Estee Lauder 2007 Annual Report Download - page 37

36 THE EST{E LAUDER COMPANIES INC.
As of June 30, 2007, we have current net deferred tax
assets of $124.0 million and non-current net deferred
tax liabilities of $16.6 million. The net deferred tax assets
assume suffi cient future earnings for their realization, as
well as the continued application of currently anticipated
tax rates. Included in net deferred tax assets is a valuation
allowance of approximately $5.5 million for deferred tax
assets, where management believes it is more likely than
not that the deferred tax assets will not be realized in the
relevant jurisdiction. Based on our assessments, no addi-
tional valuation allowance is required. If we determine
that a deferred tax asset will not be realizable, an adjust-
ment to the deferred tax asset will result in a reduction of
earnings at that time.
We provide tax reserves for Federal, state, local and
international exposures relating to periods subject to
audit. The development of reserves for these exposures
requires judgments about tax issues, potential outcomes
and timing, and is a subjective critical estimate. Although
the outcome relating to these exposures is uncertain, in
management’s opinion adequate provisions for income
taxes have been made for estimable potential liabilities
emanating from these exposures. In certain circum-
stances, the ultimate outcome of exposures and risks
involves significant uncertainties which render them
inestimable. If actual outcomes differ materially from
these estimates, including those that cannot be quanti-
fi ed, they could have a material impact on our results of
operations, as we experienced in the fourth quarter of
fi scal 2006 (see “Results of Operations, Fiscal 2006 as
Compared with Fiscal 2005 — Provision for Income Taxes”).
DERIVATIVES
We account for derivative fi nancial instruments in accor-
dance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, which
establishes accounting and reporting standards for deriva-
tive instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities.
This statement also requires the recognition of all deriva-
tive instruments as either assets or liabilities on the
balance sheet and that they be measured at fair value.
We currently use derivative fi nancial instruments to
hedge certain anticipated transactions and interest rates,
as well as receivables and payables denominated in
foreign currencies. We do not utilize derivatives for
trading or speculative purposes. Hedge effectiveness is
documented, assessed and monitored by employees who
are qualifi ed to make such assessments and monitor the
One-Percentage- One-Percentage-
Point Increase Point Decrease
(In millions)
Effect on total service
and interest costs $ 1.5 $ (1.3)
Effect on post-retirement
benefi t obligations $12.1 $(10.8)
For fi scal 2008, we are using a pre-retirement discount
rate for the Domestic Plans of 6.25% and varying rates for
our international plans of between 2.25% and 6.25%. We
are using an expected return on plan assets of 7.75% for
the U.S. Qualifi ed Plan and varying rates for our interna-
tional pension plans of between 3.00% and 6.75%. The
net change in these assumptions from those used in fi scal
2007 will result in a decrease in pension expense of
approximately $2.0 million in fi scal 2008. We will continue
to monitor the market conditions relative to these assump-
tions and adjust them accordingly.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of
purchased businesses over the fair value of their underly-
ing net assets. Other intangible assets principally consist
of purchased royalty rights and trademarks. Goodwill and
other intangible assets that have an indefi nite life are
not amortized.
On an annual basis, or more frequently if certain events
or circumstances warrant, we test goodwill and other
indefi nite-lived intangible assets for impairment. To deter-
mine 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 infl uence
the outcome and ultimate results based on the assump-
tions and estimates we choose. To mitigate undue
infl uence, we use industry accepted valuation models and
set criteria that are reviewed and approved by various
levels of management and, in certain instances, we
engage third-party valuation specialists to advise us.
INCOME TAXES
We account for income taxes in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 109, “Accounting for Income Taxes,” as amended.
This statement establishes financial accounting and
reporting standards for the effects of income taxes that
result from an enterprise’s activities during the current
and preceding years. It requires an asset and liability
approach for financial accounting and reporting of
income taxes.