Estee Lauder 2008 Annual Report Download - page 60

58 THE EST{E LAUDER COMPANIES INC.
well as the continued application of currently anticipated
tax rates. Included in net deferred tax assets is a valuation
allowance of $5.7 million for deferred tax assets, where
management believes it is more likely than not that the
deferred tax assets will not be realized in the relevant juris-
diction. Based on our assessments, no additional valuation
allowance is required. If we determine that a deferred tax
asset will not be realizable, an adjustment to the deferred
tax asset will result in a reduction of earnings at that time.
In June 2006, the Financial Accounting Standards
Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty in Income Taxes—an inter-
pretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifi es the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in
accordance with SFAS No. 109. FIN 48 prescribes a two-
step evaluation process for tax positions taken, or
expected to be taken, in a tax return. The fi rst step is
recognition and the second is measurement. FIN 48 also
provides guidance on derecognition, measurement, clas-
sification, disclosures, transition and accounting for
interim periods. In May 2007, the FASB issued FASB Staff
Position (“FSP”) No. FIN 48-1, “Defi nition of Settlement in
FASB Interpretation No. 48, an amendment of FASB Inter-
pretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes” (“FSP No. FIN 48-1”). FSP No. FIN 48-1
provides guidance on how to determine whether a tax
position is effectively settled for the purpose of recogniz-
ing previously unrecognized tax benefi ts.
We adopted the provisions of FIN 48, as amended,
effective July 1, 2007. As a result, we recognized an
increase in the liability for unrecognized tax benefi ts and
interest of $13.1 million (net of tax effect), which, as
required, was accounted for as a reduction to the July 1,
2007 balance of retained earnings. We elected to con-
tinue our historical practice of classifying applicable inter-
est and penalties as a component of the provision for
income taxes.
We provide tax reserves for Federal, state, local and
international exposures relating to periods subject to
audit. The development of reserves for these exposures
requires judgments about tax issues, potential outcomes
and timing, and is a subjective critical estimate. We assess
our tax positions and record tax benefi ts for all years sub-
ject to examination based upon management’s evaluation
of the facts, circumstances, and information available at
the reporting dates. For those tax positions where it is
more-likely-than-not that a tax benefi t will be sustained,
we have recorded the largest amount of tax benefi t with a
greater than 50% likelihood of being realized upon settle-
ment with a tax authority that has full knowledge of all
relevant information. For those tax positions where it is
One-Percentage- One-Percentage-
Point Increase Point Decrease
(In millions)
Effect on total service
and interest costs $ 1.2 $(1.1)
Effect on post-retirement
benefi t obligations $10.9 $(9.8)
.
For fi scal 2009, we are using a pre-retirement discount
rate for the Domestic Plans of 6.75% and varying rates for
our international plans of between 2.00% and 9.00%. We
are using an expected return on plan assets of 7.75% for
the U.S. Qualifi ed Plan and varying rates for our interna-
tional pension plans of between 3.25% and 9.00%. The
net change in these assumptions from those used in fi scal
2008 will result in a decrease in pension expense of
approximately $3.6 million in fi scal 2009. We will continue
to monitor the market conditions relative to these assump-
tions and adjust them accordingly.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of pur-
chased businesses over the fair value of their underlying
net assets. Other intangible assets principally consist of
purchased royalty rights and trademarks. Goodwill and
other intangible assets that have an indefi nite life are
not amortized.
On an annual basis, or more frequently if certain events
or circumstances warrant, we test goodwill and other
indefi nite-lived intangible assets for impairment. To deter-
mine the fair value of these intangible assets, there are
many assumptions and estimates used that directly impact
the results of the testing. We have the ability to infl uence
the outcome and ultimate results based on the assump-
tions and estimates we choose. To mitigate undue infl u-
ence, we use industry accepted valuation models and set
criteria that are reviewed and approved by various levels
of management and, in certain instances, we engage
third-party valuation specialists to advise us.
INCOME TAXES
We account for income taxes in accordance with State-
ment of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes,” as amended. This state-
ment establishes financial accounting and reporting
standards for the effects of income taxes that result from
an enterprise’s activities during the current and preceding
years. It requires an asset and liability approach for fi nan-
cial accounting and reporting of income taxes.
As of June 30, 2008, we have current net deferred tax
assets of $184.6 million and non-current net deferred
tax assets of $55.3 million. The net deferred tax assets
assume suffi cient future earnings for their realization, as