Estee Lauder 2014 Annual Report Download - page 51

THE EST{E LAUDER COMPANIES INC. 49
trademark, for which we recorded an impairment charge
for its remaining carrying value in fiscal 2013.
As of our annual step-one goodwill and indefinite-lived
asset impairment test on April 1, 2014, the fair values of
our reporting units and the fair values of our indefi-
nite-lived intangible assets substantially exceeded their
respective carrying values.
We review long-lived assets for impairment whenever
events or changes in circumstances indicate that the car-
rying amount may not be recoverable. When such events
or changes in circumstances occur, a recoverability test is
performed comparing projected undiscounted cash flows
from the use and eventual disposition of an asset or asset
group to its carrying value. If the projected undiscounted
cash flows 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 flows.
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 con-
solidated financial statements or tax returns. As of June
30, 2014, we have current net deferred tax assets of
$295.1 million and non-current net deferred tax assets of
$85.5 million. The net deferred tax assets assume suffi-
cient future earnings for their realization, as well as the
continued application of currently anticipated tax rates.
Included in net deferred tax assets is a valuation allow-
ance of $115.2 million for deferred tax assets, where man-
agement believes it is more-likely-than-not that the
deferred tax assets will not be realized in the relevant juris-
diction. Based on our assessments, no additional valua-
tion allowance is required. If we determine that a deferred
tax asset will not be realizable, an adjustment to the
deferred tax asset will result in a reduction of net earnings
at that time while the reduction of a valuation allowance
will result in an increase of net earnings at that time.
We provide tax reserves for U.S. federal, state, local
and foreign 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 benefits for all years subject
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 benefit will be sustained, we have
recorded the largest amount of tax benefit with a greater
2013 compound annual growth rate of sales for the first
five to eight years of our projections ranged between 5%
and 22% with the higher growth rates in certain of the
Company’s smaller reporting units that are expected to
continue the growth that they have exhibited over the
past several years. For reporting units with positive earn-
ings, growth in the corresponding earnings before interest
and taxes ranged from 3% to 38% in fiscal 2014 as com-
pared with 7% to 49% in fiscal 2013. The terminal growth
rates were projected at 3% after eight years in fiscal 2014
and five to eight years in fiscal 2013, which reflects our
estimate of long-term market and gross domestic product
growth. The weighted-average cost of capital used to dis-
count future cash flows ranged from 9% to 17% in fiscal
2014 as compared with 8% to 15% in fiscal 2013. The
range of market multiples used in our fiscal 2014 impair-
ment testing was from 1.2 to 3.5 times trailing-twelve-
month sales and 9.0 to 12.0 times trailing-twelve-month
earnings before interest, taxes, depreciation and amor-
tization. The range of market multiples used in our fiscal
2013 impairment testing was from 1.5 to 3.5 times trailing-
twelve-month sales and between 8.5 to 13.0 times
trailing-twelve-month earnings before interest, taxes and
depreciation and amortization. Future changes in these
estimates and assumptions could materially affect the
results of our reviews for impairment of goodwill. How-
ever, a decrease of 100 basis points in our terminal growth
rate or an increase of 100 basis points in our weighted-
average cost of capital would still result in a fair value
calculation exceeding our book value for each of our
reporting units. Changes in the valuation assumptions
from those used in the prior year primarily reflect the
impact of the current economic environment on the report-
ing units and their projected future results of operations.
To determine fair value of other indefinite-lived intangi-
ble 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 indefinite-lived intangible assets’ fair values require
significant judgments in determining both the assets’ esti-
mated cash flows as well as the appropriate discount and
royalty rates applied to those cash flows to determine fair
value. Changes in such estimates or the application of
alternative assumptions could produce significantly differ-
ent results. The fiscal 2014 and fiscal 2013 terminal growth
rate applied to future cash flows was 3% and the fiscal
2014 and fiscal 2013 discount rates ranged from 9% to
17% in fiscal 2014 and 10% to 18% in fiscal 2013. The
fiscal 2014 and fiscal 2013 royalty rates ranged from 0.5%
to 12%. These rates exclude those related to the Darphin