For the exclusive use of A. Alsadiq, 2023.9B11B014
STARBUCKS: VENTI LEASES1
Gabrielle Gregg revised this case (originally prepared by Caleb Yong under the supervision of Vaughan S. Radcliffe and Mitch Stein)
solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a
managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Our goal is to publish
materials of the highest quality; submit any errata to publishcases@ivey.ca. i1v2e5y5pubs
Copyright © 2011, Richard Ivey School of Business Foundation
Version: 2021-08-25
Esther Yong had recently graduated with an MBA from the Richard Ivey School of Business and joined a
top-tier investment bank in New York City. As a new associate, Yong was given the task of making a
presentation in two days to the vice-president of the bank concerning Starbucks Corporation (Starbucks)
valuation and future prospects. As she pored over the financial statements and notes, she realized that she
had forgotten to fill her coffee mug that morning on the way into work.
Exiting the elevators, Yong hurried out past the corner of Broadway and Wall Street on her way to a nearby
Starbucks shop. As she stood in line at the shop, Yong paused to look around at the interior of this Starbucks
location and noted how its layout and décor were almost identical to other locations that she had been to in
the past and that this was a key element of the service offering, integral to the concept of Starbucks being a
welcoming “third place” in addition to home and work. As with most other retail businesses, Starbucks
leased most of its locations. Thinking back to the accounting class that she took during her MBA, Yong
made a mental note to look into how Starbucks accounted for its premises financially and whether this had
any significance in the preparation of her presentation.
THE HISTORY OF STARBUCKS2
The first Starbucks was opened in Seattle on March 30, 1971, by Jerry Baldwin, Gordon Bowker, and Zev
Siegl. Starbucks sold fresh-roasted whole coffee beans. Entrepreneur Howard Schultz joined the company
as director of retail operations and marketing in 1982. On a trip to Italy in 1983, Schultz experienced the
romance of the coffee experience in Italian coffee bars and upon his return to the United States, he urged
Starbucks’ owners to adopt the Italian coffee house model; however, the owners rejected this idea, so Schultz
ventured out on his own and opened Il Giornale, a coffee bar chain selling pre-made drinks. Schultz’s vision
for Starbucks was that of a third place between work and home—a location where friends could meet for
conversation over coffee in a community-friendly coffee house setting.
In 1987, Starbucks was sold to Il Giornale and Schultz rebranded the Il Giornale locations as Starbucks; after
this rebranding the company quickly began to expand. Within the same year, Starbucks opened its first
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Starbucks Coffee Company or any of its employees.
2
Company materials from Starbucks (website), www.starbucks.com, accessed November 15, 2010.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 2
9B11B014
locations outside Seattle in Vancouver and Chicago. At the time of its initial public offering in 1992,
Starbucks had grown to 165 locations. By the end of 2009, Starbucks was reported to have almost 17,000
locations in over 50 countries worldwide. The United States had approximately 11,000 locations while
Canada had about 1,000.
OVERVIEW OF LEASE ACCOUNTING
The parties involved in a lease transaction were termed the lessor and the lessee. The lessor was the owner
of the property and transferred the right to use the property to the lessee in exchange for payment (i.e., rental
payments). When the lease expired, the lessee returned the property to the lessor.
There were different classifications of leases according to the International Accounting Standards Board
(IASB) and the Financial Accounting Standards Board (FASB)/Canadian Generally Accepted Accounting
Principles (GAAP). Though there were technical differences between the two approaches, they both
established broadly similar categories and treatment of capital and operating leases (see Exhibit 1).
Operating leases were recorded as lease expenses only in the period in which lease payments were made,
and they were shown only as an operating expense in the income statement. Thus, the operating lease did
not affect the balance sheet of the firm and there was no disclosure of indebtedness relating to the lease on
the face of the balance sheet; instead, disclosures were made in notes to the financial statements. Capital
leases were recorded differently because the lease was classified as both an asset (value of the asset) and as
a liability (present value of the lease expenses) on the balance sheet. The lessee was entitled to claim
depreciation of the asset while also deducting the interest expense of the lease payment each year. The
lessee took on some of the risks of ownership while enjoying some of the benefits of the asset.
Those who set accounting standards had long been aware of the developing problems regarding lease
accounting. As Sir David Tweedie, chair of the IASB, had commented, the lease accounting standard fell
significantly short.3 Tweedie commented on the aviation industry, a famously heavy user of lease financing:
One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet.
Why does this not occur? Because most aircraft are leased and the standards divide leasing into two
types: operating leases and capital/finance leases in which (broadly speaking) the asset is owned for
almost its entire life. For operating leases, the only amount shown in the financial statements is the
annual lease payments which are charged to the profit and loss account. For finance leases, the
present value of the future payments under the lease is shown as a liability and on the other side of
the balance sheet the right to the asset. Why aren’t aircraft shown? This is because aircraft are not
normally leased for their entire life. They are usually leased for only seven years; therefore, they fall
into the operating lease category. But ask the airline the following questions:
Q:
A:
Q:
A:
Can the airline escape from the lease?
No, it is committed to annual payments over the next seven years.
Can the airline measure the amounts it has to pay over seven years?
Yes, it is written into the lease contract.
3
David Tweedie, “Prepared Remarks of Sir David Tweedie, Chairman of the International Accounting Standards Board”
(speech, The Empire Club of Canada, Toronto, Canada, April 25, 2008), 4, https://cdn.ifrs.org//media/feature/news/speeches/2008/sir-david-tweedie-empire-club-of-canada-april-2008.pdf.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 3
9B11B014
The definition of a liability is met. The airline has an obligation from which it cannot escape and
which can be measured reliably. It should, therefore, show as a liability the present value of the
payments that have to be made and on the other side the rights to the aircraft for the same period.
These would not be trivial figures. The leasing volume for 2006 amounted to $634 billion4—and
this was for only one year. Most of it was off balance sheet.5
The use of leases as a source of off-balance sheet financing had increased significantly, largely due to
favourable lease accounting that made corporate balance sheets appear stronger due to seemingly lower
indebtedness. It was with the objective of improving lease accounting that IASB and FASB jointly
established a project to change accounting standards concerning leases—a project that was envisaged as a
prelude to the unification of accounting standards worldwide.
THE IASB AND FASB LEASE ACCOUNTING PROJECT
In August 2010, IASB and FASB jointly published an exposure draft (ED) on lease accounting, proposing
to standardize the recognition of assets and liabilities under leases and seek comment on the proposals from
stakeholder groups (see Exhibit 2). The proposed changes as presented by IASB and FASB were intended
to help users of financial statements avoid uncertainties experienced under the existing standards and deal
with the lack of full disclosure caused by off-balance sheet financing (see Exhibit 3). The two boards
intended to implement a revised lease accounting standard in 2011.
Yong found that Starbucks had written a comment letter to IASB and FASB as part of the consultative
process regarding the ED on leases (see Exhibit 4).6 The letter outlined three main areas of concern: the
length of the lease term, the amortized cost method of recognizing expenses that were front-end loaded, and
the inclusion of contingent rent payments in the estimation of lease-related liabilities.
STARBUCKS’ LEASE ACCOUNTING
Yong had heard that it was common for investment banks and other financial companies to correct and adjust
debt with amounts representing leasehold obligations due to concerns with understating debt. Thinking back
to her accounting class, she knew that there could technically be one year’s depreciation charges on leased
assets, and that there would be some lease payments that were current rather than long term.7 Although she
had no plans to pursue a professional accounting designation, she wanted to understand the obligations that
Starbucks had taken on in order to comprehend the corporation’s liabilities: she wanted a clearer picture of
indebtedness to better understand the firm. Yong also wondered what the potential consequences of the lease
proposal by IASB and FASB might be for the audited financial statements of Starbucks and other retail
businesses. Such companies had strongly supported existing lease accounting practices.
4
Euromoney Institutional Investor PLC, World Leasing Yearbook 2008 (London, United Kingdom). All funds in US dollars
unless specified otherwise.
5
Tweedie, “Prepared Remarks,” 5–6.
6
For the full list of comment letters on this proposal, see “Online Comment Letters—Project: 1850-100 Leases,” Financial
Accounting Standards Board, accessed February 15, 2011, http://bit.ly/h8abEc.
7
For further reading on lease accounting, please see J. Edward Ketz, Hidden Financial Risk: Understanding Off-Balance
Sheet Accounting (Hoboken, NJ: John Wiley & Sons, 2003).
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 4
9B11B014
THE ARRIVAL OF NEW LEASING STANDARDS
After receiving over 750 comment letters in response to the August 2010 ED, the IASB and FASB decided
in May 2013 to issue a second ED on lease accounting. Finally, in 2016, both the IASB and FASB issued
new respective accounting standards—IFRS 16 Leases and (ASU) 2016-02, Leases (Topic 842) (see Exhibit
5 for comparison)—that required all leases, with very limited exceptions for leases of less than 12 months,
to be reported on the balance sheet. A further exemption from these rules was granted under IFRS for lowvalue items.
These new leasing standards defined a lease as a contract that conveyed the right to control the use of an
asset for a period of time in exchange for consideration. These changes meant that all off-balance sheet
leases, with limited exceptions as noted above, now had to be reported on a company’s balance sheet as a
right-of-use (ROU) asset with a corresponding liability.
While the IASB and FASB took a similar approach in requiring off-balance sheet leases to be reported on
the balance sheet, they differed on how leases were classified. Under IFRS, lessees no longer classified leases
between operating and financing, whereas US GAAP continued to recognize this difference. This meant that
while the initial reporting of the lease on the balance sheet would be similar under both IFRS and US GAAP,
future reporting would vary significantly, particularly on the income statement. IFRS treated all leases as a
financing arrangement such that interest on the lease liability was reported separately from the amortization
of the asset.
US GAAP, however, would only treat those leases classified as financing leases as a financing arrangement;
leases classified as operating leases would continue to be reported on the income statement as a straight-line
total lease expense based on the total cash lease payments over the life of the operating lease. Accordingly,
how operating leases were reported on the balance sheet was changed but under US GAAP, reporting on the
income statement stayed the same.
Finally, under these new rules, lease payments used to calculate the asset and liability amounts reported on
the balance sheet would include all fixed payments and variable payments that depended upon changes in an
index or a rate. However, variable payments that depended upon other factors, such as a percentage of store
sales, were not subject to these new leasing rules and were not required to be reported on a company’s
balance sheet. Variable payments did not include contingent rentals. The lessee also had to include any
reasonably certain extension or purchase options in measuring the initial asset.
Once fully implemented, these new standards were expected to have a significant impact on Starbuck’s
financial statement and, in particular, on the company’s balance sheet (see Exhibit 6).
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 5
9B11B014
EXHIBIT 1: LEASE CLASSIFICATIONS
(a) Canadian GAAP / US GAAP
Ownership of asset transfers to
lessee at end of lease term
Yes
Lease contains a bargain
purchase option (i.e., purchase of
leased asset at substantially less
than fair market price) and it is
reasonably certain that the option
will be exercised
Yes
No
Term of lease is for 75 per cent or
more of the economic life of the
asset
Yes
No
Present value (PV) of lease
payments is 90 per cent or more
of the fair value of the asset
CAPITAL LEASE / FINANCIAL LEASE
No
Yes
No
OPERATING LEASE
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 6
9B11B014
EXHIBIT 1 (CONTINUED)
(b) International Accounting Standard 17
Ownership of asset to lessee by
end of lease term
Yes
No
Yes
No
Lease term is for major part of the
useful life of the asset
Yes
No
Present Value (PV), at the start of
the lease, of the minimum lease
payments is equal to or greater
than the fair value of the leased
assets, net of grants and tax
credits to the lessor at that time
CAPITAL LEASE / FINANCIAL LEASE
Lease contains a bargain
purchase option (i.e., purchase of
leased asset at substantially less
than fair market price) and it is
reasonably certain that the option
will be exercised
Yes
No
OPERATING LEASE
Source: Created by the case authors.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 7
9B11B014
EXHIBIT 2: EXPOSURE DRAFT ON LEASES
What are the main proposals?
The exposure draft proposes that lessees and lessors should apply a right-of-use model in accounting for
all leases (including leases of right-of-use assets in a sublease) other than leases of biological and
intangible assets, leases to explore for or use natural resources and leases of some investment properties.
For leases within the scope of the draft IFRS [International Financial Reporting Standards], this means that:
(a) a lessee would recognise an asset representing its right to use the leased (‘underlying’) asset for the
lease term (the ‘right-of-use’ asset) and a liability to make lease payments.
(b) a lessor would recognise an asset representing its right to receive lease payments and, depending on
its exposure to risks or benefits associated with the underlying asset, would either:
(i) recognise a lease liability while continuing to recognise the underlying asset (a performance
obligation approach); or
(ii) derecognise the rights in the underlying asset that it transfers to the lessee and continue to
recognise a residual asset representing its rights to the underlying asset at the end of the lease term
(a derecognition approach).
Assets and liabilities recognised by lessees and lessors would be measured on a basis that:
(a) assumes the longest possible lease term that is more likely than not to occur, taking into account the
effect of any options to extend or terminate the lease.
(b) uses an expected outcome technique to reflect the lease payments, including contingent rentals and
expected payments under term option penalties and residual value guarantees, specified by the lease.
(c) is updated when changes in facts or circumstances indicate that there would be a significant change in
those assets or liabilities since the previous reporting period.
For contracts that combine service and lease components, the right to receive lease payments and the
liability to make lease payments would exclude payments arising from distinct service components and
non-distinct service components for lessors that apply the derecognition approach.
For leases of twelve months or less, lessees and lessors would be able to apply simplified requirements.
The exposure draft also proposes disclosures based on stated objectives, including disclosures about the
amounts recognised in the financial statements arising from leases and the amount, timing and uncertainty
of cash flows arising from those contracts.
Source: International Accounting Standards Board, Leases: Exposure Draft ED/2010/9 (August 2010), 6–7,
https://www.ifrs.org/content/dam/ifrs/project/leases/exposure-draft/published-documents/ed-leases-august-2010.pdf.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 8
9B11B014
EXHIBIT 3: PROPOSALS FOR LESSEE
Recognition
10. At the date of commencement of a lease, a lessee shall recognise in the statement of financial position
a right-of-use asset and a liability to make lease payments.
11. A lessee shall recognise the following items in the statement of comprehensive income, except to the
extent that another IFRS requires or permits its inclusion in the cost of an asset:
(a) interest expense on the liability to make lease payments (see paragraph 16(a)).
(b) amortisation of the right-of-use asset (see paragraphs 16(b) and 20).
(c) revaluation gains and losses as required by IAS 38, when a right-of-use asset is revalued in
accordance with paragraph 21 (see paragraphs 21–23).
(d) any changes in the liability to make lease payments resulting from reassessment of the expected
amount of contingent rentals or expected payments under term option penalties and residual value
guarantees relating to current or prior periods (see paragraph 18(a)).
(e) any impairment losses on a right-of-use asset (see paragraph 24).
Measurement
Initial measurement
12. At the date of inception of the lease, a lessee shall measure:
(a) the liability to make lease payments at the present value of the lease payments (see paragraphs 13–
15), discounted using the lessee’s incremental borrowing rate or, if it can be readily determined, the
rate the lessor charges the lessee (see paragraph B11).
(b) the right-of-use asset at the amount of the liability to make lease payments, plus any initial direct costs
incurred by the lessee (see paragraphs B14 and B15).
Source: International Accounting Standards Board, Leases: Exposure Draft ED/2010/9 (August 2010), 19,
https://www.ifrs.org/content/dam/ifrs/project/leases/exposure-draft/published-documents/ed-leases-august-2010.pdf.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 9
9B11B014
EXHIBIT 4: STARBUCKS COMMENT LETTER
1850-100
Comment Letter No. 307
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 10
9B11B014
EXHIBIT 4 (CONTINUED)
1850-100
Comment Letter No. 307
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 11
9B11B014
EXHIBIT 4 (CONTINUED)
1850-100
Comment Letter No. 307
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 12
9B11B014
EXHIBIT 4 (CONTINUED)
1850-100
Comment Letter No. 307
Source: Starbucks Coffee Company to Financial Accounting Standards Board, December 14, 2010,
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175821948348&blobh
eader=application%2Fpdf.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 13
9B11B014
EXHIBIT 5: SUMMARY OF EFFECTS OF LEASE STANDARDS ON
FINANCE AND OPERATING LEASE
US GAAP Operating Lease
IFRS 16 Lease/
US GAAP Finance Lease
Lease Type
Operating
Finance
Balance sheet
Lease liability
Lease liability
Right-of-use (ROU) asset
Right-of-use (ROU) asset
Typically straight-line operating
lease expense based on operating
lease payments
Typically straight-line amortization of
ROU asset
Income statement
Variable rents excluded from lease
liability, such as payments
dependent on a percentage of store
sales
Statement of cash flows
Operating Activities: cash lease
payments
Interest expense based on the
opening principal multiplied by the
discount rate
Variable rents excluded from lease
liability such as payments
dependent on a percentage of store
sales
Operating Activities: cash interest
and added back amortization
Financing Activities: repayment of
lease principal
Expense recording
Straight-line
Effective interest rate method
Expense pattern
Straight-line
Front-loaded
Source: Created by the case authors based on International Accounting Standards Board, Leases: Exposure Draft
ED/2010/9 (August 2010), https://www.ifrs.org/content/dam/ifrs/project/leases/exposure-draft/published-documents/edleases-august-2010.pdf.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 14
9B11B014
EXHIBIT 6: STARBUCKS FINANCIAL STATEMENTS
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 15
9B11B014
EXHIBIT 6 (CONTINUED)
Consolidated Statements of Earnings (in Millions, Except Earnings Per Share)
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 16
9B11B014
EXHIBIT 6 (CONTINUED)
Consolidated Balance Sheets (in Millions, Except Per Share Data)
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 17
9B11B014
EXHIBIT 6 (CONTINUED)
Consolidated Statements of Cash Flows (in Millions)
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 18
9B11B014
EXHIBIT 6 (CONTINUED)
Starbucks Corporation: Excerpts from Notes to Financial Statements
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 two to seven 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 the company’s option, Starbucks
generally uses 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 Starbucks, management may
determine at the inception of the lease that renewal is reasonably assured and include the renewal option
period in the determination of 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 reflected in net earnings.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 19
9B11B014
EXHIBIT 6 (CONTINUED)
Operating Leases
Starbucks leases retail stores, roasting and distribution facilities and office space under operating leases.
Most lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent
escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives, premiums
and minimum rental expenses on a straight-line basis over the terms of the leases, the company uses the
date of initial possession to begin amortization, which is generally when the company enters the space and
begins to make improvements in preparation of intended use.
For tenant improvement allowances and rent holidays, the company records a deferred rent liability in
accrued occupancy costs and other long-term liabilities on the consolidated balance sheets and amortizes
the deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements
of earnings.
For premiums paid up front to enter a lease agreement, the company records a deferred rent asset in
prepaid expenses and other current assets and other assets on the consolidated balance sheets and then
amortizes the deferred rent over the terms of the leases as additional rent expense on the consolidated
statements of earnings.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date
other than the date of initial occupancy, the company records minimum rental expenses on a straight-line
basis over the terms of the leases on the consolidated statements of earnings.
Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess
of specified levels. The company records a contingent rent liability in accrued occupancy costs on the
consolidated balance sheets and the corresponding rent expense when specified levels have been
achieved or when management determines 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, the company records 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, the company will record the expense upon the signing of an agreement with
the landlord. Finally, in cases where the landlord does not allow the company to prematurely exit its lease,
but allows for subleasing, the company estimates the fair value of any sublease income that can be
generated from the location and expenses the present value of the excess of remaining lease payments to
the landlord over the projected sublease income at the cease-use date.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 20
9B11B014
EXHIBIT 6 (CONTINUED)
Leases
In the fourth quarter of fiscal 2009 Starbucks determined that there was an immaterial classification error
in the lease footnote of the 2008 10-K. Amounts of $25.7 million and $22.7 million for the fiscal years ended
September 28, 2008 and September 30, 2007, respectively, were incorrectly classified as contingent rent
that should have been classified as minimum rentals. The total for rent expense under operating leases
was not impacted.
The following table reflects the corrected amounts for fiscal 2008 and 2007.
Rental expense under operating lease agreements (in millions):
Fiscal Year Ended
Minimum rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sep 27, 2009
$690.00
24.7
$714.70
Sep 28, 2008
$709.10
32.0
$741.10
Sep 30, 2007
$609.90
28.2
$638.10
Minimum future rental payments under non-cancelable operating leases as of September 27, 2009 (in
millions):
Fiscal Year Ending
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 706.7
669.0
612.3
551.0
488.1
1,362.1
$4,389.2
The company has subleases related to certain of its operating leases. During fiscal 2009, 2008 and 2007,
the company recognized sublease income of $7.1 million, $3.5 million and $3.6 million, respectively.
The company had capital lease obligations of $7.8 million and $6.7 million as of September 27, 2009, and
September 28, 2008, respectively. Capital lease obligations expire at various dates, with the latest maturity
in 2015. The current portion of the total obligation is included in other accrued expenses and the remaining
long-term portion is included in other long-term liabilities on the consolidated balance sheets. Assets held
under capital leases are included in net property, plant and equipment on the consolidated balance sheets.
The company had $76.2 million and $91.1 million in prepaid rent included in prepaid expenses and other
current assets on the consolidated balance sheets as of September 27, 2009, and September 28, 2008,
respectively.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
For the exclusive use of A. Alsadiq, 2023.
Page 21
9B11B014
EXHIBIT 6 (CONTINUED)
Asset Retirement Obligations
Starbucks recognizes a liability for the fair value of required asset retirement obligations (ARO) when such
obligations are incurred. The company’s AROs are primarily associated with leasehold improvements
which, at the end of a lease, the company is contractually obligated to remove in order to comply with the
lease agreement. At the inception of a lease with such conditions, the company records 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 convention for depreciation of 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 27, 2009, and September 28, 2008, the company’s net ARO asset included in
net property, plant and equipment was $15.1 million and $18.5 million, respectively, while the company’s
net ARO liability included in other long-term liabilities was $43.4 million and $44.6 million, as of the same
respective dates.
Source: Starbucks, Fiscal 2009 Annual Report, http://media.corporate-ir.net/media_files/irol/99/99518/sbux_ar.pdf.
This document is authorized for use only by Ali Alsadiq in MBAD 6211 – Summer 2023 taught by Andy Boettcher, George Washington University from Apr 2023 to Oct 2023.
Product Number:
Title:
Prepared by:
7B11B014
Starbucks: Venti Leases – Spreadsheet for Students
Starbucks: Venti Leases (9B11B014)
Vaughan S. Radcliffe; Mitchell Stein; Caleb Yong
Last Revised:
September 23, 2015
No part of this file may be reproduced, stored in a retrieval system, posted to the Internet, or
transmitted in any form or by any means without the permission of Richard Ivey School of Business
Foundation. To order copies or request permission to reproduce materials, contact Ivey
Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t)
519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
© 2011 Richard Ivey School of Business Foundation
Starbucks Operating Lease Converter
Esther decided to use the operating lease converter tool to obtain
better picture of current and future operating lease commitments.
All numbers in $ millions.
Inputs
Operating lease expense in current year (2009) =
Operating Lease Commitments (From footnote of financials)
Year
Commitment
1
2
3
4
5
6 and beyond
Pre-tax Cost of Debt =
From the current financial statements, enter the following
Reported Operating Income (EBIT) =
Reported Debt =
Reported Interest Expenses =
Output
Number of years embedded in yr 6 estimate = #DIV/0!
Converting Operating Leases into debt
Year
Commitment Present Value
1 $
$
2 $
$
3 $
$
4 $
$
5 $
$
6 and beyond $
#DIV/0!
Debt Value of leases =
#DIV/0!
Full Operating lease adjustment
Reported Operating income =
$
–
In calculating the lease obligations, assume 5% cost of capital.
Step 1: Find lease cash paymens in firm’s financial statements.
Step 2: Choose an appropriate interest rate.
Step 3: Compute the leased assets and the lease obligations as the
present value of the lease cash payments using an appropriate interest
rate.
Step 4: Choose an appropriate life for the leased assets and estimate their
present age. In this case, assume 15 years for asset life.
Step 5: Estimate the interest expense.
Step 6: Estimate the change in the income tax expense and deferred
+ Current year’s operating lease expense =
– Depreciation on leased asset (15 years) =
Adjusted Operating Income
$
#DIV/0!
#DIV/0!
Restated Financials
Operating Income with Operating leases reclassified as debt =
Debt with Operating leases reclassified as debt =
#DIV/0!
#DIV/0!
erter tool to obtain a
ease commitments.
cost of capital.
ial statements.
e obligations as the
an appropriate interest
d assets and estimate their
xpense and deferred
Starbucks Ratios
Ratio
Formula
Return on Assets
[Net Income + Interest * (1-Tax Rate)]/Total Assets
Return on Invested Capital [Net Income + Interest * (1-Tax Rate)]/Long Term Liabilities + Shareholders’ Equity
Capital Intensity
Sales Revenues/PPE
Debt to Equity
Total Liabilities/Shareholders’ Equity
Debt to Capitalization
Long Term Liabilities/Long Term Liabilities + SH Equity
Cash Flow to Debt
Cash Generated by Operations/Total Debt
Pre-Adjusted
Adjusted
FS Sept ’09
FS Sept ’09 Difference
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
