Starbucks: Accounting for Goodwill and Other Intangible Assets

Starbucks case study: Accounting for Goodwill and other intangible assets
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Intangible assets have no physical form and are assets other than financial assets, and they can be identifiable or unidentifiable. Goodwill is an unidentifiable intangible asset, and the way of acquisition is also used to determine the assets’ classification. The company noted that acquisitions, diversifications and joint ventures with third party parties were associated with transaction risk when dealing with impairment of intangible assets acquired. Intangible assets can be recognised together with goodwill assets or separately, and Starbucks recognised distinct intangible assets from goodwill. In line with recognition of intangible assets, Starbucks measured intangible assets for the group taking into account the fair value.
Accounting for Goodwill and intangible assets for the fiscal year 2011
In testing the goodwill impairment attributed to the company, Starbucks took into account the fair value and carrying amount on an annual basis, but computed at the third fiscal quarter. The impairment was equivalent to the excess of carrying amount over the fair value, while an impairment charge was a result of the converse. The company relied on the discounted cash flow model to estimate the fair value, and this also represented what buyers were willing to pay, assuming that the buyer was integral to determining the purchase price for a reporting unit. The company also based revenue and operating expenses estimation on projected focusing on past results and prevailing market condition. Similarly, the company used a discounted rate as the cost of capital for the reporting units. Nonetheless, the projections made may change over time depending on the prevailing economic conditions.
The total goodwill as at October 2, 2011 was $321.6 million in comparison to $ 111.9 million for other intangible assets. Starbucks adhered to U.S. GAAP, and made estimates and assumptions of goodwill impairments to facilitate preparation of financial statements. Since there was underperformance in some of the stores, the company took note of this in calculating the goodwill, with some stores also being affected since the company could not renew leases. Equally, reports on assets abandoned associated with leasehold improvement affected the value of assets especially among the non-transferable assets. This is an important aspect for the company since when there is disposal of a business reporting unit then, then goodwill related to a business helps to determining the carrying amount when there is a loss on disposal.
Accounting for Goodwill and intangible assets for the fiscal year 2012
Upon acquisition of Bay Bread, LLC in 2012, there was recognition of goodwill with an estimated fair value of $58.7 million as part of the purchase price, and the amount was tax deductible. There were other acquisitions which were reflected in 2012, including that of Evolution Fresh acquired in November 2011 as well as part ownership through a joint venture partner Marinopoulos Holdings, with operations in Switzerland and Austria. There was a change in the ownership structure various other outlets in the world, with further acquisi...