Estee Lauder 2015 Annual Report Download - page 88

THE EST{E LAUDER COMPANIES INC. 85
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 prod-
ucts around the world. Products are marketed under
brand names, including: Estée Lauder, Aramis, Clinique,
Prescriptives, Lab Series, Origins, M.A.C, Bobbi Brown,
La Mer, Aveda, Jo Malone London, Bumble and bumble,
Darphin, Ojon, Smashbox, RODIN olio lusso, Le Labo,
Editions de Parfums Frédéric Malle and GLAMGLOW.
Certain subsidiaries of The Estée Lauder Companies Inc.
are also the global licensee of the Tommy Hilfiger, Kiton,
Donna Karan New York, DKNY, Michael Kors, Tom Ford,
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 sig-
nificant 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
intangible 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
$(322.5) million, $95.1 million and $(25.6) million, net of
tax, in fiscal 2015, 2014 and 2013, 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 earnings.
During the third quarter of fiscal 2014, the Venezuelan
government enacted changes to the foreign exchange
controls that expanded the use of its then-existing
exchange mechanisms and created another exchange
control mechanism (“SICAD II”), which allowed compa-
nies to apply for the purchase of foreign currency and for-
eign currency denominated securities for any legal use or
purpose. The Company considered its specific facts and
circumstances in determining the appropriate remeasur-
ment rate and determined the SICAD II rate was the most
appropriate rate that reflected the economics of its
Venezuelan subsidiary’s business 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 Vene-
zuelan 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.
On February 12, 2015, the Venezuelan government
introduced a new open market foreign exchange system
(“SIMADI”), which effectively replaced the SICAD II
mechanism. As the SIMADI is the only mechanism legally
available at this time for the Company’s highest priority
transactions, which are the import of goods, the Company
changed the exchange rate used to remeasure the mone-
tary assets and liabilities of its Venezuelan subsidiary to
the SIMADI rate during the third quarter of fiscal 2015.
Accordingly, a remeasurement charge of $5.3 million, on a
before and after tax basis, was reflected in Selling, general
and administrative expenses in the Company’s consoli-
dated statement of earnings for the year ended June 30,
2015. The net monetary assets of the Company’s Venezu-
elan subsidiary were not material as of June 30, 2015.