Snapple 2014 Annual Report Download - page 62

DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
59
DPS conducts tests for impairment in accordance with U.S. GAAP. For intangible assets with definite lives, tests for impairment
are performed if conditions exist that indicate the carrying value may not be recoverable. For goodwill and indefinite-lived intangible
assets, the Company conducts tests for impairment annually, as of October 1, or more frequently if events or circumstances indicate
the carrying amount may not be recoverable. We use present value and other valuation techniques to make this assessment.
The tests for impairment include significant judgment in estimating the fair value of reporting units and intangible assets
primarily by analyzing forecasts of future revenues and profit performance. Fair value is based on what the reporting units and
intangible assets would be worth to a third party market participant. Discount rates are based on a weighted average cost of equity
and cost of debt, adjusted with various risk premiums. Management's estimates of fair value, which fall under Level 3, are based
on historical and projected operating performance. Refer to Note 7 for additional information.
Capitalized Customer Incentive Programs
The Company provides support to certain customers to cover various programs and initiatives to increase net sales, including
contributions to customers or vendors for cold drink equipment used to market and sell the Company's products. These programs
and initiatives generally directly benefit the Company over a period of time. Accordingly, costs of these programs and initiatives
are recorded in prepaid expenses and other current assets and other non-current assets in the Consolidated Balance Sheets. The
costs for these programs are amortized over the period to be directly benefited based upon a methodology consistent with the
Company's contractual rights under these arrangements.
These programs and initiatives recorded in the current and non-current assets within the Consolidated Balance Sheets were
$73 million and $83 million, net of accumulated amortization, as of December 31, 2014 and 2013, respectively. The amortization
charge for the cost of contributions to customers or vendors for cold drink equipment was $4 million, $3 million and $5 million
during the years ended December 31, 2014, 2013 and 2012, respectively, and was recorded in selling, general and administrative
("SG&A") expenses in the Consolidated Statements of Income. The amortization charge for the cost of other programs and
incentives was $13 million, $15 million and $17 million during the years ended December 31, 2014, 2013 and 2012, respectively,
and was recorded as a deduction from gross sales.
Derivatives
The Company formally designates and accounts for certain interest rate contracts and foreign exchange forward contracts that
meet established accounting criteria under U.S. GAAP as either fair value or cash flow hedges. For derivative instruments that are
designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is recorded, net
of applicable taxes, in Accumulated Other Comprehensive Loss ("AOCL"), a component of Stockholders' Equity in the Consolidated
Balance Sheets. When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of
the gain or loss from the derivative instrument deferred in AOCL is reclassified to net income and is reported as a component of
the Consolidated Statements of Income. For derivative instruments that are designated and qualify as fair value hedges, the effective
change in the fair value of the instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk,
are recognized immediately in current-period earnings. For derivatives that are not designated as a hedging instrument, which
creates an economic hedge, or de-designated as a hedging instrument, the gain or loss on the instrument is recognized in earnings
in the period of change.
Certain interest rate swap agreements qualify for the shortcut method of accounting for hedges under U.S. GAAP. Under the
shortcut method, the hedges are assumed to be perfectly effective and no ineffectiveness is recorded in earnings. For all other
designated hedges, the Company assesses at the time the derivative contract is entered into, and at least quarterly thereafter, whether
the derivative instrument is effective in offsetting the changes in fair value or cash flows. DPS also measures hedge ineffectiveness
on a quarterly basis throughout the designated period. Changes in the fair value of the derivative instrument that do not effectively
offset changes in the fair value of the underlying hedged item throughout the designated hedge period are recorded in earnings
each period.
If a fair value or cash flow hedge were to cease to qualify for hedge accounting, or were terminated, it would continue to be
carried on the balance sheet at fair value until settled, but hedge accounting would be discontinued prospectively. If the underlying
hedged transaction ceases to exist, any associated amounts reported in AOCL are reclassified to earnings at that time. Refer to
Note 10 for additional information.