Loreal 2011 Annual Report Download - page 97

95REGISTRATION DOCUMENT − L’ORÉAL 2011
2011 Consolidated Financial Statements
4
Notes to the consolidated  nancial statements
Sales incentives, cash discounts, provisions for returns and
incentives granted to customers are recorded simultaneously
to the recognition of the sales if they can be estimated in a
reasonably reliable manner, based on statistics compiled from
past experience and contractual conditions.
1.5. Cost of sales
The cost of goods sold consists mainly of the industrial
production cost of products sold, the cost of distributing
products to customers including freight and delivery costs, either
directly or indirectly through depots, inventory impairment costs,
and royalties paid to third parties.
1.6. Research and development
expenditure
Expenditure during the research phase is charged to the
income statement for the financial year during which it is
incurred.
Expenses incurred during the development phase are
recognised as
Intangible assets only if they meet all the following
criteria set out in IAS38:
♦the project is clearly defined and the related costs are
separately identified and reliably measured;
♦the technical feasibility of the project has been demonstrated;
♦the intention and ability to complete the project and to use
or sell the products resulting from the project have been
demonstrated;
♦the resources necessary to complete the project and to use
or sell it are available;
♦the Group can demonstrate that the project will generate
probable future economic benefits, as the existence of a
potential market for the production resulting from the project,
or its internal usefulness has been demonstrated.
In view of the very large number of development projects and
uncertainties concerning the decision to launch products
relating to these projects, L’Oréal considers that some of these
capitalisation criteria are not met.
The development costs of software for internal use are
capitalised for the programming, coding and testing phases.
The costs of substantial updates and upgrades resulting in
additional functions are also capitalised.
Capitalised development costs are amortised from the
date on which the software is made available in the entity
concerned over its probable useful life, which in most cases
is between 5 and 7years.
1.7. Advertising and promotion
expenses
These expenses consist mainly of expenses relating to the
advertisement and promotion of products to customers and
consumers. They are charged to the income statement for the
financial year in which they are incurred.
1.8. Selling, general and
administrative expenses
These expenses relate mainly to sales teams and sales team
management, marketing teams and administrative services, as
well as general expenses and the costs of share-based payment
(stock options and free shares).
1.9. Foreign exchange gains and
losses
Foreign exchange gains and losses resulting from the difference
between the value of foreign currency operating income and
expenses translated at the spot rate effective on the transaction
date and at the exchange rate effective on the settlement date
are recognised directly on the appropriate income and expense
lines, after allowing for hedging derivatives. Changes in the time
value of hedging derivatives (including option premiums) are
systematically charged to the income statement (note1.3).
1.10. Operating profit
Operating profit consists of gross profit less research and
development expenses, advertising and promotion expenses,
and selling, general and administrative expenses. Operating
profit corresponds to the definition of current operating profit
provided by Conseil National de la Comptabilité (CNC)
recommendation No.2009-R-03 of July2nd, 2009 regarding the
presentation of financial statements for companies applying
international accounting standards. It notably includes the
entire charge relating to the Contribution Économique
Territoriale
(CET) tax collected in France, including its value-
added based component. The classification of the CET tax in
operating expenses is therefore consistent with the classification
of the former business tax (taxe professionelle) it replaces.
1.11. Other income and expenses
The Other income and expenses item includes capital gains
and losses on disposals of property, plant and equipment and
intangible assets, impairment of assets, restructuring costs, and
clearly identified, non-recurring income and expense items that
are material to the consolidated financial statements.
The cost of restructuring operations is fully provisioned if it results
from a Group obligation towards a third party originating from
a decision taken by a competent body which is announced
to the third parties concerned before the end of the reporting