Case Notes/Answers
Starbucks Venti Leases, by Vaughan Radcliffe, Mitchell
Stein, Caleb Yong
Discussion Questions:
1. Why are leases important for Starbucks?
2. Why is lease accounting important for Starbucks?
3. Use Starbucks’ financial statements for the year ended September 27, 2009, and the Excel lease
conversion tool to estimate Starbucks’ indebtedness related to leasing.
4. Using Starbucks’ financial statements for the year ended September 27, 2009, and your estimates
including debt related to leases as calculated above, calculate the following ratios: return on assets,
return on invested capital, capital intensity, debt to equity, debt to capitalization and cash flow to debt.
To calculate these ratios, use the 2009 year-end data alone — do not average balance sheet items with
2008.
5. Donna Brooks, vice president and controller of Starbucks, wrote the corporation’s response letter to
the IASB/FASB exposure draft on lease accounting. Discuss the significance of the areas covered in
the comment letter and how the changes suggested by Starbucks might produce different reported
levels of lease-related debt.
6. Discuss how the new lease accounting rules will impact Starbucks’ financial statements.
, Teaching Note
STARBUCKS: VENTI LEASES
SUBSTANTIVE ISSUES RAISED
Lease accounting has always been an area of contention. Managers have often wanted to record as much of
the long-term leases as possible under operating leases in order to show lower expenses in early years,
higher return on assets given that operating leases do not affect assets on the balance sheet and lastly, to
demonstrate that since operating leases do not need to be considered liabilities, it does not affect the capital
structure of the firm. On the other hand, investors and creditors tend to be more conservative and thus
prefer to classify longer-term leases as capital leases, which gives them a clearer picture of the financial
health of the firm and the full extent of its liabilities.
In August 2010, the International Accounting Standards Board (IASB) and the Financial Accounting
Standards Board (FASB) jointly published an exposure draft (ED) on lease accounting, proposing to
standardize the recognition of assets and liabilities under leases. The proposed changes as presented by
IASB and FASB would help users of financial statements avoid uncertainties experienced under the
current standards, such as off-balance sheet financing.
As noted in the last section of the case the IASB/FASB received significant feedback on the ED, issued a
second exposure draft and finally issued new accounting standards which require 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 is granted under IFRS for low-value items.
CASE BACKGROUND
The Starbucks lease accounting case demonstrates the importance of understanding the accounting
principles guiding and governing financial statements, specifically lease accounting. Given the prior
debates over and recent changes to lease accounting standards, this case is useful to help students
understand how the changes in accounting standards by both the FASB and IASB will affect the financial
statements (and perceived performance) of companies.
Starbucks Venti Leases, by Vaughan Radcliffe, Mitchell
Stein, Caleb Yong
Discussion Questions:
1. Why are leases important for Starbucks?
2. Why is lease accounting important for Starbucks?
3. Use Starbucks’ financial statements for the year ended September 27, 2009, and the Excel lease
conversion tool to estimate Starbucks’ indebtedness related to leasing.
4. Using Starbucks’ financial statements for the year ended September 27, 2009, and your estimates
including debt related to leases as calculated above, calculate the following ratios: return on assets,
return on invested capital, capital intensity, debt to equity, debt to capitalization and cash flow to debt.
To calculate these ratios, use the 2009 year-end data alone — do not average balance sheet items with
2008.
5. Donna Brooks, vice president and controller of Starbucks, wrote the corporation’s response letter to
the IASB/FASB exposure draft on lease accounting. Discuss the significance of the areas covered in
the comment letter and how the changes suggested by Starbucks might produce different reported
levels of lease-related debt.
6. Discuss how the new lease accounting rules will impact Starbucks’ financial statements.
, Teaching Note
STARBUCKS: VENTI LEASES
SUBSTANTIVE ISSUES RAISED
Lease accounting has always been an area of contention. Managers have often wanted to record as much of
the long-term leases as possible under operating leases in order to show lower expenses in early years,
higher return on assets given that operating leases do not affect assets on the balance sheet and lastly, to
demonstrate that since operating leases do not need to be considered liabilities, it does not affect the capital
structure of the firm. On the other hand, investors and creditors tend to be more conservative and thus
prefer to classify longer-term leases as capital leases, which gives them a clearer picture of the financial
health of the firm and the full extent of its liabilities.
In August 2010, the International Accounting Standards Board (IASB) and the Financial Accounting
Standards Board (FASB) jointly published an exposure draft (ED) on lease accounting, proposing to
standardize the recognition of assets and liabilities under leases. The proposed changes as presented by
IASB and FASB would help users of financial statements avoid uncertainties experienced under the
current standards, such as off-balance sheet financing.
As noted in the last section of the case the IASB/FASB received significant feedback on the ED, issued a
second exposure draft and finally issued new accounting standards which require 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 is granted under IFRS for low-value items.
CASE BACKGROUND
The Starbucks lease accounting case demonstrates the importance of understanding the accounting
principles guiding and governing financial statements, specifically lease accounting. Given the prior
debates over and recent changes to lease accounting standards, this case is useful to help students
understand how the changes in accounting standards by both the FASB and IASB will affect the financial
statements (and perceived performance) of companies.
