Pepsi 2012 Annual Report Download - page 51

Interest Rates
We centrally manage our debt and investment portfolios con-
sidering investment opportunities and risks, tax consequences
and overall financing strategies. We use various interest rate
derivative 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 effectively change
the interest rate and currency of specific debt issuances.
Certain of our fixed rate indebtedness has been swapped
to floating 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 relat-
ing to forecasted debt transactions.
The notional amounts of the interest rate derivative instru-
ments outstanding as of December29, 2012 and December31,
2011 were $8.1billion and $8.3billion, respectively. Assuming
year-end 2012 variable rate debt and investment levels, a
1-percentage-point increase in interest rates would have
increased net interest expense by $9million in 2012.
Risk Management Framework
The achievement of our strategic and operating objectives
necessarily involves taking risks. Our risk management process
is intended to ensure that risks are taken knowingly and pur-
posefully. 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:
• PepsiCo’s Board of Directors, which is responsible for over-
seeing the assessment and mitigation of the Company’s
top risks, receives updates on key risks throughout the
year. The Audit Committee of the Board of Directors helps
define PepsiCo’s risk management processes and assists
the Board in its oversight of strategic, financial, 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 compensa-
tion programs;
• The PepsiCo Risk Committee (PRC), comprised of a cross-
functional, geographically diverse, senior management
group which meets regularly to identify, assess, prioritize
and address our key risks;
• Division Risk Committees (DRC), comprised of cross-
functional senior management teams which meet regularly
to identify, assess, prioritize and address division-specific
business risks;
• PepsiCo’s Risk Management Office, which manages the
overall risk management process, provides ongoing guid-
ance, tools and analytical support to the PRC and the DRCs,
identifies and assesses potential risks and facilitates ongo-
ing communication between the parties, as well as with
PepsiCo’s Audit Committee and Board of Directors;
• PepsiCo Corporate Audit, which evaluates the ongoing
effectiveness of our key internal controls through periodic
audit and review procedures; and
• PepsiCo’s Compliance & Ethics Department, which leads
and coordinates our compliance policies and practices.
Our Critical Accounting Policies
An appreciation of our critical accounting policies is neces-
sary to understand our financial results. These policies may
require management to make difficult and subjective judg-
ments regarding uncertainties, and as a result, such estimates
may significantly impact our financial results. The precision of
these estimates and the likelihood of future changes depend
on a number of underlying variables and a range of possi-
ble outcomes. Other than our accounting for pension and
retiree medical plans, our critical accounting policies do not
involve a choice between alternative methods of accounting.
We applied our critical accounting policies and estimation
methods consistently in all material respects, and for all peri-
ods presented, and have discussed these policies with our
Audit Committee.
Our critical accounting policies arise in conjunction with
the following:
• revenue recognition;
• goodwill and other intangible assets;
• income tax expense and accruals; and
• pension and retiree medical plans.
Revenue Recognition
Our products are sold for cash or on credit terms. Our credit
terms, which are established in accordance with local and
industry practices, typically require payment within 30daysof
delivery in the U.S., and generally within 30 to 90days inter-
nationally, and may allow discounts for early payment. We
recognize revenue upon shipment or delivery to our custom-
ers based on written sales terms that do not allow for a right of
return. However, our policy for DSD and certain chilledprod-
ucts is to remove and replace damaged and out-of-date
products from store shelves to ensure that consumers receive
the product quality and freshness they expect. Similarly, our
policy for certain warehouse-distributed products is to replace
damaged and out-of-date products. Based on our experience
Management’s Discussion and Analysis
2012 PEPSICO ANNUAL REPORT 49