Estee Lauder 2007 Annual Report Download - page 64

Of the $8.2 million, net of tax, derivative instrument gain
recorded in OCI at June 30, 2007, $9.0 million, net of tax,
related to the October 2003 gain from the settlement of the
treasury lock agreements upon the issuance of the Com-
pany’s 5.75% Senior Notes due October 2033, which will
be reclassifi ed to earnings as an offset to interest expense
over the life of the debt. Partially offsetting this gain was
$0.6 million, net of tax, related to a loss from the settle-
ment of a series of forward-starting interest rate swap
agreements upon the issuance of the Company’s 6.00%
Senior Notes due May 2037, which will be reclassifi ed to
earnings as an addition to interest expense over the life of
the debt. Also partially offsetting the net derivative instru-
ment gain recorded in OCI was $0.2 million in losses, net
of tax, related to forward contracts which the Company
will reclassify to earnings during the next twelve months.
Revenue Recognition
Revenues from merchandise sales are recognized upon
transfer of ownership, including passage of title to the cus-
tomer and transfer of the risk of loss related to those
goods. In the Americas region, sales are generally recog-
nized at the time the product is shipped to the customer
and in the Europe, Middle East & Africa and Asia/Pacifi c
regions sales are generally recognized based upon the
customer’s receipt. In certain circumstances, transfer of
title takes place at the point of sale, for example, at the
Company’s retail stores. Sales at the Company’s retail
stores and online are recognized in accordance with a
4-4-5 retail calendar.
Revenues are reported on a net sales basis, which is
computed by deducting from gross sales the amount of
actual product returns received, discounts, incentive
arrangements with retailers and an amount established for
anticipated product returns. The Company’s practice is to
accept product returns from retailers only if properly
requested, authorized and approved. In accepting returns,
the Company typically provides a credit to the retailer
against accounts receivable from that retailer. As a
percentage of gross sales, returns were 4.2%, 5.0% and
4.6% in fi scal 2007, 2006 and 2005, respectively.
Payments to Customers
The Company is subject to the provisions of Emerging
Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for
Consideration Given by a Vendor to a Customer (Includ-
ing a Reseller of the Vendor’s Products).” In accordance
with this guidance, the Company has recorded the reve-
nues generated from purchase with purchase promotions
as sales and the costs of its purchase with purchase and
gift with purchase promotions as cost of sales. Certain
other incentive arrangements require the payment
of a fee to customers based on their attainment of
pre -established sales levels. These fees have been
recorded as a reduction of net sales in the accompanying
consolidated statements of earnings and were not mate-
rial to the results of operations in any period presented.
The Company enters into transactions related to adver-
tising, product promotions and demonstrations, some of
which involve cooperative relationships with customers.
These activities may be arranged either with unrelated
third parties or in conjunction with the customer. The
Company’s share of the cost of these transactions (regard-
less of to whom they were paid) are refl ected in selling,
general and administrative expenses in the accompanying
consolidated statements of earnings and were approxi-
mately $978 million, $912 million and $898 million in
fi scal 2007, 2006 and 2005, respectively.
Advertising and Promotion
Costs associated with advertising are expensed during the
year as incurred. Global net advertising and promotion
expenses, which primarily consist of television, radio, print
media, product development and promotional expenses,
such as products used as sales incentives, were $1,916.3
million, $1,793.1 million and $1,793.7 million in fi scal
2007, 2006 and 2005, respectively. These amounts
include activities relating to purchase with purchase and
gift with purchase promotions that are refl ected in net
sales and cost of sales.
Advertising, merchandising and sampling expenses
included in operating expenses were $1,715.3 million,
$1,586.3 million and $1,577.1 million in fi scal 2007, 2006
and 2005, respectively.
Research and Development
Research and development costs are included in advertis-
ing, merchandising and sampling and amounted to $74.4
million, $72.0 million and $72.3 million in fi scal 2007,
2006 and 2005, respectively. Research and development
costs are expensed as incurred.
Operating Leases
The Company recognizes rent expense from operating
leases with periods of free and scheduled rent increases
on a straight-line basis over the applicable lease term. The
Com pany considers lease renewals in the useful life of its
leasehold improvements when such renewals are reason-
ably assured. From time to time, the Company may
receive capital improvement funding from its lessors.
These amounts are recorded as deferred liabilities and
amortized over the remaining lease term as a reduction of
rent expense.
License Arrangements
The Company’s license agreements provide the Company
with worldwide rights to manufacture, market and sell
THE EST{E LAUDER COMPANIES INC. 63