Estee Lauder 2014 Annual Report Download - page 78

76 THE EST{E LAUDER COMPANIES INC.
to support forecasted sales. In addition, and as necessary,
specific reserves for future known or anticipated events
may be established.
Derivative Financial Instruments
The Company’s derivative financial instruments are
recorded as either assets or liabilities on the balance
sheet and measured at fair value. All derivatives are
(i) designated as a hedge of the fair value of a recognized
asset or liability or of an unrecognized firm commitment
(“fair-value” hedge), (ii) designated as a hedge of a fore-
casted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability
(“foreign currency cash-flow” hedge), or (iii) not desig-
nated as a hedging instrument. Changes in the fair value
of a derivative that is designated and qualifies as a
fair-value hedge that is highly effective are recorded in
current-period earnings, along with the loss or gain on the
hedged asset or liability that is attributable to the hedged
risk (including losses or gains on unrecognized firm com-
mitments). Changes in the fair value of a derivative that is
designated and qualifies as a foreign currency cash-flow
hedge of a foreign-currency-denominated forecasted
transaction that is highly effective are recorded in OCI.
Gains and losses deferred in OCI are then recognized in
current-period earnings when earnings are affected by
the variability of cash flows of the hedged foreign-
currency -denominated forecasted transaction (e.g., when
periodic settlements on a variable-rate asset or liability are
recorded in earnings). Changes in the fair value of deriva-
tive instruments not designated as hedging instruments
are reported in current-period earnings.
Property, Plant and Equipment
Property, plant and equipment, including leasehold and
other improvements that extend an asset’s useful life or
productive capabilities, are carried at cost less accumu-
lated depreciation and amortization. Costs incurred for
computer software developed or obtained for internal use
are capitalized during the application development stage
and expensed as incurred during the preliminary project
and post-implementation stages. For financial statement
purposes, depreciation is provided principally on the
straight-line method over the estimated useful lives of
the assets ranging from 3 to 40 years. Leasehold improve-
ments are amortized on a straight-line basis over the shorter
of the lives of the respective leases or the expected useful
lives of those improvements.
Goodwill and Other Indefinite-lived Intangible Assets
Goodwill is calculated as the excess of the cost of pur-
chased businesses over the fair value of their underlying
The Company enters into foreign currency forward
contracts and may enter into option contracts to hedge
foreign currency transactions for periods consistent with
its identified exposures. Accordingly, the Company cate-
gorizes 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, including the effect of the Venezuela remea-
surement charge, of $46.7 million, $3.5 million and $0.5
million in fiscal 2014, 2013 and 2012, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include $971.9 million and
$843.5 million of short-term time deposits at June 30,
2014 and 2013, respectively. The Company considers all
highly liquid investments with original maturities of three
months or less to be cash equivalents. As of June 30,
2014, approximately 17% and 16% of the Company’s cash
and cash equivalents are held by two financial institutions.
Accounts Receivable
Accounts receivable is stated net of the allowance for
doubtful accounts and customer deductions totaling
$23.9 million and $22.7 million as of June 30, 2014 and
2013, 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
well as inbound freight. Manufacturing overhead is
allocated to the cost of inventory based on the normal
production capacity. Unallocated overhead during peri-
ods of abnormally low production levels are recognized
as cost of sales in the period in which they are incurred.
Promotional merchandise is charged to expense at the
time the merchandise is shipped to the Company’s cus-
tomers. Included in inventory and promotional merchan-
dise is an inventory obsolescence reserve, which
represents the difference between the cost of the inven-
tory and its estimated realizable value, based on various
product sales projections. This reserve is calculated using
an estimated obsolescence percentage applied to the
inventory based on age, historical trends and requirements