Avon 2006 Annual Report Download - page 40

PART II
forward rates at December 31, 2006, adjusted for an assumed
10% appreciation or 10% depreciation of the U.S. dollar against
these hedging contracts.
Credit Risk of Financial Instruments
We attempt to minimize our credit exposure to counterparties by
entering into derivative transactions and similar agreements only
with major international financial institutions with "A" or higher
credit ratings as issued by Standard & Poor's Corporation. Our
foreign currency and interest rate derivatives are comprised of
over-the-counter forward contracts, swaps or options with major
international financial institutions. Although our theoretical
credit risk is the replacement cost at the then estimated fair
value of these instruments, we believe that the risk of incurring
credit risk losses is remote and that such losses, if any, would not
be material.
Non-performance of the counterparties on the balance of all the
foreign exchange and interest rate agreements would result in a
net write-off of $2.2 at December 31, 2006. In addition, in the
event of non-performance by such counterparties, we would be
exposed to market risk on the underlying items being hedged as
a result of changes in foreign exchange and interest rates.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of our Consolidated
Financial Statements and Notes thereto contained herein.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and
Procedures
As of the end of the period covered by this report, our principal
executive and principal financial officers carried out an evalua-
tion of the effectiveness of the design and operation of our dis-
closure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934 (the “Exchange Act”). In
designing and evaluating our disclosure controls and procedures,
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives,
and management was required to apply its judgment in evaluat-
ing and implementing possible controls and procedures. Based
upon their evaluation, the principal executive and principal
financial officers concluded that our disclosure controls and
procedures were effective as of December 31, 2006 at the rea-
sonable assurance level. Disclosure controls and procedures are
designed to ensure that information relating to Avon (including
our consolidated subsidiaries) required to be disclosed by us in
the reports we file under the Exchange Act is recorded, proc-
essed, summarized and reported within the time periods speci-
fied in the Securities and Exchange Commission’s rules and
forms and to ensure that information required to be disclosed is
accumulated and communicated to management to allow timely
decisions regarding disclosure.
Management’s Report on Internal Control
over Financial Reporting
Avon’s management is responsible for establishing and maintain-
ing adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) under the Exchange Act.
Internal control over financial reporting is defined as a process
designed by, or under the supervision of, Avon’s principal execu-
tive and principal financial officers and effected by Avon’s board
of directors, management and other personnel, to provide rea-
sonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable
detail accurately and fairly reflect the transactions and dis-
positions of the assets of Avon;
• provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of Avon are being made only in
accordance with authorizations of management and directors
of Avon; and
• provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
Avon’s assets that could have a material effect on the financial
statements.
Internal control over financial reporting cannot provide absolute
assurance of achieving financial reporting objectives because of
its inherent limitations. Internal control over financial reporting is
a process that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can
be circumvented by collusion or improper override. Because of
such limitations, there is a risk that material misstatements may
not be prevented or detected on a timely basis by internal