Pepsi 2011 Annual Report Download - page 36

Foreign Exchange
Financial statements of foreign subsidiaries are translated into U.S.
dollars using period- end exchange rates for assets and liabilities
and weighted- average exchange rates for revenues and expenses.
Adjustments resulting from translating net assets are reported
as a separate component of accumulated other comprehensive
loss within shareholders’ equity under the caption currency
translation adjustment.
Our operations outside of the U.S. generate approximately 50%
of our net revenue, with Russia, Mexico, Canada and the United
Kingdom comprising approximately 23% of our net revenue.
Asa result, we are exposed to foreign currency risks. During 2011,
favorable foreign currency contributed 1percentage point to net
revenue growth, primarily due to appreciation of the euro, Canadian
dollar and Mexican peso. Currency declines against the U.S. dollar
which are not oset could adversely impact our future results.
In addition, we continue to use the ocial exchange rate to trans-
late the nancial statements of our snack and beverage businesses in
Venezuela. We use the ocial rate as we currently intend to remit div-
idends solely through the government- operated Foreign Exchange
Administration Board (CADIVI). As of the beginning of our 2010 scal
year, the results of our Venezuelan businesses were reported under
hyperinationary accounting. Consequently, the functional currency
of our Venezuelan entities was changed from the bolivar fuerte
(bolivar) to the U.S. dollar. Eective January11, 2010, the Venezuelan
government devalued the bolivar by resetting the ocial exchange
rate from 2.15 bolivars per dollar to 4.3bolivars per dollar; however,
certain activities were permitted to access an exchange rate of
2.6bolivars per dollar. We continue to use all available options to
obtain U.S. dollars to meet our operational needs. In 2011 and 2010,
the majority of our transactions were remeasured at the 4.3 exchange
rate, and as a result of the change to hyper inationary account-
ing and the devaluation of the bolivar, we recorded a one- time net
charge of $120million in the rst quarter of 2010. In 2011 and 2010,
our operations in Venezuela comprised 8% and 4% of our cash and
cash equivalents balance, respectively, and generated less than 1% of
our net revenue. As of January1, 2011, the Venezuelan government
unied the country’s two ocial exchange rates (4.3 and 2.6bolivars
per dollar) by eliminating the 2.6 bolivars per dollar rate, which was
previously permitted for certain activities. This change did not have a
material impact on our nancial statements.
Exchange rate gains or losses related to foreign currency
transactions are recognized as transaction gains or losses in our
income statement as incurred. We may enter into derivatives,
primarily forward contracts with terms of no more than two
years, to manage our exposure to foreign currency transaction risk.
Our foreign currency derivatives had a total face value of $2.3billion
as of December31, 2011 and $1.7billion as of December25, 2010.
At the end of 2011, we estimate that an unfavorable 10% change
in the exchange rates would have decreased our net unrealized
gains by $105million. For foreign currency derivatives that do not
qualify for hedge accounting treatment, all losses and gains were
oset by changes in the underlying hedged items, resulting in no
net material impact on earnings.
Interest Rates
We centrally manage our debt and investment portfolios consid-
ering investment opportunities and risks, tax consequences and
overall nancing strategies. We use various interest rate deriva-
tive instruments including, but not limited to, interest rate swaps,
cross- currency interest rate swaps, Treasury locks and swap locks
to manage our overall interest expense and foreign exchange risk.
These instruments eectively change the interest rate and currency
of specic debt issuances. Certain of our xed rate indebtedness
has been swapped to oating rates. The notional amount, interest
payment and maturity date of the interest rate and cross- currency
swaps match the principal, interest payment and maturity date of
the related debt. Our Treasury locks and swap locks are entered
intoto protect against unfavorable interest rate changes relating
toforecasted debt transactions.
Assuming year- end 2011 variable rate debt and investment levels,
a 1-percentage- point increase in interest rates would have increased
net interest expense by $55million in 2011.
Risk Management Framework
The achievement of our strategic and operating objectives neces-
sarily involves taking risks. Our risk management process is intended
to ensure that risks are taken knowingly and purposefully. As such,
we leverage an integrated risk management framework to identify,
assess, prioritize, address, manage, monitor and communicate risks
across the Company. This framework includes:
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the Company’s risk assessment and mitigation, receives updates
on key risks throughout the year. The Audit Committee of the
Board of Directors helps dene PepsiCo’s risk management
processes and assists the Board in its oversight of strategic,
nancial, operating, business, compliance, safety, reputational
and other risks facing PepsiCo. The Compensation Committee
of the Board of Directors assists the Board in overseeing
potential risks that may be associated with the Company’s
compensation programs;
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functional, geographically diverse, senior management group
which meets regularly to identify, assess, prioritize and address
our key risks;
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senior management teams which meet regularly to identify,
assess, prioritize and address division- specic business risks;
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management process, provides ongoing guidance, tools and ana-
lytical support to the PRC and the DRCs, identies and assesses
potential risks and facilitates ongoing communication between
the parties, as well as with PepsiCo’s Audit Committee and Board
of Directors;
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tiveness of our key internal controls through periodic audit and
review procedures; and
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our compliance policies and practices.
Management’s Discussion and Analysis
PepsiCo, Inc.  Annual Report
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