Avon 2014 Annual Report Download - page 35

through F-51 of our 2014 Annual Report, Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-8
through F-14 of our 2014 Annual Report, Note 5, Debt and Other Financing on pages F-17 through F-20 of our 2014 Annual Report,
“Liquidity and Capital Resources” below and Note 7, Income Taxes on pages F-21 through F-25 of our 2014 Annual Report for more
information on these items.
Critical Accounting Estimates
We believe the accounting policies described below represent our critical accounting policies due to the estimation processes involved in
each. See Note 1, Description of the Business and Summary of Significant Accounting Policies, on pages F-8 through F-14 of our 2014
Annual Report for a detailed discussion of the application of these and other accounting policies.
Allowances for Doubtful Accounts Receivable
Representatives contact their customers, selling primarily through the use of brochures for each sales campaign. Sales campaigns are
generally for a two-week duration in the U.S. and a two- to four-week duration outside of the U.S. The Representative purchases products
directly from us and may or may not sell them to an end user. In general, the Representative, an independent contractor, remits a payment
to us during each sales campaign, which relates to the prior campaign cycle. The Representative is generally precluded from submitting an
order for the current sales campaign until the accounts receivable balance for the prior campaign is paid; however, there are circumstances
where the Representative fails to make the required payment. We record an estimate of an allowance for doubtful accounts on receivable
balances based on an analysis of historical data and current circumstances, including seasonality and changing trends. Over the past three
years, annual bad debt expense was $193 in 2014, $239 in 2013 and $251 in 2012, or approximately 2% of total revenue in each year. The
allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. We generally have no detailed information
concerning, or any communication with, any end user of our products beyond the Representative. We have no legal recourse against the
end user for the collection of any accounts receivable balances due from the Representative to us. If the financial condition of our
Representatives were to deteriorate, resulting in their inability to make payments, additional allowances may be required.
Allowances for Sales Returns
Policies and practices for product returns vary by jurisdiction, but within many jurisdictions, we generally allow an unlimited right of return.
We record a provision for estimated sales returns based on historical experience with product returns. Over the past three years, annual sales
returns were $298 for 2014, $340 for 2013 and $386 for 2012, or approximately 3% of total revenue in each year, which has been
generally in line with our expectations. If the historical data we use to calculate these estimates does not approximate future returns, due to
changes in marketing or promotional strategies, or for other reasons, additional allowances may be required.
Provisions for Inventory Obsolescence
We record an allowance for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value.
In determining the allowance for estimated obsolescence, we classify inventory into various categories based upon its stage in the product
life cycle, future marketing sales plans and the disposition process. We assign a degree of obsolescence risk to products based on this
classification to determine the level of obsolescence provision. If actual sales are less favorable than those projected, additional inventory
allowances may need to be recorded for such additional obsolescence. Annual obsolescence expense was $101 in 2014, $117 in 2013 and
$119 in 2012.
Pension and Postretirement Expense
We maintain defined benefit pension plans, which cover substantially all employees in the U.S. and a portion of employees in international
locations. However, our U.S. defined benefit pension plan has been closed to employees hired on or after January 1, 2015. Additionally, we
have unfunded supplemental pension benefit plans for some current and retired executives and provide retiree health care benefits subject
to certain limitations to many retired employees in the U.S. and certain foreign countries. See Note 11, Employee Benefit Plans on pages
F-32 through F-40 of our 2014 Annual Report for more information on our benefit plans.
Pension plan expense and the requirements for funding our major pension plans are determined based on a number of actuarial
assumptions, which are generally reviewed and determined on an annual basis. These assumptions include the expected rate of return on
pension plan assets, the interest crediting rate for hybrid plans and the discount rate applied to pension plan obligations, the rate of
compensation increase of plan participants and mortality rates. We use a December 31 measurement date for all of our employee benefit
plans.
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