Estee Lauder 2014 Annual Report Download - page 77

THE EST{E LAUDER COMPANIES INC. 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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, Tom Ford, Coach, Ermenegildo Zegna,
Tory Burch, Marni and Aerin 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
significant intercompany balances and transactions have
been eliminated.
Certain amounts in the consolidated financial state-
ments of prior years have been reclassified to conform to
current year 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 contin-
gent assets and liabilities at the date of the financial state-
ments 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 intan-
gible assets and long-lived assets, and income taxes.
Management evaluates its estimates and assumptions on
an ongoing basis using historical experience 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 assumptions 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 revenue
and expenses are translated at weighted-average rates of
exchange for the period. Unrealized translation gains
(losses) reported as cumulative translation adjustments
through other comprehensive income (loss) (“OCI”) attrib-
utable to The Estée Lauder Companies Inc. amounted to
$95.1 million, $(25.6) million and $(154.2) million, net of
tax, in fiscal 2014, 2013 and 2012, 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 Selling, gen-
eral and administrative expenses in the Company’s con-
solidated statements of earnings. During the third quarter
of fiscal 2014, the Venezuelan government enacted
changes to the foreign exchange controls that expanded
the use of its existing exchange mechanisms and created
another exchange control mechanism (“SICAD II”), which
allows companies to apply for the purchase of foreign
currency and foreign currency denominated securities for
any legal use or purpose. As a result, the Company con-
sidered its specific facts and circumstances in determining
the appropriate remeasurment rate, principally assessing
its legal eligibility to access the available foreign exchange
mechanisms, the transactions that would be eligible, the
Company’s past and expected future ability to transact
through those mechanisms, and the Company’s intent to
utilize a particular mechanism for particular purposes.
Although the SICAD II mechanism and its level and
frequency of exchange continue to be regulated by the
Venezuelan government, it offers the possibility of foreign
exchange in a theoretically open market without restricted
uses and in management’s opinion is the only mechanism
legally available at this time for the Company’s highest
priority transactions, which are the import of goods.
Therefore, the Company believes the SICAD II rate was,
and continues to be, the most appropriate rate that
reflects the economics of its Venezuelan subsidiary’s busi-
ness as of March 24, 2014, when the SICAD II mechanism
became operational. As a result, the Company changed
the exchange rate used to remeasure the monetary assets
and liabilities of its Venezuelan subsidiary from 6.3 to the
SICAD II rate, which was 49.98 as of June 30, 2014.
Accordingly, a remeasurement charge of $38.3 million, on
a before and after tax basis, was reflected in Selling,
general and administrative expenses in the Company’s
consolidated statement of earnings for the year ended
June 30, 2014.