Estee Lauder 2002 Annual Report Download - page 41

Download and view the complete annual report

Please find page 41 of the 2002 Estee Lauder annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 83

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83

THEEST{E LAUDER COMPANIES INC.
assumptions with our actuarial advisors and we believe
they are within accepted industry ranges, although an
increase or decrease in the assumptions or economic
events outside our control could have a direct impact on
reported net earnings.
For fiscal 2003, we will use a pre-retirement discount
rate of 7.0% and anticipate using an expected return on
plan assets of 8.75%, both of which will result in a higher
calculated pension expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of
purchased businesses over the value of their underlying
net assets. Other intangible assets principally consist of
purchased royalty rights and trademarks. Goodwill and
other intangible assets that have an indefinite life are
not amortized.
On an annual basis, we test goodwill and other intan-
gible assets for impairment. To determine the fair value of
these intangible assets, there are many assumptions and
estimates used that directly impact the results of the
testing. We have the ability to influence the outcome and
ultimate results based on the assumptions and estimates
we choose. To mitigate undue influence, we use industry
accepted valuation models and set criteria that are
reviewed and approved by various levels of management.
Additionally, we evaluated our recorded goodwill with the
assistance of a third-party valuation firm.
INCOME TAXES
We have accounted for, and currently account for, income
taxes in accordance with Statement of Financial Account-
ing Standards (“SFAS”) No. 109, “Accounting for Income
Taxes”. This Statement establishes financial accounting
and reporting standards for the effects of income taxes
that result from an enterprise’s activities during the cur-
rent and preceding years. It requires an asset and liability
approach for financial accounting and reporting of
income taxes.
As of June 30, 2002, we have current net deferred tax
assets of $112.4 million and non-current net deferred
tax assets of $72.7 million. These net deferred tax assets
assume sufficient future earnings for their realization, as
well as the continued application of current tax rates.
Included in net deferred tax assets is a valuation
allowance of approximately $1.5 million for deferred tax
assets, which relates to foreign tax loss carryforwards not
utilized to date, where management believes it is more
likely than not that the deferred tax assets will not be real-
ized in the relevant jurisdiction. Based on our assess-
ments, no additional valuation allowance is required. If we
determine that a deferred tax asset will not be realizable,
an adjustment to the deferred tax asset will result in a
reduction of earnings at that time.
Furthermore, the Company provides tax reserves for
Federal, state and international exposures relating to audit
results, planning initiatives and compliance responsi-
bilities.The development of these reserves requires
judgements about tax issues, potential outcomes and
timing, and is a subjective critical estimate.
DERIVATIVES
We currently account for derivative financial instruments
in accordance with SFAS No. 133, “Accounting for Deriva-
tive Instruments and Hedging Activities”, as amended,
which establishes accounting and reporting standards for
derivative instruments, including certain derivative instru-
ments embedded in other contracts, and for hedging
activities. This Statement also requires the recognition of
all derivative instruments as either assets or liabilities on
the balance sheet and that they be measured at fair value.
We currentlyuse derivative financial instruments to
hedge certain anticipated transactions as well as receiv-
ables and payables denominated in foreign currencies.
We do not utilize derivatives for trading or speculative
purposes. Hedge effectiveness is documented, assessed
and monitored by our employees who are qualified to
make such assessments and monitor the instruments. Vari-
ables that are external to the Company such as social,
political and economic risks may have an impact on our
hedging program and the results thereon.
40