Estee Lauder 2009 Annual Report Download - page 96

the reporting units and their projected future results
of operations.
To determine fair value of other indefi nite-lived intan-
gible assets, we use 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’ esti-
mated cash fl ows as well as the appropriate discount 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 differ-
ent results.
We review other 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.
As the duration and magnitude of the volatility of the
current economic conditions remain uncertain, we will
continue to monitor and evaluate the potential impact on
our business and on our interim and annual impairment
testing. Accordingly, it is possible that we would recog-
nize an impairment charge in the future with respect to
goodwill, intangible assets and other long-lived assets.
INCOME TAXES
We account for income taxes using an asset and liability
approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax conse-
quences of events that have been recognized in our
fi nancial statements or tax returns. As of June 30, 2009,
we have current net deferred tax assets of $202.7 million
and non-current net deferred tax assets of $156.0 million.
The net deferred tax assets assume suffi cient future earn-
ings for their realization, as well as the continued applica-
tion of currently anticipated tax rates. Included in net
deferred tax assets is a valuation allowance of $23.5 mil-
lion for deferred tax assets, where management believes
it is more-likely-than-not that the deferred tax assets will
not be realized in the relevant jurisdiction. Based on our
assessments, no additional valuation allowance is required.
If we determine that a deferred tax asset will not be realiz-
able, an adjustment to the deferred tax asset will result in
a reduction of net earnings at that time.
We provide 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. We assess
our tax positions and record tax benefi ts for all years sub-
ject 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,
we have recorded the largest amount of tax benefi t with a
greater than 50% likelihood of being realized upon settle-
ment 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 sus-
tained, no tax benefi t has been recognized in the fi nancial
statements. We classify applicable interest and penalties
as a component of the provision for income taxes.
Although the outcome relating 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 cir-
cumstances, the ultimate outcome of exposures and risks
involves signifi cant uncertainties which render them ines-
timable. If actual outcomes differ materially from these
estimates, they could have a material impact on our results
of operations.
DERIVATIVES
We address certain financial exposures through a
controlled program of risk management that includes the
use of derivative fi nancial instruments. We primarily enter
into foreign currency forward and option contracts to
reduce the effects of fluctuating foreign currency
exchange rates and interest rate derivatives to manage the
effects of interest rate movements on our aggregate
liability portfolio. We also enter into foreign currency
forward and option contracts, not designated as hedging
instruments, to mitigate the change in fair value of specifi c
assets and liabilities on the balance sheet. We do not uti-
lize derivative fi nancial instruments for trading or specula-
tive purposes. Hedge effectiveness is documented,
assessed and monitored by employees who are qualifi ed
to make such assessments and monitor the instruments.
Variables that are external to us such as social, political
and economic risks may have an impact on our hedging
program and the results thereof.
Our derivative fi nancial 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
THE EST{E LAUDER COMPANIES INC. 95