ANNUAL REPORT 2004 - Luxottica Group

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The wholesale and retail divisions may offer certain
promotions during the year. Free frames given to
customers as part of a promotional offer are recorded
as cost of sales at the time they are delivered to the
customer. Discounts and coupons tendered by
customers are recorded as a reduction of revenue at
the date of sale.
MANAGED VISION CARE UNDERWRITING AND
EXPENSES
The Company sells vision insurance plans which
generally have a duration of up to two years. Based on
its experience, the Company believes it can predict
utilization and claims experience under these plans,
including claims incurred but not yet reported, with a
high degree of confidence. Claims are recorded as
they are incurred and certain other membership costs
are amortized over the covered period.
ADVERTISING AND DIRECT RESPONSE
MARKETING
Costs to develop and create newspaper, television,
radio and other media advertising are expensed as
incurred, and the costs to communicate the
advertising are expensed the first time the airtime or
advertising space is used with the exception of
certain direct response advertising programs. Costs
for certain direct response advertising programs are
capitalized if such direct response advertising costs
result in future economic benefit and the primary
purpose of the advertising is to elicit sales to
customers who could be shown to have responded
specifically to the advertising. Such costs related to
the direct response advertising are amortized over
the period during which the revenues are recognized,
not to exceed 90 days. Generally, other direct
response program costs that do not meet the
capitalization criteria are expensed the first time the
advertising occurs.
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With the acquisition of Cole in October 2004, the
Company receives a reimbursement from its Pearle
franchisees for certain marketing costs. Operating
expenses in the Consolidated Statements of Income
are net of amounts reimbursed by the franchisees
calculated based on a percentage of their sales. The
amount received in fiscal year 2004 for such
reimbursement was Euro 4.2 million.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity
with U.S. GAAP requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE
Luxottica Group calculates basic and diluted earnings
per share in accordance with SFAS No. 128, Earnings
per Share. Net income available to shareholders is the
same for the basic and diluted earnings per share
calculations for the years ended December 31, 2002,
2003 and 2004. Basic earnings per share are based
on the weighted average number of shares of
common stock outstanding during the period. Diluted
earnings per share are based on the weighted
average number of shares of common stock and
common stock equivalents (options and warrants)
outstanding during the period, except when the
common stock equivalents are anti-dilutive. The
following is a reconciliation from basic to diluted
shares outstanding used in the calculation of earnings
per share: