Estee Lauder 2010 Annual Report Download - page 93

92 THE EST{E LAUDER COMPANIES INC.
projected future results of operations indicated that the
carrying value of the related long-lived assets were not
recoverable. These long-lived asset impairment charges
primarily related to the Company’s skin care and makeup
businesses in the Americas and the Europe, Middle East
and Africa regions and are included in Impairment of
other intangible and long-lived assets in the consolidated
statements of earnings.
Although our financial performance reflected improved
economic conditions, we expect global economic uncer-
tainties to continue to impact our business. As the dura-
tion and magnitude of the volatility of the current
economic conditions remain uncertain, we will continue
to monitor and evaluate the potential impact on our busi-
ness and on our interim and annual impairment testing.
Accordingly, it is possible that we would recognize an
impairment charge in the future with respect to goodwill,
other intangible assets and long-lived assets.
IMPACT OF RECENT ECONOMIC EVENTS
IN VENEZUELA
Cumulative inflation in Venezuela has exceeded 100%
over the three-year period ended December 31, 2009, as
measured using the blended Consumer Price Index/
National Consumer Price Index. As a result, Venezuela
has been designated as a highly inflationary economy
effective January 1, 2010 and, as such, the U.S. dollar has
become the functional currency of our subsidiary in
Venezuela. Prior to being designated as highly inflation-
ary, we translated the financial statements of our subsid-
iary in Venezuela using the official exchange rate of 2.15.
Beginning January 1, 2010, currency remeasurement
adjustments for this subsidiary’s financial statements and
other transactional foreign exchange gains and losses
were reflected in earnings. Translation adjustments that
were recorded through December 31, 2009 (prior to
being designated as highly inflationary) remain in equity
as part of other comprehensive income.
On January 8, 2010, the Venezuelan government
announced the devaluation of its currency from an official
exchange rate of 2.15 bolivars per U.S. dollar to a dual-
rate regime of 2.60 bolivars per U.S. dollar for goods
deemed “essential” and 4.30 bolivars per U.S. dollar for
most other imports and repatriation of dividends by
foreign investors (the “official rate”). From January 2010
through May 2010, we remeasured bolivar-denominated
monetary assets and liabilities at the official exchange
rate of 4.30 bolivars per U.S. dollar, as none of our trans-
actions fell into the essential classification. In June 2010,
the Venezuelan government created a third, officially-
sanctioned exchange rate based on trading bands
The fair value of the reporting unit was based upon
weighting of the income and market approaches, utilizing
estimated cash flows and a terminal value, discounted at
a rate of return that reflects the relative risk of the cash
flows, as well as valuation multiples derived from com-
parable publicly traded companies that are applied to
operating performance of the reporting unit. The key
assumptions that were used to determine the estimated
fair value of the reporting unit were predicated on planned
new market initiatives, including the rollout of reformu-
lated product lines and expanded international distribu-
tion. If such plans do not materialize, if there is a delay in
new market initiatives, or if there is a decline in the busi-
ness environment in which this reporting unit operates, a
resulting change in the key assumptions, including
a decrease in the terminal value or increase in the dis-
count rate, could have a negative impact on the estimated
fair value of the reporting unit and it is possible we could
recognize an impairment charge in the future. All other
reporting units’ fair values substantially exceeded their
respective carrying values.
As of our annual indefinite-lived asset impairment test
on April 1, 2010, we determined that the fair values of two
trademarks were equal to their carrying values. As of June
30, 2010, the carrying values of these trademarks were
$19.0 million and $17.0 million. The fair values of these
trademarks were based upon the relief-from-royalty
method. The key assumptions that were used to deter-
mine the estimated fair value of one trademark were
predicated on expanded distribution in the salon channel
and into other channels. The key assumptions that were
used to determine the estimated fair value of the other
trademark were predicated on planned new market initia-
tives, including the rollout of reformulated product lines
and expanded international distribution. If such plans do
not materialize, if there is a delay in new market initiatives,
or if there is a decline in the business environment,
a resulting change in the key assumptions could have a
negative impact on the estimated fair values of these
trademarks and it is possible we could recognize an
impairment charge in the future. The fair values of all other
indefinite-lived intangible assets substantially exceeded
their respective carrying values.
During the fourth quarter of fiscal 2010, we recorded
non-cash impairment charges of $2.7 million to reduce
the net carrying value of certain retail store and counter
assets to their estimated fair value, which was determined
based on discounted projected future cash flows. Lower
than expected operating cash flow performance relative
to the affected assets, revisions in internal forecasts and
the impact of the current economic environment on their