Pepsi 2006 Annual Report Download - page 40

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tain long-term estimates. For interim
reporting, we estimate total annual
sales incentives for most of our prog-
rams and record a pro rata share in
proportion to revenue. Certain arrange-
ments, such as fountain pouring rights,
may extend beyond one year. The costs
incurred to obtain incentive arrange-
ments are recognized over no longer
than the contract period as a reduction
of revenue, and the remaining balances
of $297 million at year-end 2006 and
$321 million at year-end 2005 are
included in current assets and other
assets on our balance sheet.
We estimate and reserve for our bad
debt exposure based on our experience
with past due accounts. In 2005, our
method of determining the reserves
was conformed across our divisions in
connection with our BPT initiative, as
discussed above. Bad debt expense is
classified within selling, general
and administrative expenses in our
income statement.
We sell products under a number of
brand names, many of which were
developed by us. The brand develop-
ment costs are expensed as incurred.
We also purchase brands and goodwill
in acquisitions. Upon acquisition, the
purchase price is first allocated to iden-
tifiable assets and liabilities, including
brands, based on estimated fair value,
with any remaining purchase price
recorded as goodwill.
We believe that a brand has an
indefinite life if it has significant market
share in a stable macroeconomic envi-
ronment and a history of strong
revenue and cash flow performance
that we expect to continue for the fore-
seeable future. If these perpetual brand
criteria are not met, brands are amor-
tized over their expected useful lives,
which generally range from five to 40
years. Determining the expected life of
a brand requires considerable manage-
ment judgment and is based on an
evaluation of a number of factors,
including the competitive environment,
market share, brand history and the
macroeconomic environment of the
countries in which the brand is sold.
Perpetual brands and goodwill,
including the goodwill that is part of
our noncontrolled bottling investment
balances, are not amortized. Perpetual
brands and goodwill are assessed for
impairment at least annually. If the car-
rying amount of a perpetual brand
exceeds its fair value, as determined
by its discounted cash flows, an
impairment loss is recognized in an
amount equal to that excess. Goodwill
is evaluated using a two-step impair-
ment test at the reporting unit level. A
reporting unit can be a division or busi-
ness within a division. The first step
compares the book value of a reporting
unit, including goodwill, with its fair
value, as determined by its discounted
cash flows. If the book value of a
reporting unit exceeds its fair value, we
complete the second step to determine
the amount of goodwill impairment
loss that we should record. In the sec-
ond step, we determine an implied fair
value of the reporting unit’s goodwill
by allocating the fair value of the
reporting unit to all of the assets and
liabilities other than goodwill (including
any unrecognized intangible assets).
The amount of impairment loss is equal
to the excess of the book value of the
goodwill over the implied fair value of
that goodwill.
Amortizable brands are only evalu-
ated for impairment upon a significant
change in the operating or macroeco-
nomic environment. If an evaluation of
the undiscounted future cash flows
indicates impairment, the asset is writ-
ten down to its estimated fair value,
which is based on its discounted future
cash flows.
Considerable management judgment
is necessary to evaluate the impact of
operating and macroeconomic changes
and to estimate future cash flows.
Assumptions used in our impairment
evaluations, such as forecasted growth
rates and our cost of capital, are based
on the best available market informa-
tion and are consistent with our internal
forecasts and operating plans. These
assumptions could be adversely
impacted by certain of the risks
discussed in “Our Business Risks.”
We did not recognize any
impairment charges for perpetual
brands or goodwill in the years
presented. As of December 30, 2006, we
had $5.8 billion of perpetual brands
and goodwill, of which approximately
65% related to Tropicana and Walkers.
Brand and Goodwill Valuations
38
We did not recognize any
impairment charges for
perpetual brands or goodwill in
the years presented.
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