Avon 2003 Annual Report Download - page 45

Stock Awards — Avon applies the recognition and measurement principles
of Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock
Issued to Employees,” and related interpretations in accounting for its long-
term stock-based incentive plans, which are described in Note 8, Long-Term
Incentive Plans. No compensation cost related to grants of stock options
was reflected in Net income, as all options granted under the plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant. Compensation cost related to grants of restricted stock is
measured as the quoted market price of Avon’s stock at the measurement
date and is amortized to expense over the vesting period. The effect on Net
income and Earnings per share if Avon had applied the fair value recognition
provisions of Financial Accounting Standard (“FAS”) No. 123, “Accounting for
Stock-Based Compensation,” to stock-based compensation for the years
ended December 31 was as follows:
2003 2002 2001
Net income, as reported $664.8 $534.6 $444.6
Less: Stock-based compensation
expense determined under
FAS No. 123, net of tax (28.7) (30.1) (27.6)
Pro forma Net income $636.1 $504.5 $417.0
Earnings per share:
Basic – as reported $ 2.82 $ 2.26 $ 1.88
Basic – pro forma 2.70 2.14 1.76
Diluted – as reported 2.78 2.22 1.85
Diluted – pro forma 2.66 2.10 1.74
Financial Instruments — The Company uses derivative financial instruments,
including interest rate swaps, forward interest rate agreements, treasury lock
agreements, forward foreign currency contracts and options, to manage interest
rate and foreign currency exposures. Avon records all derivative instruments at
their fair values on the Consolidated Balance Sheets as either assets or liabilities.
Research and Development — Research and development costs are expensed
as incurred and aggregated in 2003 – $49.6 (2002 - $47.7; 2001 – $45.9).
Advertising — Advertising costs are expensed as incurred and aggregated in
2003 – $111.6 (2002 – $101.0; 2001 – $97.2). Direct response advertising costs,
consisting primarily of brochure preparation, are amortized over the period dur-
ing which the benefits are expected, which is typically the campaign length. At
December 31, 2003 and 2002, Prepaid expenses and other included deferred
brochure costs of $34.4 and $25.0, respectively.
Income Taxes — Deferred income taxes have been provided on items recog-
nized for financial reporting purposes in different periods than for income tax
purposes at future enacted rates. A valuation allowance is provided for deferred
tax assets if it is more likely than not these items will either expire before Avon is
able to realize their benefit, or that future deductibility is uncertain. U.S. income
taxes have not been provided on approximately $423.1 of undistributed income
of subsidiaries that has been or is intended to be permanently reinvested out-
side the United States.
Shipping and Handling — Shipping and handling costs are expensed as
incurred and aggregated in 2003 – $599.0 (2002 – $544.0; 2001 – $534.0).
Shipping and handling costs are included in Marketing, distribution and
administrative expenses on the Consolidated Statements of Income.
Contingencies — In accordance with FAS No. 5, “Accounting for Contingencies,”
Avon determines whether to disclose and accrue for loss contingencies based
on an assessment of whether the risk of loss is remote, reasonably possible or
probable. Avon records loss contingencies when it is probable that a liability
has been incurred and the amount of loss is reasonably estimable.
Reclassifications — To conform to the 2003 presentation, certain reclassifica-
tions were made to the prior years’ Consolidated Financial Statements and
the accompanying footnotes.
Earnings per Share — Basic earnings per share (“EPS”) are computed by
dividing net income by the weighted-average number of shares outstanding
during the year. Diluted EPS are calculated to give effect to all potentially dilutive
common shares that were outstanding during the year.
Notes to Consolidated Financial Statements
notes to statements
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