Avon 2006 Annual Report Download - page 66

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004, $6.1, $7.3 and $10.4,
respectively, related to the effective portions of these hedges
were included in foreign currency translation adjustments within
AOCI on the Consolidated Balance Sheets.
At December 31, 2006 and 2005, we held foreign currency
forward contracts and option contracts with fair values totaling
$7.9 and $2.5, respectively, recorded in accounts payable.
Credit and Market Risk
We attempt to minimize our credit exposure to counterparties by
entering into interest rate swap and foreign currency forward
rate and option agreements only with major international finan-
cial institutions with "A" or higher credit ratings as issued by
Standard & Poor's Corporation. Our foreign currency and inter-
est 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 replace-
ment 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
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.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liqui-
dation.
The methods and assumptions used to estimate fair value are as
follows:
Fixed-income securities – The fair values of these investments
were based on the quoted market prices for issues listed on
securities exchanges.
Debt maturing within one year and long-term debt – The fair
values of all debt and other financing were determined based on
quoted market prices.
Foreign exchange forward and option contracts – The fair values
of forward and option contracts were determined based on
quoted market prices from banks.
Interest rate swap and treasury lock agreements – The fair values
of interest rate swap and treasury lock agreements were esti-
mated based on quotes from market makers of these instru-
ments and represent the estimated amounts that we would
expect to receive or pay to terminate the agreements.
The asset (liability) amounts recorded in the balance sheet
(carrying amount) and the estimated fair values of financial
instruments at December 31 consisted of the following:
2006 2005
Carrying
Amount Fair Value
Carrying
Amount Fair Value
Cash and cash
equivalents $ 1,198.9 $ 1,198.9 $1,058.7 $1,058.7
Fixed–income
securities 18.0 18.0 17.1 17.1
Grantor trust cash
and cash
equivalents 25.2 25.2 34.4 34.4
Debt maturing
within one year (615.6) (615.6) (882.5) (882.5)
Long-term debt, net
of related discount
or premium (1,170.4) (1,165.4) (766.1) (776.1)
Foreign exchange
forward and
option contracts 7.9 7.9 2.5 2.5
Interest rate swap
and treasury lock
agreements (10.1) (10.1) 2.7 2.7
NOTE 8. Share-Based Compensation
Plans and Other Long-Term Incentive
Plan
The Avon Products, Inc. 2005 Stock Incentive Plan (the “2005
Plan”), which is shareholder approved, provides for several types
of share-based incentive compensation awards including stock
options, stock appreciation rights, restricted stock, restricted
stock units and performance unit awards. Under the 2005 Plan,
the maximum number of shares that may be awarded is
31,000,000 shares, of which no more than 8,000,000 shares
may be used for restricted stock awards and restricted stock unit
awards. Shares issued under share-based awards will be primarily
funded with issuance of new shares.
We have issued stock options, restricted stock, restricted stock units
and stock appreciation rights under the 2005 Plan. Stock option
awards are granted with an exercise price equal to the market price
of Avon’s stock at the date of grant; those option awards generally
vest in thirds over the three-year period following each option grant
date and have ten-year contractual terms. Restricted stock or
restricted stock units generally vest after three years.