NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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 statements of prior years have been reclassified to conform to current year presentation.

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Management Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements 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. Descriptions of these policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013. 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 period-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”) attributable to The Estée Lauder Companies Inc. amounted to $(14.5) million and $6.1 million, net of tax, during the three months ended December 31, 2013 and 2012, respectively, and $58.0 million and $82.6 million of unrealized translation gains, net of tax, during the six months ended December 31, 2013 and 2012, respectively. For the Company’s Venezuelan subsidiary operating in a highly inflationary economy, the U.S. dollar is the functional currency. Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in earnings.

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 categorizes these instruments as entered into for purposes other than trading.

The accompanying consolidated statements of earnings include net exchange gains (losses) on foreign currency transactions of $(6.5) million and $0.5 million during the three months ended December 31, 2013 and 2012, respectively, and $(6.4) million and $1.4 million during the six months ended December 31, 2013 and 2012, respectively.

Accounts Receivable

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $25.2 million and $22.7 million as of December 31, 2013 and June 30, 2013, respectively.

Concentration of Credit Risk

The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to department stores, perfumeries, specialty multi-brand retailers and retailers in its travel retail business. The Company grants credit to all qualified customers and does not believe it is exposed significantly to any undue concentration of credit risk.

The Company’s largest customer sells products primarily within the United States and accounted for $281.4 million, or 9%, and $270.0 million, or 9%, of the Company’s consolidated net sales for the three months ended December 31, 2013 and 2012, respectively, and $623.0 million, or 11%, and $606.2 million, or 11%, of the Company’s consolidated net sales for the six months ended December 31, 2013 and 2012, respectively. This customer accounted for $149.2 million, or 10%, and $113.7 million, or 10%, of the Company’s accounts receivable at December 31, 2013 and June 30, 2013, respectively.

Inventory and Promotional Merchandise

Inventory and promotional merchandise, net consists of:

	December 31		June 30
(In millions)	2013		2013

Raw materials	$	302.2	$	274.2
Work in process	143.6		116.8
Finished goods	524.9		510.9
Promotional merchandise	175.2		212.0
	$	1,145.9	$	1,113.9

Property, Plant and Equipment

	December 31		June 30
(In millions)	2013		2013
Assets (Useful Life)
Land	$	15.1	$	14.7
Buildings and improvements (10 to 40 years)	200.6		195.4
Machinery and equipment (3 to 10 years)	665.5		647.9
Computer hardware and software (4 to 10 years)	996.4		948.4
Furniture and fixtures (5 to 10 years)	72.9		71.6
Leasehold improvements	1,466.8		1,349.6
	3,417.3		3,227.6
Less accumulated depreciation and amortization	2,021.9		1,876.9
	$	1,395.4	$	1,350.7

The cost of assets related to projects in progress of $183.5 million and $178.7 million as of December 31, 2013 and June 30, 2013, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was $94.0 million and $77.9 million during the three months ended December 31, 2013 and 2012, respectively, and $181.1 million and $153.2 million during the six months ended December 31, 2013 and 2012, respectively. Depreciation and amortization related to the Company’s manufacturing process is included in Cost of Sales and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.

Other Accrued Liabilities

Other accrued liabilities consist of the following:

	December 31		June 30
(In millions)	2013		2013

Advertising, merchandising and sampling	$	337.5	$	318.6
Employee compensation	345.0		433.3
Payroll and other taxes	192.1		135.7
Accrued income taxes	173.1		81.3
Other	482.2		465.7
	$	1,529.9	$	1,434.6

Income Taxes

The effective rate for income taxes was 32.4% and 32.0% for the three months ended December 31, 2013 and 2012, respectively. The increase in the effective income tax rate was principally due to a slightly higher effective tax rate on the Company’s foreign operations.

The effective income tax rate was 31.8% and 32.5% for the six months ended December 31, 2013 and 2012, respectively. The decrease in the effective income tax rate was principally due to a reduction in income tax reserve adjustments.

As of December 31, 2013 and June 30, 2013, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $60.4 million and $64.0 million, respectively. The total amount of unrecognized tax benefits at December 31, 2013 that, if recognized, would affect the effective tax rate was $43.3 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and six months ended December 31, 2013 in the accompanying consolidated statements of earnings was $0.1 million and $0.4 million, respectively. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at December 31, 2013 and June 30, 2013 was $15.7 million and $17.4 million, respectively. On the basis of the information available as of December 31, 2013, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $5 million to $10 million within 12 months as a result of projected resolutions of global tax examinations and controversies and a potential lapse of the applicable statutes of limitations.

During the second quarter of fiscal 2014, the Spain Supreme Court notified the Company that its appeal with respect to the disallowance of tax deductions claimed by its Spanish subsidiary for fiscal years 1999 through 2002 was denied. The denial of the appeal represents the final outcome of the matter, which did not have a material impact on the Company’s consolidated financial statements. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

As of December 31, 2013 and June 30, 2013, the Company had current net deferred tax assets of $288.4 million and $296.0 million, respectively, substantially all of which are included in Prepaid expenses and other current assets in the accompanying consolidated balance sheets. In addition, the Company had noncurrent net deferred tax assets of $52.3 million and $50.3 million as of December 31, 2013 and June 30, 2013, respectively, substantially all of which are included in Other assets in the accompanying consolidated balance sheets.

Recently Adopted Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance requiring an entity to present, in a single location either parenthetically on the face of the financial statements or in a separate note, significant amounts reclassified from each component of accumulated other comprehensive income (loss) (“AOCI”) and the income statement line items affected by the reclassification. An entity is not permitted to provide this information parenthetically on the face of the income statement if it has items that are not required to be reclassified in their entirety to net income. Instead of disclosing the income statement line affected, a cross reference to other disclosures that provide additional details on these items is required. This guidance became effective prospectively for the Company’s fiscal 2014 first quarter and the adoption of this disclosure-only guidance did not have a significant impact on the Company’s consolidated financial statements.

In July 2012, the FASB amended its authoritative guidance related to testing indefinite-lived intangible assets for impairment. Under the revised guidance, entities testing their indefinite-lived intangible assets for impairment have the option of performing a qualitative assessment before performing further impairment testing. If entities determine, on the basis of qualitative factors, that it is more-likely-than-not that the asset is impaired, a quantitative test is required. This guidance became effective in the beginning of the Company’s fiscal 2014 and the adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued authoritative guidance that creates new disclosure requirements about the nature of an entity’s rights of offset and related arrangements associated with its financial instruments and derivative instruments. This revised guidance helps reconcile differences in the offsetting requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). These requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB issued an update that limits the scope of these disclosures to recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions to the extent they are offset in the balance sheet or subject to an enforceable master netting arrangement or similar agreement. This disclosure-only guidance became effective for the Company’s fiscal 2014 first quarter, with retrospective application required. The Company currently does not hold any financial or derivative instruments within the scope of this guidance that are offset in its consolidated balance sheets or are subject to an enforceable master netting arrangement. The adoption of this guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

Recently Issued Accounting Standards

In July 2013, the FASB issued authoritative guidance that requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward. If either (i) an NOL carryforward, a similar tax loss, or tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position or (ii) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice), an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. This guidance becomes effective prospectively for unrecognized tax benefits that exist as of the Company’s fiscal 2015 first quarter, with retrospective application and early adoption permitted. The Company will apply this new guidance prospectively when it becomes effective, and the adoption of this disclosure-only guidance is not expected to have a significant impact on its consolidated financial statements.

In March 2013, the FASB issued authoritative guidance to resolve the diversity in practice concerning the release of the cumulative translation adjustment (“CTA”) into net income (i) when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity, and (ii) in connection with a step acquisition of a foreign entity. This amended guidance requires that CTA be released in net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, and that a pro rata portion of the CTA be released into net income upon a partial sale of an equity method investment in a foreign entity only. In addition, the amended guidance clarifies the definition of a sale of an investment in a foreign entity to include both, events that result in the loss of a controlling financial interest in a foreign entity and events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately prior to the date of acquisition. The CTA should be released into net income upon the occurrence of such events. This guidance becomes effective prospectively for the Company’s fiscal 2015 first quarter with early adoption permitted. The Company will apply this new guidance when it becomes effective, and the adoption of this guidance is not expected to have a significant impact on its consolidated financial statements.

In February 2013, the FASB issued authoritative guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligations within the scope of this guidance is fixed at the reporting date. It does not apply to certain obligations that are addressed within existing guidance in U.S. GAAP. This guidance requires an entity to measure in-scope obligations with joint and several liability (e.g., debt arrangements, other contractual obligations, settled litigations, judicial rulings) as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount it expects to pay on behalf of its co-obligors. In addition, an entity is required to disclose the nature and amount of the obligation. This guidance should be applied retrospectively to all prior periods for those obligations resulting from joint and several liability arrangements within the scope of this guidance that exist at the beginning of the Company’s fiscal 2015 first quarter, with early adoption permitted. The Company will apply this guidance when it becomes effective, and the adoption of this guidance is not expected to have a significant impact on its consolidated financial statements.