Presented below are excerpts from Note 1 to Starbucks' September 28, 2008, Consolidated Financial Statements in which Starbucks describes accounting policy for long-lived assets.
Required
a. Leasehold improvements are substantial costs incurred by Starbucks to outfit, remodel, and improve leased retail outlets. Why does Starbucks capitalize and amortize leasehold improvements? Does its policy for determining useful lives in the presence of a lease renewal option yield high-quality accounting numbers? How would Starbucks account for the leasehold improvement costs remaining at the end of a lease it had expected to renew but did not?
b. Starbucks has an ARO related to the leasehold improvements. Describe how Starbucks recognizes the ARO initially in the balance sheet. Then describe how Starbucks recognizes changes in the ARO-related asset and ARO liability in the income statement over time. How is income affected when Starbucks actually spends cash to return a leased property to its original condition? If Starbucks spends more cash than reflected in the ARO liability, how will it account for the difference?
c. How would the first sentence of the Long-lived Assets section of Note 1 appear if Starbucks followed IFRS? Which system do you believe provides the best quality accounting for long-lived asset impairment?
d. The second paragraph of the long-lived assets section of the note describes how Starbucks reflects impairment charges in the income statement. Which line item would you prefer that Starbucks use to report the charges? Why?
e. How would the first sentence of Starbucks R&D accounting policy appear if Starbucks followed IFRS? Do you prefer the IFRS or U.S. GAAP approach to R&D accounting? Why?