Pepsi 2006 Annual Report Download - page 39

Our products are sold for cash or on
credit terms. Our credit terms, which
are established in accordance with local
and industry practices, typically require
payment within 30 days of delivery in
the U.S., and generally within 30 to 90
days internationally, and may allow dis-
counts for early payment. 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 DSD and
chilled products is to remove and
replace damaged and out-of-date prod-
ucts 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out-of-date products.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 his-
torical experience with this practice, we
have reserved for anticipated damaged
and out-of-date products. Our bottlers
have a similar replacement policy
and are responsible for the products
they distribute.
Our policy is to provide customers
with product when needed. In fact, our
commitment 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 limiting 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 dis-
counts are accounted for as a reduction
of revenue and totaled $10.1 billion in
2006, $8.9 billion in 2005 and $7.8 bil-
lion in 2004. 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 targets,
and accruals are established during the
year for the expected payout. These
accruals are based on contract terms and
our historical experience with similar
programs and require management
judgment with respect to estimating
customer participation and performance
levels. Differences between estimated
expense and actual incentive costs are
normally insignificant and are
recognized in earnings in the period
such differences are determined. The
terms of most of our incentive arrange-
ments do not exceed a year, and
therefore do not require highly uncer-
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 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.
Revenue Recognition
37
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.
Our credit terms typically
require payment within 30 days
of delivery in the U.S., and
generally within 30 to 90 days
internationally.
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