Estee Lauder 2007 Annual Report Download - page 53

52 THE EST{E LAUDER COMPANIES INC.
Tax positions that meet the more-likely-than-not recog-
nition threshold at the effective date of FIN 48 may be
recognized or, continue to be recognized, upon adoption
of FIN 48. The cumulative effect of applying the provi-
sions of FIN 48 shall be reported as an adjustment to the
opening balance of retained earnings for that fi scal year.
FIN 48 will apply to fi scal years beginning after December
15, 2006, with earlier adoption permitted. In May 2007,
the FASB issued FASB Staff Position (“FSP”) No. FIN 48-1,
“Defi nition of Settlement in FASB Interpretation No. 48,
an amendment of FASB Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes” (“FSP
No. FIN 48-1”). FSP No. FIN 48-1 provides guidance on
how to determine whether a tax position is effectively
settled for the purpose of recognizing previously
unrecognized tax benefi ts.
The provisions of FIN 48 became effective for us on
July 1, 2007. While we are continuing to evaluate the
impact of the interpretation on the consolidated fi nancial
statements, we expect the cumulative effect of adoption
to reduce opening retained earnings by approximately
$10 million to $20 million with a corresponding increase
to reserves for uncertain tax positions.
In September 2006, the FASB issued Statement of
Financial Accounting Standard (“SFAS”) No. 157, “Fair
Value Measurements” (“SFAS No. 157”) to clarify the def-
inition of fair value, establish a framework for measuring
fair value and expand the disclosures on fair value
measurements. SFAS No. 157 defi nes fair value as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between mar-
ket participants at the measurement date (an exit price).
SFAS No. 157 also stipulates that, as a market-based mea-
surement, fair value measurement should be determined
based on the assumptions that market participants would
use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes between (a) market par-
ticipant assumptions developed based on market data
obtained from sources independent of the reporting
entity (observable inputs) and (b) the reporting entity’s
own assumptions about market participant assumptions
developed based on the best information available in the
circumstances (unobservable inputs). SFAS No. 157
becomes effective for us in our fiscal year ending
June 30, 2009. We are currently evaluating the impact of
the provisions of SFAS No. 157 on our consolidated
fi nancial statements.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities,” (“SFAS No. 159”) to permit all entities to
choose to elect, at specifi ed election dates, to measure
made assuming normal market conditions and a 95 per-
cent confi dence level. We used a statistical simulation
model that valued our derivative fi nancial instruments
against one thousand randomly generated market
price paths.
Our calculated value-at-risk exposure represents an
estimate of reasonably possible net losses that would be
recognized on our portfolio of derivative fi nancial instru-
ments assuming hypothetical movements in future market
rates and is not necessarily indicative of actual results,
which may or may not occur. It does not represent the
maximum possible loss or any expected loss that may
occur, since actual future gains and losses will differ from
those estimated, based upon actual fl uctuations in market
rates, operating exposures, and the timing thereof, and
changes in our portfolio of derivative fi nancial instruments
during the year.
We believe, however, that any such loss incurred would
be offset by the effects of market rate movements on the
respective underlying transactions for which the deriva-
tive fi nancial instrument was intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with
unconsolidated entities that would be expected to have a
material current or future effect upon our fi nancial condi-
tion or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the FASB issued FASB Interpretation Num-
ber (“FIN”) 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 clarifi es the accounting for
uncertainty in income taxes recognized in an enterprise’s
fi nancial statements in accordance with FASB Statement
No. 109, “Accounting for Income Taxes.” FIN 48 pre-
scribes a two-step evaluation process for tax positions
taken, or expected to be taken, in a tax return. The fi rst
step is recognition and the second is measurement. For
recognition, an enterprise judgmentally determines
whether it is more-likely-than-not that a tax position will
be sustained upon examination, including resolution of
related appeals or litigation processes, based on the tech-
nical merits of the position. If the tax position meets the
more-likely-than-not recognition threshold it is measured
and recognized in the fi nancial statements as the largest
amount of tax benefi t that is greater than 50% likely of
being realized. If a tax position does not meet the more-
likely-than-not recognition threshold, the benefi t of that
position is not recognized in the fi nancial statements.