Proctor and Gamble 2005 Annual Report Download - page 50

Management’s฀Discussion฀and฀AnalysisThe฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
46
Notes฀to฀Consolidated฀Financial฀Statements
Note฀1฀Summary฀of฀Significant฀Accounting฀Policies
Nature฀of฀Operations
The฀Procter฀&฀Gamble฀Company’s฀(the฀“Company,”฀“we”฀or฀“us”)฀฀
business฀is฀focused฀on฀providing฀consumer฀branded฀products฀of฀฀
superior฀quality฀and฀value.฀We฀market฀over฀300฀branded฀products฀฀
in฀more฀than฀160฀countries฀around฀the฀world.฀Our฀products฀are฀sold฀฀
primarily฀through฀retail฀operations฀including฀mass฀merchandisers,฀฀
grocery฀ stores,฀ membership฀ club฀ stores,฀ drug฀ stores฀ and฀฀
high-frequency฀stores.
Basis฀of฀Presentation
The฀Consolidated฀Financial฀Statements฀include฀The฀Procter฀&฀Gamble฀
Company฀and฀its฀controlled฀subsidiaries.฀Intercompany฀transactions฀
are฀eliminated฀in฀consolidation.฀Investments฀in฀certain฀companies฀over฀
which฀we฀exert฀significant฀influence,฀but฀do฀not฀control฀the฀financial฀and฀
operating฀decisions,฀are฀accounted฀for฀as฀equity฀method฀investments.
Use฀of฀Estimates
Preparation฀of฀financial฀statements฀in฀conformity฀with฀accounting฀
principles฀generally฀accepted฀in฀the฀United฀States฀of฀America฀(U.S.฀
GAAP)฀requires฀management฀to฀make฀estimates฀and฀assumptions฀
that฀affect฀the฀amounts฀reported฀in฀the฀Consolidated฀Financial฀
Statements฀and฀accompanying฀disclosures.฀These฀estimates฀are฀based฀
on฀management’s฀best฀knowledge฀of฀current฀events฀and฀actions฀
the฀Company฀may฀undertake฀in฀the฀future.฀Estimates฀are฀used฀in฀
accounting฀for,฀among฀other฀items,฀consumer฀and฀trade฀promotion฀
accruals,฀pensions,฀post-employment฀benefits,฀stock฀options,฀useful฀
lives฀for฀depreciation฀and฀amortization,฀future฀cash฀flows฀associated฀
with฀impairment฀testing฀for฀goodwill฀and฀long-lived฀assets,฀deferred฀
tax฀assets,฀potential฀income฀tax฀assessments฀and฀contingencies.฀Actual฀
results฀may฀ultimately฀differ฀from฀estimates,฀although฀management฀
does฀not฀believe฀such฀differences฀would฀materially฀affect฀the฀financial฀
statements฀in฀any฀individual฀year.฀
Revenue฀Recognition
Sales฀are฀recognized฀when฀revenue฀is฀realized฀or฀realizable฀and฀has฀
been฀earned.฀Most฀revenue฀transactions฀represent฀sales฀of฀inventory.฀
The฀revenue฀recorded฀includes฀shipping฀and฀handling฀costs,฀which฀฀
generally฀are฀included฀in฀the฀list฀price฀to฀the฀customer.฀Our฀policy฀is฀to฀
recognize฀revenue฀when฀title฀to฀the฀product,฀ownership฀and฀risk฀of฀loss฀
transfer฀to฀the฀customer,฀which฀generally฀is฀on฀the฀date฀of฀shipment.฀฀
A฀provision฀for฀payment฀discounts฀and฀product฀return฀allowances฀is฀฀
recorded฀as฀a฀reduction฀of฀sales฀in฀the฀same฀period฀that฀the฀revenue฀฀
is฀recognized.฀
Trade฀promotions,฀consisting฀primarily฀of฀customer฀pricing฀allowances,฀
merchandising฀funds฀and฀consumer฀coupons,฀are฀offered฀through฀various฀
programs฀to฀customers฀and฀consumers.฀Sales฀are฀recorded฀net฀of฀trade฀
promotion฀spending,฀which฀is฀recognized฀as฀incurred,฀generally฀at฀the฀
time฀of฀the฀sale.฀Most฀of฀these฀arrangements฀have฀terms฀of฀approximately฀
one฀year.฀Accruals฀for฀expected฀payouts฀under฀these฀programs฀are฀฀
included฀as฀accrued฀marketing฀and฀promotion฀in฀the฀accrued฀and฀other฀
liabilities฀line฀item฀in฀the฀Consolidated฀Balance฀Sheets.฀
Cost฀of฀Products฀Sold
Cost฀of฀products฀sold฀primarily฀comprises฀direct฀materials฀and฀supplies฀
consumed฀in฀the฀manufacture฀of฀product,฀as฀well฀as฀manufacturing฀
labor,฀depreciation฀expense฀and฀direct฀overhead฀expense฀necessary฀to฀
acquire฀and฀convert฀the฀purchased฀materials฀and฀supplies฀into฀finished฀
product.฀Cost฀of฀products฀sold฀also฀includes฀the฀cost฀to฀distribute฀
products฀to฀customers,฀inbound฀freight฀costs,฀internal฀transfer฀costs,฀
warehousing฀costs฀and฀other฀shipping฀and฀handling฀activity.฀Shipping฀
and฀handling฀costs฀invoiced฀to฀customers฀are฀included฀in฀net฀sales.
Selling,฀General฀and฀Administrative฀Expense
Selling,฀general฀and฀administrative฀expense฀is฀primarily฀comprised฀฀
of฀marketing฀expenses,฀including฀the฀cost฀of฀media,฀advertising฀and฀
related฀costs;฀selling฀expenses;฀research฀and฀development฀costs;฀฀
administrative฀and฀ other฀ indirect฀overhead฀ costs;฀depreciation฀฀
and฀amortization฀expense฀on฀non-manufacturing฀assets;฀and฀other฀฀
miscellaneous฀operating฀items.฀Research฀and฀development฀costs฀are฀
charged฀to฀expense฀as฀incurred฀and฀were฀$1,940฀in฀2005,฀$1,802฀in฀
2004฀and฀$1,665฀in฀2003.฀Advertising฀costs฀are฀charged฀to฀expense฀
as฀incurred.฀Worldwide฀television,฀print,฀radio฀and฀internet฀advertising฀
expenses฀were฀$5,917฀in฀2005,฀$5,504฀in฀2004฀and฀$4,373฀in฀2003.฀
Restructuring฀Program
In฀1999,฀concurrent฀with฀a฀reorganization฀of฀our฀operations฀into฀฀
product-based฀Global฀Business฀Units,฀we฀initiated฀a฀multi-year฀฀
Organization฀2005฀Restructuring฀Program.฀Costs฀included฀enrollment฀
reductions,฀manufacturing฀consolidations฀and฀portfolio฀choices฀to฀
scale฀back฀or฀discontinue฀under-performing฀businesses฀and฀initiatives.฀฀
Total฀restructuring฀program฀charges฀were฀$751฀in฀2003,฀including฀฀
$351฀in฀separations฀related฀to฀approximately฀5,000฀people,฀$190฀in฀฀
asset฀write-downs฀and฀$87฀in฀accelerated฀depreciation฀related฀to฀฀
long-lived฀assets฀that฀were฀taken฀out฀of฀service฀prior฀to฀the฀end฀of฀their฀
normal฀service฀period.
At฀June฀30,฀2003,฀the฀program฀was฀substantially฀complete฀with฀a฀฀
remaining฀reserve฀of฀$335.฀Substantially฀all฀of฀this฀liability฀was฀settled฀
through฀cash฀payments฀by฀June฀30,฀2004.
We฀continue฀to฀undertake฀projects฀substantially฀smaller฀in฀scope฀to฀
maintain฀a฀competitive฀cost฀structure,฀including฀manufacturing฀streamlining฀
and฀work฀force฀rationalization,฀as฀part฀of฀our฀normal฀operations.
Other฀Non-Operating฀Income,฀Net
Other฀non-operating฀income,฀net฀primarily฀includes฀divestiture฀gains฀
and฀losses฀and฀interest฀and฀investment฀income.
The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
Millions฀of฀dollars฀except฀per฀share฀amounts฀or฀otherwise฀specified.