Pepsi 2013 Annual Report Download - page 120

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Off-Balance-Sheet Arrangements
It is not our business practice to enter into off-balance-sheet arrangements, other than in the normal course
of business. See Note 8 regarding contracts related to certain of our bottlers.
See “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition
and Results of Operations for further unaudited information on our borrowings.
Note 10 — Financial Instruments
We are exposed to market risks arising from adverse changes in:
• commodity prices, affecting the cost of our raw materials and energy;
• foreign exchange risks and currency restrictions; and
• interest rates.
In the normal course of business, we manage these risks through a variety of strategies, including productivity
initiatives, global purchasing programs and hedging strategies. Ongoing productivity initiatives involve the
identification and effective implementation of meaningful cost-saving opportunities or efficiencies, including
the use of derivatives. Our global purchasing programs include fixed-price purchase orders and pricing
agreements. Our hedging strategies include the use of derivatives. Certain derivatives are designated as either
cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and
are marked to market through earnings. Cash flows from derivatives used to manage commodity price, foreign
exchange or interest rate risks are classified as operating activities in the Consolidated Statement of Cash
Flows. We classify both the earnings and cash flow impact from these derivatives consistent with the
underlying hedged item. See “Our Business Risks” in Management’s Discussion and Analysis of Financial
Condition and Results of Operations for further unaudited information on our business risks.
For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within
common shareholders’ equity until the underlying hedged item is recognized in net income. For fair value
hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged
item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our
derivative instruments would be substantially offset by an opposite change in the value of the underlying
hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the
hedge does not fully offset the change in the value of the underlying hedged item. If the derivative instrument
related to a cash flow hedge is terminated, we continue to defer the related gain or loss as part of accumulated
other comprehensive loss and then include it as a component of the cost of the underlying hedged item. Upon
determination that the underlying hedged item will not be part of an actual transaction, we recognize the
related gain or loss on the hedge in net income immediately.
We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives
at market value with the resulting gains and losses reflected in our income statement. We do not use derivative
instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk
regularly, including a review of credit ratings, credit default swap rates and potential nonperformance of the
counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to
be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe
are creditworthy in order to reduce our concentration of credit risk.
Commodity Prices
We are subject to commodity price risk because our ability to recover increased costs through higher pricing
may be limited in the competitive environment in which we operate. This risk is managed through the use
of fixed-price contracts and purchase orders, pricing agreements and derivatives. In addition, risk to our