposal of the related assets. As noted above, if store closures are indicative of potential impairment of goodwill
at the reporting unit level, we perform an evaluation of our reporting unit goodwill when such closures occur.
During the past three fiscal years, we have not made any material changes in the accounting methodology that we
use to assess goodwill impairment loss. For fiscal 2012, we determined the fair value of our reporting units was
substantially in excess of their carrying values. Accordingly, we did not recognize any goodwill impairments
during the current fiscal year. 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 test for impairment losses on goodwill in the foreseeable
future. However, as we periodically reassess our fair value calculations, including estimated future cash flows,
changes in our estimates and assumptions may cause us to realize material impairment charges in the future.
Self Insurance Reserves
We use a combination of insurance and self-insurance mechanisms, including a wholly owned captive insurance
entity and participation in a reinsurance treaty, to provide for the potential liabilities for certain risks, including
workers’ compensation, healthcare benefits, general liability, property insurance, and director and officers’
liability insurance. Key assumptions used in the estimate of our self insurance reserves include the amount of
claims incurred but not reported at the balance sheet date. These liabilities, which are associated with the risks that
are retained by Starbucks are not discounted and are estimated, in part, by considering historical claims
experience, demographic, exposure and severity factors, and other actuarial assumptions. The estimated accruals
for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions
and historical trends.
Our self-insurance reserves contain uncertainties because management is required to make assumptions and to
apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the
balance sheet date. Periodically, we review our assumptions to determine the adequacy of our self-insurance
reserves.