SEC Questions Starbucks About Revenue-Recognition Policy
September 09 2019 - 6:37PM
Dow Jones News
By Mark Maurer
Starbucks Corp. has agreed to provide additional disclosures on
how it recognizes revenue after the U.S. Securities and Exchange
Commission questioned some of its accounting practices.
The Seattle-based coffee chain is one of many U.S. companies
adjusting to new accounting guidelines that came into effect at the
start of last year for most public companies. The new rules aim to
standardize how companies from different industries account for
revenue from sales and services.
At least 208 companies received letters from the SEC about their
revenue-recognition practices in 2018, according to regulatory
filings and data compiled by consulting firm Audit Analytics Inc.
That's up about 56% over the annual average during the previous two
years. As of the end of June, 50 companies had received letters on
the subject, down slightly from 53 during that period a year
earlier.
"When there are issues around revenue recognition, the SEC takes
it very seriously because it's an area that management can
manipulate," said Derryck Coleman, research manager at Audit
Analytics.
Representatives for the SEC declined to comment. Starbucks did
not immediately provide a comment.
The SEC regularly sends comment letters to companies with
questions about disclosures made in securities filings. The letters
usually focus on accounting practices and can result in additional
disclosures in future filings, revisions to previously filed
disclosures or a simple response with extra details that help the
SEC better understand a disclosure.
The SEC, in letters sent between May and August as a part of a
routine review, questioned Starbucks management's approach to
recognizing revenue in its quarterly earnings filing ended March
31. The regulator sought clarification on Starbucks'
revenue-recognition policy. One question from the SEC was why the
company believed it was appropriate to recognize pre-opening
services, such as reviewing architectural plans and training
employees, upon completion of the services. The regulator also
asked Starbucks to explain the way it recognized Nestlé SA's $7
billion upfront payment in 2018 for the rights to sell Starbucks
products.
A change in accounting for gift cards also made it harder for
the SEC to discern the amount of deferred revenue allocated to the
Nestlé deal.
"Starbucks' historic disclosure wasn't robust enough to relay
the info that investors need to assess where the revenues are
coming from," Mr. Coleman said.
Starbucks' responses on its approach led the regulator to ask
the company to make additional disclosures in its forthcoming
annual report for the fiscal year ended Sept. 29, which the company
usually releases in November.
Starbucks, in a response to the SEC, said it would expand its
disclosures to clarify the new revenue-recognition standard's
impact on financial line items and to re-classify its income from
breakage, which refers to gift-card balances that a company can
claim once they think they're unlikely to be redeemed.
The back-and-forth between a company and the SEC stops once the
regulator deems the matter resolved. The SEC judged the Starbucks
matter resolved Aug. 8, according to a letter the regulator sent to
the company. The letters are typically made public about 20 days
after a matter is resolved.
The accounting shift in gift-card breakage inflated the
year-over-year increase in gross margins at Starbucks' Americas
division, a Cowen Inc. research report said in April. Cowen
analysts wrote their "excitement has been tempered" from Starbucks'
disclosure on what was driving the increase.
The SEC last wrote to Starbucks in 2015, seeking clarity on how
it accounted for gift cards and loyalty points redeemed at licensed
stores, records show.
The company's finance chief, Patrick Grismer, offered a weak
outlook to shareholders last week for next fiscal year's earnings,
warning that profit growth will slow in fiscal 2020 due to the loss
of tax-related gains that won't be repeated.
Write to Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
September 09, 2019 18:22 ET (22:22 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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