Estee Lauder 2010 Annual Report Download - page 118

THE EST{E LAUDER COMPANIES INC. 117
opinion adequate provisions for income taxes have been
made for estimable potential liabilities emanating from
these exposures. In certain circumstances, the ultimate
outcome of exposures and risks involves significant uncer-
tainties which render them inestimable. If actual outcomes
differ materially from these estimates, they could have
a material impact on the Company’s consolidated results
of operations.
Recently Adopted Accounting Standards
In May 2010, the Financial Accounting Standards Board
(“FASB”) amended its authoritative guidance related to
foreign currency issues that were discussed at the FASB’s
Emerging Issues Task Force (“EITF”) meeting in March
2010 where the staff of the U.S. Securities and Exchange
Commission (“SEC”) announced temporary guidance on
certain exchange rate issues. Prompted by the use of
multiple currency exchange rates in Venezuela, the use
of different rates for remeasurement and translation
p urposes has caused reported balances for financial
reporting purposes and the actual U.S. dollar denomi-
nated balances to be different. The SEC staff indicated
that any differences between the amounts reported for
financial reporting purposes and actual U.S. dollar denom-
inated balances that may have existed prior to the applica-
tion of highly inflationary accounting requirements on
January 1, 2010 should be recognized in the income state-
ment upon adoption, unless the issuer can document that
the difference was previously recognized as a cumulative
translation adjustment (“CTA”), in which case the differ-
ence should be recognized as an adjustment to CTA. The
adoption of this guidance, effective March 31, 2010, did
not have a material impact on the Company’s consoli-
dated financial statements.
In February 2010, the FASB amended its authoritative
guidance related to subsequent events to alleviate poten-
tial conflicts with current SEC guidance. Effective immedi-
ately, these amendments remove the requirement that an
SEC filer disclose the date through which it has evaluated
subsequent events. The adoption of this guidance did not
have a material impact on the Company’s consolidated
financial statements.
In January 2010, the FASB issued authoritative guid-
ance that will require entities to make new disclosures
about recurring or nonrecurring fair-value measurements
of assets and liabilities, including (i) the amounts of sig-
nificant transfers between Level 1 and Level 2 fair-value
measurements and the reasons for the transfers, (ii) the
reasons for any transfers in or out of Level 3, and (iii) infor-
mation on purchases, sales, issuances and settlements on
a gross basis in the reconciliation of recurring Level 3 fair
value measurements. The FASB also clarified existing
Stock-Based Compensation
The Company records stock-based compensation, mea-
sured at the fair value of the award, as an expense in the
consolidated financial statements. Upon the exercise of
stock options or the vesting of restricted stock units and
performance share units, the resulting excess tax benefits,
if any, are credited to additional paid-in capital. Any result-
ing tax deficiencies will first be offset against those cumu-
lative credits to additional paid-in capital. If the cumulative
credits to additional paid-in capital are exhausted, tax defi-
ciencies will be recorded to the provision for income
taxes. Excess tax benefits are required to be reflected as
financing cash inflows in the accompanying consolidated
statements of cash flows.
Income Taxes
The Company accounts for income taxes using an asset
and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in
its financial statements or tax returns. The net deferred tax
assets assume sufficient future earnings for their realiza-
tion, as well as the continued application of currently
anticipated tax rates. Included in net deferred tax assets is
a valuation allowance for deferred tax assets, where man-
agement believes it is more-likely-than-not that the
deferred tax assets will not be realized in the relevant juris-
diction. Based on the Company’s assessments, no addi-
tional valuation allowance is required. If the Company
determines that a deferred tax asset will not be realizable,
an adjustment to the deferred tax asset will result in a
reduction of net earnings at that time.
The Company provides tax reserves for federal, state,
local and international exposures relating to periods sub-
ject to audit. The development of reserves for these expo-
sures requires judgments about tax issues, potential
outcomes and timing, and is a subjective critical estimate.
The Company assesses its tax positions and records tax
benefits for all years subject to examination based upon
management’s evaluation of the facts, circumstances, and
information available at the reporting dates. For those tax
positions where it is more-likely-than-not that a tax benefit
will be sustained, the Company has recorded the largest
amount of tax benefit with a greater than 50% likelihood
of being realized upon settlement with a tax authority that
has full knowledge of all relevant information. For those
tax positions where it is not more-likely-than-not that a tax
benefit will be sustained, no tax benefit has been recog-
nized in the financial statements. The Company classifies
applicable interest and penalties as a component of the
provision for income taxes. Although the outcome relat-
ing to these exposures is uncertain, in management’s