Estee Lauder 2009 Annual Report Download - page 122

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 research
labs and Ojon. 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 fragrances
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 discon-
tinued operations for fi scal 2007. All signifi cant inter-
company 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.
In preparing these consolidated fi nancial statements,
the Company has evaluated events and transactions for
potential recognition or disclosure through August 19,
2009, the date the consolidated financial statements
were issued.
Management Estimates
The preparation of fi nancial statements and related disclo-
sures in conformity with U.S. generally accepted account-
ing principles (“GAAP”) requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contin-
gent 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. Certain
signifi cant accounting policies that contain subjective
management estimates and assumptions include those
related to revenue recognition, inventory, pension and
other post-retirement benefi t costs, goodwill, intangible
assets and other long-lived assets, income taxes and
derivatives. Management evaluates its estimates and
assumptions on an ongoing basis using historical experi-
ence and other factors, including the current economic
environment, and makes adjustments when facts and
THE EST{E LAUDER COMPANIES INC. 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
circumstances dictate. Illiquid credit markets, volatile
equity, foreign currency and declines in consumer spend-
ing have combined to increase the uncertainty inherent in
such estimates and assumptions. As future events and
their effects cannot be determined with precision, actual
results could differ signifi cantly from those estimates and
assumptions. Changes in those estimates resulting from
continuing changes in the economic environment will be
reflected in the consolidated financial statements in
future periods.
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 (loss). Such adjust-
ments amounted to $139.1 million of unrealized trans-
lation losses, net of tax, in fi scal 2009 and $98.3 million
and $53.1 million of unrealized translation gains, net of
tax, in fi scal 2008 and 2007, 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 $(20.0) million,
$3.9 million and $(0.6) million in fi scal 2009, 2008 and
2007, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include $239.8 million and
$66.6 million of short-term time deposits at June 30, 2009
and 2008, respectively. The Company considers all highly
liquid investments with original maturities of three months
or less to be cash equivalents. Approximately 20% and
14% of the Company’s cash and cash equivalents are held
by two counterparties.
Accounts Receivable
Accounts receivable is stated net of the allowance for
doubtful accounts and customer deductions of $41.4 mil-
lion and $26.3 million as of June 30, 2009 and 2008,
respectively. This reserve is based upon the evaluation of
accounts receivable aging, specifi c exposures and histori-
cal trends.
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