Estee Lauder 2008 Annual Report Download - page 82

NOTE 1 — DESCRIPTION OF BUSINESS
The Estée Lauder Companies Inc. manufactures, markets
and sells skin care, makeup, fragrance and hair care prod-
ucts around the world. Products are marketed under the
following brand names: Estée Lauder, Aramis, Clinique,
Prescriptives, Lab Series, Origins, M.A.C, Bobbi Brown,
La Mer, Aveda, Jo Malone, Bumble and bumble, Darphin,
American Beauty, Flirt!, Good Skin™, Grassroots, Ojon
and Eyes by Design. The Estée Lauder Companies Inc. is
also the global licensee of the Tommy Hilfi ger, Kiton,
Donna Karan, Michael Kors, Sean John, Missoni, Daisy
Fuentes, Tom Ford and Mustang brand names for fra-
grances and/or cosmetics.
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated fi nancial statements
include the accounts of The Estée Lauder Companies Inc.
and its subsidiaries (collectively, the “Company”) as con-
tinuing operations, with the exception of the operating
results of its reporting unit that marketed and sold Stila
brand products, which have been refl ected as discontin-
ued operations for fi scal 2007 and 2006 (see Note 7). All
signifi cant intercompany balances and transactions have
been eliminated.
Certain amounts in the consolidated fi nancial state-
ments of prior years have been reclassifi ed to conform to
current year presentation for comparative purposes.
Management Estimates
The preparation of financial statements and related
disclosures in conformity with U.S. generally accepted
accounting principles requires management to make esti-
mates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the fi nancial statements and
the reported amounts of revenues and expenses reported
in those fi nancial statements. Actual results could differ
from those estimates and assumptions.
Currency Translation and Transactions
All assets and liabilities of foreign subsidiaries and affi liates
are translated at year-end rates of exchange, while reve-
nue and expenses are translated at weighted average rates
of exchange for the year. Unrealized translation gains or
losses are reported as cumulative translation adjustments
through other comprehensive income. Such adjustments
amounted to $98.3 million, $53.1 million and $27.0 million
of unrealized translation gains in fi scal 2008, 2007 and
2006, respectively.
The Company enters into foreign currency forward and
option contracts to hedge foreign currency transactions
for periods consistent with its identified exposures.
Accordingly, the Company categorizes these instruments
as entered into for purposes other than trading.
The accompanying consolidated statements of earn-
ings include net exchange gains (losses) of $3.9 million,
$(0.6) million and $4.0 million in fi scal 2008, 2007 and
2006, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include $66.6 million and
$51.3 million of short-term time deposits at June 30, 2008
and 2007, respectively. The Company considers all highly
liquid investments with original maturities of three months
or less to be cash equivalents.
Accounts Receivable
Accounts receivable is stated net of the allowance for
doubtful accounts and customer deductions of $26.3
million and $23.3 million as of June 30, 2008 and
2007, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only includes
inventory considered saleable or usable in future periods,
and is stated at the lower of cost or fair-market value, with
cost being determined on the fi rst-in, fi rst-out method.
Cost components include raw materials, componentry,
direct labor and overhead (e.g., indirect labor, utilities,
depreciation, purchasing, receiving, inspection and
warehousing) as well as inbound freight. Promotional
merchandise is charged to expense at the time the mer-
chandise is shipped to the Company’s customers. Included
in inventory and promotional merchandise is an inventory
obsolescence reserve, which represents the difference
between the cost of the inventory and its estimated realiz-
able value, based on various product sales projections.
This reserve is calculated using an estimated obsolescence
percentage applied to the inventory based on age,
historical trends and requirements to support forecasted
sales. In addition, and as necessary, specifi c reserves for
future known or anticipated events may be established.
Derivative Financial Instruments
The Company accounts for derivative financial
instruments in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS
No. 133”) as amended, which establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other con-
tracts, 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.
80 THE EST{E LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS