Estee Lauder 2013 Annual Report Download - page 165

To determine the fair value of the Darphin reporting unit
at April 1, 2013, the Company used the income approach.
Under the income approach, the Company determines
fair value using a discounted cash flow method, project-
ing future cash flows of the reporting unit. For the Darphin
reporting unit, negative cash flows in future forecasted
periods would not support a value in excess of carrying
value and therefore the Company concluded that all
remaining goodwill was fully impaired.
To determine fair value of the Ojon trademark at
December 31, 2011, the Company used the relief-from-
royalty method. This method, which is an income
approach, assumed 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. The calculation of fair
value requires significant judgment 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. As these inputs are unobservable in
the market and significant to the fair value calculation, the
trademark was classified as Level 3. In determining its fair
value, a terminal growth rate of 3% was applied to future
cash flows, and was used in conjunction with a 1.5%
royalty rate discounted to present value at a 17% rate.
To determine fair value of the Ojon trademark and cus-
tomer list at April 1, 2012, the Company assessed the
future performance of the related reporting unit and
determined that negative cash flows in future forecasted
periods would not support a royalty rate for the calcula-
tion of fair value of the trademark and negative income
associated with existing customers would not support a
value for the customer list. The Company therefore
concluded that the carrying value of these assets were not
recoverable.
See Note 5 — Goodwill and Other Intangible Assets for
further discussion of the Company’s impairment testing.
The following methods and assumptions were used to
estimate the fair value of the Company’s other classes of
financial instruments for which it is practicable to estimate
that value:
To determine fair value of the Darphin trademark at
April 1, 2013, the Company assessed the future perfor-
mance of the related reporting unit and determined that
negative cash flows in future forecasted periods would
not support a royalty rate for the calculation of fair value
of the trademark. The Company therefore concluded that
the carrying value of this asset was not recoverable.
The following table presents the Company’s hierarchy
and impairment charges for certain of its nonfinancial
assets measured at fair value on a nonrecurring basis
during fiscal 2012:
Cash and cash equivalents — The carrying amount
approximates fair value, primarily because of the short
maturity of cash equivalent instruments.
Available-for-sale securities — Available-for-sale securi-
ties are generally comprised of mutual funds and are
valued using quoted market prices on an active exchange.
Available-for-sale securities are included in Other assets in
the accompanying consolidated balance sheets.
Note receivable — During the second quarter of fiscal
2013, the Company amended the agreement related to
the August 2007 sale of Rodan+ Fields (a brand then
owned by the Company) to receive a fixed amount in lieu
of future contingent consideration and other rights. The
fair value of the receivable under the amended agree-
ment was determined by discounting the future cash
flows using an implied market rate of 6.6%. This implied
market rate reflects the Company’s estimate of interest
rates prevailing in the market for notes with comparable
remaining maturities, the creditworthiness of the counter -
party, and an assessment of the ultimate collectability of
the instrument. The implied market rate is deemed to be
an unobservable input and as such the Company’s note
receivable is classified within Level 3 of the valuation hier-
archy. An increase or decrease in the risk premium of 100
basis points would not result in a significant change to the
fair value of the receivable. See Note 13 — Commitments
and Contingencies for further discussion on the amended
agreement.
Foreign currency forward contracts — The fair values of
the Company’s foreign currency forward contracts were
determined using an industry-standard valuation model,
THE EST{E LAUDER COMPANIES INC. 163
Impairment Date of
Charges Carrying Value Carrying Value Level 3
(In millions)
Other intangible assets, net (trademark) $ 6.7 December 31, 2011 $3.3 $3.3
Other intangible assets, net (trademark) 3.3 April 1, 2012 — —
Other intangible assets, net (customer list) 11.7 April 1, 2012 — —
Total $21.7