Avon 2006 Annual Report Download - page 58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepaid Brochure Costs
Costs to prepare brochures are deferred and amortized over the
period during which the benefits are expected, which is typically
the campaign length. At December 31, 2006 and 2005, prepaid
expenses and other included deferred brochure costs of $37.2
and $34.5, respectively.
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 dis-
posal 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 con-
struction 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 2006, 2005 and 2004, Avon cap-
italized $1.0, $6.6 and $2.5 of interest, respectively.
Deferred Software
Certain systems development costs related to the purchase,
development and installation of computer software are cap-
italized 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. At December 31, 2006 and 2005, other assets included
unamortized deferred software costs of $74.7 and $68.7,
respectively.
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 holding
gains and losses, net of applicable taxes, are recorded as a sepa-
rate component of shareholders’ equity, net of deferred taxes.
Realized gains and losses from the sale of available-for-sale secu-
rities 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, net. In determining whether an other-than-temporary
decline in market value has occurred, we consider various fac-
tors, including the duration and the extent to which market
value is below cost.
Goodwill and Intangible Assets
Goodwill is not amortized, but rather is 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 2006, 2005 or 2004.
Share-Based Compensation Plans
Prior to January 1, 2006, we applied the disclosure-only provisions
of Statement of Financial Accounting Standards (“SFAS”)
No. 123, Accounting for Stock-Based Compensation (“SFAS
123”). In accordance with the provisions of SFAS 123, we applied
APB 25, Accounting for Stock Issued to Employees (“APB 25”)
and related interpretations in accounting for our share-based
compensation plans and, accordingly, did not recognize compen-
sation expense for stock options because we issued options at
exercise prices equal to the market value at date of grant.
Effective January 1, 2006, we adopted SFAS No. 123 (revised
2004), Share-Based Payment (“SFAS 123R”), which revises SFAS
123 and supersedes APB 25. SFAS 123R requires all share-based
payments to employees to be recognized in the financial state-
ments based on their fair values using an option-pricing model at
the date of grant. We have elected to use the modified pro-
spective method for adoption, which requires compensation
expense to be recorded for all unvested stock options and
restricted shares beginning in the first quarter of adoption, based
on the fair value at the original grant date. Prior year financial
statements have not been restated. We have elected to use the
alternative short-cut method to calculate the historical pool of
windfall tax benefits upon adoption of SFAS 123R in accordance
with FASB Staff Position (“FSP”) No. FAS 123R-3, Transition Elec-
tion Related to Accounting for the Tax Effects of Share-based
Payment Awards. For the year ended December 31, 2006, we
have determined that we have a pool of windfall tax benefits.
The impact from the adoption of SFAS 123R during 2006, includ-
ing restricted stock units granted in connection with design
changes to share-based compensation plans related to the adop-
tion, decreased income before taxes and minority interest, net
income, basic and diluted earnings per share, and net cash pro-
vided by operating activities for the year ended December 31,
2006, by $49.2, $32.4, $.07 and $8.1 respectively, while it
increased net cash provided by financing activities by $8.1.
See Note 8, Share-Based Compensation Plans and Other Long-
Term Incentive Plan, for additional information regarding our
share-based compensation plans.