Starbucks 2010 Annual Report Download - page 54

Advertising expenses, recorded in store operating expenses, other operating expenses and general and administrative
expenses on the consolidated statements of earnings, totaled $176.2 million, $126.3 million and $129.0 million in
fiscal 2010, 2009 and 2008, respectively. As of October 3, 2010 and September 27, 2009, $5.6 million and
$7.2 million, respectively, of capitalized advertising costs were recorded on the consolidated balance sheets.
Store Preopening Expenses
Costs incurred in connection with the start-up and promotion of new store openings are expensed as incurred.
Operating Leases
We lease retail stores, roasting, distribution and warehouse 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, we use the date of initial possession to begin amortization, which
is generally when we enter the space and begin to make improvements in preparation of intended use.
For tenant improvement allowances and rent holidays, we record a deferred rent liability in accrued occupancy costs
and other long-term liabilities on the consolidated balance sheets and amortize the deferred rent over the terms of the
leases as reductions to rent expense on the consolidated statements of earnings.
For premiums paid upfront to enter a lease agreement, we record a deferred rent asset in prepaid expenses and other
current assets and other assets on the consolidated balance sheets and then amortize 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, we record 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. We record 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 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 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
October 3, 2010 and September 27, 2009, our net ARO asset included in property, plant and equipment was
$13.7 million and $15.1 million, respectively, while our net ARO liability included in other long-term liabilities was
$47.7 million and $43.4 million, as of the same respective dates.
48