Estee Lauder 2011 Annual Report Download - page 124

122 THE EST{E LAUDER COMPANIES INC.
NOTE 1 — DESCRIPTION OF BUSINESS
The Estée Lauder Companies Inc. manufactures, markets
and sells skin care, makeup, fragrance and hair care
products around the world. Products are marketed under
various brand names including: Estée Lauder, Aramis,
Clinique, Prescriptives, Lab Series, Origins, M.A.C, Bobbi
Brown, La Mer, Aveda, Jo Malone, Bumble and bumble,
Darphin, Flirt!, GoodSkin Labs, Ojon and Smashbox.
Certain subsidiaries of The Estée Lauder Companies Inc.
are also the global licensee of the Tommy Hilfiger, Kiton,
Donna Karan, Michael Kors, Sean John, Missoni, Daisy
Fuentes, Tom Ford and Coach brand names for fragrances
and/or cosmetics.
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of The Estée Lauder Companies Inc.
and its subsidiaries (collectively, the “Company”). All sig-
nificant intercompany balances and transactions have
been eliminated.
Certain amounts in the consolidated financial state-
ments of prior periods have been reclassified to conform
to current period presentation.
Management Estimates
The preparation of financial statements and related disclo-
sures in conformity with U.S. generally accepted account-
ing principles (“U.S. GAAP”) requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of con-
tingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses reported in those financial statements. Certain
significant accounting policies that contain subjective
management estimates and assumptions include those
related to revenue recognition, inventory, pension and
other post-retirement benefit costs, goodwill, other
intangible assets and long-lived assets, income taxes
and derivatives. Management evaluates its estimates and
assumptions on an ongoing basis using historical experi-
ence and other factors, including the current economic
environment, and makes adjustments when facts and
circumstances dictate. As future events and their effects
cannot be determined with precision, actual results could
differ significantly from those estimates and assumptions.
Significant changes, if any, in those estimates and assump-
tions resulting from continuing changes in the economic
environment will be reflected in the consolidated financial
statements in future periods.
Currency Translation and Transactions
All assets and liabilities of foreign subsidiaries and affiliates
are translated at year-end rates of exchange, while reve-
nue and expenses are translated at weighted average
rates of exchange for the period. Unrealized translation
gains or losses are reported as cumulative translation
adjustments through other comprehensive income (loss)
(“OCI”). Such adjustments, attributable to The Estée
Lauder Companies Inc., amounted to $210.5 million of
unrealized translation gains, net of tax, in fiscal 2011 and
$65.9 million and $139.1 million of unrealized translation
losses, net of tax, in fiscal 2010 and 2009, respectively. For
the Company’s Venezuelan subsidiary operating in a
highly inflationary economy, the U.S. dollar is the func-
tional currency. Remeasurement adjustments in financial
statements in a highly inflationary economy and other
transactional gains and losses are reflected in earnings.
The Company enters into foreign currency forward and
option contracts to hedge foreign currency transactions
for periods consistent with its identified exposures.
Accordingly, the Company categorizes these instruments
as entered into for purposes other than trading.
The accompanying consolidated statements of earn-
ings include net exchange losses on foreign currency
transactions of $18.6 million, $33.3 million and $20.0 mil-
lion in fiscal 2011, 2010 and 2009, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include $242.5 million and
$534.5 million of short-term time deposits at June 30,
2011 and 2010, respectively. The Company considers all
highly liquid investments with original maturities of three
months or less to be cash equivalents. As of June 30,
2011, approximately 18% and 17% of the Company’s cash
and cash equivalents are held by two counterparties.
Accounts Receivable
Accounts receivable is stated net of the allowance for
doubtful accounts and customer deductions totaling
$33.9 million and $34.3 million as of June 30, 2011 and
2010, respectively. This reserve is based upon the evalua-
tion of accounts receivable aging, specific exposures and
historical trends.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only includes
inventory considered saleable or usable in future periods,
and is stated at the lower of cost or fair-market value, with
cost being based on standard cost which approximates
actual cost on the first-in, first-out method. Cost compo-
nents include raw materials, componentry, direct labor
and overhead (e.g., indirect labor, utilities, depreciation,
purchasing, receiving, inspection and warehousing) as
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS