Estee Lauder 2007 Annual Report Download - page 62

“Business Combinations” (“SFAS No. 141”) and SFAS
No. 142, “Goodwill and Other Intangible Assets”
(“SFAS No. 142”). These statements establish fi nancial
accounting and reporting standards for acquired goodwill
and other intangible assets. Specifi cally, 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 fi nancial statements. In
accordance with SFAS No. 142, intangible assets, includ-
ing purchased goodwill, must be evaluated for impair-
ment. Those intangible assets that will continue to be
classifi ed as goodwill or as other intangibles with indefi -
nite 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 car-
rying amount of that goodwill. To determine fair value, the
Company relies on three valuation models: guideline pub-
lic companies, acquisition analysis and discounted cash
fl ow. For goodwill valuation purposes only, the revised fair
value of a reporting unit is allocated to the assets and
liabilities of the business unit to arrive at an implied fair
value of goodwill, based upon known facts and circum-
stances, as if the acquisition occurred at that time.
During fiscal 2007, the Company purchased the
remaining minority equity interest in the Bumble and
bumble business, recorded additional goodwill related to
payments made in prior years in connection with the
acquisition of the Bobbi Brown brand (see Note 3— Staff
Accounting Bulletin No. 108), and acquired businesses
engaged in the wholesale distribution and retail sale of
the Company’s products in the United States and other
countries. The combined results of these activities
increased goodwill by $20.4 million and other intangible
assets by $47.0 million. Also during fiscal 2007, as a
result of the Company’s annual impairment testing, the
Company determined that the carrying values of its good-
will and intangible assets related to the Darphin and
Rodan + Fields brands exceeded their respective fair values .
As such, the Company reduced its goodwill by $7.3 mil-
lion and other intangible assets by $4.3 million, which are
reported in selling, general and administrative expenses in
the accompanying consolidated statements of earnings.
During fi scal 2006, the Company sold certain assets
and operations of its reporting unit that marketed and
sold Stila brand products. In conjunction with the sale, the
Company reduced its goodwill by $91.3 million, which is
reported as a component of discontinued operations in
the accompanying consolidated statements of earnings.
THE EST{E LAUDER COMPANIES INC. 61
Goodwill
The Company assigns goodwill of a reporting unit to the product category in which that reporting unit predominantly
operates at the time of its acquisition. The change in the carrying amount of goodwill, including the effect of foreign
exchange rates is as follows:
YEAR ENDED OR AT JUNE 30 2005 Additions Reductions 2006 Additions Reductions 2007
(In millions)
Skin Care $ 19.0 $1.3 $ — $ 20.3 $ 1.3 $7.3 $ 14.3
Makeup 318.6 — 91.3 227.3 18.5 — 245.8
Fragrance 55.2 — 1.3 53.9 0.6 — 54.5
Hair Care 327.8 6.5 — 334.3 2.4 — 336.7
Total $720.6 $7.8 $92.6 $635.8 $22.8 $7.3 $651.3
2007
$
14.
3
245.
8
54.
5
336
.
7
$
651.
3
Other Intangible Assets
Other intangible assets include trademarks and patents,
as well as license agreements and other intangible assets
resulting from or related to businesses purchased by the
Company. Indefi nite lived assets (e.g., trademarks) are not
subject to amortization and are evaluated annually for
impairment or more frequently if certain events or circum-
stances indicate a potential impairment. Indefi nite lived
assets of $70.5 million and $30.3 million at June 30, 2007
and 2006, respectively, are classifi ed as “Trademarks and
other” in the table below. Patents are amortized on a
straight-line basis over the shorter of the legal term or the
useful life of the patent, approximately 20 years. Other
intangible assets (e.g., non-compete agreements, cus-
tomer lists) are amortized on a straight-line basis over
their expected period of benefi t, approximately 2 years to
10 years. Intangible assets related to license agreements
are amortized on a straight-line basis over their useful lives
based on the term of the respective agreement, currently
approximately 10 years to 16 years, and are subject to
impairment testing if certain events or circumstances indi-
cate a potential impairment.