Estee Lauder 2011 Annual Report Download - page 94

92 THE EST{E LAUDER COMPANIES INC.
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
The discussion and analysis of our financial condition at
June 30, 2011 and our results of operations for the three
fiscal years ended June 30, 2011 are based upon our con-
solidated financial statements, which have been prepared
in conformity with U.S. generally accepted accounting
principles. The preparation of these financial statements
requires us to make estimates and assumptions that affect
the amounts of assets, liabilities, revenues and expenses
reported in those financial statements. These estimates
and assumptions can be subjective and complex and,
consequently, actual results could differ from those esti-
mates. Our most critical accounting policies relate to
revenue recognition, inventory, pension and other post-
retirement benefit costs, goodwill, other intangible assets
and long-lived assets, income taxes and derivatives.
Management of the Company has discussed the selec-
tion of significant accounting policies and the effect of
estimates with the Audit Committee of the Company’s
Board of Directors.
REVENUE RECOGNITION
Revenues from product sales are recognized upon
transfer of ownership, including passage of title to the
customer 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, the Middle East & Africa and Asia/
Pacific 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 exam-
ple, at our retail stores.
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 3.5%, 4.3% and 4.4% in fiscal 2011,
2010 and 2009, respectively, and the improvement
reflects efforts to work with our customers to improve
their forecasting and product mix to better address their
inventory requirements.
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, esti-
mated future returns and information provided by retailers
regarding their inventory levels. Consideration of these
factors results in an accrual for anticipated sales returns
that reflects increases or decreases related to seasonal
fluctuations. Experience has shown a relationship between
retailer inventory levels and sales returns in the subse-
quent period, as well as a consistent pattern of returns
due to the seasonal nature of our business. In addition,
as necessary, specific accruals may be established for
significant future known or anticipated events. The
types of known or anticipated events that we have con-
sidered, and will continue to consider, include, but are
not limited to, the financial condition of our customers,
store closings by retailers, changes in the retail environ-
ment and our decision to continue to 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, specific 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 $33.9 million and $34.3 million as of
June 30, 2011 and 2010, respectively. The allowance for
doubtful accounts was reduced by $9.9 million, $15.8
million and $14.1 million for customer deductions and
write-offs in fiscal 2011, 2010 and 2009, respectively,
and increased by $9.5 million, $8.7 million and $29.2
million for additional provisions in fiscal 2011, 2010 and
2009, respectively.
INVENTORY
We state our inventory 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 (FIFO)
method. We believe this method most closely matches
the flow 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.
We also record an inventory obsolescence reserve,
which represents the difference between the cost of
the inventory and its estimated realizable value, based
on various product sales projections. This reserve is
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS