Case #5

Starbucks Corporation:
The New Lease Accounting Standard

In August 2010, International Accounting Standards Board (IASB) and 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 and seek comment
on the proposals from stakeholder groups.

By the end of 2009, Starbucks was reported to have almost 17,000 locations in over 50 countries
worldwide, of which approximately 9,000 company-operated retail locations under operating
leases in the U.S. and abroad.

The Vice President and Controller, Donna Brooks, of Starbucks had written a comment letter to
IASB and FASB as part of the consultative process regarding the ED on leases. One of her
concerns was the amortized cost method of recognizing expenses that were front-end loaded.
Below is what she wrote in the letter:

“The new accounting standard will distort the allocation of rent expense over the lease term,
particularly for real estate leases with long lease terms… The economic reality is that rents
generally increase over time, and leases are typically designed to provide the landlord with
increasing rent payments based on expected inflation in market rents over the term. The expense
recognized under the “amortized cost” approach is likely to be materially different from the
market rent cost for the leased property, particularly in the early and latter periods of the
lease.”

Discussion Questions
1. Why is lease accounting important for Starbucks?
2. Discuss how the new lease accounting standard will impact Starbucks’ financial statements.
3. Do you agree that the old lease accounting rule better reflects the economic reality of the
company?