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NOTE 3 - STAFF ACCOUNTING BULLETIN NO. 108
In September 2006, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin
("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in
Current Year Financial Statements" ("SAB No. 108"),
which sets forth the SEC Staff's views on the proper methods
for quantifying errors when there were uncorrected
errors in a prior year. Under SAB No. 108, companies
should evaluate a misstatement that existed in prior years
based on its impact on the current year income statement
(the "rollover" approach), as well as the cumulative effect
of correcting such misstatements in the current year's
ending balance sheet (the "iron curtain" approach), or
collectively, the "dual" approach. In prior years, the
Company utilized the "rollover" approach to evaluate
uncorrected misstatements and believes the conclusions
reached regarding its quantitative and qualitative assessments
of materiality of such items, both individually and in
the aggregate, were appropriate.
SAB No. 108 became effective for the Company's fiscal
year ended June 30, 2007. In accordance with the transition
guidance set forth in SAB No. 108, the Company
elected to record a one-time cumulative effect adjustment
to opening retained earnings to correct errors in certain
balance sheet accounts that arose in prior years, which
previously had been considered immaterial using the
"rollover" approach.
Since the fiscal 1996 acquisition of the Bobbi Brown
brand, the Company made payments to the sellers based
on a percentage of Bobbi Brown sales internationally,
which should have been capitalized as goodwill in accordance
with SFAS No. 141, "Business Combinations," as
amended. These payments were previously recorded as
selling, general and administrative expenses in the consolidated
statements of earnings. As such, goodwill
increased by $10.5 million and opening retained earnings
increased by $6.7 million, net of tax, in the accompanying
fiscal 2007 consolidated balance sheet.
In connection with the Company's defined benefit
pension obligations, certain liability amounts were incorrectly
reflected on the balance sheet in years prior to fiscal
2002, the majority of which related to benefit plans for
the Company's international operations. As such, other
noncurrent liabilities decreased by $8.7 million and
opening retained earnings increased by $5.0 million, net
of tax, in the accompanying fiscal 2007 consolidated
balance sheet.
Beginning in years prior to fiscal 2003, inventory valuation
was impacted by the incorrect application of profit
in ending inventory partially offset by the overstatement
of inventory obsolescence reserves, culminating in the
current year net decrease to inventory of $2.5 million and
opening retained earnings decrease of $2.0 million, net
of tax, in the accompanying fiscal 2007 consolidated
balance sheet.
In years prior to fiscal 2004, the Company overstated
certain accrued liability positions. As such, other accrued
liabilities decreased by $19.1 million and opening retained
earnings increased by $14.5 million, net of tax, in the
accompanying fiscal 2007 consolidated balance sheet.
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