Question

Rules of Financial Reporting: Consider the following governmental and GAAP reporting requirements for what is mandated that Starbucks include in its financial statements:

A. Why is the reporting of control procedures required, and what information is disclosed about Starbucks' control procedures? Justify your response.

B. Why is the reporting of segment information required, and what information is disclosed about Starbucks' segment information? Justify your response.

C. Why is the reporting of estimates and assumptions required, and what information is disclosed about Starbucks' reporting of estimates and assumptions? Justify your response.

D. Why is the reporting of investments and fair value required, and what information is disclosed about Starbucks' investments and fair value reporting? Justify your response.

E. Why is the reporting of leases required, and what information is disclosed about Starbucks' lease structure? Justify your response.

Answer 1

Answer :

(A) -

Controls are designed to prevent fraud and clerical errors that may compromise the accuracy of a company's financial statements. An effective control system provides reasonable, but not absolute assurance for the safeguarding of assets, the reliability of financial information, and the compliance with laws and regulations. The degree of control employed is a matter of good business judgment. The overall object of controls of a corporation’s financial reporting is to ensure that there is a proper process for preparing reliable financial statements. Reliable financial statements must be accurate in every material aspect.

For example Starbucks’ identify three types of control, comparing the effectiveness of them, the reaction to the use of these controls, and how they affect the functions of management at a company like Starbucks; it is easy to see how they are so successful.

1. Bureaucratic control - Bureaucratic controls instill use of rules and authority to guide employee’s performance.
2. Market control - Market control “involves the use of economic forces-and the pricing mechanisms that accompany them-to regulate performance”.
3. Clan control - Clan control mechanism of empowerment is empowering an organization’s employees to meet performance standards.

(B) -

The need of segment reporting is applicable to a diversified enterprise. The progress and success of a diversified company are composites of the progress and success of its several segments. Segmental reporting help investors to know about the profitability, risk and growth of the different segments of a company’s operations, they will be better able to assess the earnings potential and the risk of the company as a whole. Also, Segmental disclosures by geographical location seem likely to promote a better understanding of corporate strategy and its impact.

For Example, Starbucks’ segment information is divided into four operating segments: 1) Americas, inclusive of the U.S., Canada, and Latin America; 2) China/Asia Pacific 3) Europe, Middle East, and Africa ("EMEA") and 4) Channel Development.

(C) -

Estimates and assumptions enable the accountant to determine what financial value to record when the actual amount is unknown. This information includes both actual dollar amounts and estimated amounts. Assumptions and estimates comply with the conditions and appraisals prevailing on the balance sheet date. The assumptions on which the estimates are based relate primarily to the uniform determination of useful lives throughout the Group, the ascertainment of fair values of financial instruments, the recognition and measurement of provisions, the reliability of future tax benefits, and assumptions made in connection with impairment tests and purchase price allocations.

For StarBucks’, estimates and assumptions made are the long term assets and goodwill. The impairment of the long lived asset is estimated based on its carrying value not being recoverable in future. For example, Goodwill was estimated to come from different countries of world. These estimates therefore help in allocating the amounts to the assets and liabilities.

(D) -

The fair value measurement of a deposit liability is described as the amount payable on demand as of the reporting date.

If an asset or a liability is measured initially at fair value under U.S. GAAP, any difference between the transaction price and fair value is recognized immediately as a gain or loss in earnings unless otherwise specified.

For example, Starbucks reported investment of approximately $1.6 for a financial year. This investment is primarily for new stores, store renovation and investment to support ongoing growth initiatives.

(E) -

As per GAAP, companies that lease assets report a lease based on whether the lease is classified as a capital lease or an operating lease. Capital leases (for example, a lease of equipment for nearly all of its useful life) are recognized as assets and liabilities on a lessee’s balance sheet, but operating leases (for example, a lease of office or retail space for 10 years) are not. Operating leases appear in financial statements only as a rent expense and as a disclosure item. Lessees also will be required to make additional disclosures to help users of financial statements better understand the amount, timing, and uncertainty of cash flows related to leases. They must disclose qualitative and quantitative requirements, including information about variable lease payments and options to renew and terminate leases.

For Example, Starbucks lease overview include Lease Type, Lease Term, Lease Expiration, Rent increase (for example - 10% Every 5 Years In Primary Term & Options) and annual rent.