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

The Sarbanes-Oxley Act requires the reporting of control procedures. This Act states that:

“Section 404 of the Act directs the Commission to adopt rules requiring each annual report of a company, other than a registered investment company, to contain (1) a statement of management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) management’s assessment, as of the end of the company’s most recent fiscal year, of the effectiveness of the company’s internal control structure and procedures for financial reporting.”(Sec.gov, 2017)

The sole purpose of reporting of control procedures is to show how a company attempts to reduce fraudulent practices as well as other unnecessary errors in its financial records and statements. Control procedures ensure that companies can only audit financial records that are valid and accurate to promote a good image (Mackenzie, 2014). Control procedures can be conducted by different consultants or company personnel handling various tasks and also ensuring that only people authorized are able to sign the financial statements of an organization (Mackenzie, 2014). The Act also mandates company management to disclose any material weaknesses, and if these weaknesses are present, then the company cannot hold claims that its financial reporting is effective.

Starbucks disclosed its control procedure under section rules 13a-15(e) and 15d-15(e) of the 1934 Security Exchange Act. The company conducted analysis and evaluation with its Chief Executive Officer and Chief Financial Officer. The assessment focused on the design effectiveness and the operations of their controls and procedures disclosure. The company’s fourth quarter of 2015 financial statements showed controls and procedures to be efficient and that no changes in their internal controls and procedures interfered with financial reporting. The executives also list the company’s internal control procedures including maintenance of records in sufficient details, record transactions significant for financial statements, expenditures and receipts are provided with the authority of the management, and unpermitted access or use of company resources and assets would be prohibited and prevented if discovered on time. Therefore, the use of control procedures was significant in helping the company reduce fraud and make improvements on accuracy.

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

Reporting of segment information is required by ASC 208. Organizations are required to report information concerning a company’s operating segments, geographic locations of their operations, and their major customers (Nienhaus, 2015). Reporting of such information is crucial in providing the investors and debt holders vital information about which segments are making good progress, and they can thus make informed decisions about investing. Segment information reporting assists company management with resource allocation following the financial information provided about different segments. The segment report allows management to allocate more resources to segments that incur significant expenses and generating reasonable revenues. Companies are required to report revenue information about each type of product or service produced, as well as the locations where they earn revenues or hold assets (Nienhaus, 2015). For Starbucks, the evaluation of segment information reporting is conducted by management. The company has four segments that generate revenues to the economy. These include America (the US, Canada, and Latin America), China/ Asia Pacific (CAP), Europe, Middle East, and Africa (EMEA), as well as Channel Development selling single served products and packaged coffee. The company provides overall information about the operations of each segment, as well as the products that they offer. Starbucks additionally disclosed that the management selected the segments by operating income and net revenues. It also lists the profit and loss margins for each segment. This information is crucial to providing investors and management insight that more can be done in all other segments, except the well developed America segment.

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

ASC 275 “risk and uncertainties” mandates that companies disclose that financial figures are estimates and sometimes approximations of numbers. This disclosure is necessary because it allows users of financial reports to make better and informed decisions with the knowledge that the numbers are not exact figures (Jonas and Blanchet, 2014). Furthermore, companies are also required to disclose assumptions. Such disclosure is essential to help financial report users not to give ‘unwarranted degrees’ of reliability to them.  Some of the estimates and assumptions made may include depreciation, amortizations, allowance of doubtful debts, taxes, future cash flows, employee benefits, as well as contingent liabilities (Jonas and Blanchet, 2014). Starbucks discloses that its management makes assumptions and estimates that directly affect revenues, expenses, assets, and liabilities. For the company, the assumptions and estimates made are goodwill and assets impairment. Long-lived asset impairment is estimated based on its value being unrecoverable in the future. The goodwill estimated at 914 million will generate from the US, Canada, and Japan segments.

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

ASC 820 “fair value measurement” describes the methods of measuring fair value and report in financial records. It states that the fair market value is used to determine an asset’s price through observables or non-observables. Reporting of the investment and fair value is crucial in showing the exchange price to be received when purchasing or selling an asset or expected payment when a company wants to transfer liability (Iasplus.com. 2017). The final price settled upon should be similar to the one chosen by the participants in the market for asset purchasing. The lack of fair market valuation can result in assets becoming too subjective and may not be accurately measured. Starbucks discloses that it uses a similar definition to determine fair value and assigns three different categories to assets. Category 1 assets are cash and its equivalents. Category 2 assets are securities available for sale, over the counter contracts, swaps, and collars. Category 3 assets include credit and liquidity spread, auction rate securities, and maturity.

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

ASC 840 “leases” mandates the reporting of leases. The leases are divided in to three categories: operating leases, capital leases, and also sales-leaseback transactions. Lease reporting is essential as it assists investors to understand the amount they are expected to get from leasing their property, time of the lease, as well as any uncertainties related to cash flows from the lease (Ruppel, 2015). Starbucks has both the operating leases reduced using the straight-line method and the financial lease requirements. The company discloses that it uses operating leases for roasting, distribution, retail stores, office space, and warehouse facilities. The company also discloses that most of its lease agreements include tenant allowances, holiday rents, lease premiums, and contingent rent provisions. Starbucks discloses that it is occasionally involved in property construction and when it does not qualify for sales lease back, it is recorded as a capital lease.

References

Iasplus.com. (2017).ASC 820 — Fair Value Measurements and Disclosures. Retrieved From https://www.iasplus.com/en-us/standards/fasb/broad-transactions/asc820

Jonas, G. J., & Blanchet, J. (2014). Assessing quality of financial reporting. Accounting horizons, 14(3), 353-363.

Mackenzie, B. (2014). Wiley IFRS 2014: Interpretation and Application of International Financial Reporting Standards.

Nienhaus, M. (2015). Segment reporting under IFRS 8: Reporting practice and economic consequences.

Ruppel, W. (2015). Wiley GAAP for Governments 2015: Interpretation and Application of Generally Accepted Accounting Principles for State and Local Governments. Chichester: Wiley.

Sec.gov. (2017).SEC Implements Internal Control Provisions of Sarbanes-Oxley Act; Adopts Investment Company R&D Safe Harbor. Retrieved from https://www.sec.gov/news/press/2003-66.htm

 
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