Avon 2005 Annual Report Download - page 24

NOTES฀TO฀CONSOLIDATED฀FINANCIAL฀STATEMENTS
In millions, except per share and share data.
1DESCRIPTION฀OF฀THE฀BUSINESS฀
AND฀SUMMARY฀OF฀SIGNIFICANT฀
ACCOUNTING฀POLICIES
Business
We are a global manufacturer and marketer of beauty and
related products. Our business is conducted worldwide primarily
in one channel, direct selling. Our reportable segments are based
on geographic operations in four regions: North America, Europe,
Latin America and Asia Pacific. In December 2005, we announced
changes to our global operating structure. Effective January 1,
2006, we began managing operations in Central and Eastern
Europe and also China as stand-alone operating segments, and
we began centrally managing Brand Marketing and the Supply
Chain. These changes increase the number of operating seg-
ments to six. Sales are made to the ultimate customers principally
by independent Avon Representatives. Product categories include
Beauty, which consists of cosmetics, fragrances, skin care and
toiletries; Beauty Plus, which consists of fashion jewelry, watches,
apparel and accessories; and Beyond Beauty, which consists of
home products and gift and decorative products. 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 our majority and wholly-owned subsidiaries.
Intercompany balances and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with gener-
ally accepted accounting principles in the U.S. requires us to make
estimates and assumptions that affect the reported amounts
of assets and liabilities, 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, we review our estimates,
including those related to restructuring reserves, allowances for
doubtful accounts receivable, allowances for sales returns, provi-
sions for inventory obsolescence, income taxes and tax valuation
reserves, stock-based compensation, loss contingencies, and the
determination 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 result-
ing translation adjustments are recorded within accumulated other
comprehensive loss. Financial statements of subsidiaries operating
in highly inflationary economies are translated using a combina-
tion of current and historical exchange rates and any translation
adjustments are included in current earnings.
Financial statement translation of subsidiaries operating in highly
inflationary economies and foreign currency transactions resulted
in net losses of $0, $9.5 and $15.9 in 2005, 2004 and 2003,
respectively, which are included in other expense, net. Included
in these amounts are transaction losses of $.2, $2.6 and $2.8
in 2005, 2004 and 2003, respectively, related to U.S. dollar-
denominated assets.
Revenue Recognition
Net sales primarily include sales generated as a result of
Representative orders less any discounts, taxes and other deduc-
tions. We recognize revenue upon delivery, when both title and
the risks and rewards of ownership pass to the independent
Representatives, who are our customers. Our internal financial
systems accumulate revenues as orders are shipped to the
Representative. Since we report revenue upon delivery, revenues
recorded in the financial system must be reduced for an estimate
of the financial impact of those orders shipped but not deliv-
ered at the end of each reporting period. We use estimates in
determining the adjustments to revenue and operating profit for
orders that have been shipped but not delivered as of the end of
the period. These estimates are based on daily sales levels, delivery
lead times, gross margin and variable expenses. We also estimate
We are a global manufacturer
and marketer of beauty and
related products. Our business
is conducted worldwide
primarily in one channel,
direct selling.