Avon 2009 Annual Report Download - page 71

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 aglobal manufacturer and marketer of beauty and
related products. Our business is conducted worldwide, primarily
in one channel, direct selling. Our reportable segments are based
on geographic operations in six regions: Latin America; North
America; Central &Eastern Europe; Western Europe, Middle
East &Africa; Asia Pacific; and China. We have centralized oper-
ations for Global Brand Marketing, Global Sales and Supply
Chain. Our product categories are Beauty, Fashion and Home.
Beauty consists of color cosmetics, fragrances, skin care and per-
sonal care. Fashion consists of fashion jewelry, watches, apparel,
footwear and accessories. Home consists of gift and decorative
products, housewares, entertainment and leisure products and
children’s and nutritional products. Sales from Health and Well-
ness products and mark.,aglobal 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. Inter-
company balances and transactions are eliminated.
Use of Estimates
We prepare our consolidated financial statements and related
disclosures in conformity with accounting principles generally
accepted in the United States of America, or GAAP. In preparing
these statements, we are required to use estimates and assump-
tions 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
receivable, allowances for sales returns, provisions for inventory
obsolescence, 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 subsidi-
aries operating in highly inflationary economies are translated
using acombination of current and historical exchange rates and
any translation adjustments are included in current earnings.
Gains or losses resulting from foreign currency transactions are
recorded in other expense, net.
Revenue Recognition
Net sales primarily include sales generated as aresult of Represen-
tative 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 theindependent Representatives,
who are our customers. Our internal financial systems accumulate
revenuesasordersare shipped to theRepresentative. 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 delivered as of the end of the period. These estimatesare
based on daily saleslevels, deliverylead 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 fordoubtful 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 anumber
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 dis-
position process. We assign adegree of obsolescence risk to
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