Avon 2008 Annual Report Download - page 43

material potential change in fair value, earnings or cash flows.
This potential change was calculated based on discounted cash
flow analyses using interest rates comparable to our current cost
of debt.
Foreign Currency Risk
We operate globally, with operations in various locations around
the world. Over the past three years, approximately 75% to
80% of our consolidated revenue was derived from operations
of subsidiaries outside of the U.S. The functional currency for
most of our foreign operations is the local currency. We are
exposed to changes in financial market conditions in the normal
course of our operations, primarily due to international busi-
nesses and transactions denominated in foreign currencies and
the use of various financial instruments to fund ongoing activ-
ities. At December 31, 2008, the primary currencies for which
we had net underlying foreign currency exchange rate exposures
were the Argentine peso, Brazilian real, British pound, Canadian
dollar, Chinese renminbi, Colombian peso, the Euro, Japanese
yen, Mexican peso, Philippine peso, Polish zloty, Russian ruble,
Turkish lira, Ukrainian hryvna and Venezuelan bolivar.
We may reduce our exposure to fluctuations in cash flows asso-
ciated with changes in foreign exchange rates by creating
offsetting positions through the use of derivative financial
instruments.
Our hedges of our foreign currency exposure are not designed
to, and, therefore, cannot entirely eliminate the effect of
changes in foreign exchange rates on our consolidated financial
position, results of operations and cash flows.
Our foreign-currency financial instruments were analyzed at
year-end to determine their sensitivity to foreign exchange
rate changes. Based on our foreign exchange contracts at
December 31, 2008, the impact of a hypothetical 10% apprecia-
tion or 10% depreciation of the U.S. dollar against our foreign
exchange contracts would not represent a material potential
change in fair value, earnings or cash flows. This potential
change does not consider our underlying foreign currency ex-
posures. The hypothetical impact was calculated on the open
positions using forward rates at December 31, 2008, adjusted
for an assumed 10% appreciation or 10% depreciation of the
U.S. dollar against these hedging contracts.
Credit Risk of Financial Instruments
We attempt to minimize our credit exposure to counterparties by
entering into derivative transactions and similar agreements only
with major international financial institutions with “A” or higher
credit ratings as issued by Standard & Poor’s Corporation. Our
foreign currency and interest rate derivatives are comprised of
over-the-counter forward contracts, swaps or options with major
international financial institutions. Although our theoretical
credit risk is the replacement cost at the then estimated fair
value of these instruments, we believe that the risk of incurring
credit risk losses is remote and that such losses, if any, would not
be material.
Non-performance of the counterparties on the balance of all the
foreign exchange and interest rate agreements would result in a
write-off of $111.8 at December 31, 2008. In addition, in the
event of non-performance by such counterparties, we would be
exposed to market risk on the underlying items being hedged as
a result of changes in foreign exchange and interest rates.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of our Consolidated
Financial Statements and Notes thereto contained herein.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and
Procedures
As of the end of the period covered by this report, our principal
executive and principal financial officers carried out an evalua-
tion of the effectiveness of the design and operation of our dis-
closure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934 (the “Exchange Act”). In
designing and evaluating our disclosure controls and procedures,
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives,
and management was required to apply its judgment in evaluat-
ing and implementing possible controls and procedures. Based
upon their evaluation, the principal executive and principal
financial officers concluded that our disclosure controls and
procedures were effective as of December 31, 2008, at the rea-
sonable assurance level. Disclosure controls and procedures are
designed to ensure that information relating to Avon (including
our consolidated subsidiaries) required to be disclosed by us in
the reports we file under the Exchange Act is recorded, proc-
essed, summarized and reported within the time periods speci-
fied in the Securities and Exchange Commission’s rules and
forms and to ensure that information required to be disclosed is
A V O N 2008 37