Estee Lauder 2005 Annual Report Download - page 64

THE EST{E LAUDER COMPANIES INC.
to customers based on their attainment of pre-established
sales levels. These fees have been recorded as a reduction
of net sales in the accompanying consolidated statements
of earnings and were not material to the results of opera-
tions in any period presented.
The Company enters into transactions related to adver-
tising, product promotions and demonstrations, some of
which involve cooperative relationships with customers.
These activities may be arranged either with unrelated
third parties or in conjunction with the customer. The
Company’s share of the cost of these transactions
(regardless of to whom they were paid) are reflected in
selling, general and administrative expenses in the accom-
panying consolidated statements of earnings and were
approximately $906 million, $845 million and $790 million
in fiscal 2005, 2004 and 2003, respectively.
Advertising and Promotion
Costs associated with advertising are expensed during the
year as incurred. Global advertising expenses, which
primarily include television, radio and print media, and
promotional expenses, such as products used as sales
incentives, were $1,812.5 million, $1,612.0 million and
$1,416.1 million in fiscal 2005, 2004 and 2003, respec-
tively. These amounts include activities relating to purchase
with purchase and gift with purchase promotions that are
reflected in net sales and cost of sales.
Advertising and promotional expenses included in
operating expenses were $1,595.6 million, $1,426.8 million
and $1,217.8 million in fiscal 2005, 2004 and 2003,
respectively.
Research and Development
Research and development costs, which amounted
to $72.3 million, $67.2 million and $60.8 million in
fiscal 2005, 2004 and 2003, respectively, are expensed
as incurred.
Operating Leases
The Company recognizes rent expense from operating
leases with periods of free and scheduled rent increases
on a straight-line basis over the applicable lease term.
The Company considers lease renewals in the useful life of
its leasehold improvements when such renewals are
reasonably assured. From time to time, the Company may
receive capital improvement funding from its lessors.
These amounts are recorded as deferred liabilities and
amortized over the remaining lease term as a reduction of
rent expense.
Generally, leasing is not a significant portion of the
Company’s business, however, in connection with a
February 7, 2005 letter from the Office of the Chief
Accountant of the Securities and Exchange Commission to
the American Institute of Certified Public Accountants
expressing its views of existing accounting literature related
to lease accounting, the Company has completed a review
of its lease accounting policies. The Company has deter-
mined that any changes to its previous practices would not
result in a material impact on its results of operations and
statements of financial position and cash flows for the
current period or any individual prior year. Accordingly, the
Company’s consolidated financial statements for prior
periods have not been restated.
Related Party Royalties and Trademarks
On April 24, 2004, Mrs. Estée Lauder passed away. As a
result, the royalty payments previously made to her since
1969 in connection with the Company’s purchase of the
“Estée Lauder” trademark outside the United States ceased
to accrue. Royalty payments totaling $18.8 million and
$20.3 million have been charged to expense in fiscal 2004
and 2003, respectively.
License Arrangements
The Company’s license agreements provide the Company
with worldwide rights to manufacture, market and sell
beauty and beauty-related products (or particular
categories thereof) using the licensors’ trademarks. The
licenses typically have an initial term of approximately 2
years to 11 years, and are renewable subject to the
Company’s compliance with the license agreement provi-
sions. The remaining terms, including the potential renewal
periods, range from approximately 3 years to 25 years.
Under each license, the Company is required to pay
royalties to the licensor, at least annually, based on net sales
to third parties.
Most of the Company’s licenses were entered into to
create new business. In some cases, the Company
acquired, or entered into, a license where the licensor or
another licensee was operating a pre-existing beauty prod-
ucts business. In those cases, intangible assets are capital-
ized and amortized over their useful lives based on the
terms of the agreement and are subject to periodic impair-
ment testing.
Stock-Based Compensation
The Company observes the provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS No.
123”), by continuing to apply the provisions of Account-
ing Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees” (“APB No. 25”).
The Company applies the intrinsic value method as
outlined in APB No. 25 and related interpretations in
accounting for stock options and share units granted under
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