Estee Lauder 2015 Annual Report Download - page 89

86 THE EST{E LAUDER COMPANIES INC.
The Company enters into foreign currency forward
contracts and may enter into option contracts to hedge
foreign currency transactions for periods consistent with
its identified exposures. Accordingly, the Company cate-
gorizes these instruments as entered into for purposes
other than trading.
The accompanying consolidated statements of earn-
ings include net exchange (gains) losses on foreign
currency transactions, including the effect of the Vene-
zuela remeasurement charges, of $(4.1) million, $46.7
million and $3.5 million in fiscal 2015, 2014 and 2013,
respectively.
Cash and Cash Equivalents
Cash and cash equivalents include $373.4 million and
$971.9 million of short-term time deposits at June 30,
2015 and 2014, respectively. The Company considers all
highly liquid investments with original maturities of three
months or less to be cash equivalents.
Investments
During the fiscal 2015 second quarter, the Company
modified its cash investment strategy to invest a portion
of its cash and cash equivalents in short- and long-term
investments. The Company’s investment objectives
include capital preservation, maintaining adequate liquid-
ity, asset diversification, and achieving appropriate returns
within the guidelines set forth in the Company’s invest -
ment policy. These investments are classified as available-
for-sale, with any temporary difference between the cost
and fair value of an investment presented as a separate
component of accumulated other comprehensive income
(loss) (“AOCI”). See Note 12—Fair Value Measurements
for further information about how the fair values of invest-
ments are determined.
Investments in privately-held companies in which the
Company has significant influence, but less than a con-
trolling financial interest, are generally accounted for
under the equity method of accounting. These invest-
ments were not material to the Company’s consolidated
financial statements as of June 30, 2015 and 2014 and are
included in Long-term investments in the accompanying
consolidated balance sheets.
The Company evaluates investments held in unrealized
loss positions for other-than-temporary impairment on a
quarterly basis. Such evaluation involves a variety of con-
siderations, including assessments of the risks and uncer-
tainties associated with general economic conditions and
distinct conditions affecting specific issuers. Factors con-
sidered by the Company include, but are not limited to
(i) the length of time and extent the security has been in
a material loss position; (ii) the financial condition and
creditworthiness of the issuer; (iii) future economic condi-
tions and market forecasts related to the issuer’s industry,
sector, or geography; (iv) the Company’s intent and ability
to retain its investment until maturity or for a period of
time sufficient to allow for recovery of market value; and
(v) an assessment of whether it is more likely than not that
the Company will be required to sell its investment before
recovery of market value.
Accounts Receivable
Accounts receivable is stated net of the allowance for
doubtful accounts and customer deductions totaling
$20.6 million and $23.9 million as of June 30, 2015 and
2014, respectively. This reserve is based upon the evalua-
tion of accounts receivable aging, specific exposures and
historical trends.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only includes
inventory considered saleable or usable in future periods,
and is stated at the lower of cost or fair-market value, with
cost being based on standard cost and production
variances, which approximate actual cost on the first-in,
first-out method. Cost components include raw materials,
componentry, direct labor and overhead (e.g., indirect
labor, utilities, depreciation, purchasing, receiving, inspec-
tion and warehousing) as well as inbound freight. Manu-
facturing overhead is allocated to the cost of inventory
based on the normal production capacity. Unallocated
overhead during periods of abnormally low production
levels are recognized as cost of sales in the period in
which they are incurred. Promotional merchandise
is charged to expense at the time the merchandise is
shipped to the Company’s customers. Included in inven-
tory and promotional merchandise is an inventory obso-
lescence reserve, which represents the difference
between the cost of the inventory and its estimated realiz-
able value, based on various product sales projections.
This reserve is calculated using an estimated obsoles-
cence percentage applied to the inventory based on age,
historical trends and requirements to support forecasted
sales. In addition, and as necessary, specific reserves for
future known or anticipated events may be established.
Derivative Financial Instruments
The Company’s derivative financial instruments are
recorded as either assets or liabilities on the balance sheet
and measured at fair value. All derivatives are (i) desig-
nated as a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment
(“fair-value” hedge), (ii) designated as a hedge of a fore-
casted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability