Estee Lauder 2009 Annual Report Download - page 123

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 ware-
housing) as well as inbound freight. Manufacturing over-
head is allocated to the cost of inventory based on the
normal production capacity. Unallocated overhead during
periods of abnormally low production levels are recog-
nized as cost of sales in the period in which they are
incurred. Promotional merchandise is charged to expense
at the time the merchandise 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 inven-
tory and its estimated realizable 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 require-
ments to support forecasted sales. In addition, and as
necessary, specifi c reserves for future known or antici-
pated events may be established.
Derivative Financial Instruments
The Company’s derivative financial instruments are
recorded as either assets or liabilities on the balance sheet
and measured at fair value. All derivatives outstanding as
of June 30, 2009 are (i) designated as a hedge of the
fair value of a recognized asset or liability or of an
unrecognized firm commitment (“fair-value” hedge),
(ii) designated as a hedge of a forecasted transaction or of
the variability of cash fl ows to be received or paid related
to a recognized asset or liability (“foreign currency cash-
fl ow” hedge), or (iii) not designated as a hedging instru-
ment. Changes in the fair value of a derivative that is
designated and qualifi es as a fair-value hedge that is highly
effective are recorded in current-period earnings, along
with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk (including losses or gains
on unrecognized fi rm commitments). Changes in the fair
value of a derivative that is designated and qualifi es as a
foreign currency cash-fl ow hedge of a foreign-currency-
denominated forecasted transaction that is highly effec-
tive are recorded in other comprehensive income (loss)
(“OCI”). Gains and losses deferred in OCI are then recog-
nized in current-period earnings when earnings are
affected by the variability of cash fl ows of the hedged
foreign-currency-denominated forecasted transaction
(e.g., when periodic settlements on a variable-rate asset or
liability are recorded in earnings). Changes in the fair
value of derivative instruments not designated as hedging
instruments are reported in current-period earnings.
Property, Plant and Equipment
Property, plant and equipment, including leasehold and
other improvements that extend an asset’s useful life or
productive capabilities, are carried at cost less accumu-
lated depreciation and amortization. Costs incurred for
computer software developed or obtained for internal use
are capitalized during the application development stage
and expensed as incurred during the preliminary project
and post-implementation stages. For fi nancial statement
purposes, depreciation is provided principally on the
straight-line method over the estimated useful lives of the
assets ranging from 3 to 40 years. Leasehold improve-
ments are amortized on a straight-line basis over the
shorter of the lives of the respective leases or the expected
useful lives of those improvements.
Investments
The Company’s investments consist principally of avail-
able-for-sale securities and equity-method investments.
Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from
earnings and are reported as a component of stockhold-
ers’ equity until realized. Investments in affi liated compa-
nies, which are not controlled by the Company but where
the Company has the ability to exercise signifi cant infl u-
ence over, are accounted for using the equity-method
where the earnings and losses attributable to the invest-
ment are recorded in the accompanying consolidated
statements of earnings.
Goodwill and Other Indefi nite-lived Intangible Assets
Goodwill is calculated as the excess of the cost of
purchased businesses over the fair value of their underly-
ing net assets. Other indefi nite-lived intangible assets
principally consist of trademarks. Goodwill and other
indefi nite-lived intangible assets are not amortized.
The Company assesses goodwill and other indefi nite-
lived intangibles at least annually for impairment as of the
beginning of the fi scal fourth quarter, or more frequently
if certain events or circumstances warrant. The Company
tests goodwill for impairment at the reporting unit level,
which is one level below the Company’s operating seg-
ments. The Company identifi es its reporting units by
assessing whether the components of its operating seg-
ments constitute businesses for which discrete fi nancial
information is available and management of each report-
ing unit regularly reviews the operating results of those
components. Impairment testing is performed in two
steps: (i) the Company determines impairment by com-
paring the fair value of a reporting unit with its carrying
value, and (ii) if there is an impairment, the Company
122 THE EST{E LAUDER COMPANIES INC.