Avon 2008 Annual Report Download - page 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share and share data)
NOTE 1. Description of the Business
and Summary of Significant Accounting
Policies
Business
When used in these notes, the terms “Avon,” “Company,”
“we,” “our” or “us” mean Avon Products, Inc.
We are a global manufacturer and marketer of beauty and
related products. Our business is conducted worldwide primarily
in one channel, direct selling. We manage our operations based
on geographic operations and our reportable segments are Latin
America; North America; Central & Eastern Europe; Western
Europe, Middle East & Africa; Asia Pacific; and China. We also
centrally manage Global Brand Marketing, Supply Chain and
Sales organizations. Beginning in the fourth quarter of 2008, we
changed our product categories from Beauty, Beauty Plus and
Beyond Beauty to Beauty, Fashion and Home. Beauty consists of
cosmetics, fragrances, skin care and toiletries (“CFT”). Fashion
consists of fashion jewelry, watches, apparel, footwear and
accessories. Home consists of gift and decorative products,
housewares, entertainment and leisure, children’s and nutritional
products. Sales from Health and Wellness products and mark.,a
global cosmetics brand that focuses on the market for young
women, are included among these three categories based on
product type. Sales are made to the ultimate consumer
principally by independent Avon Representatives.
Principles of Consolidation
The consolidated financial statements include the accounts of
Avon and our majority and wholly-owned subsidiaries.
Intercompany balances and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with gen-
erally accepted accounting principles in the United States of
America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
materially from those estimates and assumptions. On an ongoing
basis, we review our estimates, including those related to
restructuring reserves, allowances for doubtful accounts receiv-
able, allowances for sales returns, provisions for inventory obso-
lescence, income taxes and tax valuation reserves, share-based
compensation, loss contingencies, and the determination of
discount rate and other actuarial assumptions for pension,
postretirement and postemployment benefit expenses.
Foreign Currency
Financial statements of foreign subsidiaries operating in other
than highly inflationary economies are translated at year-end
exchange rates for assets and liabilities and average exchange
rates during the year for income and expense accounts. The
resulting translation adjustments are recorded within accumu-
lated other comprehensive loss. Financial statements of
subsidiaries operating in highly inflationary economies are trans-
lated using a combination of current and historical exchange
rates and any translation adjustments are included in current
earnings. Gains or losses resulting from foreign currency trans-
actions are recorded in other expense, net.
Revenue Recognition
Net sales primarily include sales generated as a result of
Representative orders less any discounts, taxes and other
deductions. We recognize revenue upon delivery, when both
title and the risks and rewards of ownership pass to the
independent Representatives, who are our customers. Our
internal financial systems accumulate revenues as orders are
shipped to the Representative. Since we report revenue upon
delivery, revenues recorded in the financial system must be
reduced for an estimate of the financial impact of those orders
shipped but not delivered at the end of each reporting period.
We use estimates in determining the adjustments to revenue and
operating profit for orders that have been shipped but not deliv-
ered as of the end of the period. These estimates are based on
daily sales levels, delivery lead times, gross margin and variable
expenses. We also estimate an allowance for sales returns based
on historical experience with product returns. In addition, we
estimate an allowance for doubtful accounts receivable based on
an analysis of historical data and current circumstances.
Other Revenue
Other revenue primarily includes shipping and handling fees
billed to Representatives.
Cash and Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which
approximates fair value. Cash equivalents are high-quality,
short-term money market instruments with an original maturity
of three months or less and consist of time deposits with a
number of U.S. and non-U.S. commercial banks and money
market fund investments.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (“FIFO”) method. We clas-
sify inventory into various categories based upon their stage in
the product life cycle, future marketing sales plans and
disposition process. We assign a degree of obsolescence risk to
A V O N 2008 F-7