Estee Lauder 2005 Annual Report Download - page 61

THE EST{E LAUDER COMPANIES INC.
Accounts Receivable
Accounts receivable is stated net of the allowance for
doubtful accounts and customer deductions of $28.9
million and $30.1 million as of June 30, 2005 and 2004,
respectively.
Currency Translation and Transactions
All assets and liabilities of foreign subsidiaries and affiliates
are translated at year-end rates of exchange, while revenue
and expenses are translated at weighted average rates of
exchange for the year. Unrealized translation gains or
losses are reported as cumulative translation adjustments
through other comprehensive income. Such adjustments
amounted to $8.2 million, $36.5 million and $51.3 million
of unrealized translation gains in fiscal 2005, 2004 and
2003, respectively.
The Company enters into forward foreign exchange
contracts and foreign currency options to hedge foreign
currency transactions for periods consistent with its identi-
fied exposures. Accordingly, the Company categorizes
these instruments as entered into for purposes other
than trading.
The accompanying consolidated statements of earnings
include net exchange losses of $15.8 million, $14.5
million and $15.0 million in fiscal 2005, 2004 and 2003,
respectively.
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 determined 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, inspection and ware-
housing) as well as inbound freight. Promotional merchan-
dise is charged to expense at the time the merchandise is
shipped to the Company’s customers.
JUNE 30 2005 2004
(In millions)
Inventory and promotional
merchandise consists of:
Raw materials $149.9 $148.1
Work in process 43.2 36.5
Finished goods 403.4 317.7
Promotional merchandise 171.8 151.2
$768.3 $653.5
Property, Plant and Equipment
Property, plant and equipment is carried at cost less accu-
mulated depreciation and amortization. For financial state-
ment 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.
JUNE 30 2005 2004
(In millions)
Asset (Useful Life)
Land $ 13.6 $ 13.6
Buildings and improvements
(10 to 40 years) 160.8 160.9
Machinery and equipment
(3 to 10 years) 721.2 661.1
Furniture and fixtures
(5 to 10 years) 109.1 101.9
Leasehold improvements 703.9 630.3
1,708.6 1,567.8
Less accumulated depreciation
and amortization 1,014.4 920.8
$ 694.2 $ 647.0
Depreciation and amortization of property, plant and
equipment was $187.2 million, $176.9 million and $156.3
million in fiscal 2005, 2004 and 2003, respectively.
Depreciation and amortization related to the Company’s
manufacturing process is included in cost of sales and all
other depreciation and amortization is included in selling,
general and administrative expenses in the accompanying
consolidated statements of earnings.
Goodwill and Other Intangible Assets
The Company follows the provisions of Statement of Finan-
cial Accounting Standards (“SFAS”) No. 141, “Business
Combinations” and SFAS No. 142, “Goodwill and Other
Intangible Assets.” These statements established financial
accounting and reporting standards for acquired goodwill
and other intangible assets. Specifically, the standards
address how acquired intangible assets should be
accounted for both at the time of acquisition and after they
have been recognized in the financial statements. In
accordance with SFAS No. 142, intangible assets, including
purchased goodwill, must be evaluated for impairment.
Those intangible assets that will continue to be classified
as goodwill or as other intangibles with indefinite lives are
no longer amortized.
In accordance with SFAS No. 142, the impairment test-
ing is performed in two steps: (i) the Company determines
impairment 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. To determine fair value,
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