Estee Lauder 2015 Annual Report Download - page 90

THE EST{E LAUDER COMPANIES INC. 87
(“cash-flow” hedge), or (iii) not designated as a hedging
instrument. Changes in the fair value of a derivative that
is designated and qualifies as a fair-value hedge that is
highly effective are recorded in current-period earnings,
along with the loss or gain on the hedged asset or liability
that is attributable to the hedged risk (including losses or
gains on unrecognized firm commitments). Changes in
the fair value of a derivative that is designated and quali-
fies as a cash-flow hedge of a forecasted transaction that
is highly effective are recorded in OCI. Gains and losses
deferred in OCI are then recognized in current-period
earnings when earnings are affected by the variability
of cash flows of the hedged forecasted transaction
(e.g., when periodic settlements on a variable-rate asset or
liability are recorded in earnings). Changes in the fair
value of derivative instruments not designated as hedging
instruments are reported in current-period earnings.
Property, Plant and Equipment
Property, plant and equipment, including leasehold and
other improvements that extend an asset’s useful life or
productive capabilities, are carried at cost less accumu-
lated depreciation and amortization. Costs incurred for
computer software developed or obtained for internal use
are capitalized during the application development stage
and expensed as incurred during the preliminary project
and post-implementation stages. For financial statement
purposes, depreciation is provided principally on the
straight-line method over the estimated useful lives
of the assets ranging from 3 to 40 years. Leasehold
improvements are amortized on a straight-line basis over
the shorter of the lives of the respective leases or the
expected useful lives of those improvements.
Goodwill and Other Indefinite-lived Intangible Assets
Goodwill is calculated as the excess of the cost of
purchased businesses over the fair value of their underly-
ing net assets. Other indefinite-lived intangible assets
principally consist of trademarks. Goodwill and other
indefinite-lived intangible assets are not amortized.
The Company assesses goodwill and other indefi-
nite-lived intangible assets at least annually for impairment
as of the beginning of the fiscal fourth quarter, or more
frequently if certain events or circumstances exist. The
Company tests goodwill for impairment at the reporting
unit level, which is one level below the Company’s oper-
ating segments. The Company identifies its reporting units
by assessing whether the components of its operating
segments constitute businesses for which discrete finan-
cial information is available and management of each
operating segment regularly reviews the operating results
of those components. The Company makes certain
judgments and assumptions in allocating assets and liabil-
ities to determine carrying values for its reporting units.
When testing goodwill for impairment, the Company has
the option of first performing a qualitative assessment to
determine whether it is more-likely-than-not that the fair
value of a reporting unit is less than its carrying amount as
a basis for determining whether it is necessary to perform
a quantitative goodwill impairment test. If necessary, the
quantitative impairment test is performed in two steps:
(i) the Company determines if an indication of impairment
exists by comparing the fair value of a reporting unit with
its carrying value, and (ii) if there is an impairment, the
Company measures the amount of impairment loss by
comparing the implied fair value of goodwill with the
carrying amount of that goodwill. When testing other
indefinite-lived intangible assets for impairment, the
Company also has the option of first performing a qualita-
tive assessment to determine whether it is more-likely-
than-not that the indefinite-lived intangible asset is
impaired as a basis for determining whether it is necessary
to perform a quantitative test. The quantitative impair-
ment test for indefinite-lived intangible assets encom-
passes calculating the fair value of an indefinite-lived
intangible asset and comparing the fair value to its carry-
ing value. If the carrying value exceeds the fair value an
impairment charge is recorded.
For fiscal 2015, the Company elected to perform the
qualitative assessment for all of its reporting units and
indefinite-lived intangible assets. This qualitative assess-
ment included the review of certain macroeconomic
factors and entity-specific qualitative factors to determine
if it was more-likely-than-not that the fair values of its
reporting units were below carrying value. The Company
considered macroeconomic factors including the global
economic growth, general macroeconomic trends for
the markets in which the reporting units operate and the
intangible assets are employed, and the growth of
the global prestige beauty industry. In addition to these
macroeconomic factors, among other things, the
Company considered the reporting units’ current results
and forecasts, any changes in the nature of the business,
any significant legal, regulatory, contractual, political
or other business climate factors, changes in the industry/
competitive environment, changes in the composition or
carrying amount of net assets and its intention to sell
or dispose of a reporting unit or cease the use of
a trademark.
For fiscal 2014, the Company tested its reporting units
for impairment using the two-step approach and its other
indefinite-lived intangible assets for impairment by com-
paring their fair values to their carrying values.