Starbucks 2012 Annual Report Download - page 62

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56
We record all derivatives on the balance sheets at fair value. For a cash flow hedge, the effective portion of the
derivative's gain or loss is initially reported as a component of other comprehensive income (“OCI”) and
subsequently reclassified into net earnings when the hedged exposure affects net earnings. For a net investment
hedge, the effective portion of the derivative's gain or loss is reported as a component of OCI.
Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge
by matching the terms of the contract to the underlying transaction. We classify the cash flows from hedging
transactions in the same categories as the cash flows from the respective hedged items. Once established, cash
flow hedges are generally not removed until maturity unless an anticipated transaction is no longer likely to occur.
For discontinued or dedesignated cash flow hedges, the related accumulated derivative gains or losses are
recognized in net interest income and other on the consolidated statements of earnings.
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.
Certain foreign currency forward contracts, commodity swap contracts, and futures contracts 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 September 30, 2012, October 2, 2011, and October 3, 2010, the
allowance for doubtful accounts was $5.6 million, $3.3 million, and $3.3 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 obsolescence trends, historical experience and application of the
specific identification method. As of September 30, 2012, October 2, 2011, and October 3, 2010, inventory
reserves were $22.6 million, $19.5 million, and $18.1 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 2 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 the 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.