Avon 2007 Annual Report Download - page 29

Key Performance Indicators
Within the following discussion and analysis, we utilize the key performance indicators (“KPIs”) defined below to assist in the evaluation of
our business.
KPI Definition
Growth in Active Representatives This indicator is based on the number of Representatives submitting an order in a cam-
paign, totaled for all campaigns in the related period. This amount is divided by the
number of billing days in the related period, to exclude the impact of year-to-year
changes in billing days (for example, holiday schedules). To determine the growth in
Active Representatives, this calculation is compared to the same calculation in the corre-
sponding period of the prior year.
Change in Units This indicator is based on the gross number of pieces of merchandise sold during a peri-
od, as compared to the same number in the same period of the prior year. Units sold
include samples sold and product contingent upon the purchase of another product (for
example, gift with purchase or purchase with purchase), but exclude free samples.
Inventory Days This indicator is equal to the number of days of historical cost of sales covered by the
inventory balance at the end of the period.
CRITICAL ACCOUNTING ESTIMATES
We believe the accounting policies described below represent our
critical accounting policies due to the estimation processes
involved in each. See Note 1, Description of the Business and
Summary of Significant Accounting Policies, for a detailed dis-
cussion of the application of these and other accounting policies.
Restructuring Reserves
We record severance-related expenses once they are both prob-
able and estimable in accordance with the provisions of FAS
No. 112, Employer’s Accounting for Post-Employment Benefits for
severance provided under an ongoing benefit arrangement.
One-time, involuntary benefit arrangements and disposal costs,
primarily contract termination costs, are accounted for under the
provisions of FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. One-time, voluntary benefit arrange-
ments are accounted for under the provisions of FAS No. 88,
Employers’ Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits.We
evaluate impairment issues under the provisions of FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
We estimate the expense for these initiatives, when approved by
the appropriate corporate authority, by accumulating detailed
estimates of costs for such plans. These expenses include the esti-
mated costs of employee severance and related benefits, impair-
ment of property, plant and equipment, contract termination
payments for leases, and any other qualifying exit costs. These
estimated costs are grouped by specific projects within the overall
plan and are then monitored on a quarterly basis by finance per-
sonnel. Such costs represent management’s best estimate, but
require assumptions about the programs that may change over
time, including attrition rates. Estimates are evaluated periodically
to determine if and adjustment is required.
Allowances for Doubtful Accounts
Receivable
Representatives contact their customers, selling primarily through
the use of brochures for each sales campaign. Sales campaigns are
generally for a two-week duration in the U.S. and a two- to four-
week duration outside the U.S. The Representative purchases
products directly from Avon and may or may not sell them to an
end user. In general, the Representative, an independent con-
tractor, remits a payment to Avon each sales campaign, which
relates to the prior campaign cycle. The Representative is generally
precluded from submitting an order for the current sales campaign
until the accounts receivable balance for the prior campaign is
paid; however, there are circumstances where the Representative
fails to make the required payment. We record an estimate of an
allowance for doubtful accounts on receivable balances based on
an analysis of historical data and current circumstances. Over the
past three years, annual bad debt expense has been in the range
of $136 to $164, or approximately 1.7% of total revenue. We
generally have no detailed information concerning, or any
communication with, any end user of our products beyond the
Representative. We have no legal recourse against the end user for
the collectability of any accounts receivable balances due from the
Representative to us. If the financial condition of our Representa-
tives were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
A V O N 2007 23