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. The interim consolidated financial statements should be read in conjunction with 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, 2015.

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, 2015. 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 $(83.6) million and $(136.7) million, net of tax, during the three months ended September 30, 2015 and 2014, 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 $(4.9) million and $(9.9) million during the three months ended September 30, 2015 and 2014, respectively.

Accounts Receivable

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $22.2 million and $20.6 million as of September 30, 2015 and June 30, 2015, 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 $338.7 million, or 12%, and $292.8 million, or 11%, of the Company’s consolidated net sales for the three months ended September 30, 2015 and 2014, respectively. This customer accounted for $260.6 million, or 17%, and $139.1 million, or 12%, of the Company’s accounts receivable at September 30, 2015 and June 30, 2015, respectively.

Inventory and Promotional Merchandise

Inventory and promotional merchandise, net consists of:

	September 30		June 30
(In millions)	2015		2015

Raw materials	$	265.7	$	306.9
Work in process	132.8		168.7
Finished goods	609.4		581.3
Promotional merchandise	168.8		158.9

	$	1,176.7	$	1,215.8

Property, Plant and Equipment

	September 30		June 30
(In millions)	2015		2015
Assets (Useful Life)
Land	$	15.2	$	15.4
Buildings and improvements (10 to 40 years)	182.3		184.9
Machinery and equipment (3 to 10 years)	673.4		671.3
Computer hardware and software (4 to 15 years)	1,024.9		1,012.4
Furniture and fixtures (5 to 10 years)	70.3		73.7
Leasehold improvements	1,641.0		1,621.9

	3,607.1		3,579.6
Less accumulated depreciation and amortization	2,138.6		2,089.4

	$	1,468.5	$	1,490.2

The cost of assets related to projects in progress of $182.0 million and $192.0 million as of September 30, 2015 and June 30, 2015, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was $95.2 million and $98.9 million during the three months ended September 30, 2015 and 2014, 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:

	September 30		June 30
(In millions)	2015		2015

Advertising, merchandising and sampling	$	317.9	$	293.8
Employee compensation	324.1		463.3
Payroll and other taxes	165.6		142.0
Accrued income taxes	174.3		96.9
Other	504.1		474.4

	$	1,486.0	$	1,470.4

Income Taxes

The effective rate for income taxes was 29.2% and 31.5% for the three months ended September 30, 2015 and 2014, respectively. The decrease in the effective tax rate was principally due to a lower effective tax rate related to the Company’s foreign operations.

As of September 30, 2015 and June 30, 2015, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $78.1 million and $77.8 million, respectively. The total amount of unrecognized tax benefits at September 30, 2015 that, if recognized, would affect the effective tax rate was $50.9 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2015 in the accompanying consolidated statements of earnings was $1.0 million. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2015 and June 30, 2015 was $16.9 million and $16.5 million, respectively. On the basis of the information available as of September 30, 2015, the Company does not expect any significant changes to the total amount of unrecognized tax benefits within the next 12 months.

As of September 30, 2015 and June 30, 2015, the Company had current net deferred tax assets of $274.7 million and $279.0 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 $82.8 million and $72.1 million as of September 30, 2015 and June 30, 2015, respectively, substantially all of which are included in Other assets in the accompanying consolidated balance sheets.

Debt

As of September 30, 2015, the Company had $422.0 million of commercial paper outstanding, maturing through October 2015, which the Company is refinancing on a periodic basis as it matures at then-prevailing market interest rates.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a single comprehensive five-step principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard is not effective for the Company until fiscal 2019. In addition, the FASB is allowing companies to early adopt this guidance for the Company’s fiscal 2018. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply this new guidance when it becomes effective and has not yet selected a transition method. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.