INCOME TAXES DERIVATIVES  GOODWILL AND OTHER INTANGIBLE ASSETS 40 THEEST{E LAUDER COMPANIES INC. assets and future compensation levels. We evaluate these assumptions with our actuarial advisors and we believe they are within accepted industry ranges, although an increase or decrease in the assumptions or economic events outside our control could have a direct impact on reported net earnings. The pre-retirement discount rate for each plan used for determining future pension obligations is based on a review of highly rated long-term bonds. At June 30, 2003, we used a pre-retirement discount rate for our U.S. Plan of 5.75% and varying rates on our international plans of between 2.75% and 7.0%. For fiscal 2003, we used an expected return on plan assets of 8.5% for our U.S. Plan and varying rates of between 4.5% and 8.25% for our international plans. In determining the long-term rate of return for a plan, we consider the historical rates of return, the nature of the plan’s investments and an expectation for the plan’s investment strategies. The U.S. Plan asset allocation as of June 30, 2003 was approximately 58% equity investments, 23% fixed income investments, 13% cash and 6% other investments. For fiscal 2004, we will use a pre-retirement discount rate for the U.S. Plan of 5.75% and anticipate using an expected return on plan assets of 8.00%. The change  in this assumption from that used in fiscal 2003 will cause an increase in pension expense in fiscal 2004. We will continue to monitor the market conditions relative to these assumptions and adjust them accordingly. Goodwill is calculated as the excess of the cost of pur- chased businesses over the value of their underlying net assets. Other intangible assets principally consist of purchased royalty rights and trademarks. Goodwill and other intangible assets that have an indefinite life are  not amortized. On an annual basis, we test goodwill and other intan- gible assets for impairment. To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. We have the ability to influence the outcome and ultimate results based on the assumptions and estimates we choose. To mitigate undue influence, we use industry accepted valuation models and set criteria that are reviewed and approved by various levels of management. Additionally, we evaluate our recorded goodwill with the assistance of a third-party valuation firm. We currently account for derivative financial instruments in accordance with SFAS No. 133, “Accounting for Deriva- tive Instruments and Hedging Activities,” as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instru- ments embedded in other contracts, and for hedging activities. This Statement also requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet and that they be measured at fair value. We currently use derivative financial instruments to hedge certain anticipated transactions and interest rates, as well as receivables and payables denominated in for- eign currencies. We do not utilize derivatives for trading or speculative purposes. Hedge effectiveness is docu- mented, assessed and monitored by our employees who are qualified to make such assessments and monitor the instruments. Variables that are external to us such as social, political and economic risks may have an impact on our hedging program and the results thereof. We have accounted for, and currently account for, income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” This Statement establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities dur- ing the current and preceding years. It requires an asset and liabilityapproach for financial accounting and report- ing of income taxes. As of June 30, 2003, we have current net deferred tax assets of $116.0 million and non-current net deferred  tax assets of $38.7 million. These net deferred tax assets assume sufficient future earnings for their realization, as well as the continued application of current tax  rates. Included in net deferred tax assets is a valuation allowance of approximately $2.9 million for deferred tax assets, which relates to foreign tax loss carryforwards not utilized to date, where management believes it is more likely than not that the deferred tax assets will not be real- ized in the relevant jurisdiction. Based on our assess- ments, no additional valuation allowance is required. If we determine that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of earnings at that time. Furthermore, we provide tax reserves for Federal, state and international exposures relating to audit results, plan- ning initiatives and compliance responsibilities. The devel- opment of these reserves requires judgments about tax issues, potential outcomes and timing, and is a subjective critical estimate.