Estee Lauder 2009 Annual Report Download - page 124

measures the amount of impairment loss by comparing
the implied fair value of goodwill with the carrying amount
of that goodwill. The impairment test for indefi nite-lived
intangible assets encompasses calculating a fair value of
an indefi nite-lived intangible asset and comparing the fair
value to its carrying value. If the carrying value exceeds
the fair value, impairment is recorded.
Testing goodwill for impairment requires the Company
to estimate fair values of reporting units using signifi cant
estimates and assumptions. The assumptions made will
impact the outcome and ultimate results of the testing.
The Company uses industry accepted valuation models
and set criteria that are reviewed and approved by various
levels of management and, in certain instances, the
Company engages third-party valuation specialists to
advise it. To determine fair value of the reporting unit, the
Company generally uses an equal weighting of the income
and market approaches. In certain circumstances, equal
weighting will not be applied if one of these methods may
be less reliable (e.g., only the income approach would be
used for reporting units with existing negative margins).
The Company believes both approaches are equally rele-
vant and the most reliable indications of fair value because
the fair value of product or service companies is more
dependent on the ability to generate earnings than on the
value of the assets used in the production process.
Under the income approach, the Company determines
fair value using a discounted cash fl ow method, estimat-
ing future cash fl ows of each reporting unit, as well as ter-
minal value, and discounting such cash fl ows at a rate of
return that refl ects the relative risk of the cash fl ows.
Under the market approach, the Company utilizes infor-
mation from comparable publicly traded companies with
similar operating and investment characteristics as the
reporting units, which creates valuation multiples that are
applied to the operating performance of the reporting
unit being tested, to value the reporting unit. The key esti-
mates and factors used in these two approaches include,
but are not limited to, revenue growth rates and profi t
margins based on internal forecasts, terminal value, the
weighted-average cost of capital used to discount future
cash fl ows and comparable market multiples.
To determine fair value of other indefi nite-lived intan-
gible assets, the Company uses an income approach, the
relief-from-royalty method. This method assumes that, in
lieu of ownership, a third party would be willing to pay a
royalty in order to obtain the rights to use the comparable
asset. Other indefi nite-lived intangible assets’ fair values
require signifi cant judgments in determining both the
assets’ estimated cash fl ows as well as the appropriate dis-
count and royalty rates applied to those cash fl ows to
determine fair value. Changes in such estimates or the
application of alternative assumptions could produce
signifi cantly different results.
Long-Lived Assets
The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. When
such events or changes in circumstances occur, a recover-
ability test is performed comparing projected undis-
counted cash fl ows from the use and eventual disposition
of an asset or asset group to its carrying value. If the pro-
jected undiscounted cash fl ows are less than the carrying
value, an impairment would be recorded for the excess of
the carrying value over the fair value, which is determined
by discounting future cash fl ows.
Concentration of Credit Risk
The Company is a worldwide manufacturer, marketer and
distributor of skin care, makeup, fragrance and hair care
products. Domestic and international sales are made
primarily to department stores, perfumeries and specialty
retailers. The Company grants credit to all qualified
customers and does not believe it is exposed signifi cantly
to any undue concentration of credit risk.
The Company’s largest customer sells products primar-
ily within the United States and accounted for $907.3 mil-
lion, or 12%, $951.4 million, or 12%, and $958.8 million,
or 14%, of the Company’s consolidated net sales in fi scal
2009, 2008 and 2007, respectively. This customer
accounted for $97.1 million and $109.2 million, or 11%, of
the Company’s accounts receivable at June 30, 2009 and
2008, respectively.
Revenue Recognition
Revenues from merchandise sales are recognized upon
transfer of ownership, including passage of title to the cus-
tomer and transfer of the risk of loss related to those
goods. In the Americas region, sales are generally recog-
nized at the time the product is shipped to the customer
and in the Europe, the Middle East & Africa and Asia/
Pacifi c regions sales are generally recognized based upon
the customer’s receipt. In certain circumstances, transfer
of title takes place at the point of sale, for example, at the
Company’s retail stores. Sales at the Company’s retail
stores and online are recognized in accordance with a
traditional 4-4-5 retail calendar, where each fi scal quarter
is comprised of two 4-week periods and one 5-week
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
THE EST{E LAUDER COMPANIES INC. 123