Pepsi 2005 Annual Report Download - page 59

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Revenue Recognition
We recognize 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 direct-store-
delivery (DSD) and chilled products is to
remove and replace damaged and out-of-
date products from store shelves to ensure
that our consumers receive the product
quality and freshness that they expect.
Similarly, our policy for warehouse distrib-
uted products is to replace damaged and
out-of-date products. Based on our histori-
cal experience with this practice, we have
reserved for anticipated damaged and out-
of-date products. For additional unaudited
information on our revenue recognition and
related policies, including our policy on
bad debts, see “Our Critical Accounting
Policies” in Management’s Discussion and
Analysis. We are exposed to concentration
of credit risk by our customers, Wal-Mart
and PBG. Wal-Mart represents approxi-
mately 9% of our net revenue, including
concentrate sales to our bottlers which are
used in finished goods sold by them to
Wal-Mart; and PBG represents approxi-
mately 10%. We have not experienced
credit issues with these customers.
Sales Incentives and Other Marketplace
Spending
We offer sales incentives and discounts
through various programs to our customers
and consumers. Sales incentives and dis-
counts are accounted for as a reduction of
revenue and totaled $8.9 billion in 2005,
$7.8 billion in 2004 and $7.1 billion in
2003. While most of these incentive
arrangements have terms of no more than
one year, certain arrangements extend
beyond one year. For example, fountain
pouring rights may extend up to 15 years.
Costs incurred to obtain these arrange-
ments are recognized over the contract
period and the remaining balances of
$321 million at December 31, 2005 and
$337 million at December 25, 2004 are
included in current assets and other assets
in our Consolidated Balance Sheet. For
additional unaudited information on our
sales incentives, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.
Other marketplace spending includes the
costs of advertising and other marketing
activities and is reported as selling, general
and administrative expenses. Advertising
expenses were $1.8 billion in 2005,
$1.7 billion in 2004 and $1.6 billion in
2003. Deferred advertising costs are not
expensed until the year first used and
consist of:
• media and personal service prepayments,
• promotional materials in inventory, and
• production costs of future media
advertising.
Deferred advertising costs of $202 mil-
lion and $137 million at year-end 2005
and 2004, respectively, are classified as
prepaid expenses in our Consolidated
Balance Sheet.
Distribution Costs
Distribution costs, including the costs of
shipping and handling activities, are
reported as selling, general and administra-
tive expenses. Shipping and handling
expenses were $4.1 billion in 2005,
$3.9 billion in 2004 and $3.6 billion
in 2003.
Cash Equivalents
Cash equivalents are investments with
original maturities of three months or less
which we do not intend to rollover beyond
three months.
Software Costs
We capitalize certain computer software
and software development costs incurred
in connection with developing or obtaining
computer software for internal use.
Capitalized software costs are included in
property, plant and equipment on our
Consolidated Balance Sheet and amortized
on a straight-line basis over the estimated
useful lives of the software, which gener-
ally do not exceed 5 years. Net capitalized
software and development costs were
$327 million at December 31, 2005 and
$181 million at December 25, 2004.
Commitments and Contingencies
We are subject to various claims and
contingencies related to lawsuits, taxes
and environmental matters, as well as
commitments under contractual and other
commercial obligations. We recognize lia-
bilities for contingencies and commitments
when a loss is probable and estimable. For
additional information on our commit-
ments, see Note 9.
Other Significant Accounting Policies
Our other significant accounting policies
are disclosed as follows:
•
Property, Plant and Equipment and
Intangible Assets
— Note 4 and, for
additional unaudited information on
brands and goodwill, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.
• Income Taxes — Note 5 and, for addi-
tional unaudited information, see “Our
Critical Accounting Policies” in
Management’s Discussion and Analysis.
•
Stock-Based Compensation Expense —
Note 6 and, for additional unaudited
information, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.
• Pension, Retiree Medical and Savings
Plans
— Note 7 and, for additional
unaudited information, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.
•
Risk Management — Note 10 and, for
additional unaudited information, see
“Our Business Risks” in Management’s
Discussion and Analysis.
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 consoli-
dated financial statements.
Note 2 — Our Significant Accounting Policies