Estee Lauder 2011 Annual Report Download - page 126

124 THE EST{E LAUDER COMPANIES INC.
income and market approaches. In certain circumstances,
equal weighting will not be applied if one of these
methods may be less applicable (e.g., only the income
approach would be used for reporting units with existing
negative margins). The Company believes both
approaches are equally relevant and the most reliable
indications of fair value because the fair value of product
or service companies is more dependent on the ability to
generate earnings than on the value of the assets used in
the production process.
Under the income approach, the Company determines
fair value using a discounted cash flow method, project-
ing future cash flows of each reporting unit, as well as a
terminal value, and discounting such cash flows at a rate
of return that reflects the relative risk of the cash flows.
Under the market approach, the Company utilizes infor-
mation from comparable publicly traded companies with
similar operating and investment characteristics as the
reporting units, which creates valuation multiples that are
applied to the operating performance of the reporting
unit being tested, to value the reporting unit. The key esti-
mates and factors used in these two approaches include,
but are not limited to, revenue growth rates and profit
margins based on internal forecasts, terminal value, the
weighted-average cost of capital used to discount future
cash flows and comparable market multiples.
To determine fair value of other indefinite-lived intan-
gible assets, the Company uses 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’ estimated 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 different results.
Long-Lived Assets
The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. When
such events or changes in circumstances occur, a recover-
ability test is performed comparing projected undis-
counted cash flows from the use and eventual disposition
of an asset or asset group to its carrying value. If the pro-
jected 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.
Concentration of Credit Risk
The Company is a worldwide manufacturer, marketer and
distributor of skin care, makeup, fragrance and hair care
products. Domestic and international sales are made
primarily to department stores, perfumeries and specialty
retailers. The Company grants credit to all qualified
customers and does not believe it is exposed significantly
to any undue concentration of credit risk.
The Company’s largest customer sells products primar-
ily within the United States and accounted for $967.6 mil-
lion, or 11%, $876.3 million, or 11%, and $907.3 million, or
12%, of the Company’s consolidated net sales in fiscal
2011, 2010 and 2009, respectively. This customer
accounted for $92.3 million, or 10%, and $84.3 million, or
11%, of the Company’s accounts receivable at June 30,
2011 and 2010, respectively.
Revenue Recognition
Revenues from product sales are recognized upon trans-
fer 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, the 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 exam-
ple, at the Company’s retail stores. The Company records
revenues generated from purchase with purchase promo-
tions in Net Sales and costs of its purchase with purchase
and gift with purchase promotions in Cost of sales.
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. The Company’s practice is to
accept product returns from retailers only if properly
requested, authorized and approved. In accepting returns,
the Company typically provides a credit to the retailer
against accounts receivable from that retailer. As a
percentage of gross sales, returns were 3.5%, 4.3% and
4.4% in fiscal 2011, 2010 and 2009, respectively.
Payments to Customers
Certain incentive arrangements require the payment
of a fee to customers based on their attainment of pre -
established sales levels. These fees have been recorded as
a reduction of Net sales in the accompanying consoli-
dated statements of earnings and were not material to the
results of operations in any period presented.
The Company enters into transactions related to advertis-
ing, product promotions and demonstrations, some of