SEC Questions Starbucks’ Accounting Policies
Starbucks’ stock fell today after news broke that the Securities and Exchange Commission sent a letter questioning the way that Starbucks recognizes its revenue. New accounting guidelines were implemented at the end of 2018 that is affecting many public companies. In Starbucks’ case, the SEC wanted clarification as to the reporting of a number of different deals that the company has made. One such deal was a nearly $7 billion agreement with Nestle that would allow them to sell Starbucks products in grocery stores. Another issue was with breakage, which is revenue that comes from unused gift cards or prepaid services.
“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. The Wall Street Journal also reported that as of the end of June, 50 other companies have also received letters from the SEC questioning their accounting methods. The SEC explained that companies need to be thorough enough in their reports to ensure that investors are aware of where revenues are coming from, and what the true financial state of the company looks like.
Once the SEC sends a letter to a company requesting information, the two sides will go back and forth until the SEC is satisfied. At that point, the SEC will judge the matter resolved. In this case, the matter with Starbucks was resolved on August 8th. The news of the letters that the SEC sends will typically be released to the public around a few weeks after an issue is resolved. So, even though the SEC is now satisfied, mere news of the issue having happened dropped Starbucks’ stock price 4%. According to the WSJ, Starbucks said “it would expand its disclosures to clarify the new revenue-recognition standard’s impact on financial line items, including its income from breakage, which refers to gift-card balances that a company can claim once they think they’re unlikely to be redeemed.” This means that the exchange will have an impact on the company’s future disclosures.
Starbucks is also planning to open up their first ever “pick-up cafe” in the U.S., “which allows customers to place mobile orders in advance and pick up their food and drinks at an “express” shop without any wait.” Currently, customers can earn reward points by making orders on the Starbucks app. Because customers at the pick-up cafes can only order on the app, they should see reward points becoming more prominent to their accounting systems. As more brands continue to incorporate reward points and subscription-based services into their business models, it will be interesting to see if there are more problems with how these services are accounted. Furthermore, the SEC may continue to need to update their guidelines as these changes to develop, which companies will have to adapt to as well.
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