Avon 2003 Annual Report Download - page 29

Management’s Discussion and Analysis of Financial Condition and Results of Operations
management’s discussion
Avon’s foreign-currency financial instruments were analyzed at year-end to
determine their sensitivity to foreign exchange rate changes. Based on the
Company’s foreign exchange contracts at December 31, 2003, the impact
of a 10% appreciation or 10% depreciation of the U.S. dollar against the
Company’s foreign exchange contracts would not represent a material poten-
tial change in fair value, earnings or cash flows. This potential change does
not consider the underlying foreign currency exposures of the Company. The
hypothetical impact was calculated on the combined option and forward posi-
tions using forward rates at December 31, 2003, adjusted for an assumed 10%
appreciation or 10% depreciation of the U.S. dollar against the foreign con-
tracts. The impact of payments to settle option contracts are not significant
to this calculation. In 2003, net foreign exchange losses associated with the
Company’s foreign exchange contracts totaled $1.3 and were recorded in Other
expense (income), net. Additionally, net foreign exchange losses of $2.4 related
to derivative instruments designated as cash flow hedges are recorded in
Accumulated other comprehensive loss at December 31, 2003.
Equity Price Risk
Avon is exposed to equity price fluctuations for investments included in the
grantor trust (see Note 10, Employee Benefit Plans). A 10% change (either an
increase or decrease) in equity prices would not be material based on the fair
value of equity investments as of December 31, 2003.
Credit Risk
Avon attempts to minimize its credit exposure to counterparties by entering into
derivative transactions and similar agreements only with major international
financial institutions with “A” or higher credit ratings as issued by Standard &
Poor’s Corporation. Avon’s foreign currency and interest rate derivatives are
comprised of over-the-counter forward contracts, swaps or options with major
international financial institutions. Although Avon’s theoretical credit risk is the
replacement cost at the then estimated fair value of these instruments, manage-
ment believes that the risk of incurring credit risk losses is remote and that
such losses, if any, would not be material.
Non-performance of the counterparties on the balance of all the foreign
exchange and interest rate swap and forward rate agreements would not
result in a material write-off at December 31, 2003. In addition, in the event of
non-performance by such counterparties, Avon would be exposed to market
risk on the underlying items being hedged as a result of changes in foreign
exchange and interest rates.
Accounting Changes
See Note 2, Accounting Changes, for a discussion regarding recent accounting
standards, including the following:
• Emerging Issues Task Force (“EITF”) 00-14, “Accounting for Certain
Sales Incentives,”
• EITF 00-25, “Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor’s Products,”
• EITF 01-09, “Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s Products),”
• FAS No. 142, “Goodwill and Other Intangible Assets,”
• FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,”
• FAS No. 143, “Accounting for Asset Retirement Obligations,”
• FAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities,”
• FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,”
• FAS No. 148, “Accounting for Stock-Based Compensation – Transition
and Disclosure,”
• FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,”
• FAS No.132 “Employers’ Disclosures about Pensions and Other
Postretirement Benefits,” and
• FASB Staff Position No. FAS 106-a, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003.”
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