Estee Lauder 2010 Annual Report Download - page 115

114 THE EST{E LAUDER COMPANIES INC.
liability are recorded in earnings). Changes in the fair
value of derivative instruments not designated as hedging
instruments are reported in current-period earnings.
Property, Plant and Equipment
Property, plant and equipment, including leasehold and
other improvements that extend an asset’s useful life or
productive capabilities, are carried at cost less accumu-
lated depreciation and amortization. Costs incurred for
computer software developed or obtained for internal use
are capitalized as part of machinery and equipment
during the application development stage and expensed
as incurred during the preliminary project and post-
implementation stages. For financial statement purposes,
depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets rang-
ing from 3 to 40 years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the
lives of the respective leases or the expected useful lives
of those improvements.
Investments
The Company’s investments consist principally of avail-
able-for-sale securities and equity-method investments.
Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from
earnings and are reported as a component of stockholders’
equity until realized. Investments in affiliated companies,
which are not controlled by the Company but where the
Company has the ability to exercise significant influence
over, are accounted for using the equity-method where
the earnings and losses attributable to the investment are
recorded in the accompanying consolidated statements
of earnings.
Goodwill and Other Indefinite-lived Intangible Assets
Goodwill is calculated as the excess of the cost of pur-
chased businesses over the fair value of their underlying
net assets. Other indefinite-lived intangible assets princi-
pally consist of trademarks. Goodwill and other indefinite-
lived intangible assets are not amortized.
The Company assesses goodwill and other indefinite-
lived intangibles at least annually for impairment as of the
beginning of the fiscal fourth quarter, or more frequently
if certain events or circumstances warrant. The Company
tests goodwill for impairment at the reporting unit level,
which is one level below the Company’s operating seg-
ments. The Company identifies its reporting units by
assessing whether the components of its operating seg-
ments constitute businesses for which discrete financial
information is available and management of each report-
ing unit regularly reviews the operating results of those
Inventory and Promotional Merchandise
Inventory and promotional merchandise only includes
inventory considered saleable or usable in future periods,
and is stated at the lower of cost or fair-market value, with
cost being determined on the first-in, first-out method.
Cost components include raw materials, componentry,
direct labor and overhead (e.g., indirect labor, utilities,
depreciation, purchasing, receiving, inspection and
warehousing) as well as inbound freight. Manufacturing
overhead is allocated to the cost of inventory based on
the normal production capacity. Unallocated overhead
during periods of abnormally low production levels are
recognized as cost of sales in the period in which they are
incurred. Promotional merchandise is charged to expense
at the time the merchandise is shipped to the Company’s
customers. Included in inventory and promotional
merchandise is an inventory obsolescence reserve, which
represents the difference between the cost of the inven-
tory and its estimated realizable value, based on various
product sales projections. This reserve is calculated using
an estimated obsolescence percentage applied to the
inventory based on age, historical trends and require-
ments to support forecasted sales. In addition, and as
necessary, specific reserves for future known or antici-
pated events may be established.
Derivative Financial Instruments
The Company’s derivative financial instruments are
recorded as either assets or liabilities on the balance sheet
and measured at fair value. All derivatives outstanding
as of June 30, 2010 are (i) designated as a hedge of
the fair value of a recognized asset or liability or of an
unrecognized firm commitment (“fair-value” hedge),
(ii) designated as a hedge of a forecasted transaction or of
the variability of cash flows to be received or paid related
to a recognized asset or liability (“foreign currency cash-
flow” hedge), or (iii) not designated as a hedging instru-
ment. Changes in the fair value of a derivative that is
designated and qualifies as a fair-value hedge that is highly
effective are recorded in current-period earnings, along
with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk (including losses or gains
on unrecognized firm commitments). Changes in the fair
value of a derivative that is designated and qualifies as a
foreign currency cash-flow hedge of a foreign-currency-
denominated forecasted transaction that is highly effec-
tive are recorded in other comprehensive income (loss)
(“OCI”). Gains and losses deferred in OCI are then recog-
nized in current-period earnings when earnings are
affected by the variability of cash flows of the hedged
foreign-currency-denominated forecasted transaction
(e.g., when periodic settlements on a variable-rate asset or