Question

Since 1995, Starbucks Corporation had owned a 39.5 percent equity interest in Starbucks Coffee Japan, Ltd. ("Starbucks Japan"). Its joint venture partner, Sazaby League of Japan also owned 39.5 percetn equity interest in Starbucks Japan. The remaining 21 percetn equity interest was help by public sharholders and option holders.

On October 31, 2014, Starbucks acquired all of Sazaby League's shares of Starbucks Coffee Japan, brining Starbucks' total ownership to 79 percent. Starbucks paid Sazaby $508.7 million for the additional 39.5 percent ownership. Later in 2014, Starbucks acquired the remaining 21 percent of Starbucks Coffee Japan.

Access Starbucks' 2015 10-K annual report and answer the following:

1. What amount did Starbucks estimate for the October 31, 2014, acquisition-date fair value of Starbucks Japan?

2. How did Starbucks allocate the acquisition-date fair value of Starbucks Japan among the assets acquired and liabilities assumed?

3. How does Starbucks explain the three different valuations bases for the following items?

--Amount paid to Sazaby for 29.5 percent share purchase

--The fair value of Starbucks’ pre-existing 29.5 equity interest

--The fair value of the 21 percent noncontrolling interest

4. How did Starbucks account for its 29.5 percent ownership interest in Starbucks Japan prior to the acquisition of the controlling interest?

5. Upon acquisition of its controlling interest on October 31, 2014, how did Starbucks account for the change in fair value of its original 39.5 percent ownership interest?

6. Upon acquisition of the 21 percent noncontrolling interest, how did Starbucks account for the difference between the amount paid and the underlying carrying amount of Starbucks Japan?

Answer 1

1. $ 577 million for their existing shares however they paid cash of $ 508.70 million to their partner (given on Page 61)

2.

Cash and cash equivalents	$224.40
Accounts receivable, net	$37.40
Inventories	$26.40
Prepaid expenses and other current assets	$35.70
Deferred income taxes, net (current)	$23.40
Property, plant and equipment	$282.90
Other long-term assets	$141.40
Other intangible assets	$323.00
Goodwill	$815.60
Total assets acquired	$1,910.20
Accounts payable	$(54.50)
Accrued liabilities	$(115.90)
Stored value card liability	$(36.50)
Deferred income taxes (noncurrent)	$(90.70)
Other long-term liabilities	$(115.80)
Total liabilities assumed	$(413.40)
Noncontrolling interest	$(411.10)
Total consideration	$1,085.70

3.a The fair value of the noncontrolling interest in Starbucks Japan was estimated by applying the market approach.

3.b The fair value of $577.0 million was calculated using an average of the income and market approach. The income approach fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of stores, local market economics and the business environment impacting the stores' performance. The discount rate applied was based on Starbucks Japan's weighted-average cost of capital and included a company-specific risk premium. The market approach fair value measurement was based on the implied fair value of Starbucks Japan using the purchase price of Sazaby's 39.5% ownership interest and the expected purchase price of the 21% remaining noncontrolling interest.

3.c the fair value was determined based on the purchase price we expected to pay for the remaining 21% noncontrolling interest, which was comprised of a set market price and a premium above the market price. The market price premium is a customary business practice for public tender offer transactions in Japan

4. Under the earlier joint venture model, they recognized royalties and product sales within revenue and related product cost of sales as well as proportionate share of Starbucks Japan's net earnings, which they recognized within income from equity investees. This resulted in a lower gross margin and a very high operating margin

5. Ownership change led to change of 39.50% and associated gain of $ 391 Million as a result of remeasuring the stock to FMV. The recognized the gain as Gain resulting from acquisition of joint venture under Other Income and Expenses of Income Statement