Estee Lauder 2013 Annual Report Download - page 116

CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
The discussion and analysis of our financial condition at
June 30, 2013 and our results of operations for the three
fiscal years ended June 30, 2013 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 esti-
mates. We consider accounting estimates to be critical if
both (i) the nature of the estimate or assumption is mate-
rial due to the levels of subjectivity and judgment
involved, and (ii) the impact within a reasonable range of
outcomes of the estimate and assumption is material to
the Company’s financial condition. Our most critical
accounting policies relate to revenue recognition, inven-
tory, pension and other post-retirement benefit costs,
goodwill, other intangible assets and long-lived assets and
income taxes.
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 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 our retail stores.
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 3.3% in fiscal 2013 and 3.5% in fiscal
2012 and 2011.
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 subsequent 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 estab-
lished for significant 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 environ-
ment and our decision to continue to 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 $22.7 million and $31.1 million as of June
30, 2013 and 2012, respectively. The allowance for doubt-
ful accounts was reduced by $23.0 million, $13.8 million
and $9.9 million for customer deductions and write-offs in
fiscal 2013, 2012 and 2011, respectively, and increased by
$14.6 million, $11.0 million and $9.5 million for additional
provisions in fiscal 2013, 2012 and 2011, respectively.
INVENTORY
We state our inventory at the lower of cost or fair-market
value, with cost being based on standard cost which
approximates actual cost on the first-in, first-out (FIFO)
method. We believe this method 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 inven-
tory based on the normal production capacity. Unallo-
cated overhead during periods of abnormally low
production levels are recognized as cost of sales in the
period in which they are incurred.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
114 THE EST{E LAUDER COMPANIES INC.