Avon 2013 Annual Report Download - page 33

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 2013
Annual Report for a detailed discussion of the application of these and other accounting policies.
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 $340 for 2013, $386 for 2012 and $443 for 2011, or approximately 4% 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.
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 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 $239 in 2013, $251 in 2012 and $247 in 2011, 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.
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 $117 for 2013, $119 for 2012
and $128 for 2011.
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. 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 the majority of retired employees in the U.S. and certain foreign countries. See Note 12,
Employee Benefit Plans on pages F-34 through F-42 of our 2013 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. 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.
For 2013, the weighted average assumed rate of return on all pension plan assets, including the U.S. and non-U.S. plans was 7.19%,
compared with 7.28% for 2012. In determining the long-term rates of return, we consider the nature of the plans’ investments, an
expectation for the plans’ investment strategies, historical rates of return and current economic forecasts. We evaluate the expected long-
term rate of return annually and adjust as necessary.
A significant portion of our pension plan assets relate to the U.S. pension plan. The assumed rate of return for 2013 for the U.S. plan was
7.75%, which was based on an asset allocation of approximately 35% in corporate and government bonds and mortgage-backed securities
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