Estee Lauder 2010 Annual Report Download - page 86

THE EST{E LAUDER COMPANIES INC. 85
requires judgments about tax issues, potential outcomes
and timing, and is a subjective critical estimate. We assess
our tax positions and record tax benefits for all years sub-
ject 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,
we have recorded the largest amount of tax benefit with a
greater than 50% likelihood of being realized upon settle-
ment 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 sus-
tained, no tax benefit has been recognized in the financial
statements. We classify applicable interest and penalties
as a component of the provision for income taxes.
Although the outcome relating to these exposures is
uncertain, in management’s opinion adequate provisions
for income taxes have been made for estimable potential
liabilities emanating from these exposures. In certain cir-
cumstances, the ultimate outcome of exposures and risks
involves significant uncertainties which render them ines-
timable. If actual outcomes differ materially from these
estimates, they could have a material impact on our results
of operations.
DERIVATIVES
We address certain financial exposures through a con-
trolled program of risk management that includes the use
of derivative financial instruments. We primarily enter into
foreign currency forward and option contracts to reduce
the effects of fluctuating foreign currency exchange rates
and interest rate derivatives to manage the effects of inter-
est rate movements on our aggregate liability portfolio.
We also enter into foreign currency forward contracts and
may use option contracts, not designated as hedging
instruments, to mitigate the change in fair value of specific
assets and liabilities on the balance sheet. We do not
utilize derivative financial instruments for trading or spec-
ulative purposes. Hedge effectiveness is documented,
assessed and monitored by employees who are qualified
to make such assessments and monitor the instruments.
Variables that are external to us such as social, political
and economic risks may have an impact on our hedging
program and the results thereof.
Our 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 unrecog-
nized firm commitment (“fair-value” hedge), (ii) desig-
nated as a hedge of a forecasted transaction or of the
Intangible Assets and Long-Lived Assets.” Changes in the
valuation assumptions from those used in the prior year
primarily reflect the impact of the current economic envi-
ronment on the reporting units and their projected future
results of operations.
To determine fair value of other indefinite-lived intan-
gible assets, we use an income approach, the relief-from-
royalty method. This method assumes that, in lieu of
ownership, a third party would be willing to pay a royalty
in order to obtain the rights to use the comparable asset.
Other indefinite-lived intangible assets’ fair values require
significant judgments in determining both the assets’ esti-
mated cash flows as well as the appropriate discount and
royalty rates applied to those cash flows to determine fair
value. Changes in such estimates or the application of
alternative assumptions could produce significantly differ-
ent results.
We review long-lived assets for impairment whenever
events or changes in circumstances indicate that the car-
rying amount may not be recoverable. When such events
or changes in circumstances occur, a recoverability test is
performed comparing projected undiscounted cash flows
from the use and eventual disposition of an asset or asset
group to its carrying value. If the projected undiscounted
cash flows are less than the carrying value, an impairment
would be recorded for the excess of the carrying value
over the fair value, which is determined by discounting
future cash flows.
INCOME TAXES
We account for income taxes using an asset and liability
approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax conse-
quences of events that have been recognized in our finan-
cial statements or tax returns. As of June 30, 2010, we
have current net deferred tax assets of $269.0 million and
non-current net deferred tax assets of $104.8 million. The
net deferred tax assets assume sufficient future earnings
for their realization, as well as the continued application
of currently anticipated tax rates. Included in net deferred
tax assets is a valuation allowance of $38.5 million for
deferred tax assets, where management believes it is
more-likely-than-not that the deferred tax assets will not
be realized in the relevant jurisdiction. Based on our
assessments, no additional valuation allowance is required.
If we determine 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.
We provide tax reserves for federal, state, local and
international exposures relating to periods subject to
audit. The development of reserves for these exposures