Estee Lauder 2005 Annual Report Download - page 66

THE EST{E LAUDER COMPANIES INC.
Derivative Financial Instruments
The Company accounts for derivative financial instruments
in accordance with SFAS No. 133, “Accounting for Deriva-
tive Instruments and Hedging Activities,” as amended,
which establishes accounting and reporting standards for
derivative instruments, including certain derivative instru-
ments embedded in other contracts, and for hedging
activities. SFAS No. 133 also requires the recognition of
all derivative instruments as either assets or liabilities on
the balance sheet and that they be measured at fair value.
Recently Issued Accounting Standards
In June 2005, the EITF reached a consensus on Issue
No. 05-6,“Determining the Amortization Period for Lease-
hold Improvements.” This Issue addresses the amortization
period for leasehold improvements in operating leases that
are either (a) placed in service significantly after and not
contemplated at or near the beginning of the initial lease
term or (b) acquired in a business combination. Leasehold
improvements that are placed in service significantly after
and not contemplated at or near the beginning of the lease
term should be amortized over the shorter of the useful
life of the assets or a term that includes required lease peri-
ods and renewals that are deemed to be reasonably
assured at the date the leasehold improvements are pur-
chased. Leasehold improvements acquired in a business
combination should be amortized over the shorter of the
useful life of the assets or a term that includes required
lease periods and renewals that are deemed to be reason-
ably assured at the date of acquisition. This Issue shall be
applied to leasehold improvements that are purchased or
acquired in reporting periods after June 29, 2005 and the
Company does not expect this Issue to have a material
impact on its consolidated financial statements.
In June 2005, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position (“FSP”) FAS 143-1,
“Accounting for Electronic Equipment Waste Obligations,”
to address the accounting for electronic equipment waste
obligations associated with Directive 2002/96/EC on
Waste Electrical and Electronic Equipment (the “Directive”)
adopted by the European Union (“EU”). The Directive
effectively obligates a commercial user to incur costs asso-
ciated with the retirement of a specified asset that qualifies
as historical waste equipment, as defined in the Directive.
Commercial users of electronic equipment should apply
the provisions of SFAS No. 143, “ Accounting for Asset
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. The Company is currently evaluating the impact this
FSP will have on its 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. The
Company will adopt this statement as required, and does
not believe the adoption will have a material effect on its
consolidated 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 Produc-
tion Activities Provided by the American Jobs Creation Act
of 2004” (“FSP No. 109-1”), and FSP FAS 109-2, “Account-
ing 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 American Jobs Creation
Act of 2004 (the “AJCA”) that was signed into law on Octo-
ber 22, 2004.
FSP No. 109-1 states that the tax relief (special tax
deduction for domestic manufacturing) from this legis-
lation should be accounted for as a “special deduction”
instead of a tax rate reduction. The special deduction
for domestic manufacturing becomes effective for the
Company in the first quarter of fiscal 2006. The Company
believes this legislation and the provisions of FSP No. 109-1
will not have a significant impact on its 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
quarter of fiscal 2005, the Company formulated a plan to
repatriate approximately $690 million of foreign earnings in
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