Avon 2004 Annual Report Download - page 33

1Description of the Business
and Summary of Significant
Accounting Policies
Business
Avon Products, Inc. (“Avon” or the “Company”) is a global
manufacturer and marketer of beauty and related prod-
ucts. Avon’s business is conducted worldwide primarily
in one channel, direct selling. The Company’s reportable
segments are based on geographic operations in four
regions: North America, Europe, Latin America and Asia
Pacific. Sales are made to the ultimate customers princi-
pally by independent Avon Representatives. The product
categories include Beauty, which consists of cosmetics,
fragrance, skin care and toiletries (“CFT”); Beauty Plus,
which consists of fashion jewelry, watches, apparel and
accessories; and Beyond Beauty, which consists of home
products, gift and decorative products, candles and toys.
Sales from Health and Wellness and mark. are included
among these three categories based on product type.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the
accounts of Avon and its majority and wholly-owned
subsidiaries. Intercompany balances and transactions
are eliminated. The accounts of Avon’s variable interest
entity, as defined by the Financial Accounting Standards
Board’s (“FASB”) Interpretation No. 46, “Consolidation of
Variable Interest Entities” (“FIN 46"), are included in the
Consolidated Financial Statements. Avon has a 40% inter-
est in Mirabella Realty Company, (“Mirabella”), a Philippine
company formed to purchase land in the Philippines. The
remaining 60% interest is held by Company-sponsored
retirement plans. Prior to July 1, 2003, the investment was
accounted for under the equity method. Avon holds a
variable interest in Mirabella because Avon guarantees
$2.2 of Mirabella’s third-party borrowings. As a result,
Mirabella was consolidated beginning July 1, 2003.
Mirabella’s net assets totaled $.7 at December 31,
2004, and consisted primarily of land of $3.8 and
debt of $2.2.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles in the U.S.
requires management to make estimates and assump-
tions that affect the reported amounts of assets and lia-
bilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those
estimates and assumptions. On an ongoing basis, man-
agement reviews its estimates, including those related to
allowances for doubtful accounts receivable, allowances
for sales returns, provisions for inventory obsolescence,
income taxes and tax valuation reserves, stock-based
compensation, loss contingencies, and the determina-
tion of discount rate and other actuarial assumptions
for pension, postretirement and postemployment
benefit expenses.
Foreign Currency
Financial statements of foreign subsidiaries operating in
other than highly inflationary economies are translated
at year-end exchange rates for assets and liabilities and
average exchange rates during the year for income and
expense accounts. The resulting translation adjustments
are recorded within accumulated other comprehensive
loss. Financial statements of subsidiaries operating in
highly inflationary economies are translated using a com-
bination of current and historical exchange rates and any
translation adjustments are included in earnings.
Financial statement translation of subsidiaries operating
in highly inflationary economies and foreign currency
transactions resulted in net losses (gains) of $9.5, $15.9
and ($16.0) in 2004, 2003 and 2002, respectively, which
are included in other expense (income), net. Included
in these amounts are transaction losses (gains) of $2.6,
$2.8 and ($27.8) in 2004, 2003 and 2002, respectively,
related to U.S. dollar-denominated assets (see Note 7,
Financial Instruments and Risk). In addition, cost of
sales and marketing, distribution and administrative
expenses included the (favorable) unfavorable impact
of the translation of inventories and prepaid expenses
Avon’s reportable segments are based
on geographic operations in four regions:
North America, Europe, Latin America
and Asia Pacific.
In millions, except per share and share data