Estee Lauder 2004 Annual Report Download - page 66

THE EST{E LAUDER COMPANIES INC.
Derivative Financial Instruments
The Company accounts for derivative financial instru-
ments in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as
amended, which establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 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.
Recently Issued Accounting Standards
On May 19, 2004, the Financial Accounting Standards
Board (“FASB”) issued FASB Staff Position No. FAS 106-2,
“Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modern-
ization Act of 2003” (“FSP No. 106-2”), in response to a
new law regarding prescription drug benefits under
Medicare (“Medicare Part D”) and a Federal subsidy to
sponsors of retiree health care benefit plans that provide
a benefit that is at least actuarially equivalent to Medicare
Part D. Currently, Statement of Financial Accounting Stan-
dard No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions” (“SFAS No. 106”), requires
that changes in relevant law be considered in current
measurement of postretirement benefit costs. FSP No.
106-2 will be effective for financial statements of compa-
nies for the first interim or annual period beginning after
June 15, 2004. The Company will adopt FSP No. 106-2 in
the first quarter of fiscal 2005 and will recognize the
impact of the new law under Medicare Part D, which will
not be material to the Company’s results of operations,
cash flows, or financial condition. Therefore, any measures
of the accumulated postretirement benefit obligation or
the net periodic postretirement benefit cost as of and for
the year ended June 30, 2004 do not reflect the effects of
the new law.
In December 2003, the FASB issued FASB Interpreta-
tion Number 46-R (“FIN 46-R”), “Consolidation of Vari-
able Interest Entities.” FIN 46-R, which modifies certain
provisions and effective dates of FIN 46, sets forth criteria
to be used in determining whether an investment in a vari-
able interest entity should be consolidated. These provi-
sions are based on the general premise that if a company
controls another entity through interests other than vot-
ing interests, that company should consolidate the con-
trolled entity. The Company has evaluated whether the
provisions of FIN 46-R are applicable to its investments,
certain of which are currently accounted for by the equity
method, as well as other arrangements, which may
meet the criteria of the interpretation, and believes that
there are currently no material arrangements that meet
the definition of a variable interest entity which would
require consolidation.
In December 2003, the FASB revised SFAS No. 132
(Revised 2003), “Employers’ Disclosures about Pensions
and other Postretirement Benefits” (“SFAS No. 132 (R)”),
establishing additional annual disclosures about plan
assets, investment strategy, measurement date, plan obli-
gations and cash flows. In addition, the revised standard
established interim disclosure requirements related to the
net periodic benefit cost recognized and contributions
paid or expected to be paid during the current fiscal year.
The new annual disclosures are effective for financial
statements of companies with fiscal years ending after
December 15, 2003 and the interim-period disclosures
are effective for interim periods beginning after Decem-
ber 15, 2003. The Company adopted the interim disclo-
sures for the fiscal quarter ended March 31, 2004 and the
annual disclosures for the year ended June 30, 2004. The
adoption of the revised SFAS No. 132 (R) had no impact
on the results of operations or financial condition.
The Company adopted SFAS No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150
established standards for classifying and measuring cer-
tain financial instruments with characteristics of both lia-
bilities and equity. Among other things, it specifically
requires that mandatorily redeemable instruments, such
as redeemable preferred stock, be classified as a liability.
Initial and subsequent measurements of the instruments
differ based on the characteristics of each instrument
and as provided for in the statement. Based on the provi-
sions of this statement, the Company has classified its
redeemable preferred stock as a liability in fiscal 2004 and
the related dividends thereon have been characterized as
interest expense. Restatement of financial statements for
earlier years presented was not permitted. The adoption
of this statement has resulted in the inclusion of the divi-
dends on the preferred stock (equal to $17.4 million for
the year ended June 30, 2004) as interest expense. While
the inclusion has impacted net earnings, net earnings
attributable to common stock and earnings per common
share were unaffected. Given that the dividends are not
deductible for income tax purposes, the inclusion of the
preferred stock dividends as an interest expense has
caused an increase in our effective tax rate for fiscal 2004.
The adoption of SFAS No. 150 had no impact on the
Company’s financial condition.
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