Estee Lauder 2014 Annual Report Download - page 80

78 THE EST{E LAUDER COMPANIES INC.
Advertising and Promotion
Global net expenses for advertising, merchandising, sam-
pling, promotion and product development costs were
$2,840.0 million, $2,754.8 million and $2,614.5 million in
fiscal 2014, 2013 and 2012, respectively, and are
expensed as incurred. Excluding the impact of purchase
with purchase and gift with purchase promotions, costs
for advertising, merchandising, sampling, promotion and
product development included in Selling, general
and administrative expenses in the accompanying consol-
idated statements of earnings were $2,618.1 million,
$2,541.0 million and $2,417.6 million in fiscal 2014, 2013
and 2012, respectively.
Research and Development
During fiscal 2014, the Company conducted a review of
the activities and elements of costs associated with its
research and development process. As a result of its
review, the Company identified certain activities, such as
product innovation and packaging design and develop-
ment, and their related costs that should be categorized
as research and development costs, which continue to be
recorded in Selling, general and administrative expenses
in the consolidated statements of earnings. As a result,
research and development costs totaled $157.9 million,
$146.8 million and $137.8 million in fiscal 2014, 2013 and
2012, respectively, and are expensed as incurred.
Shipping and Handling
Shipping and handling expenses of $373.6 million, $337.9
million and $312.4 million in fiscal 2014, 2013 and 2012,
respectively, are recorded in Selling, general and adminis-
trative expenses in the accompanying consolidated
statements of earnings and include distribution center
costs, third-party logistics costs and outbound freight.
Operating Leases
The Company recognizes rent expense from operating
leases with periods of free and scheduled rent increases
on a straight-line basis over the applicable lease term. The
Company considers lease renewals when such renewals
are reasonably assured. From time to time, the Company
may receive capital improvement funding from its lessors.
These amounts are recorded as deferred liabilities and
amortized over the remaining lease term as a reduction of
rent expense.
License Arrangements
The Company’s license agreements provide the Company
with worldwide rights to manufacture, market and
sell beauty and beauty-related products (or particular
net sales in fiscal 2014, 2013 and 2012, respectively. This
customer accounted for $158.5 million, or 11%, and
$113.7 million, or 10%, of the Company’s accounts receiv-
able at June 30, 2014 and 2013, respectively.
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 the Company’s retail stores. The Company records
revenues generated from purchase with purchase promo-
tions in Net Sales and costs of its purchase with purchase
and gift with purchase promotions in Cost of Sales.
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. The Company’s practice is to
accept product returns from retailers only if properly
requested, authorized and approved. In accepting returns,
the Company typically provides a credit to the retailer
against accounts receivable from that retailer. As a per-
centage of gross sales, returns were 3.4% in fiscal 2014,
3.3% in fiscal 2013 and 3.5% in fiscal 2012.
Payments to Customers
Certain incentive arrangements require the payment of
a fee to customers based on their attainment of pre-
established sales levels. These fees have been recorded as
a reduction of Net Sales in the accompanying consoli-
dated statements of earnings and were not material to the
results of operations in any period presented.
The Company enters into transactions related to
demonstrations, advertising and counter construction,
some of which involve cooperative relationships with
customers. These activities may be arranged either
with unrelated third parties or in conjunction with the
customer. The Company’s share of the cost of these
transac tions (regardless of to whom they were paid) are
reflected in Selling, general and administrative expenses
in the accompanying consolidated statements of
earnings and were approximately $1,410 million, $1,412
million and $1,343 million in fiscal 2014, 2013 and
2012, respectively.