Estee Lauder 2008 Annual Report Download - page 87

THE EST{E LAUDER COMPANIES INC. 85
Beginning in years prior to fi scal 2003, inventory valu-
ation was impacted by the incorrect application of profi t
in ending inventory partially offset by the overstatement
of inventory obsolescence reserves, culminating in a fi scal
2007 decrease to inventory of $2.5 million and an open-
ing retained earnings decrease of $2.0 million, net of tax
pursuant to initial application of SAB No. 108.
In years prior to fi scal 2004 and through the initial
application of SAB No. 108, the Company overstated cer-
tain accrued liability positions. As such, Other accrued
liabilities decreased by $19.1 million and opening retained
earnings increased by $14.5 million, net of tax, in the
accompanying fi scal 2007 consolidated balance sheet.
NOTE 4 — INVENTORY AND
PROMOTIONAL MERCHANDISE
JUNE 30 2008 2007
(In millions)
Inventory and promotional
merchandise consists of:
Raw materials $205.4 $179.5
Work in process 56.8 49.2
Finished goods 494.7 431.3
Promotional merchandise 230.3 195.8
$987.2 $855.8
NOTE 5 — PROPERTY, PLANT AND EQUIPMENT
JUNE 30 2008 2007
(In millions)
Asset (Useful Life)
Land $ 14.9 $ 14.4
Buildings and improvements
(10 to 40 years) 183.5 167.5
Machinery and equipment
(3 to 10 years) 1,008.9 905.0
Furniture and fi xtures
(5 to 10 years) 95.6 108.2
Leasehold improvements 1,090.7 917.2
2,393.6 2,112.3
Less accumulated depreciation
and amortization 1,350.5 1,231.5
$1,043.1 $ 880.8
Depreciation and amortization of property, plant and
equipment was $233.9 million, $198.1 million and $189.9
million in fiscal 2008, 2007 and 2006, respectively.
Depreciation and amortization related to the Company’s
manufacturing process is included in Cost of sales and all
other depreciation and amortization is included in Selling,
general and administrative expenses in the accompanying
consolidated statements of earnings.
NOTE 3 — STAFF ACCOUNTING BULLETIN NO. 108
In September 2006, the Securities and Exchange Commis-
sion (“SEC”) issued Staff Accounting Bulletin (“SAB”) No.
108, “Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements” (“SAB No. 108”), which sets forth the SEC
Staff’s views on the proper methods for quantifying errors
when there were uncorrected errors in a prior year. Under
SAB No. 108, companies should evaluate a misstatement
that existed in prior years based on its impact on the
current year income statement (the “rollover” approach),
as well as the cumulative effect of correcting such
mis statements in the current year’s ending balance
sheet (the “iron curtain” approach), or collectively, the
“dual” approach.
SAB No. 108 became effective for the Company’s fi s-
cal year ended June 30, 2007. Prior to application of this
guidance, the Company utilized the “rollover” approach
to evaluate uncorrected misstatements and believed the
conclusions reached regarding its quantitative and quali-
tative assessments of materiality of such items, both indi-
vidually and in the aggregate, were appropriate. In
accordance with the transition guidance set forth in SAB
No. 108, the Company elected to record a one-time
cumulative effect adjustment to opening retained earn-
ings to correct errors in certain balance sheet accounts
that arose in prior years, which previously had been con-
sidered immaterial using the “rollover” approach.
Since the fi scal 1996 acquisition of the Bobbi Brown
brand and through the application of SAB No. 108 on
July 1, 2006, the Company made payments to the sellers
based on a percentage of Bobbi Brown sales internation-
ally, which should have been capitalized as goodwill in
accordance with SFAS No. 141, “Business Combinations,”
as amended. These payments were previously recorded
as Selling, general and administrative expenses in the con-
solidated statements of earnings. As such, goodwill
increased by $10.5 million and opening retained earnings
increased by $6.7 million, net of tax, in the accompanying
fi scal 2007 consolidated balance sheet.
In connection with the Company’s defi ned benefi t
pension obligations, certain liability amounts were incor-
rectly refl ected on the balance sheet in years prior to fi scal
2002, the majority of which related to benefi t plans for
the Company’s international operations. As such, upon
initial application of SAB No. 108 on July 1, 2006, other
noncurrent liabilities decreased by $8.7 million and
opening retained earnings increased by $5.0 million, net
of tax, in the accompanying fi scal 2007 consolidated
balance sheet.