Like a perplexed customer who has yet to receive the Salted Caramel Mocha Frappuccino ordered 15 minutes ago, the SEC wanted answers from Starbucks. Some investors mistook the scene as a major kerfuffle. But Starbucks, acting with the calm of a veteran barista, defused the situation by agreeing to brew up more information about its accounting practices.
That’s the outcome of a back-and-forth from earlier this year between the Commission and Starbucks. Media reports surfaced last week detailing the SEC’s questions about how Starbucks is implementing the new revenue recognition standard that went into effect this year. Between May and August, the financial regulator sent letters to the Seattle-based coffee king regarding its earnings report from the first quarter of 2019. They included questions about how the company accounts for so-called “breakage,” or unused gift card purchases.
After news of the inquiry broke last Monday, Starbucks’ shares dove 4% the following day. The sellers may not have realized just how commonplace it has become for the SEC to issue comment letters questioning public companies about revenue recognition in the wake of the sea change that has occurred in that field of accounting. As Part II of our revenue recognition research series recently made clear, the new standard has taken significant work to implement, and has required companies to make certain judgment calls that were not previously necessary
Starbucks actually made the correspondence public on September 6. In the first letter, dated May 6, the SEC requested more information on the company’s licensed store arrangements, including the rationale for recognizing revenue from fees for pre-opening services like site selection and employee training on completion of the services. The SEC also wanted to know more about how Starbucks recognized an upfront payment of $7 billion from a licensing deal with Swiss food and beverage company Nestle.
Starbucks responded on May 16, promising to layer on more disclosures in future filings related to its treatment of revenues from pre-opening operations. Not satisfied, the SEC issued another request in July for additional information. As a result, Starbucks said it intends to beef up its disclosures related to deferred revenues, including those stemming from its agreement with Nestlé.
A typically terse response from the SEC in August suggests Starbucks’ promised disclosures resolved the matter. Not surprisingly, once its dialogue with the Commission became public, Starbucks was quick to highlight the fact that it was never under investigation for accounting irregularities. The company also noted that the episode would not require it to restate prior financial results or alter its accounting going forward. In fact, according to Starbucks, more than 200 other companies received comments from the SEC related to the new revenue recognition accounting standard.
If all of this sounds like a tempest in a Jade Citrus Mint Green Tea pot, that’s because it might very well be. A massive shift in an important accounting standard like revenue recognition can probably be expected to elicit a high volume of exchanges like the one between Starbucks and the SEC to ensure that the transition is going smoothly.