Avon 2014 Annual Report Download - page 84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using a straight-line method over the estimated useful lives of the
assets. The estimated useful lives generally are as follows: buildings, 45 years; land improvements, 20 years; machinery and equipment, 15
years; and office equipment, five to ten years. Leasehold improvements are depreciated over the shorter of the lease term or the estimated
useful life of the asset. Upon disposal of property, plant and equipment, the cost of the assets and the related accumulated depreciation are
removed from the accounts and the resulting gain or loss is reflected in earnings. Costs associated with repair and maintenance activities are
expensed as incurred. We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
We capitalize interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost
of the related asset and depreciated over the useful life of the related asset. We did not capitalize any interest in 2014, and we capitalized
interest of $1.4 in 2013 and $2.0 in 2012.
Capitalized Software
Certain systems development costs related to the purchase, development and installation of computer software are capitalized and
amortized over the estimated useful life of the related project, generally not to exceed five years. Costs incurred prior to the development
stage, as well as maintenance, training costs, and general and administrative expenses are expensed as incurred. The other assets balance
included unamortized capitalized software costs of $101.3 at December 31, 2014 and $122.9 at December 31, 2013. The amortization
expense associated with capitalized software was $48.4, $55.4 and $41.2 for the years ended December 31, 2014, 2013 and 2012,
respectively. In addition, we recorded a capitalized software impairment charge of $117.2 during 2013.
Capitalized software is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
fully recoverable. If such a change in circumstances occurs, the related estimated future pre-tax undiscounted cash flows expected to result
from the use of the asset and its eventual disposition are compared to the carrying amount. If the sum of the expected cash flows is less
than the carrying amount, an impairment charge is recorded. The impairment charge is measured as the amount by which the carrying
amount exceeds the fair value of the asset. The fair value of the asset is determined using revenue and cash flow projections, and royalty
and discount rates, as appropriate.
In December 2013, we decided to halt further roll-out of our Service Model Transformation (“SMT”) project. SMT was a global program
initiated in 2009 to improve our order management system and enable changes to the way Representatives interact with us. SMT was
piloted in Canada during 2013, and caused significant business disruption in that market. This decision to halt the further roll-out of SMT
was made in light of the potential risk of further disruption. In addition, SMT did not show a clear return on investment.
As Canada was the only market expected to utilize the capitalized software associated with SMT (“SMT asset”), the accounting guidance
requires the impairment assessment to consider the cash flows of the Canadian business, which includes the ongoing costs associated with
SMT. These expected cash flows were not sufficient to supporting the carrying value of the associated asset group, which includes the SMT
asset. In the fourth quarter of 2013, we recorded a non-cash impairment charge of $117.2 before tax ($74.1 after tax), reflecting the write-
down of capitalized software. This impairment charge was recorded as a component of our global expenses, within selling, general and
administrative expenses in the Consolidated Statements of Income.
The fair value of the SMT asset was determined using a risk-adjusted discounted cash flow (“DCF”) model under the relief-from-royalty
method. The impairment analysis performed for the asset group, which includes the SMT asset, required several estimates, including revenue
and cash flow projections, and royalty and discount rates. As a result of this impairment charge, the remaining carrying amount of the SMT
asset is not material.
Goodwill and Intangible Assets
Goodwill is not amortized and is assessed for impairment annually during the fourth quarter or on the occurrence of an event that indicates
impairment may have occurred, at the reporting unit level. A reporting unit is the operating segment, or a component, which is one level
below that operating segment. Components are aggregated as a single reporting unit if they have similar economic characteristics. When