Starbucks 2012 Annual Report Download - page 61

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55
certain banks, which creates book overdrafts. Book overdrafts are presented as a current liability in accounts
payable on the consolidated balance sheets.
Short-term and Long-term Investments
Our short-term and long-term investments consist primarily of investment grade debt securities, including some
auction rate securities, all of which are classified as available-for-sale. Also included in our available-for-sale
investment portfolio are certificates of deposit placed through an account registry service. Available-for-sale
securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a
component of accumulated other comprehensive income. Available-for-sale securities with remaining maturities
of less than one year and those identified by management at the time of purchase to be used to fund operations
within one year are classified as short term. All other available-for-sale securities, including all of our auction rate
securities, are classified as long term. Unrealized losses are charged against net earnings when a decline in fair
value is determined to be other than temporary. We review several factors to determine whether a loss is other
than temporary, such as the length and extent of the fair value decline, the financial condition and near term
prospects of the issuer, and whether we have the intent to sell or will likely be required to sell before the securities
anticipated recovery, which may be at maturity. Realized gains and losses are accounted for using the specific
identification method. Purchases and sales are recorded on a trade date basis.
We also have a trading securities portfolio, which is comprised of marketable equity mutual funds and equity
exchange-traded funds. Trading securities are recorded at fair value with unrealized holding gains and losses
included in net earnings.
Fair Value
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly
transaction between market participants. For financial instruments and investments that we record or disclose at
fair value, we determine fair value based upon the quoted market price as of the last day of the fiscal period, if
available. If a quoted market price is not available for identical assets, we determine fair value based upon the
quoted market price of similar assets or using a variety of other valuation methodologies. We determine fair value
of our auction rate securities using an internally developed valuation model, using inputs that include interest rate
curves, credit and liquidity spreads, and effective maturity.
The carrying value of cash and cash equivalents approximates fair value because of the short-term nature of these
instruments. The fair value of our long-term debt is estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to us for debt of the same remaining maturities.
We measure our equity and cost method investments at fair value on a nonrecurring basis when they are
determined to be other-than temporarily impaired. Fair values are determined using available quoted market prices
or discounted cash flows.
Derivative Instruments
We manage our exposure to various risks within the consolidated financial statements according to a market price
risk management policy. Under this policy, we may engage in transactions involving various derivative
instruments to hedge interest rates, commodity prices and foreign currency denominated revenues, purchases,
assets and liabilities. We generally do not enter into derivative instruments with maturities longer than five years.
We enter into fixed-price and price-to-be-fixed coffee purchase commitments. Price-to-be-fixed contracts are
purchase commitments whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon,
but the date, and therefore price, at which the base “C” coffee commodity price component will be fixed has not
yet been established. For these types of contracts, either Starbucks or the seller has the option to “fix” the base “C”
coffee commodity price prior to the delivery date. For both fixed-price and price-to-be-fixed purchase
commitments, we expect to take delivery of and to utilize the coffee in a reasonable period of time and in the
conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not
recorded at fair value on our balance sheets.