Avon 2004 Annual Report Download - page 35

Investments in Debt and Equity Securities
Debt and equity securities that have a readily deter-
minable fair value and that management does not
intend to hold to maturity are classified as available-
for-sale and carried at fair value. Unrealized holding
gains and losses, net of applicable taxes, are recorded
as a separate component of shareholders’ equity, net
of deferred taxes. Realized gains and losses from the
sale of available-for-sale securities are calculated on a
specific identification basis. Declines in the fair values
of investments below their cost basis that are judged
to be other-than-temporary are recorded in other
expense (income), net. In determining whether an other-
than-temporary decline in market value has occurred,
Avon considers various factors, including the duration
and the extent to which market value is below cost.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are
not amortized, but rather are assessed for impairment
annually and upon the occurrence of an event that indi-
cates impairment may have occurred. Intangible assets
with estimable useful lives are amortized using a straight-
line method over the estimated useful lives of the assets.
Avon completed its annual goodwill impairment assess-
ment and no adjustments to goodwill were necessary.
Goodwill totaled $82.2 and $45.2 at December 31, 2004
and 2003, respectively. The change in carrying value of
goodwill for the year ended December 31, 2004 is due
to the acquisition of additional shares in Avon’s two
subsidiaries in China (see Note 17, Acquisition). Intangible
assets totaled $.6 and $1.0 at December 31, 2004 and
2003, respectively.
Stock Awards
Avon applies the recognition and measurement princi-
ples 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 and restricted stock units 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 earn-
ings per share if Avon had applied the fair value recogni-
tion provisions of Statement of Financial Accounting
Standards (“FAS”) No. 123, “Accounting for Stock-Based
Compensation,”to stock-based compensation for the
years ended December 31 was as follows:
2004 2003 2002
Net income, as reported $846.1 $664.8 $534.6
Add: compensation
expense recognized for
restricted stock and
restricted stock units,
net of taxes 5.7 4.3 4.4
Less: stock-based
compensation expense
determined under
FAS No. 123, net of taxes (32.0) (33.0) (34.5)
Pro forma net income $819.8 $636.1 $504.5
Earnings per share:
Basic – as reported $ 1.79 $ 1.41 $ 1.13
Basic – pro forma 1.74 1.35 1.07
Diluted – as reported 1.77 1.39 1.11
Diluted – pro forma 1.72 1.33 1.05
The fair value for these options granted to employees
was estimated at the grant date using a Black-Scholes
option pricing model with the following weighted-
average assumptions:
2004 2003 2002
Risk-free interest rate 2.4% 2.4% 4.6%
Expected life 4 years 4 years 4 years
Expected volatility 30% 45% 45%
Expected dividend yield 1.5% 1.6% 1.5%
The weighted-average grant date fair values per share
of options granted during 2004, 2003 and 2002 were
$8.54, $8.83, and $9.55, respectively.