Estee Lauder 2008 Annual Report Download - page 74

72 THE EST{E LAUDER COMPANIES INC.
obtained from sources independent of the reporting
entity (observable inputs) and (b) the reporting entity’s
own assumptions about market participant assumptions
developed based on the best information available in the
circumstances (unobservable inputs).
In February 2008, the FASB issued FSP No. FAS 157-1,
“Application of FASB Statement No. 157 to FASB State-
ment No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of
Lease Classifi cation or Measurement under Statement
13.” This FSP amends SFAS No. 157 to exclude certain
leasing transactions accounted for under previously exist-
ing accounting guidance. However, this scope exception
does not apply to assets acquired and liabilities assumed
in a business combination, regardless of whether those
assets and liabilities are related to leases.
SFAS No. 157 becomes effective for us in the begin-
ning of fi scal 2009. We are currently evaluating the impact
of the provisions of SFAS No. 157 on our consolidated
fi nancial statements. In February 2008, the FASB issued
FSP No. FAS 157-2, “Effective Date for FASB Statement
No. 157.” This FSP permits the delayed application of SFAS
No. 157 for nonfi nancial assets and nonfi nancial liabilities,
as defi ned in this FSP, except for those that are recognized
or disclosed at fair value in the fi nancial statements at least
annually, until the beginning of our fi scal 2010.
In February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”), to permit all entities to
choose to elect, at specifi ed election dates, to measure
eligible fi nancial instruments at fair value. An entity shall
report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each sub-
sequent reporting date, and recognize upfront costs and
fees related to those items in earnings as incurred and not
deferred. SFAS No. 159 applies to fi scal years beginning
after November 15, 2007, with early adoption permitted
for an entity that has also elected to apply the provisions
of SFAS No. 157. An entity is prohibited from retro-
spectively applying SFAS No. 159, unless it chooses early
adoption. We are currently evaluating the impact of the
provisions of SFAS No. 159 on our consolidated fi nancial
statements, if any, when it becomes effective in the begin-
ning of fi scal 2009.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations” (“SFAS No.
141(R)”). SFAS No. 141(R) replaces SFAS No. 141,
“Business Combinations,” however, it retains the funda-
mental requirements of the former Statement that the
acquisition method of accounting (previously referred to
as the purchase method) be used for all business
value-at-risk across all of our derivative fi nancial instru-
ments using a model with historical volatilities and
correlations calculated over the past 250-day period. The
measured value-at-risk, calculated as an average, for the
twelve months ended June 30, 2008 related to our foreign
exchange contracts and our interest rate contracts was
$11.3 million and $20.0 million, respectively. The model
estimates were made assuming normal market conditions
and a 95 percent confi dence level. We used a statistical
simulation model that valued our derivative fi nancial
instruments against one thousand randomly generated
market price paths.
Our calculated value-at-risk exposure represents an
estimate of reasonably possible net losses that would be
recognized on our portfolio of derivative fi nancial instru-
ments assuming hypothetical movements in future market
rates and is not necessarily indicative of actual results,
which may or may not occur. It does not represent the
maximum possible loss or any expected loss that may
occur, since actual future gains and losses will differ from
those estimated, based upon actual fl uctuations in market
rates, operating exposures, and the timing thereof, and
changes in our portfolio of derivative fi nancial instruments
during the year.
We believe, however, that any such loss incurred would
be offset by the effects of market rate movements on the
respective underlying transactions for which the deriva-
tive fi nancial instrument was intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with
unconsolidated entities that would be expected to have a
material current or future effect upon our fi nancial condi-
tion or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements” (“SFAS No. 157”), to clarify the
defi nition of fair value, establish a framework for measur-
ing fair value and expand the disclosures on fair value
measurements. SFAS No. 157 defi nes fair value as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between mar-
ket participants at the measurement date (an exit price).
SFAS No. 157 also stipulates that, as a market-based mea-
surement, fair value measurement should be determined
based on the assumptions that market participants would
use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes between (a) market par-
ticipant assumptions developed based on market data