Estee Lauder 2008 Annual Report Download - page 84

82 THE EST{E LAUDER COMPANIES INC.
$1,640.9 million and $1,514.3 million in fi scal 2008, 2007
and 2006, respectively.
Research and Development
Research and development costs amounted to $80.9 mil-
lion, $74.4 million and $72.0 million in fi scal 2008, 2007
and 2006, respectively. Research and development costs
are expensed as incurred.
Operating Leases
The Company recognizes rent expense from operating
leases with periods of free and scheduled rent increases on
a straight-line basis over the applicable lease term. The Com-
pany considers lease renewals in the useful life of its lease-
hold improvements when such renewals are reasonably
assured. From time to time, the Company may receive cap i-
tal improvement funding from its lessors. These amounts
are recorded as deferred liabilities and amortized over the
remaining lease term as a reduction of rent expense.
License Arrangements
The Company’s license agreements provide the Company
with worldwide rights to manufacture, market and sell
beauty and beauty-related products (or particular catego-
ries thereof) using the licensors’ trademarks. The licenses
typically have an initial term of approximately 3 years to 11
years, and are renewable subject to the Company’s compli-
ance with the license agreement provisions. The remaining
terms, including the potential renewal periods, range from
approximately 2 years to 22 years. Under each license,
the Company is required to pay royalties to the licensor, at
least annually, based on net sales to third parties.
Most of the Company’s licenses were entered into to
create new business. In some cases, the Company acquired,
or entered into, a license where the licensor or another
licensee was operating a pre-existing beauty products busi-
ness. In those cases, intangible assets are capitalized and
amortized over their useful lives based on the terms of the
agreement and are subject to impairment testing if certain
events or circumstances indicate a potential impairment.
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with SFAS No. 123(R), “Share-Based
Payment” (“SFAS No. 123(R)”). This statement requires
that all stock-based compensation be recognized as an
expense in the fi nancial statements and that such cost be
measured at the fair value of the award. SFAS No. 123(R)
also requires that excess tax benefi ts related to stock
option exercises be refl ected as fi nancing cash infl ows
instead of operating cash infl ows.
Income Taxes
The Company accounts for income taxes in accordance
with SFAS No. 109, “Accounting for Income Taxes,” as
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. The Company’s practice is to
accept product returns from retailers only if properly
requested, authorized and approved. In accepting returns,
the Company typically provides a credit to the retailer
against accounts receivable from that retailer. As a per-
centage of gross sales, returns were 4.4%, 4.2% and 5.0%
in fi scal 2008, 2007 and 2006, respectively.
Payments to Customers
The Company is subject to the provisions of Emerging
Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for
Consideration Given by a Vendor to a Customer (Includ-
ing a Reseller of the Vendor’s Products).” In accordance
with this guidance, the Company has recorded the reve-
nues generated from purchase with purchase promotions
as sales and the costs of its purchase with purchase and
gift with purchase promotions as cost of sales. Certain
other incentive arrangements require the payment of a
fee to customers based on their attainment of pre-
established sales levels. These fees have been recorded as
a reduction of Net sales in the accompanying consoli-
dated statements of earnings and were not material to the
results of operations in any period presented.
The Company enters into transactions related to adver-
tising, product promotions and demonstrations, some of
which involve cooperative relationships with customers.
These activities may be arranged either with unrelated
third parties or in conjunction with the customer. The
Company’s share of the cost of these transactions (regard-
less of to whom they were paid) are refl ected in Selling,
general and administrative expenses in the accompanying
consolidated statements of earnings and were approxi-
mately $1,098 million, $978 million and $912 million in
fi scal 2008, 2007 and 2006, respectively.
Advertising and Promotion
Global net expenses for advertising, merchandising,
sampling and promotion were $2,034.6 million, $1,841.9
million and $1,721.1 million in fi scal 2008, 2007 and 2006,
respectively, and are expensed as incurred. These amounts
include activities relating to purchase with purchase and
gift with purchase promotions that are refl ected in net
sales and cost of sales. Excluding the impact of purchase
with purchase and gift with purchase promotions, adver-
tising, merchandising, sampling and promotion expenses
included in operating expenses were $1,836.1 million,