Estee Lauder 2015 Annual Report Download - page 61

58 THE EST{E LAUDER COMPANIES INC.
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
The discussion and analysis of our financial condition at
June 30, 2015 and our results of operations for the three
fiscal years ended June 30, 2015 are based upon our con-
solidated financial statements, which have been prepared
in conformity with U.S. generally accepted accounting
principles (“U.S. GAAP”). The preparation of these finan-
cial statements requires us to make estimates and assump-
tions 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 estimates. We consider accounting estimates
to be critical if both (i) the nature of the estimate or
assumption is material 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,
inventory, 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
transfer of ownership, including passage of title to the
customer 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
and approved. In accepting returns, we typically provide a
credit to the retailer against accounts receivable from that
retailer. As a percentage of gross sales, returns were 3.4%
in fiscal 2015 and 2014 and 3.3% in fiscal 2013.
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,
estimated 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 sea-
sonal 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.
INVENTORY
We state our inventory at the lower of cost or fair-market
value, with cost being based on standard cost and pro-
duction variances, which approximate actual cost on the
first-in, first-out method. We believe this method most
closely matches the flow of our products from manufac-
ture through sale. The reported net value of our inventory
includes saleable products, promotional products, raw
materials and componentry 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 inventory based on the normal production
capacity. Unallocated overhead during periods of abnor-
mally low production levels are recognized as cost of
sales in the period in which they are incurred.
We also record an inventory obsolescence reserve,
which represents the difference between the cost of the
inventory and its estimated realizable value, based on var-
ious product sales projections. This reserve is calculated
using an estimated obsolescence percentage applied to
the inventory based on age, historical trends and require-
ments to support forecasted sales. In addition, and as
necessary, we may establish specific reserves for future
known or anticipated events.
PENSION AND OTHER POST-RETIREMENT
BENEFIT COSTS
We offer the following benefits to some or all of our
employees: a domestic trust-based noncontributory
qualified defined benefit pension plan (“U.S. Qualified
Plan”) and an unfunded, non-qualified domestic non-
contributory pension plan to provide benefits in excess of
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS