Estee Lauder 2008 Annual Report Download - page 58

CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
The discussion and analysis of our fi nancial condition at
June 30, 2008 and our results of operations for the three
fi scal years ended June 30, 2008 are based upon our con-
solidated fi nancial statements, which have been prepared
in conformity with U.S. generally accepted accounting
principles. The preparation of these fi nancial statements
requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and
expenses reported in those fi nancial statements. These
judgments can be subjective and complex, and conse-
quently actual results could differ from those estimates.
Our most critical accounting policies relate to revenue
recognition, concentration of credit risk, inventory, pen-
sion and other post-retirement benefi t costs, goodwill and
other intangible assets, income taxes and derivatives.
Management of the Company has discussed the selec-
tion of signifi cant accounting policies and the effect of
estimates with the Audit Committee of the Company’s
Board of Directors.
REVENUE RECOGNITION
Revenues from merchandise sales are recognized upon
transfer of ownership, including passage of title to the cus-
tomer and transfer of the risk of loss related to those
goods. In the Americas region, sales are generally recog-
nized at the time the product is shipped to the customer
and in the Europe, Middle East & Africa and Asia/Pacifi c
regions sales are generally recognized based upon the
customer’s receipt. In certain circumstances, transfer of
title takes place at the point of sale, for example, at our
retail stores. Sales at our retail stores and online are recog-
nized in accordance with a traditional 4-4-5 retail calen-
dar, where each fi scal quarter is comprised of two 4-week
periods and one 5-week period, with one extra week in
one quarter every seven years. As a result, the retail
quarter-end and the fi scal quarter-end may be different by
up to six days.
Revenues are reported on a net sales basis, which is
computed by deducting from gross sales the amount of
actual product returns received, discounts, incentive
arrangements with retailers and an amount established for
anticipated product returns. Our practice is to accept
product returns from retailers only if properly requested,
authorized and approved. In accepting returns, we typi-
cally provide a credit to the retailer against accounts
receivable from that retailer. As a percentage of gross
sales, returns were 4.4%, 4.2% and 5.0% in fi scal 2008,
2007 and 2006, respectively.
Our sales return accrual is a subjective critical estimate
that has a direct impact on reported net sales. This accrual
is calculated based on a history of actual returns, estimated
future returns and information provided by authorized
retailers regarding their inventory levels. Consideration of
these factors results in an accrual for anticipated sales
returns that refl ects increases or decreases related to sea-
sonal fl uctuations. Experience has shown a relationship
between retailer inventory levels and sales returns in the
subsequent period, as well as a consistent pattern of
returns due to the seasonal nature of our business. In
addition, as necessary, specifi c accruals may be estab-
lished for signifi cant future known or anticipated events.
The types of known or anticipated events that we have
considered, and will continue to consider, include, but are
not limited to, the fi nancial condition of our customers,
store closings by retailers, changes in the retail environ-
ment and our decision to continue or support new and
existing products.
CONCENTRATION OF CREDIT RISK
An entity is vulnerable to concentration of credit risk if it is
exposed to risks of loss greater than it would have if it
mitigated its risks through diversifi cation of customers.
The signifi cance of such credit risk depends on the extent
and nature of the concentration.
During fi scal 2006, Federated Department Stores, Inc.
acquired The May Department Stores Company, resulting
in the merger of our previous two largest customers
(collectively “Macy’s, Inc.”). This customer sells products
primarily within North America and accounted for
$951.4 million, or 12%, $958.8 million, or 14%, and
$1,005.8 million, or 16%, of our consolidated net sales in
fi scal 2008, 2007 and 2006, respectively. This customer
accounted for $109.2 million, or 11%, and $105.3 million,
or 12%, of our accounts receivable at June 30, 2008 and
2007, respectively. Although management believes that
this customer and our other major customers are sound
and creditworthy, a severe adverse impact on their busi-
ness operations could have a corresponding material
adverse effect on our net sales, cash fl ows and/or fi nan-
cial condition.
In the ordinary course of business, we have established
an allowance for doubtful accounts and customer deduc-
tions in the amount of $26.3 million and $23.3 million as
of June 30, 2008 and 2007, respectively. Our allowance
for doubtful accounts is a subjective critical estimate that
has a direct impact on reported net earnings. The allow-
ance for doubtful accounts was reduced by $10.2 million,
$18.2 million and $12.0 million for customer deductions
and write-offs in fi scal 2008, 2007 and 2006, respectively,
and increased by $13.2 million, $14.4 million and $10.2
million for additional provisions in fi scal 2008, 2007 and
2006, respectively. This reserve is based upon the
56 THE EST{E LAUDER COMPANIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS