The University of Chicago Financial Accounting 30000

Booth School of Business

Starbucks, Inc.
Marketable Securities and Fair Value Accounting

In 2007-2009 financial crises, fair value accounting was challenged by financial services
industry that had absorbed large write-downs related to the mortgage-backed securities.
However, without fair-value accounting, investors are unlikely to know the true worth of these
securities. According to the International Accounting Standards Board1, “fair value seems to be
the only measure that is appropriate for all types of financial instruments”. Still, the board
acknowledges that “there are issues and concerns that have to be addressed before the boards can
require general fair value measurement.” There is a gradual trend towards greater reliance on
general use of fair value measurements which may have important implications for financial
reporting.

Attached are the Consolidated Balance Sheet, Consolidated Statement of Income, Consolidated
Statement of Cash Flows, Consolidated Statement of Stockholders’ Equity and selected
footnotes from the 2008 Annual Report of Starbucks, Inc. Please answer the following questions
regarding Starbucks’s marketable securities:

1. What is the fair value of “available for sale” securities held by Starbucks at the end of
2008? At the end of 2007?

2. What are the accumulated gains/losses for “available for sale” securities held by
Starbucks at the end of 2008? At the end of 2007?

3. Suppose GAAP required firms to recognize all unrealized gains/losses on marketable

securities (including “available for sale”) in Net income. What effect would this
alternative accounting treatment have on Starbucks’:

a. Total Shareholders’ Equity at the end of 2008?

b. Retained Earnings at the end of 2008?
c. Net income for 2008?

4. What is the fair value of “trading” securities held by Starbucks at the end of 2008? At the
end of 2007?

1
IASB Discussion Paper “Reducing Complexity in Reporting Financial Instruments”, March 2008
5. What is the unrealized holding gain/loss accumulated on “trading” securities held by
Starbucks at the end of 2008? At the end of 2007?

6. Suppose Starbucks has always classified all its trading securities as “available-for-sale”.
What effect would this alternative accounting treatment have on Starbucks’:

a. Total Shareholders’ Equity at the end of 2008?

b. Retained Earnings at the end of 2008?
c. Net income for 2008?