Pepsi 2005 Annual Report Download - page 36

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Our products are sold for cash or on credit
terms. Our credit terms, which are estab-
lished in accordance with local and industry
practices, typically require payment within
30 days of delivery in the U.S. and may
allow discounts for early payment. We rec-
ognize revenue upon shipment or delivery
to our customers based on written sales
terms that do not allow for a right of return.
However, our policy for DSD and chilled
products is to remove and replace dam-
aged and out-of-date products from store
shelves to ensure that consumers receive
the product quality and freshness they
expect. Similarly, our policy for warehouse
distributed products is to replace damaged
and out-of-date products. Based on our
historical experience with this practice, we
have reserved for anticipated damaged and
out-of-date products. Our bottlers have a
similar replacement policy and are respon-
sible for the products they distribute.
Our policy is to provide customers with
product when needed. In fact, our com-
mitment to freshness and product dating
serves to regulate the quantity of product
shipped or delivered. In addition, DSD
products are placed on the shelf by our
employees with customer shelf space lim-
iting the quantity of product. For product
delivered through our other distribution
networks, customer inventory levels are
monitored.
As discussed in “Our Customers,” we
offer sales incentives and discounts
through various programs to customers and
consumers. Sales incentives and discounts
are accounted for as a reduction of sales and
totaled $8.9 billion in 2005, $7.8 billion
in 2004 and $7.1 billion in 2003. Sales
incentives include payments to customers
for performing merchandising activities on
our behalf, such as payments for in-store
displays, payments to gain distribution of
new products, payments for shelf space
and discounts to promote lower retail
prices. A number of our sales incentives,
such as bottler funding and customer
volume rebates, are based on annual tar-
gets, and accruals are established during
the year for the expected payout. These
accruals are based on contract terms and
our historical experience with similar pro-
grams and require management judgment
with respect to estimating customer partic-
ipation and performance levels. Differences
between estimated expense and actual
incentive costs are normally insignificant
and are recognized in earnings in the
Revenue Recognition
Our Critical Accounting Policies
An appreciation of our critical accounting policies is necessary
to understand our financial results. These policies may require
management to make difficult and subjective judgments 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 possible outcomes. Other than our accounting
for stock-based compensation and pension plans, our critical
accounting policies do not involve the choice between alternative
methods of accounting. We applied our critical accounting policies and estimation methods consistently in all
material respects, and for all periods presented, and have discussed these policies with our Audit Committee.
In connection with our ongoing BPT initiative, we aligned certain accounting policies across our divisions in
2005. We conformed our methodology for calculating our bad debt reserves and modified our policy for recognizing
revenue for products shipped to customers by third-party carriers. Additionally, we conformed our method of
accounting for certain costs, primarily warehouse and freight. These changes reduced our net revenue by $36 million
and our operating profit by $60 million in 2005. We also made certain reclassifications on our Consolidated
Statement of Income in the fourth quarter of 2005 from cost of sales to selling, general and administrative
expenses in connection with our BPT initiative. These reclassifications resulted in reductions to cost of sales of
$556 million through the third quarter of 2005, $732 million in the full year 2004 and $688 million in the full
year 2003, with corresponding increases to selling, general and administrative expenses in those periods. These
reclassifications had no net impact on operating profit and have been made to all periods presented for comparability.
There have been no new accounting pronouncements issued or effective during 2005 that have had, or are
expected to have, a material impact on our consolidated financial statements.
Our critical accounting policies arise in
conjunction with the following:
• revenue recognition,
• brand and goodwill valuations,
• income tax expense and accruals,
• stock-based compensation expense, and
• pension and retiree medical plans.