Avon 2008 Annual Report Download - page 61

Statement No. 109, (“FIN 48”). In accordance with FIN 48, we
recognize the benefit of a tax position, if that position is more
likely than not of being sustained on audit, based on the techni-
cal 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; advertising; research and
development; information technology; and other administrative
costs, including finance, legal and human resource functions.
Shipping and Handling
Shipping and handling costs are expensed as incurred and
amounted to $972.1 in 2008 (2007 - $913.9; 2006 - $810.0).
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 $390.5 in 2008 (2007 -
$368.4; 2006 - $248.9).
Research and Development
Research and development costs are expensed as incurred and
amounted to $70.0 in 2008 (2007 - $71.8; 2006 - $65.8).
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.
Share-based Compensation
All share-based payments to employees are recognized in the
financial statements based on their fair values using an option-
pricing model at the date of grant. We use a Black-Scholes-
Merton option-pricing model to calculate the fair value
of options.
Restructuring Reserves
We record severance-related expenses once they are both prob-
able and estimable in accordance with the provisions of State-
ment of Financial Accounting Standard (“SFAS”) No. 112,
Employer’s Accounting for Post-Employment Benefits, for sev-
erance 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 contin-
gencies based on an assessment of whether the risk of loss is
remote, reasonably possible or probable. We record loss contin-
gencies 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 $45.4 from accounts
receivable to prepaid expenses and other on the Consolidated
Balance Sheet for the year ended December 31, 2007. We also
reclassified $17.9 and $8.0 from changes in accounts receivable
to changes in prepaid expenses and other on the Consolidated
Statements of Cash Flows for the years ended December 31,
2007 and 2006, 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
components of basic and diluted EPS were as follows:
(Shares in millions) 2008 2007 2006
Numerator:
Net income $ 875.3 $ 530.7 $ 477.6
Denominator:
Basic EPS weighted-average
shares outstanding 426.36 433.47 447.40
Diluted effect of assumed
conversion of share-based
awards 3.17 3.42 1.76
Diluted EPS adjusted
weighted-average shares
outstanding 429.53 436.89 449.16
Earnings Per Share:
Basic $ 2.05 $ 1.22 $ 1.07
Diluted $ 2.04 $ 1.21 $ 1.06
A V O N 2008 F-9