Estee Lauder 2010 Annual Report Download - page 83

82 THE EST{E LAUDER COMPANIES INC.
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
The discussion and analysis of our financial condition at
June 30, 2010 and our results of operations for the three
fiscal years ended June 30, 2010 are based upon our con-
solidated financial statements, which have been prepared
in conformity with U.S. generally accepted accounting
principles. The preparation of these financial statements
requires us to make estimates and assumptions that affect
the amounts of assets, liabilities, revenues and expenses
reported in those financial statements. These estimates
and assumptions can be subjective and complex and,
consequently, actual results could differ from those
estimates. Our most critical accounting policies relate to
revenue recognition, inventory, pension and other post-
retirement benefit costs, goodwill, other intangible assets
and long-lived assets, income taxes and derivatives.
Management of the Company has discussed the selec-
tion of significant accounting policies and the effect of
estimates with the Audit Committee of the Company’s
Board of Directors.
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/Pacific
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 our
retail stores. Sales at our retail stores and online are recog-
nized in accordance with a traditional 4-4-5 retail calen-
dar, where each fiscal quarter is comprised of two 4-week
periods and one 5-week period, with one extra week in
one quarter every seven years. As a result, the retail
quarter-end and the fiscal quarter-end may be different by
up to six days.
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. Our practice is to accept
product returns from retailers only if properly requested,
authorized and approved. In accepting returns, we typi-
cally provide a credit to the retailer against accounts
receivable from that retailer. As a percentage of gross
sales, returns were 4.3%, 4.4% and 4.4% in fiscal 2010,
2009 and 2008, respectively.
Our sales return accrual is a subjective critical estimate
that has a direct impact on reported net sales. This accrual
is calculated based on a history of actual returns, esti-
mated future returns and information provided by retailers
regarding their inventory levels. Consideration of these
factors results in an accrual for anticipated sales returns
that reflects increases or decreases related to seasonal
fluctuations. Experience has shown a relationship between
retailer inventory levels and sales returns in the subse-
quent period, as well as a consistent pattern of returns
due to the seasonal nature of our business. In addition, as
necessary, specific accruals may be established for signifi-
cant future known or anticipated events. The types of
known or anticipated events that we have considered, and
will continue to consider, include, but are not limited to,
the financial condition of our customers, store closings by
retailers, changes in the retail environment and our deci-
sion to continue or support new and existing products.
In the ordinary course of business, we have established
an allowance for doubtful accounts and customer deduc-
tions based upon the evaluation of accounts receivable
aging, specific exposures and historical trends. Our allow-
ance for doubtful accounts and customer deductions is a
subjective critical estimate that has a direct impact on
reported net earnings. The allowance for doubtful
accounts was $34.3 million and $41.4 million as of
June 30, 2010 and 2009, respectively. The allowance for
doubtful accounts was reduced by $15.8 million, $14.1
million and $10.2 million for customer deductions and
write-offs in fiscal 2010, 2009 and 2008, respectively,
and increased by $8.7 million, $29.2 million and $13.2
million for additional provisions in fiscal 2010, 2009 and
2008, respectively.
INVENTORY
We state our inventory at the lower of cost or fair market
value, with cost being determined on the first-in, first-out
(FIFO) method. We believe FIFO most closely matches
the flow of our products from manufacture through sale.
The reported net value of our inventory includes saleable
products, promotional products, raw materials and com-
ponentry and work in process that will be sold or used in
future periods. Inventory cost includes raw materials,
direct labor and overhead, as well as inbound freight.
Manufacturing overhead is allocated to the cost of
inventory based on the normal production capacity. Unal-
located overhead during periods of abnormally low pro-
duction levels are recognized as cost of sales in the period
in which they are incurred.
We also record an inventory obsolescence reserve,
which represents the difference between the cost of the
inventory and its estimated realizable value, based on
various product sales projections. This reserve is calcu-
lated using an estimated obsolescence percentage applied
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS