LensCrafters 2005 Annual Report Download - page 109

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> 108 | ANNUAL REPORT 2005
Standards (“SFAS”) No. 52, Foreign Currency Translation. The financial statements of foreign subsidiaries
are translated into Euro, which is the functional currency of the Parent Company and the reporting currency
of the Company. Assets and liabilities of foreign subsidiaries, which use the local currency as their functional
currency, are translated at year-end exchange rates. Results of operations are translated using the average
exchange rates prevailing throughout the year. The resulting cumulative translation adjustments have been
recorded as a separate component of “Accumulated other comprehensive income (loss).”
The Company has one subsidiary in a highly inflationary country. The operations of such subsidiary
are currently not material to the Company’s Consolidated Financial Statements.
Transactions in foreign currencies are recorded at the exchange rate in effect at the transaction date.
Gains or losses from foreign currency transactions, such as those resulting from the settlement of
foreign receivables or payables during the year, are recognized in consolidated income in such year.
Aggregate transaction gain/(loss) for the years ended December 31, 2003, 2004 and 2005, were Euro
1.3 million, Euro 12.5 million and Euro 9.5 million, respectively.
Cash and cash equivalents - Cash and cash equivalents includes cash on hand, demand
deposits, and highly liquid investments with an original maturity of three months or less, and
amounts in-transit from bank for customer credit card, debit card, and electronic bank transfer
(“EBT”) transactions. Substantially, all amounts in transit from the banks are converted to cash within
four business days from the time of sale. Credit card, debit card and EBT transactions in transit were
approximately Euro 23.3 million and Euro 17.8 million at December 31, 2004 and 2005, respectively.
Bank overdrafts - Bank overdrafts represent negative cash balances held in banks and amounts
borrowed under various unsecured short-term lines of credit (see “Credit Facilities” included in Note
14 for further discussion of the short-term lines of credit) that the Company has obtained through
local financial institutions. These facilities are usually short-term in nature or may contain provisions
that allow them to renew automatically with a cancellation notice period. Certain subsidiaries’
agreements require a guarantee from Luxottica Group S.p.A. Interest rates on these lines of credit
vary and can be used to obtain various letters of credit when needed.
Inventories - Luxottica Group’s manufactured inventories, approximately 65.0% and 75.4% of total
frame inventory for 2004 and 2005, respectively, are stated at the lower of cost, as determined under
the weighted-average method (which approximates the first-in, first-out method, or “FIFO”), or
market value. Retail inventory not manufactured by the Company or its subsidiaries are stated at the
lower of cost, at FIFO or weighted-average cost, or market value. As of January 2, 2005, the
Company changed its method of valuing certain of its retail inventory from the last-in, first-out
method (“LIFO”) to FIFO in order to reduce the number of valuation methods among retail divisions.
The effect of the change in the inventory valuation method had an immaterial effect on the 2005
Statements of Consolidated Income. At December 31, 2003 and 2004 approximately 43 and 33%,
or Euro 100.4 million and Euro 97.7 million, respectively, of retail inventory cost was calculated using
LIFO. The LIFO reserve at December 31, 2003 and 2004, was less then Euro 2 million and Euro 3
million, respectively. Inventories are recorded net of allowances for estimated losses among other
reserves. These reserves are calculated using various factors including sales volume, historical
shrink results and current trends.
Property, plant and equipment - Property, plant and equipment are stated at historical cost.
Depreciation is computed principally on the straight-line method over the estimated useful lives of the
related assets as follows: