Pepsi 2011 Annual Report Download - page 76

result, we are exposed to foreign currency risks. We also enter into
derivatives, primarily forward contracts with terms of no more than
two years, to manage our exposure to foreign currency transaction
risk. Exchange rate gains or losses related to foreign currency trans-
actions are recognized as transaction gains or losses in our income
statement as incurred.
Our foreign currency derivatives had a total face value of $2.3bil-
lion as of December31, 2011 and $1.7billion as of December25,
2010. During the next 12 months, we expect to reclassify net gains
of $20million related to foreign currency contracts that qualify for
hedge accounting from accumulated other comprehensive loss into
net income. Additionally, ineectiveness for our foreign currency
hedges is not material. 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 fore-
casted debt transactions.
The notional amounts of the interest rate derivative instruments
outstanding as of December31, 2011 and December25, 2010 were
$8.33billion and $9.23billion, respectively. For those interest rate
derivative instruments that qualify for cash ow hedge accounting,
any ineectiveness is recorded immediately. Ineectiveness for our
interest rate hedges is not material. We classify both the earnings
and cash ow impact from these interest rate derivative instruments
consistent with the underlying hedged item. During the next
12months, we expect to reclassify net losses of $16million related
to these hedges from accumulated other comprehensive loss into
net income.
As of December31, 2011, approximately 38% of total debt, after
the impact of the related interest rate derivative instruments, was
exposed to variable rates, compared to 43% as of December25,2010.
Fair Value Measurements
The fair values of our nancial assets and liabilities as of December31, 2011 and December25, 2010 are categorized as follows:
2011 2010
Assets(a) Liabilities(a) Assets(a) Liabilities(a)
Available- for-sale securities(b) $ 59 $ – $ 636 $ –
Short- term investments — index funds(c) $ 157 $ – $ 167 $ –
Prepaid forward contracts(d) $ 40 $ – $ 48 $ –
Deferred compensation(e) $ – $ 519 $ – $ 559
Derivatives designated as fair value hedging instruments:
Interest rate derivatives(f) $ 300 $ – $ 276 $ 7
Derivatives designated as cash flow hedging instruments:
Forward exchange contracts(g) $ 25 $ 5 $ 8 $ 23
Interest rate derivatives(f) – 69 8 5
Commodity contracts — other(h) 3 77 70 2
Commodity contracts — futures(i) – 1 1 23
$ 28 $ 152 $ 87 $ 53
Derivatives not designated as hedging instruments:
Forward exchange contracts(g) $ 17 $ 20 $ 1 $ 7
Interest rate derivatives(f) 107 141 6 45
Commodity contracts — other(h) 10 51 28 1
Commodity contracts — futures(i) – 11 – 1
$ 134 $ 223 $ 35 $ 54
Total derivatives at fair value $ 462 $ 375 $ 398 $ 114
Total $ 718 $ 894 $ 1,249 $ 673
(a) Financial assets are classied on our balance sheet within prepaid expenses and other current assets and other assets, with the exception of available- for-sale securities and short- term
investments, which are classied as short- term investments. Financial liabilities are classied on our balance sheet within accounts payable and other current liabilities and other liabilities.
Unless specically indicated, all nancial assets and liabilities are categorized as Level 2 assets or liabilities.
(b) Based on the price of common stock. Categorized as a Level 1 asset.
(c) Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability. Categorized as a Level 1 asset.
(d) Based primarily on the price of our common stock.
(e) Based on the fair value of investments corresponding to employees’ investment elections. As of December31, 2011 and December25, 2010, $44million and $170million, respectively, are
categorized as Level 1 liabilities. The remaining balances are categorized as Level 2 liabilities.
(f) Based on LIBOR and recently reported transactions in the marketplace.
(g) Based on observable market transactions of spot and forward rates.
(h) Based on recently reported transactions in the marketplace, primarily swap arrangements.
( i ) Based on average prices on futures exchanges. Categorized as a Level 1 asset or liability.
PepsiCo, Inc.  Annual Report
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Notes to Consolidated Financial Statements