Avon 2007 Annual Report Download - page 62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income taxes on the December 31, 2006 Consolidated Balance
Sheet. In order to consistently report certain distribution and
sourcing costs across all segments, we reclassified net amounts
of $18.1 and $20.5 from cost of sales to selling, general and
administrative expenses on the Consolidated Statements of
Income for the years ended December 31, 2006 and 2005,
respectively. We also reclassified $6.4 and $9.4 from changes in
inventory to obsolescence expense on the Consolidated State-
ments of Cash Flows for the years ended December 31, 2006
and 2005, respectively.
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) 2007 2006 2005
Numerator:
Net income $ 530.7 $ 477.6 $ 847.6
Denominator:
Basic EPS weighted-average
shares outstanding 433.47 447.40 466.28
Diluted effect of assumed
conversion of share-based
awards 3.42 1.76 3.19
Diluted EPS adjusted weighted-
average shares outstanding 436.89 449.16 469.47
Earnings Per Share:
Basic $ 1.22 $ 1.07 $ 1.82
Diluted $ 1.21 $ 1.06 $ 1.81
At December 31, 2007 and 2006, we did not include stock
options to purchase 7.4 million shares and 12.9 million shares of
Avon common stock, respectively, in the calculations of diluted
EPS because the exercise prices of those options were greater
than the average market price and their inclusion would be anti-
dilutive.
NOTE 2. New Accounting Standards
Standards Implemented
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”). See Note 6, Income Taxes, for addi-
tional information.
Effective January 1, 2006, we adopted SFAS No. 123 (revised
2004), Share-Based Payment (“SFAS 123R”). See Note 1,
Description of Business and Summary of Significant Accounting
Policies, and Note 8, Share-Based Compensation Plans and Other
Long-Term Incentive Plan, for additional information.
Effective December 31, 2006, we adopted SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106 and 132R (“SFAS 158”). See Note 10, Employee
Benefit Plans, for additional information.
Effective December 31, 2006, we adopted Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstate-
ments when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”), which provides interpretive guidance
on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 allows for a one-time transi-
tional cumulative effect adjustment to beginning retained earn-
ings as of January 1, 2007, for errors that were not previously
deemed material, but are material under the guidance in SAB
108. The adoption of SAB 108 had no impact on our Con-
solidated Financial Statements.
Effective January 1, 2006, we adopted SFAS No. 151, Inventory
Costs (“SFAS 151”), which requires certain inventory-related
costs to be expensed as incurred. The adoption of SFAS 151 had
no impact on our Consolidated Financial Statements.
Standards to be Implemented
In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business Combinations, (“SFAS 141R”), which changes
how business combinations are accounted for and will impact
financial statements both on the acquisition date and in sub-
sequent periods. SFAS 141R is effective January 1, 2009 for
Avon and will be applied prospectively. The impact of adopting
SFAS 141R will depend on the nature and terms of future
acquisitions.
In December 2007, the FASB issued SFAS No. 160, Non-
controlling Interests in Consolidated Financial Statements,
(“SFAS”) which changes the accounting and reporting stan-
dards, for the noncontrolling interests in a subsidiary in con-
solidated financial statements. SFAS 160 recharacterizes minority
interests as noncontrolling interests and requires noncontrolling
interests to be classified as a component of shareholders equity.
SFAS 160 is effective January 1, 2009 for Avon, and requires
retroactive adoption of the presentation and disclosure require-
ments for existing minority interests. We do not believe the
adoption of SFAS 160 will have a material impact on our