Avon 2011 Annual Report Download - page 70

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising
Advertising costs, excluding brochure preparation costs, are expensed as incurred and amounted to $311.2 in 2011, $400.4 in 2010 and
$352.7 in 2009.
Net Brochure Costs
Brochure costs amounted to $507.7 in 2011, $472.7 in 2010, and $481.2 in 2009 and were offset by brochure fees of $293.5 in 2011,
$291.0 in 2010, and $270.0 in 2009.
Research and Development
Research and development costs are expensed as incurred and amounted to $77.7 in 2011, $72.6 in 2010, and $65.4 in 2009. 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 the estimated expense for our restructuring initiatives as such costs are deemed probable and estimable, when approved by the
appropriate corporate authority and by accumulating detailed estimates of costs for such plans. These expenses include the estimated costs
of employee severance and related benefits, impairment of property, plant and equipment, and any other qualifying exit costs. Such costs
represent our best estimate, but require assumptions about the programs that may change over time, including attrition rates. Estimates are
evaluated periodically to determine if an adjustment is required.
Contingencies
We determine whether to disclose and accrue for loss contingencies based on an assessment of whether the risk of loss is remote,
reasonably possible or probable. We record loss contingencies when it is probable that a liability has been incurred and the amount of loss is
reasonably estimable.
Revisions
We have revised some immaterial amounts in the consolidated financial statements and accompanying notes. We reclassified $5.5 from
Noncurrent assets and liabilities to Proceeds from sale of investments on the Consolidated Statements of Cash Flows for the twelve months
ended December 31, 2010. We reclassified $30.7 of order processing fees from selling, general and administrative expenses to other
revenue on the Consolidated Statements of Income for the twelve months ended December 31, 2009, which did not have an impact on the
Consolidated Statements of Income.
Out-of-Period Items
During the first quarter of 2011, we determined that the net after tax gain on sale of Avon Products Company Limited (“Avon Japan”),
reported in our financial statements for the year ended December 31, 2010, should have been reported as a net after tax loss of
approximately $3, to correctly include all balances relating to Avon Japan that were previously included in Accumulated Other
Comprehensive Loss (“AOCI”). In addition, in the first quarter of 2011 the Company released a liability relating to a previously owned health
care business, which should have been released in a prior period, resulting in an approximate $4 increase in net income. The results of these
businesses were originally reported within discontinued operations upon disposition. The net impact of these two items decreased net
income for the first quarter of 2011 by approximately $9. We also identified and recorded other various out-of-period adjustments during
2011 (primarily related to cost of sales and selling, general and administrative expenses) that related to prior years. The net impact of these
other items decreased net income for 2011 by approximately $14.
We evaluated the total out-of-period adjustments impacting 2011 of approximately $23, both individually and in the aggregate, in relation
to the current period, which is when they were corrected, as well as the periods in which they originated and concluded that these
adjustments are immaterial to the consolidated annual financial statements for all impacted periods. See Note 19, Results of Operations by
Quarter (Unaudited), for discussion of these and other out-of-period adjustments within 2011 and their impact on the interim periods.