Estee Lauder 2009 Annual Report Download - page 126

THE EST{E LAUDER COMPANIES INC. 125
nized in the fi nancial statements. The Company classifi es
applicable interest and penalties as a component of the
provision for income taxes. Although the outcome relat-
ing to these exposures is uncertain, in management’s
opinion adequate provisions for income taxes have been
made for estimable potential liabilities emanating from
these exposures. In certain circumstances, the ultimate
outcome of exposures and risks involves signifi cant uncer-
tainties which render them inestimable. If actual outcomes
differ materially from these estimates, they could have
a material impact on the Company’s consolidated results
of operations.
Out-of-period Adjustments
The Company evaluates out-of-period adjustments based
on their impact on the current year statement of earnings
as well as the cumulative effect of adjustments in the
current year’s ending balance sheet. Out-of-period adjust-
ments identifi ed and recorded in the accompanying state-
ments of earnings during fi scal 2009 and 2008 were not
material, individually or in the aggregate, to the
Company’s consolidated fi nancial statements for all fi scal
years affected. In fi scal 2007 and in accordance with the
Securities and Exchange Commission Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in
Current Year Financial Statements,” the Company elected
to record a one-time cumulative effect adjustment of
$24.2 million to opening retained earnings to correct
errors in certain balance sheet accounts that arose in
previous years.
Recently Adopted Accounting Standards
In May 2009, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 165, “Subsequent
Events” (“SFAS No. 165”). SFAS No. 165 requires the dis-
closure of the date through which an entity has evaluated
subsequent events for potential recognition or disclosure
in the fi nancial statements and whether that date repre-
sents the date the fi nancial statements were issued or
were available to be issued. This standard also provides
clarifi cation about circumstances under which an entity
should recognize events or transactions occurring after
the balance sheet date in its fi nancial statements and the
disclosures that an entity should make about events
or transactions that occurred after the balance sheet
date. This standard is effective for interim and annual
periods beginning with the Company’s fi scal year ended
June 30, 2009. The adoption of this standard did not
have a material impact on the Company’s consolidated
fi nancial statements.
consolidated fi nancial statements. Upon the exercise of
stock options or the vesting of restricted stock units and
performance share units, the resulting excess tax benefi ts,
if any, are credited to additional paid-in capital. Any result-
ing tax defi ciencies will fi rst be offset against those cumu-
lative credits to additional paid-in capital. Once the
cumulative credits to additional paid-in capital are
exhausted, tax defi ciencies will be recorded to the provi-
sion for income taxes. Excess tax benefi ts are required to
be refl ected as fi nancing cash infl ows in the accompany-
ing consolidated statements of cash fl ows.
Income Taxes
The Company accounts for income taxes using an asset
and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in
its fi nancial statements or tax returns. The net deferred tax
assets assume suffi cient future earnings for their realiza-
tion, as well as the continued application of currently
anticipated tax rates. Included in net deferred tax assets is
a valuation allowance for deferred tax assets, where man-
agement believes it is more-likely-than-not that the
deferred tax assets will not be realized in the relevant
jurisdiction. Based on the Company’s assessments, no
additional valuation allowance is required. If the Company
determines that a deferred tax asset will not be realizable,
an adjustment to the deferred tax asset will result in a
reduction of net earnings at that time.
The Company adopted the provisions of Financial
Accounting Standards Board (“FASB”) Interpretation No.
48, “Accounting for Uncertainty in Income Taxes— an
interpretation of FASB Statement No. 109” on July 1, 2007.
As a result, the Company recognized an increase in the
liability for unrecognized tax benefi ts and interest of $13.1
million (after tax) as an adjustment to opening retained
earnings. The Company provides tax reserves for Federal,
state, local and international exposures relating to periods
subject to audit. The development of reserves for these
exposures requires judgments about tax issues, potential
outcomes and timing, and is a subjective critical estimate.
The Company assesses its tax positions and records tax
benefi ts for all years subject to examination based upon
management’s evaluation of the facts, circumstances, and
information available at the reporting dates. For those tax
positions where it is more-likely-than-not that a tax benefi t
will be sustained, the Company has recorded the largest
amount of tax benefi t with a greater than 50% likelihood
of being realized upon settlement with a tax authority that
has full knowledge of all relevant information. For those
tax positions where it is not more-likely-than-not that a tax
benefi t will be sustained, no tax benefi t has been recog-