Estee Lauder 2011 Annual Report Download - page 142

140 THE EST{E LAUDER COMPANIES INC.
contracts. As of June 30, 2011, the Company was in com-
pliance with such credit-risk-related contingent features.
NOTE 12 — FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at
fair value, which is defined as the price that would be
received to sell an asset or paid to transfer a liability, in the
principal or most advantageous market for the asset or
liability, in an orderly transaction between market partici-
pants at the measurement date. The accounting for fair
value measurements must be applied to nonrecurring
nonfinancial assets and nonfinancial liabilities, which prin-
cipally consist of assets and liabilities acquired through
business combinations, goodwill, indefinite-lived intangi-
ble assets and long-lived assets for the purposes of calcu-
lating potential impairment, and liabilities associated with
restructuring activities. The Company is required to maxi-
mize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The
three levels of inputs that may be used to measure fair
value are as follows:
Level 1: Inputs based on quoted market prices for identi-
cal assets or liabilities in active markets at the
measurement date.
Level 2: Observable inputs other than quoted prices
included in Level 1, such as quoted prices for
simi lar assets and liabilities in active markets;
quoted prices for identical or similar assets and
liabilities in markets that are not active; or other
inputs that are observable or can be corrobo-
rated by observable market data.
Level 3: Inputs reflect management’s best estimate of
what market participants would use in pricing
the asset or liability at the measurement date.
The inputs are unobservable in the market and
significant to the instrument’s valuation.
Fair-Value Hedges
The Company may enter into interest rate derivative con-
tracts to manage the exposure to interest rate fluctuations
on its funded indebtedness and anticipated issuance of
debt for periods consistent with the identified exposures.
At June 30, 2010, the Company had interest rate swap
agreements with a notional amount of $250 million, a
weighted average pay rate of 0.96% and a weighted
average receive rate of 5.55%. During fiscal 2011, the
Company terminated its interest rate swap agreements
which had effectively converted the fixed rate interest on
its outstanding 2017 Senior Notes to variable interest
rates. Additionally, the instrument, which was classified as
an asset, had a fair value of $47.4 million at the date of
cash settlement. This net settlement is classified as a
financing activity on the consolidated statements of cash
flows. Hedge accounting treatment was discontinued pro-
spectively and the fair value adjustment to the carrying
amount of the related debt is being amortized against
interest expense over the remaining life of the debt.
Credit Risk
As a matter of policy, the Company only enters into deriv-
ative contracts with counterparties that have at least an
“A” (or equivalent) credit rating. The counterparties to
these contracts are major financial institutions. Exposure
to credit risk in the event of nonperformance by any of
the counterparties is limited to the gross fair value of con-
tracts in asset positions, which totaled $15.0 million at
June 30, 2011, of which 30% and 23% were attributable
to two counterparties. To manage this risk, the Company
has established strict counterparty credit guidelines that
are continually monitored and reported to management.
Accordingly, management believes risk of loss under
these hedging contracts is remote.
Certain of the Company’s derivative financial instru-
ments contain credit-risk-related contingent features. At
June 30, 2011, the Company was in a net liability position
for certain derivative contracts that contain such features
with two counterparties. The fair value of those contracts
as of June 30, 2011 was approximately $3.4 million. Such
credit-risk-related contingent features would be triggered
if (a) upon a merger involving the Company, the ratings of
the surviving entity were materially weaker than prior to
the merger or (b) the Company’s credit ratings fall below
investment grade (rated below BBB-/Baa3) and the
Company fails to enter into an International Swaps &
Derivatives Association Credit Support Annex within 30
days of being requested by the counterparty. The fair
value of collateral required or assets required to settle the
instruments immediately if a triggering event were to
occur is estimated at approximately the fair value of the