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Analysis of Operating Leases
Difficulty: Advanced
An operating lease is treated like a rental contract. Neither the leased asset nor the associated liability is reported on the lessee statement of financial position, but the rights may be very similar to the rights of an owner. The lessee only records the lease payments as a rental expense in income statement.
- Operating Leases Accounting Policy
- Present Value of Future Operating Lease Payments
- Analyst Adjustments for Operating Leases
- Adjusted Ratios for Operating Leases (Summary)
- Adjusted Total Asset Turnover
- Adjusted Debt to Equity
- Adjusted Return on Assets (ROA)
- Adjusted Interest Coverage
- Estimation of Depreciation Expense, Operating Leased Assets
- Estimation of Interest Expense, Operating Lease Obligations
- Present Value of Operating Lease Payments, at Beginning of Year
Operating Leases Accounting Policy
Starbucks leases retail stores, roasting, distribution and warehouse facilities and office space for corporate administrative purposes under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent escalation clauses and/or contingent rent provisions. Starbucks recognizes amortization of lease incentives, premiums and minimum rent expenses on a straight-line basis beginning on the date of initial possession, which is generally when Starbucks enters the space and begin to make improvements in preparation for intended use.
For tenant improvement allowances and rent holidays, Starbucks records a deferred rent liability within accrued liabilities, or other long-term liabilities, on the consolidated balance sheets and amortizes the deferred rent over the terms of the leases as reductions to rent expense in cost of sales including occupancy costs on the consolidated statements of earnings.
For premiums paid upfront to enter a lease agreement, Starbucks records a prepaid rent asset in prepaid expenses and other current assets and other long-term assets on the consolidated balance sheets and amortizes the premium over the terms of the leases as additional rent expense in cost of sales including occupancy costs on the consolidated statements of earnings.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial possession, Starbucks records minimum rent expense on a straight-line basis over the terms of the leases in cost of sales including occupancy costs on the consolidated statements of earnings, with the adjustments to cash rent accrued as deferred rent in the consolidated balance sheets.
Certain leases provide for contingent rent, which is determined as a percentage of gross sales in excess of specified levels. Starbucks records a contingent rent liability in accrued occupancy costs within accrued liabilities on the consolidated balance sheets and the corresponding rent expense when Starbucks determines that achieving the specified levels during the fiscal year is probable.
When ceasing operations of company-operated stores under operating leases, in cases where the lease contract specifies a termination fee due to the landlord, Starbucks records such expense at the time written notice is given to the landlord. In cases where terms, including termination fees, are yet to be negotiated with the landlord, Starbucks will record the expense upon signing of an agreement with the landlord. In cases where the landlord does not allow Starbucks to prematurely exit the lease, Starbucks recognizes a lease abandonment accrual equal to the present value of the remaining lease payments to the landlord and other rent related payments such as common area maintenance, taxes and insurance, less any projected sublease income at the cease-use date.
Source: 10-K (filing date: 2018-11-16).
Present Value of Future Operating Lease Payments
Starbucks Corp., future operating lease payments
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
1 Weighted-average interest rate for Starbucks Corp.’s debt
| Year | Future operating lease payments (as reported) | Year | Future operating lease payments (estimated) | Present value at |
|---|---|---|---|---|
| 2019 | |
2019 | |
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| 2020 | |
2020 | |
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| 2021 | |
2021 | |
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| 2022 | |
2022 | |
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| 2023 | |
2023 | |
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| 2024 and thereafter | |
2024 | |
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| 2025 | |
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| 2026 | |
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| 2027 | |
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| Total: | |
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Based on: 10-K (filing date: 2018-11-16).
| Year | Future operating lease payments (as reported) | Year | Future operating lease payments (estimated) | Present value at |
|---|---|---|---|---|
| 2018 | |
2018 | |
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| 2019 | |
2019 | |
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| 2020 | |
2020 | |
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| 2021 | |
2021 | |
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| 2022 | |
2022 | |
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| 2023 and thereafter | |
2023 | |
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| 2024 | |
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| 2025 | |
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| 2026 | |
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| Total: | |
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Based on: 10-K (filing date: 2017-11-17).
| Year | Future operating lease payments (as reported) | Year | Future operating lease payments (estimated) | Present value at |
|---|---|---|---|---|
| 2017 | |
2017 | |
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| 2018 | |
2018 | |
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| 2019 | |
2019 | |
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| 2020 | |
2020 | |
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| 2021 | |
2021 | |
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| 2022 and thereafter | |
2022 | |
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| 2023 | |
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| 2024 | |
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| 2025 | |
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| Total: | |
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Based on: 10-K (filing date: 2016-11-18).
| Year | Future operating lease payments (as reported) | Year | Future operating lease payments (estimated) | Present value at |
|---|---|---|---|---|
| 2016 | |
2016 | |
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| 2017 | |
2017 | |
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| 2018 | |
2018 | |
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| 2019 | |
2019 | |
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| 2020 | |
2020 | |
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| 2021 and thereafter | |
2021 | |
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| 2022 | |
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| 2023 | |
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| 2024 | |
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| Total: | |
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Based on: 10-K (filing date: 2015-11-12).
| Year | Future operating lease payments (as reported) | Year | Future operating lease payments (estimated) | Present value at |
|---|---|---|---|---|
| 2015 | |
2015 | |
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| 2016 | |
2016 | |
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| 2017 | |
2017 | |
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| 2018 | |
2018 | |
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| 2019 | |
2019 | |
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| 2020 and thereafter | |
2020 | |
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| 2021 | |
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| 2022 | |
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| 2023 | |
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| Total: | |
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Based on: 10-K (filing date: 2014-11-14).
| Year | Future operating lease payments (as reported) | Year | Future operating lease payments (estimated) | Present value at |
|---|---|---|---|---|
| 2014 | |
2014 | |
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| 2015 | |
2015 | |
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| 2016 | |
2016 | |
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| 2017 | |
2017 | |
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| 2018 | |
2018 | |
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| 2019 and thereafter | |
2019 | |
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| 2020 | |
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| 2021 | |
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| Total: | |
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Based on: 10-K (filing date: 2013-11-18).
Analyst Adjustments for Operating Leases
Starbucks Corp., adjustments to financial data
USD $ in thousands
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
1, 2 Equal to total present value of future operating lease payments. See Details »
Starbucks Corp., Financial Data: Reported vs. Adjusted
Adjusted Ratios for Operating Leases (Summary)
Starbucks Corp., adjusted ratios
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Starbucks Corp.’s adjusted total asset turnover deteriorated from 2016 to 2017 and from 2017 to 2018. |
| Adjusted debt-to-equity | A solvency ratio calculated as adjusted total debt divided by total shareholders’ equity. | Starbucks Corp.’s adjusted debt-to-equity deteriorated from 2016 to 2017 and from 2017 to 2018. |
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | Starbucks Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level. |
| Adjusted interest coverage | A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. | Starbucks Corp.’s adjusted interest coverage deteriorated from 2016 to 2017 and from 2017 to 2018. |
Starbucks Corp., Ratios: Reported vs. Adjusted
Adjusted Total Asset Turnover
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
2018 Calculations
1 Total asset turnover = Net revenues ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Net revenues ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Starbucks Corp.’s adjusted total asset turnover deteriorated from 2016 to 2017 and from 2017 to 2018. |
Adjusted Debt to Equity
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
2018 Calculations
1 Debt to equity = Total debt ÷ Shareholders’ equity
= ÷ =
2 Adjusted debt to equity = Adjusted total debt ÷ Shareholders’ equity
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted debt-to-equity | A solvency ratio calculated as adjusted total debt divided by total shareholders’ equity. | Starbucks Corp.’s adjusted debt-to-equity deteriorated from 2016 to 2017 and from 2017 to 2018. |
Adjusted Return on Assets (ROA)
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
2018 Calculations
1 ROA = 100 × Net earnings attributable to Starbucks ÷ Total assets
= 100 × ÷ =
2 Adjusted ROA = 100 × Net earnings attributable to Starbucks ÷ Adjusted total assets
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | Starbucks Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level. |
Adjusted Interest Coverage
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
2018 Calculations
2 Interest coverage = EBIT ÷ Interest expense
= ÷ =
3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted interest coverage ratio | A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. | Starbucks Corp.’s adjusted interest coverage ratio deteriorated from 2016 to 2017 and from 2017 to 2018. |
Estimation of Depreciation Expense, Operating Leased Assets
USD $ in thousands
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
Estimation of Interest Expense, Operating Lease Obligations
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
2 Weighted-average interest rate for Starbucks Corp.’s debt
2018 Calculations
3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= × =
Present Value of Operating Lease Payments, at Beginning of Year
Based on: 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14), 10-K (filing date: 2013-11-18).
1 Equal to total present value of future operating lease payments. See Details »
2 Weighted-average interest rate for Starbucks Corp.’s debt
2018 Calculations
3 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Minimum rent expense under operating lease agreements) ÷ (1 + Discount rate)
= ( + ) ÷ (1 + ) =
