Starbucks 2014 Annual Report Download - page 61

Starbucks Corporation 2014 Form 10-K 57
Certain leases provide for contingent rent, which is 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 of 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 recognize an expense
equal to the present value of the remaining lease payments to the landlord less any 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. We estimate the
liability using a number of assumptions, including store closing costs, cost inflation rates and discount rates, and accrete it 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 a gain or loss in cost of sales including occupancy costs in the consolidated
statements of earnings. As of September 28, 2014 and September 29, 2013, our net ARO assets included in property, plant and
equipment were $4.1 million and $3.8 million, respectively, and our net ARO liabilities included in other long-term liabilities
were $28.4 million and $27.7 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 an employee stock purchase plan ("ESPP"). RSUs issued by us are equivalent to nonvested shares
under the applicable accounting guidance. We record stock-based compensation expense 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.
Expense for performance-based RSUs is recognized when it is probable the performance goal will be achieved. Performance
goals are determined by the Board of Directors and may include measures such as earnings per share, operating income and
return on invested capital. The fair value of each stock option granted is estimated on the grant date using the Black-Scholes-
Merton option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised,
as necessary, to reflect market conditions and our historical experience. Options granted are valued using the multiple option
valuation approach, and the resulting expense is recognized over the requisite service period for each separately vesting portion
of the award. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date
of grant based on our historical experience and future expectations. The fair value of RSUs is based on the closing price of
Starbucks common stock on the award date, less the present value of expected dividends not received during the vesting period.
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 reported as a component of OCI and recorded in AOCI on
the consolidated balance sheets.
Income Taxes
We compute income taxes using the asset and liability method, under which deferred income taxes are recognized based on the
differences between the financial statement carrying amounts and the respective tax basis of our assets and liabilities. Deferred
tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which
we expect the temporary differences to reverse. The effect of a change in tax rates on deferred taxes is recognized in income in
the period that includes the enactment date.
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. In evaluating our ability
to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and