Proctor and Gamble 2013 Annual Report Download - page 55

The Procter & Gamble Company 53
Amounts in millions of dollars except per share amounts or as otherwise specified.
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
The Procter & Gamble Company's (the "Company," "Procter
& Gamble," "we" or "us") business is focused on providing
branded consumer packaged goods of superior quality and
value. Our products are sold in more than 180 countries and
territories primarily through retail operations including mass
merchandisers, grocery stores, membership club stores, drug
stores, department stores, salons, high-frequency stores and
e-commerce. We have on-the-ground operations in
approximately 70 countries.
Basis of Presentation
The Consolidated Financial Statements include the
Company and its controlled subsidiaries. Intercompany
transactions are eliminated.
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, restructuring reserves, pensions, post-
employment benefits, stock options, valuation of acquired
intangible assets, useful lives for depreciation and
amortization of long-lived assets, future cash flows
associated with impairment testing for goodwill, indefinite-
lived intangible assets and other long-lived assets, deferred
tax assets, uncertain income tax positions and contingencies.
Actual results may ultimately differ from estimates, although
management does not generally believe such differences
would materially affect the financial statements in any
individual year. However, in regard to ongoing impairment
testing of goodwill and indefinite-lived intangible assets,
significant deterioration in future cash flow projections or
other assumptions used in estimating fair values versus those
anticipated at the time of the initial valuations, could result
in impairment charges that materially affect the financial
statements in a given year.
Revenue Recognition
Sales are recognized when revenue is realized or realizable
and has been earned. Revenue transactions represent sales
of inventory. The revenue recorded is presented net of sales
and other taxes we collect on behalf of governmental
authorities. The revenue 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 can be on the date of shipment or the date
of receipt by the customer. 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 is primarily comprised of 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.
Selling, General and Administrative Expense
Selling, general and administrative expense (SG&A) is
primarily comprised of marketing expenses, 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 $2.0
billion in 2013, 2012 and 2011. Advertising costs, charged
to expense as incurred, include worldwide television, print,
radio, internet and in-store advertising expenses and were
$9.7 billion in 2013, $9.3 billion in 2012 and $9.2 billion in
2011. Non-advertising related components of the
Company's total marketing spending include costs associated
with consumer promotions, product sampling and sales aids,
which are included in SG&A, as well as coupons and
customer trade funds, which are recorded as reductions to
net sales.
Other Non-Operating Income, Net
Other non-operating income, net, primarily includes net
acquisition and divestiture gains and investment income.