Starbucks Corporation, founded in 1985 in Seattle, Washington, purchases, roasts and sells whole bean coffees at retail locations worldwide. Starbuck’s in-store products include brewed coffees, espresso beverages, blended beverages, complimentary food items, teas and brewing equipment. At the end of 2009, Starbucks operated through 7, 803 retail locations in 49 countries (Annual Report 4). In recent years, Starbucks’s stock has risen to near record highs (Starbucks Corporation – Finance).
Like many chain stores, Starbucks classifies its leases on retail stores, roasting and distribution facilities and office space as "operating leases." FASB Standard No. 13 says that a lease may be classified as an operating lease only if it meets the following four criteria: the lease life does not exceed 75% of the estimated life of the asset, there is not a transfer of ownership to the lessee at the end of the lease term, there is not an option to purchase the asset at a "bargain price" at the end of the lease term, the present value of the lease payments, discounted at an appropriate discount rate, is less than or equal to 90% of the fair market value of the asset (Stickney 479).
Starbuck’s total rental expense for fiscal year 2009 was $714.7 million. Starbucks also provides an estimate for minimum future rental payment for non-cancelable operating leases of $4,389.2 million. By comparison, capital lease obligations were $7.8 million for fiscal year 2009. The company also discloses that it has gained $7.1 million of income from subleased properties that are recorded as operating leases (Annual Report 42-63).
Under an operating lease, Starbucks is presumed not to have the risk of ownership and therefore the lease expense is treated as an operating expense in the income statement (rent expense) and the lease does not affect the balance sheet. This allows Starbucks to avoid showing debt on the...