Avon 2005 Annual Report Download - page 25

2005฀ANNUAL฀REPORT฀฀45
an allowance for sales returns based on historical experience with
product returns. In addition, we estimate an allowance for doubt-
ful accounts receivable based on an analysis of historical data and
current circumstances.
Other Revenue
Other revenue primarily includes shipping and handling fees billed
to Representatives.
Cash and Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which
approximates fair value. Cash equivalents are high-quality, short-term
money market instruments with an original maturity of three months
or less and consist of time deposits with a number of U.S. and non-
U.S. commercial banks and money market fund investments.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (“FIFO”) method. We classify
inventory into various categories based upon their stage in the
product life cycle, future marketing sales plans and disposition pro-
cess. We assign a degree of obsolescence risk to products based on
this classification to determine the level of obsolescence provision.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreci-
ated using a straight-line method over the estimated useful lives
of the assets. The estimated useful lives generally are as follows:
buildings, 45 years; land improvements, 20 years; machinery
and equipment, 15 years; and office equipment, five to ten years.
Leasehold improvements are depreciated over the shorter of
the lease term or the estimated useful life of the asset. Upon
disposal of property, plant and equipment, the cost of the assets
and the related accumulated depreciation are removed from the
accounts and the resulting gain or loss is reflected in earnings.
Costs associated with repair and maintenance activities are
expensed as incurred.
We capitalize interest on borrowings during the active construc-
tion period of major capital projects. Capitalized interest is added
to the cost of the related asset and depreciated over the useful
lives of the assets. For 2005, 2004 and 2003, Avon capitalized
$6.6, $2.5 and $1.6 of interest, respectively.
Deferred Software
Certain systems development costs related to the purchase,
development and installation of computer software are capitalized
and amortized over the estimated useful life of the related project,
not to exceed five years. Costs incurred prior to the development
stage, as well as maintenance, training costs, and general and
administrative expenses are expensed as incurred. Unamortized
deferred software costs totaled $68.7 and $65.5 at December 31,
2005 and 2004, respectively, and are included in other assets.
Investments in Debt and Equity Securities
Debt and equity securities that have a readily determinable fair
value and that we do not intend to hold to maturity are classified
as available-for-sale and carried at fair value. Unrealized hold-
ing 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 securi-
ties 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, we consider 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 indicates 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. We completed our annual goodwill impairment
assessment and no adjustments to goodwill were necessary in
2005, 2004 or 2003.
Our 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.