Starbucks 2012 Annual Report Download - page 66

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Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of
specified levels. We record a contingent rent liability on the consolidated balance sheets and the corresponding
rent expense when specified levels have been achieved or when we determine that achieving the specified levels
during the fiscal year is probable.
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 September 30, 2012 and October 2, 2011, our net ARO asset included in property, plant and
equipment was $8.8 million and $11.8 million, respectively, and our net ARO liability included in other long-term
liabilities was $42.6 million and $50.1 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