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Answer :
In order to understand how Starbucks follows the five-step revenue recognition model, it is necessary to define the model itself. The five-step model is a framework established by the Financial Accounting Standards Board (FASB) to guide entities in recognizing revenue from contracts with customers. The five steps are as follows:
Step 1: Identify the contract with the customer: Starbucks identifies the contract with the customer when a customer places an order for a product or service through the company’s mobile application, website, or in-store POS system.
Step 2: Identify the performance obligations in the contract: Starbucks identifies the performance obligations in the contract when it determines what specific product or service the customer has ordered.
Step 3: Determine the transaction price: Starbucks determines the transaction price by applying the appropriate price for the specific product or service ordered by the customer.
Step 4: Allocate the transaction price to the performance obligations in the contract: Starbucks allocates the transaction price to the performance obligations in the contract by applying the appropriate price for each specific product or service ordered by the customer.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation: Starbucks recognizes revenue when it satisfies a performance obligation by delivering the product or service ordered by the customer.
Examples of how Starbucks follows the five-step revenue recognition model are as follows: Starbucks recognizes revenue when it satisfies a performance obligation by delivering the product or service ordered by the customer. Starbucks determines the transaction price by applying the appropriate price for the specific product or service ordered by the customer. Starbucks identifies the performance obligations in the contract when it determines what specific product or service the customer has ordered. Starbucks identifies the contract with the customer when a customer places an order for a product or service through the company’s mobile application, website, or in-store POS system.
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Final answer:
Starbucks follows the five-step revenue recognition model by identifying contracts and performance obligations, determining and allocating transaction prices, and recognizing revenue when performance obligations are satisfied, as detailed in their Form 10-K.
Explanation:
Starbucks, in its Form 10-K filing, adheres to the five-step revenue recognition model outlined by the Financial Accounting Standards Board (FASB). The steps involve:
- Identifying the contract(s) with a customer: Starbucks identifies contracts with customers for the sale of its products, such as a sale of coffee or merchandise.
- Identifying performance obligations in the contract: Performance obligations could be the delivery of coffee, food, or other products.
- Determining the transaction price: This involves the price the customer will pay, taking into account any variable considerations like discounts or loyalty points.
- Allocating the transaction price to the performance obligations in the contract: Starbucks would allocate the price to the various products ordered if a customer purchases multiple items.
- Recognizing revenue when (or as) the entity satisfies a performance obligation: Revenue is recognized when the customer takes possession of their coffee or product, signifying the performance obligation has been fulfilled.
