Avon 2005 Annual Report Download - page 27

2005฀ANNUAL฀REPORT฀฀47
Contingencies
In accordance with FAS No. 5, “Accounting for Contingencies,”
we determine whether to disclose and accrue for loss contingen-
cies based on an assessment of whether the risk of loss is remote,
reasonably possible or probable. We record loss contingencies
when it is probable that a liability has been incurred and the
amount of loss is reasonably estimable.
Reclassifications
We have reclassified some prior year amounts in the
Consolidated Financial Statements and accompanying notes
for comparative purposes.
Earnings per Share
We compute basic earnings per share (“EPS”) 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.
For each of the three years ended December 31, the components
of basic and diluted earnings per share were as follows:
Shares in millions 2005 2004 2003
Numerator:
Net income $847.6 $846.1 $664.8
Interest expense on convertible
notes, net of taxes – – 5.7
Net income for purposes of
computing diluted EPS $847.6 $846.1 $670.5
Denominator:
Basic EPS weighted-average
shares outstanding 466.28 472.35 471.08
Diluted effect of:
Stock options 3.19 5.61 4.73
Convertible notes – – 7.32
Diluted EPS adjusted weighted-
average shares outstanding 469.47 477.96 483.13
EPS:
Basic $ 1.82 $ 1.79 $ 1.41
Diluted $ 1.81 $ 1.77 $ 1.39
At December 31, 2005 and 2004, we did not include stock
options to purchase 12.1 million shares and .2 million shares of
Avon common stock, respectively, in the calculations of diluted
earnings per share because the exercise prices of those options
were greater than the average market price and their inclusion
would be anti-dilutive.
2NEW฀ACCOUNTING฀฀ STANDARDS
Stock-Based Compensation
In December 2004, the FASB issued FASB Statement No. 123(R)
(revised December 2004), Share-Based Payment (“FAS 123(R)”),
which requires companies to expense the value of employee and
director stock options and similar awards. Beginning January 1,
2006, in accordance with FAS 123(R), we will record expense for
all grants of stock-based awards utilizing the modified prospective
method. The fair value of options granted will be calculated using
a Black-Scholes model. The impact of the adoption of FAS 123(R)
will depend on levels of share-based payments granted in the
future. Net income in each of the years of 2005, 2004 and 2003,
would have been lower by $31.1, $26.3 and $28.7, respectively, if
we had applied the fair value recognition provisions of FAS No. 123.
(See Note 1, Description of the Business and Summary of Significant
Accounting Policies.)
Inventory
In November 2004, the FASB issued FASB Statement No. 151,
Inventory Costs (“FAS 151”), which requires certain inventory-
related costs to be expensed as incurred. We will adopt FAS 151 on
January 1, 2006. We do not believe the adoption of FAS 151 will
have a material impact on the Consolidated Financial Statements.
Advertising costs, excluding
brochure preparation costs,
are expensed as incurred
and amounted to $135.9
in 2005, $127.6 in 2004
and $108.8 in 2003.