Estee Lauder 2005 Annual Report Download - page 55

THE EST{E LAUDER COMPANIES INC.
Retirement Obligations” (“SFAS No. 143”), and the related
FASB Interpretation No. 47, “Accounting for Conditional
Asset Retirement Obligations,” to the obligation associated
with historical waste, since this type of obligation is
an asset retirement obligation. The initial recognition of an
asset-retirement-cost liability shall be recorded as an equal
and offsetting increase in the carrying amount of the
related asset. Subsequent adjustments to the initial meas-
urement of the asset and liability shall also be made in
accordance with the provisions of SFAS No. 143. The guid-
ance in this FSP shall be applied the later of the first report-
ing period ending after June 8, 2005 or the date of the
adoption of the law by the applicable EU-member coun-
try. We are currently evaluating the impact this FSP will
have on our consolidated financial statements, if any.
In May 2005, the FASB issued SFAS No. 154, “Account-
ing Changes and Error Corrections,” (“SFAS No. 154”)
which establishes, unless impracticable, retrospective appli-
cation as the required method for reporting a change in
accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting
principle. The statement provides guidance for determining
whether retrospective application of a change in account-
ing principle is impracticable. The statement also addresses
the reporting of a correction of an error by restating previ-
ously issued financial statements. SFAS No. 154 is effective
for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. We will
adopt this statement as required, and we do not believe
the adoption will have a material effect on our consoli-
dated financial statements.
On December 21, 2004, the FASB issued FSP
FAS 109-1, “Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American
Jobs Creation Act of 2004” (“FSP No. 109-1”), and FSP
FAS 109-2, “Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004” (“FSP No. 109-2”).
These staff positions provide accounting guidance on how
companies should account for the effects of the AJCA that
was signed into law on October 22, 2004.
FSP No. 109-1 states that the tax relief (special tax
deduction for domestic manufacturing) from this legisla-
tion should be accounted for as a “special deduction”
instead of a tax rate reduction. The special deduction for
domestic manufacturing becomes effective for us in the
first quarter of fiscal 2006. We believe this legislation and
the provisions of FSP No. 109-1 will not have a significant
impact on our effective tax rate.
FSP No. 109-2 gives a company additional time to eval-
uate the effects of the legislation on any plan for reinvest-
ment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109. During the fourth quar-
ter of fiscal 2005, we formulated a plan to repatriate
approximately $690 million of foreign earnings in fiscal
2006, which includes $500 million of extraordinary inter-
company dividends under the provisions of the AJCA. This
action resulted in an aggregate tax charge of approximately
$35 million, which included an incremental tax charge of
approximately $28 million in fiscal 2005. The overall effec-
tive rate for income taxes increased from 37.7% for fiscal
2004 to 41.2% for fiscal 2005 primarily as a result of the
repatriation plan.
In December 2004, the FASB issued SFAS No. 123(R),
“Share-Based Payment” (“SFAS No. 123(R)”). This state-
ment replaces SFAS No. 123, “Accounting for Stock-Based
Compensation” and supersedes Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees.” SFAS No. 123(R) requires all stock-based com-
pensation to be recognized as an expense in the financial
statements and that such cost be measured according to
the fair value of the award. SFAS No. 123(R) will be effec-
tive for our first quarter of fiscal 2006. While we currently
provide the pro forma disclosures required by SFAS
No. 148, “Accounting for Stock-Based Compensation —
Transition and Disclosure,” on a quarterly basis (see
Note 2 of Notes to Consolidated Financial Statements —
Stock-Based Compensation), we are currently evaluating
the impact this statement will have on our consolidated
financial statements. In March 2005, Staff Accounting
Bulletin No. 107 (“SAB No. 107”) was issued to provide
guidance from the Securities and Exchange Commission
to simplify some of the implementation challenges of SFAS
No. 123(R) as this statement relates to the valuation of
share-based payment arrangements for public companies.
We will apply the principles of SAB No. 107 in connection
with our adoption of SFAS No. 123(R).
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs — an amendment of ARB No. 43, Chapter 4”
(“SFAS No. 151”). SFAS No. 151 requires all companies to
recognize a current-period charge for abnormal amounts
of idle facility expense, freight, handling costs and wasted
materials. This statement also requires that the allocation
of fixed production overhead to the costs of conversion be
based on the normal capacity of the production facilities.
SFAS No. 151 will be effective for fiscal years beginning
after June 15, 2005. We believe the adoption of this state-
ment will not have a material impact on our consolidated
financial statements.
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