Avon 2015 Annual Report Download - page 90

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars 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 primarily in one channel, direct
selling. Our reportable segments are based on geographic operations in three regions: Latin America; Europe, Middle East & Africa; and Asia
Pacific. In addition, we operate our business in North America, which has been presented as discontinued operations for all periods
presented and is discussed further below. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare (which
includes personal care), fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear,
accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products.
Sales are made to the ultimate consumer principally by independent Representatives.
In December 2015, we entered into definitive agreements with affiliates controlled by Cerberus Capital Management (“Cerberus”), which
include a $435 investment in Avon by an affiliate of Cerberus through the purchase of our convertible preferred stock and the separation of
the North America business from Avon into a privately-held company that will be majority-owned and managed by an affiliate of Cerberus.
Avon will retain approximately 20% ownership in this new privately-held company. The transactions are expected to close concurrently in
the first half of 2016. North America was previously its own reportable segment and has been presented as discontinued operations for all
periods presented. Refer to Note 3, Discontinued Operations and Divestitures for additional information regarding the investment by an
affiliate of Cerberus and the separation of the North America business.
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
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 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 allowances for sales returns, allowances for doubtful
accounts receivable, provisions for inventory obsolescence, the determination of discount rate and other actuarial assumptions for pension
and postretirement benefit expenses, restructuring expense, income taxes and tax valuation allowances, share-based compensation, loss
contingencies and the evaluation of goodwill, intangible assets, property, plant and equipment and capitalized software for potential
impairment.
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 accumulated other comprehensive income (loss) (“AOCI”). Gains or losses resulting from the impact of changes in
foreign currency rates on assets and liabilities denominated in a currency other than the functional currency are recorded in other expense,
net.
For financial statements of Avon subsidiaries operating in highly inflationary economies, the United States (“U.S.”) dollar is required to be used
as the functional currency. At December 31, 2015, Venezuela was the only Avon subsidiary considered to be operating in a highly inflationary
economy. Highly inflationary accounting requires monetary assets and liabilities, such as cash, receivables and payables, to be remeasured into
U.S. dollars at the current exchange rate at the end of each period with the impact of any changes in exchange rates being recorded in
income. We record the impact of changes in exchange rates on monetary assets and liabilities in other expense, net. Similarly, deferred tax
assets and liabilities are remeasured into U.S. dollars at the current exchange rates; however, the impact of changes in exchange rates is
recorded in income taxes in the Consolidated Statements of Operations. Non-monetary assets and liabilities, such as inventory, property, plant
and equipment and prepaid expenses are recorded in U.S. dollars at the historical rates at the time of acquisition of such assets or liabilities.
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