Avon 2013 Annual Report Download - page 122

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 2010, the 2002 assessment was upheld at the first administrative level at an amount reduced to approximately $28 from $67,
including penalties and accrued interest, at the exchange rate on December 31, 2013. We have appealed this decision to the second
administrative level.
In the event that the 2002 or 2012 assessments are upheld at the second as well as the third and last administrative level, it may be
necessary for us to provide security to pursue further appeals, which, depending on the circumstances, may result in a charge to earnings. It
is not possible to reasonably estimate the amount or range of potential loss that we could incur related to the 2002 and 2012 assessments
or any additional assessments that may be issued for subsequent periods (tax years up through 2007 are closed by statute). However, other
similar excise tax (IPI) assessments involving different periods (1998-2001) have been canceled and officially closed in our favor by the second
administrative level, and management believes that the likelihood that the 2002 and 2012 assessments will be upheld is remote.
Other Matters
Various other lawsuits and claims, arising in the ordinary course of business or related to businesses previously sold, are pending or
threatened against Avon. In management’s opinion, based on its review of the information available at this time, the total cost of resolving
such other contingencies at December 31, 2013, is not expected to have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
NOTE 17. Goodwill and Intangible Assets
In the second quarter of 2013, Silpada was classified within discontinued operations. See Note 3, Discontinued Operations for more
information. Accordingly, all amounts exclude the results of Silpada for all periods presented.
Q3 2013 China Impairment Assessment
As compared to our projections used in our fourth quarter 2012 impairment analysis (“Q4 2012 projections”), China performed generally in
line with our revenue and earnings projections during the first half of 2013. As assumed in our Q4 2012 projections, China’s revenue in the
first half of 2013 continued to deteriorate versus the prior-year period; however, beginning in the third quarter of 2013, this revenue decline
was significantly in excess of our assumptions. Revenue in the third quarter of 2013 declined 67% versus the third quarter of 2012,
compared to a revenue decline of 28% in the first half of 2013 versus the first half of 2012. As a result, in the third quarter of 2013, it
became apparent that we would not achieve our 2013 and long-term forecasted revenue and earnings, and we completed an interim
impairment assessment of the fair value of goodwill related to our operations in China.
China’s revenue performance in the third quarter of 2013 was approximately 67% less (when excluding the impact of foreign currency) than
the revenue in our Q4 2012 projections. The revenue decline in China during the third quarter of 2013 resulted in the recognition of an
operating loss while we had expected operating profit in our Q4 2012 projections. In the third quarter of 2013, we significantly lowered our
long-term revenue and earnings projections for China that was included in our DCF model utilized in our interim impairment assessment.
Based upon this interim analysis, we determined that the goodwill related to our operations in China was impaired. Specifically, the results
of our interim impairment analysis indicated the estimated fair value of our China reporting unit was less than its respective carrying amount.
As a result of our impairment testing, we recorded a non-cash before tax impairment charge of $38.4 ($38.4 after tax) to reduce the
carrying amount of goodwill. There is no goodwill remaining for our China reporting unit as a result of this impairment. The decline in the
fair value of the China reporting unit was primarily driven by the significant reduction in the forecasted long-term growth rates and cash
flows used to estimate fair value. Fiscal year 2013 revenue for China was expected to be approximately 38% less than the revenue in our Q4
2012 projections and 47% less than fiscal year 2012 results.
We also performed an interim impairment analysis for our China finite-lived intangible assets, which indicated the carrying value of these
intangible assets exceeded the estimated future undiscounted cash flows of the business. This resulted in a non-cash before tax impairment
charge of $3.7 ($2.8 after tax) to reduce the carrying amount of these assets. There are no intangible assets remaining for China as a result
of this impairment charge.
China had historically generated positive cash flows, but was not expected to generate positive cash flows in 2013 or for a number of years
thereafter as there was a need for further investment than was previously anticipated. As a result, the expected cash flows of the business as
of the date of our impairment analysis were not at a level sufficient to support the carrying value of the business. As compared to prior
years’ projections for China, the future expectations declined significantly in the 2012 and 2013 impairment analyses. This reduction in
future expectations led to impairments of $44.0 and $42.1 being recorded during the third quarters of 2012 and 2013, respectively.