Pepsi 2006 Annual Report Download - page 63

Sales Incentives and Other
Marketplace Spending
We offer sales incentives and discounts
through various programs to our cus-
tomers and consumers. Sales incentives
and discounts are accounted for as a
reduction of revenue and totaled
$10.1 billion in 2006, $8.9 billion in 2005
and $7.8 billion in 2004. While most of
these incentive arrangements have
terms of no more than one year, certain
arrangements, such as fountain pouring
rights, extend beyond one year. Costs
incurred to obtain these arrangements
are recognized over no longer than the
contract period and the remaining bal-
ances of $297 million at December 30,
2006 and $321 million at December 31,
2005 are included in current assets and
other assets on our 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 mar-
keting activities and is reported as
selling, general and administrative
expenses. Advertising expenses were
$1.7 billion in 2006, $1.8 billion in 2005
and $1.7 billion in 2004. 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
$171 million and $202 million at year-
end 2006 and 2005, respectively, are
classified as prepaid expenses on our
balance sheet.
Distribution Costs
Distribution costs, including the costs of
shipping and handling activities, are
reported as selling, general and adminis-
trative expenses. Shipping and handling
expenses were $4.6 billion in 2006,
$4.1 billion in 2005 and $3.9 billion
in 2004.
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 devel-
oping or obtaining computer software
for internal use. Capitalized software
costs are included in property, plant
and equipment on our balance sheet
and amortized on a straight-line
basis when placed into service over the
estimated useful lives of the software,
which approximate five to seven
years. Net capitalized software and
development costs were $537 million
at December 30, 2006 and $327 million
at December 31, 2005.
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 rec-
ognize liabilities for contingencies and
commitments when a loss is probable
and estimable. For additional informa-
tion on our commitments, see Note 9.
Research and Development
We engage in a variety of research and
development activities. These activities
principally involve the development of
new products, improvement in the
quality of existing products, improve-
ment and modernization of production
processes, and the development and
implementation of new technologies to
enhance the quality and value of both
current and proposed product lines.
Research and development costs were
$344 million in 2006 and $340 million in
2005 and are reported as selling, gen-
eral and administrative expenses.
Other Significant Accounting Policies
Our other significant accounting poli-
cies 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.
Recent Accounting Pronouncements
As further discussed in Note 6, we
adopted SFAS 123R on January 1, 2006.
As further discussed in Note 7, we
adopted SFAS 158 on December 30, 2006.
In September 2006, the SEC issued
SAB 108 to address diversity in practice
in quantifying financial statement mis-
statements. SAB 108 requires that we
quantify misstatements based on their
impact on each of our financial state-
ments and related disclosures. On
December 30, 2006, we adopted SAB
108. Our adoption of SAB 108 did not
impact our financial statements.
In July 2006, the FASB issued FIN 48
which clarifies the accounting for uncer-
tainty in tax positions. FIN 48 requires
that we recognize in our financial state-
ments, the impact of a tax position, if
that position is more likely than not of
being sustained on audit, based on the
technical merits of the position. The
provisions of FIN 48 are effective as of
the beginning of our 2007 fiscal year,
with the cumulative effect of the
change in accounting principle
recorded as an adjustment to opening
retained earnings. We do not expect
our adoption of FIN 48 to materially
impact our financial statements.
In September 2006, the FASB issued
SFAS 157 which defines fair value,
establishes a framework for measuring
fair value, and expands disclosures
about fair value measurements. The
provisions of SFAS 157 are effective
as of the beginning of our 2008 fiscal
year. We are currently evaluating the
impact of adopting SFAS 157 on our
financial statements.
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