Estee Lauder 2007 Annual Report Download - page 66

“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 prescribes a two-step evalua-
tion 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 technical merits of the position. If
the tax position meets the more-likely-than-not recogni-
tion threshold it is measured and recognized in the fi nan-
cial 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.
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 unrec-
ognized tax benefi ts.
The provisions of FIN 48 became effective for the
Company on July 1, 2007. While the Company is continu-
ing to evaluate the impact of the interpretation on the
consolidated fi nancial statements, the Company expects
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 market
participants at the measurement date (an exit price). SFAS
No. 157 also stipulates that, as a market-based measure-
ment, 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 the Company in its fi scal year end-
ing June 30, 2009. The Company is currently evaluating
the impact of the provisions of SFAS No. 157 on its con-
solidated 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
eligible fi nancial instruments at fair value. An entity shall
report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each sub-
sequent reporting date, and recognize upfront costs and
fees related to those items in earnings as incurred and not
deferred. SFAS No. 159 applies to fi scal years beginning
after November 15, 2007, with early adoption permitted
for an entity that has also elected to apply the provisions
of SFAS No. 157. An entity is prohibited from retro-
spectively applying SFAS No. 159, unless it chooses early
adoption. The Company is currently evaluating the impact
of the provisions of SFAS No. 159 on its consolidated
fi nancial statements, if any, when it becomes effective for
the fi scal year ending June 30, 2009.
NOTE 3 — STAFF ACCOUNTING BULLETIN NO. 108
In September 2006, the Securities and Exchange
Commission (“SEC”) issued Staff Accounting Bulletin
(“SAB”) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB No. 108”),
which sets forth the SEC Staff’s views on the proper meth-
ods for quantifying errors when there were uncorrected
errors in a prior year. Under SAB No. 108, companies
should evaluate a misstatement that existed in prior years
based on its impact on the current year income statement
(the “rollover” approach), as well as the cumulative effect
of correcting such misstatements in the current year’s
ending balance sheet (the “iron curtain” approach), or
collectively, the “dual” approach. In prior years, the
Company utilized the “rollover” approach to evaluate
THE EST{E LAUDER COMPANIES INC. 65