Avon 2006 Annual Report Download - page 59

Financial Instruments
We use derivative financial instruments, including interest rate
swaps, forward foreign currency contracts and options, to
manage interest rate and foreign currency exposures. We record
all derivative instruments at their fair values on the Consolidated
Balance Sheets as either assets or liabilities. See Note 7, Financial
Instruments and Risk Management.
Deferred Income Taxes
Deferred income taxes have been provided on items recognized
for financial reporting purposes in different periods than for
income tax purposes using tax rates in effect for the year in
which the differences are expected to reverse. A valuation
allowance is provided for deferred tax assets if it is more likely
than not these items will not be realized. The ultimate realization
of our deferred tax assets depends upon generating sufficient
future taxable income during the periods in which our temporary
differences become deductible or before our net operating loss
carryforwards expire. U.S. income taxes have not been provided
on approximately $2,158.7 of undistributed income of sub-
sidiaries that has been or is intended to be permanently
reinvested outside the United States.
Selling, General and Administrative
Expenses
Selling, general and administrative expenses include costs asso-
ciated with selling; marketing; and distribution activities, includ-
ing shipping and handling costs; research and development;
information technology; and other administrative costs, includ-
ing finance, legal, and human resource functions.
Shipping and Handling
Shipping and handling costs are expensed as incurred and
amounted to $787.0 in 2006 (2005 – $706.0; 2004 – $680.0).
Shipping and handling costs are included in selling, general and
administrative expenses on the Consolidated Statements of
Income.
Advertising
Advertising costs, excluding brochure preparation costs, are
expensed as incurred and amounted to $248.9 in 2006 (2005 –
$135.9; 2004 – $127.6).
Research and Development
Research and development costs are expensed as incurred and
amounted to $65.8 in 2006 (2005 – $64.2; 2004 – $63.1).
Research and development costs include all costs related to the
design and development of new products such as salaries and
benefits, supplies and materials and facilities costs.
Restructuring Reserves
We record severance-related expenses once they are both prob-
able and estimable in accordance with the provisions of SFAS
No. 112, Employer’s Accounting for Post-Employment Benefits,
for severance provided under an ongoing benefit arrangement.
One-time benefit arrangements and disposal costs, primarily
contract termination costs, are accounted for under the provi-
sions of SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. We evaluate impairment issues under the
provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
Contingencies
In accordance with SFAS No. 5, Accounting for Contingencies,
we determine whether to disclose and accrue for loss con-
tingencies based on an assessment of whether the risk of loss is
remote, reasonably possible or probable. We record loss con-
tingencies 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 Con-
solidated 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 is 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 compo-
nents of basic and diluted EPS were as follows:
(Shares in millions) 2006 2005 2004
Numerator:
Net income $ 477.6 $ 847.6 $ 846.1
Denominator:
Basic EPS weighted-average
shares outstanding 447.40 466.28 472.35
Diluted effect of assumed
conversion of share-based
awards 1.76 3.19 5.61
Diluted EPS adjusted weighted-
average shares outstanding 449.16 469.47 477.96
Earnings Per Share:
Basic $ 1.07 $ 1.82 $ 1.79
Diluted $ 1.06 $ 1.81 $ 1.77
At December 31, 2006 and 2005, we did not include stock
options to purchase 12.9 million shares and 12.1 million shares
of Avon common stock, respectively, in the calculations of
A V O N 2006 F-9