Pepsi 2005 Annual Report Download - page 56

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Our financial statements include the con-
solidated accounts of PepsiCo, Inc. and
the affiliates that we control. In addition,
we include our share of the results of cer-
tain other affiliates based on our economic
ownership interest. We do not control these
other affiliates, as our ownership in these
other affiliates is generally less than 50%.
Our share of the net income of noncon-
trolled bottling affiliates is reported in our
income statement as bottling equity
income. Bottling equity income also
includes any changes in our ownership
interests of these affiliates. In 2005, bot-
tling equity income includes $126 million
of pre-tax gains on our sales of PBG stock.
See Note 8 for additional information on
our noncontrolled bottling affiliates. Our
share of other noncontrolled affiliates is
included in division operating profit.
Intercompany balances and transactions
are eliminated. In 2005, we had an addi-
tional week of results (53rd week). Our
fiscal year ends on the last Saturday of
each December, resulting in an additional
week of results every five or six years.
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 reclassifi-
cations had no net impact on operating
profit and have been made to all periods
presented for comparability.
The preparation of our consolidated
financial statements in conformity with
generally accepted accounting principles
requires us to make estimates and
assumptions that affect reported amounts
of assets, liabilities, revenues, expenses
and disclosure of contingent assets and
liabilities. Estimates are used in determin-
ing, among other items, sales incentives
accruals, future cash flows associated with
impairment testing for perpetual brands
and goodwill, useful lives for intangible
assets, tax reserves, stock-based compen-
sation and pension and retiree medical
accruals. Actual results could differ from
these estimates.
See “Our Divisions” below and for
additional unaudited information on items
affecting the comparability of our
consolidated results, see “Items Affecting
Comparability” in Management’s
Discussion and Analysis.
Tabular dollars are in millions, except per
share amounts. All per share amounts
reflect common per share amounts, assume
dilution unless noted, and are based on
unrounded amounts. Certain reclassifica-
tions were made to prior years’ amounts to
conform to the 2005 presentation.
We manufacture or use contract manufac-
turers, market and sell a variety of salty,
sweet and grain-based snacks, carbonated
and non-carbonated beverages, and foods
through our North American and interna-
tional business divisions. Our North
American divisions include the United
States and Canada. The accounting poli-
cies for the divisions are the same as those
described in Note 2, except for certain
allocation methodologies for stock-based
compensation expense and pension and
retiree medical expense, as described in
the unaudited information in “Our Critical
Accounting Policies.” Additionally, begin-
ning in the fourth quarter of 2005, we
began centrally managing commodity
derivatives on behalf of our divisions.
Certain of the commodity derivatives,
primarily those related to the purchase of
energy for use by our divisions, do not
qualify for hedge accounting treatment.
These derivatives hedge underlying com-
modity price risk and were not entered into
for speculative purposes. Such derivatives
are marked to market with the resulting
gains and losses recognized as a compo-
nent of corporate unallocated expense.
These gains and losses are reflected in
division results when the divisions take
delivery of the underlying commodity.
Therefore, division results reflect the
contract purchase price of the energy or
other commodities.
Division results are based on how our
Chairman and Chief Executive Officer
evaluates our divisions. Division results
exclude certain Corporate-initiated restruc-
turing and impairment charges, merger-
related costs and divested businesses.
For additional unaudited information on
our divisions, see “Our Operations” in
Management’s Discussion and Analysis.
Notes to Consolidated Financial Statements
Note 1 — Basis of Presentation and Our Divisions
Our Divisions
Basis of Presentation