Estee Lauder 2003 Annual Report Download - page 55

THEEST{E LAUDER COMPANIES INC.
calculated over the past 250-day period. The measured
value-at-risk, calculated as an average, for the twelve
months ended June 30, 2003 related to our foreign
exchange contracts was $7.6 million. As of June 30, 2003,
the measured value-at-risk related to our interest rate
contracts was $10.3 million. The model estimates were
made assuming normal market conditions and a 95 percent
confidence level. We used a statistical simulation model
that valued our derivative financial instruments against
one thousand randomly generated market price paths.
Our calculated value-at-risk exposure represents an
estimate of reasonably possible net losses that would be
recognized on our portfolio of derivative financial instru-
ments assuming hypothetical movements in future mar-
ket rates and is not necessarily indicative of actual results,
which may or may not occur. It does not represent the
maximum possible loss or any expected loss that may
occur, since actual future gains and losses will differ from
those estimated, based upon actual fluctuations in mar-
ket rates, operating exposures, and the timing thereof, and
changes in our portfolio of derivative financial instruments
during the year.
We believe, however, that any loss incurred would be
offset by the effects of market rate movements on the
respective underlying transactions for which the hedge
is intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with uncon-
solidated entities that would be expected to have a mate-
rial current or future effect upon our financial condition or
results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 150, “Accounting for Certain
Financial Instruments with Characteristics of both Lia-
bilities and Equity” (“SFAS No. 150 ”). SFAS No. 150 estab-
lished standards for classifying and measuring certain
financial instruments with characteristics of both liabilities
and equity. It specifically requires that mandatorily
redeemable instruments, instruments with repurchase
obligations which embody, are indexed to, or obligate the
repurchase of, the issuer’s own equity shares, and instru-
ments with obligations to issue a variable number of the
issuer’s own equity shares, be classified as a liability. Initial
and subsequent measurements of the instruments differ
based on the characteristics of each instrument and as
provided for in the statement. SFAS No. 150 is effective
for all freestanding financial instruments entered into or
modified after May 31, 2003 and otherwise became
effective at the beginning of the first interim period begin-
ning after June 15, 2003. We have adopted this statement
effective for all instruments entered into or modified after
May 31, 2003 and will adopt the statement for any exist-
ing financial instruments in the first quarter of fiscal 2004.
Based on the provisions of this statement, beginning in
fiscal 2004, we will be classifying the $6.50 Cumulative
Redeemable Preferred Stock as a liability and the related
dividends thereon will be characterized as interest
expense. Restatement of financial statements for earlier
years presented is not permitted. The adoption of this
statement will result in the inclusion of the dividends on
the preferred stock (equal to $23.4 million per year) as
interest expense. While the inclusion will impact net earn-
ings,net earnings attributable to common stock and
earnings per common share will be unaffected. Given that
the dividends are not deductible for income tax purposes,
the inclusion of the preferred stock dividends as an inter-
est expense will cause an increase in our effective tax
rate. The adoption of SFAS No.150 will have no impact
on our financial condition.
In December 2002, the FASB issued SFAS No. 148,
“Accounting for Stock-Based Compensation — Transition
and Disclosure” (“SFAS No. 148”). SFAS No. 148 provides
alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based
employee compensation as originally defined by SFAS
No.123, “Accounting for Stock-Based Compensation.”
Additionally, SFAS No. 148 amends the disclosure require-
ments of SFAS No. 123 to require prominent disclosure in
both the annual and interim financial statements about
the method of accounting for stock-based compensation
and the effect of the method used on reported results.
The transitional requirements of SFAS No. 148 are effec-
tive for all financial statements for fiscal years ending after
December 15, 2002. We adopted the disclosure portion
of this statement for the fiscal quarter ended March 31,
2003. The application of the disclosure portion of this
standard has no impact on our consolidated financial
position or results of operations. The FASB recently indi-
cated that it will require stock-based employee compen-
sation to be recorded as a charge to earnings pursuant to
a standard on which it is currently deliberating. The FASB
anticipates issuing an Exposure Draft in the fourth quarter
of 2003 and a final statement in the second quarter of
2004. We will continue to monitor the FASB’s progress on
the issuance of this standard as well as evaluate our posi-
tion with respect to current guidance.
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