Starbucks EPS Hurt by Accounting Changes

Playing catch-up to satisfy FIN 47 was a drag on the chain's earnings.
Stephen TaubNovember 17, 2006

Eleven cents doesn’t seem like a lot, especially relative to the cost of a grande double mocha latte. But it was material enough to report in Starbucks Corp.’s most recent earnings results. To be sure, Starbucks’s fourth-quarter and full-year earnings were penalized by the adoption of two new accounting requirements.

A Financial Accounting Standards Board rule known as SFAS 123R, which requires the expensing of stock compensation, reduced earnings by 2 cents per share for the fourth quarter and 9 cents per share for the full year. The company adopted this accounting change, as mandated by FASB, at the beginning of the year.

Meanwhile, FASB’s FIN 47, which addresses asset retirement obligations (AROs), was adopted at the end of the fiscal year. It reduced earnings by 2 cents per share in both the fourth quarter and the full year.

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Effective October 1, 2006, the last day of its fiscal year, the coffeehouse chain explained, FIN 47 requires the recognition of a liability for the estimated fair value of a legally required conditional ARO when incurred, if the liability’s fair value can be reasonably estimated, along with an associated offsetting capital asset. The company elaborated that its ARO liabilities are primarily associated with the future costs of removing leasehold improvements at the termination of its building leases.

Before FIN 47 was issued, ARO expenses were recorded as they were incurred: when leases were terminated, noted Starbucks. Now these costs will be estimated at the inception of each applicable lease, and the expense will be recognized on the company’s balance sheet over the expected lease term.

Starbucks explained that the cumulative catch-up amount recorded of $17.2 million, net of tax, represents the total expense that would have been recorded in all prior years as if the new accounting guidance had always been in effect. It said FIN 47 requires that the cumulative approach to adoption be used, rather than retrospectively revising prior-year financials.

Because of the accounting changes and other factors, Starbucks reported a 5.2 percent decline in fourth-quarter earnings, causing its stock to drop 6 percent in the first hour of trading on Friday.