Estee Lauder 2015 Annual Report Download - page 92

THE EST{E LAUDER COMPANIES INC. 89
administrative expenses in the accompanying consoli-
dated statements of earnings and include distribution cen-
ter 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 catego-
ries thereof) using the licensors’ trademarks. The licenses
typically have an initial term of approximately 5 years to
11 years, and are renewable subject to the Company’s
compliance with the license agreement provisions. The
remaining terms, including the potential renewal periods,
range from approximately 5 years to 26 years. Under
each license, the Company is required to pay royalties
to the licensor, at least annually, based on net sales to
third parties.
Most of the Company’s licenses were entered into to
create new business. In some cases, the Company
acquired, or entered into, a license where the licensor or
another licensee was operating a pre-existing beauty
products business. In those cases, other intangible assets
are capitalized and amortized over their useful lives.
Certain license agreements may require minimum
royalty payments, incremental royalties based on net sales
levels and minimum spending on advertising and promo-
tional activities. Royalty expenses are accrued in the
period in which net sales are recognized while advertising
and promotional expenses are accrued at the time these
costs are incurred.
Stock-Based Compensation
The Company records stock-based compensation, mea-
sured at the fair value of the awards that are ultimately
expected to vest, as an expense in the consolidated finan-
cial statements. Upon the exercise of stock options or the
vesting of restricted stock units, performance share units,
performance share units based on total stockholder return
and market share units, the resulting excess tax benefits,
if any, are credited to additional paid-in capital. Any
resulting tax deficiencies will first be offset against those
cumulative credits to additional paid-in capital. If the
cumulative credits to additional paid-in capital are
exhausted, tax deficiencies will be recorded to the
provision for income taxes.
Income Taxes
The Company accounts for income taxes using an asset
and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in
its consolidated financial statements or tax returns. The
net deferred tax assets assume sufficient 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 allowance for deferred tax assets,
where management believes it is not more-likely-than-not
that the deferred tax assets will be realized in the relevant
jurisdiction. Based on the Company’s assessments, no
additional valuation allowance is required during the
current year. If the Company’s assessment of realizability
of a deferred tax asset changes, an increase to a valuation
allowance 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.
The Company provides tax reserves for U.S. federal,
state, local and foreign exposures relating to periods sub-
ject to audit. The development of reserves for these expo-
sures requires judgments about tax issues, potential
outcomes and timing, and is a subjective critical estimate.
The Company assesses its tax positions and records 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, the Company has recorded the largest
amount of tax benefit with a greater than 50% likelihood
of being realized upon settlement with a tax authority that
has full knowledge of all relevant information. For those
tax positions where it is more-likely-than-not that a tax
benefit will not be sustained, no tax benefit has been rec-
ognized in the consolidated financial statements. The
Company classifies applicable interest and penalties as a
component of the provision for income taxes. Although
the outcome relating to these exposures is uncertain, in
management’s opinion adequate provisions for income
taxes have been made for estimable potential liabilities
emanating from these exposures. If actual outcomes
differ materially from these estimates, they could have
a material impact on the Company’s consolidated results
of operations.