Pepsi 2013 Annual Report Download - page 57

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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 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. See “Unfavorable economic conditions may have an adverse impact on our
business results or financial condition.” and “Our operating results may be adversely affected by increased
costs, disruption of supply or shortages of raw materials or other supplies.” in “Risk Factors” in Item 1A.
The fair value of our derivatives fluctuates based on market rates and prices. The sensitivity of our derivatives
to these market fluctuations is discussed below. See Note 10 to consolidated financial statements for further
discussion of these derivatives and our hedging policies. See “Our Critical Accounting Policies” for a
discussion of the exposure of our pension and retiree medical plan assets and liabilities to risks related to
market fluctuations.
Inflationary, deflationary and recessionary conditions impacting these market risks also impact the demand
for and pricing of our products. See “Risk Factors” in Item 1A. for further discussion.
Commodity Prices
We expect to be able to reduce the impact of volatility in our raw material and energy costs through our
hedging strategies and ongoing sourcing initiatives. We use derivatives, with terms of no more than three
years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases,
primarily for agricultural products, energy and metals.
Our open commodity derivative contracts that qualify for hedge accounting had a face value of $494 million
as of December 28, 2013 and $507 million as of December 29, 2012. At the end of 2013, the potential change
in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity
price, would have increased our net unrealized losses in 2013 by $47 million.
Our open commodity derivative contracts that do not qualify for hedge accounting had a face value of $881
million as of December 28, 2013 and $853 million as of December 29, 2012. At the end of 2013, the potential
change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying
commodity price, would have increased our net losses in 2013 by $81 million.
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 PepsiCo common shareholders’ equity under the caption currency translation adjustment.
Our operations outside of the U.S. generate 49% of our net revenue, with Russia, Mexico, Canada, the United
Kingdom and Brazil comprising approximately 25% of our net revenue in 2013. As a result, we are exposed
to foreign currency risks. During 2013, unfavorable foreign exchange reduced net revenue growth by 2
percentage points, primarily due to depreciation of the Venezuelan bolivar (bolivar), Brazilian real, Egyptian
pound and Russian ruble, partially offset by appreciation of the Mexican peso. Currency declines against the
U.S. dollar which are not offset could adversely impact our future results.