Avon 2007 Annual Report Download - page 61

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.
Financial Instruments
We use derivative financial instruments, including interest rate
swaps, treasury lock agreements, forward foreign currency con-
tracts and options, to manage interest rate and foreign currency
exposures. We record all derivative instruments at their fair val-
ues 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
and tax credit carryforwards expire. Deferred taxes are not pro-
vided on the portion of unremitted earnings of subsidiaries out-
side of the U.S. when management concludes that these
earnings are indefinitely reinvested. Deferred taxes are provided
on earnings not considered indefinitely reinvested. U.S. income
taxes have not been provided on approximately $2,102.6 of
undistributed income of subsidiaries that has been or is intended
to be indefinitely reinvested outside the U.S.
Uncertain Tax Positions
Effective January 1, 2007, we adopted Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB State-
ment No. 109, (“FIN 48”). In accordance with FIN 48, we recog-
nize the benefit of a tax position, if that position is more likely
than not of being sustained on audit, based on the technical
merits of the position.
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 $913.9 in 2007 (2006 – $810.0; 2005 – $739.9).
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 $368.4 in 2007
(2006 – $248.9; 2005 – $135.9).
Research and Development
Research and development costs are expensed as incurred and
amounted to $71.8 in 2007 (2006 – $65.8; 2005 – $64.2).
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, involuntary benefit arrangements and disposal costs,
primarily contract termination costs, are accounted for under the
provisions of SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. One-time, voluntary benefit
arrangements are accounted for under the provisions of SFAS
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 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. We reclassified taxes payable of $24.9
from sales taxes and taxes other than income to long-term
A V O N 2007 F-9