Estee Lauder 2009 Annual Report Download - page 93

CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
The discussion and analysis of our fi nancial condition at
June 30, 2009 and our results of operations for the three
fi scal years ended June 30, 2009 are based upon our con-
solidated fi nancial statements, which have been prepared
in conformity with U.S. generally accepted accounting
principles. The preparation of these fi nancial statements
requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and
expenses reported in those fi nancial statements. These
judgments can be subjective and complex and, conse-
quently, actual results could differ from those estimates.
Our most critical accounting policies relate to revenue
recognition, inventory, pension and other post-retirement
benefi t costs, goodwill and other indefi nite-lived intangi-
ble assets, income taxes and derivatives.
Management of the Company has discussed the selec-
tion of signifi cant accounting policies and the effect of
estimates with the Audit Committee of the Company’s
Board of Directors.
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, 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 our
retail stores. Sales at our 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 differ-
ent by up to six days.
Revenues are reported on a net sales basis, which is
computed by deducting from gross sales the amount of
actual product returns received, discounts, incentive
arrangements with retailers and an amount established for
anticipated product returns. Our practice is to accept
product returns from retailers only if properly requested,
authorized and approved. In accepting returns, we typi-
cally provide a credit to the retailer against accounts
receivable from that retailer. As a percentage of gross
sales, returns were 4.4%, 4.4% and 4.2% in fi scal 2009,
2008 and 2007, respectively.
Our sales return accrual is a subjective critical estimate
that has a direct impact on reported net sales. This accrual
is calculated based on a history of actual returns, estimated
future returns and information provided by authorized
retailers regarding their inventory levels. Consideration of
these factors results in an accrual for anticipated sales
returns that refl ects increases or decreases related to sea-
sonal fl uctuations. Experience has shown a relationship
between retailer inventory levels and sales returns in the
subsequent period, as well as a consistent pattern of
returns due to the seasonal nature of our business. In
addition, as necessary, specifi c accruals may be estab-
lished for signifi cant future known or anticipated events.
The types of known or anticipated events that we have
considered, and will continue to consider, include, but are
not limited to, the fi nancial condition of our customers,
store closings by retailers, changes in the retail environ-
ment and our decision to continue or support new and
existing products.
In the ordinary course of business, we have established
an allowance for doubtful accounts and customer deduc-
tions based upon the evaluation of accounts receivable
aging, specifi c exposures and historical trends. Our allow-
ance for doubtful accounts and customer deductions is a
subjective critical estimate that has a direct impact on
reported net earnings. The allowance for doubtful
accounts was $41.4 million and $26.3 million as of
June 30, 2009 and 2008, respectively. The allowance for
doubtful accounts was reduced by $14.1 million, $10.2
million and $18.2 million for customer deductions and
write-offs in fi scal 2009, 2008 and 2007, respectively, and
increased by $29.2 million, $13.2 million and $14.4 mil-
lion for additional provisions in fi scal 2009, 2008 and
2007, respectively.
INVENTORY
We state our inventory at the lower of cost or fair market
value, with cost being determined on the fi rst-in, fi rst-out
(FIFO) method. We believe FIFO most closely matches
the fl ow of our products from manufacture through sale.
The reported net value of our inventory includes saleable
products, promotional products, raw materials and com-
ponentry and work in process that will be sold or used in
future periods. Inventory cost includes raw materials,
direct labor and overhead, as well as inbound freight.
Manufacturing overhead is allocated to the cost of
inventory based on the normal production capacity.
Unallocated overhead during periods of abnormally low
production levels are recognized as cost of sales in the
period in which they are incurred.
92 THE EST{E LAUDER COMPANIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS