Pepsi 2007 Annual Report Download - page 41

Commodity Prices
Our open commodity derivative contracts
that qualify for hedge accounting had a
face value of $5 million at December 29,
2007 and $55 million at December 30,
2006. The open derivative contracts that
qualify for hedge accounting resulted in
net unrealized gains of less than $1 million
at December 29, 2007 and December 30,
2006. We estimate that a 10% decline in
commodity prices would have had
no impact on our net unrealized gains
in 2007.
Our open commodity derivative
contracts that do not qualify for hedge
accounting had a face value of $105 million
at December 29, 2007 and $196 million at
December 30, 2006. The open derivative
contracts that do not qualify for hedge
accounting resulted in net gains of $3 million
in 2007 and net losses of $28 million in
2006. We estimate that a 10% decline
in commodity prices would have had no
impact on our net gains in 2007.
We expect to be able to continue to
reduce the impact of increases in our raw
material and energy costs through our
hedging strategies and ongoing produc-
tivity initiatives.
Foreign Exchange
Financial statements of foreign subsidiar-
ies are translated into U.S. dollars using
period-end exchange rates for assets
and liabilities and weighted-average
exchange rates for revenues and expenses.
Adjustments resulting from translating net
assets are reported as a separate compo-
nent of accumulated other comprehensive
loss within shareholders’ equity under the
caption currency translation adjustment.
Our operations outside of the U.S.
generate 44% of our net revenue, with
Mexico, the United Kingdom and Canada
comprising 19% of our net revenue. As a
result, we are exposed to foreign currency
risks. During 2007, net favorable foreign
currency, primarily due to appreciation in
the euro, British pound, Canadian dollar
and Brazilian real, contributed 2 percentage
points to net revenue growth. Currency
declines which are not offset could
adversely impact our future results.
Exchange rate gains or losses related
to foreign currency transactions are
recognized as transaction gains or losses
in our income statement as incurred. We
may enter into derivatives to manage our
exposure to foreign currency transaction
risk. Our foreign currency derivatives
had a total face value of $1.6 billion at
December 29, 2007 and $1.0 billion at
December 30, 2006. The contracts that
qualify for hedge accounting resulted
in net unrealized losses of $44 million
at December 29, 2007 and $6 million
at December 30, 2006. We estimate
that an unfavorable 10% change in the
exchange rates would have resulted in net
unrealized losses of $152 million in 2007.
The contracts not meeting the criteria for
hedge accounting resulted in a net gain
of $15 million in 2007 and a net loss of
$10 million in 2006. All losses and gains
were offset by changes in the underlying
hedged items, resulting in no net material
impact on earnings.
Interest Rates
We centrally manage our debt and invest-
ment portfolios considering investment
opportunities and risks, tax consequences
and overall fi nancing strategies. We
may use interest rate and cross currency
interest rate swaps to manage our overall
interest expense and foreign exchange
risk. These instruments effectively change
the interest rate and currency of specifi c
debt issuances. These swaps are entered
into concurrently with the issuance of the
debt that they are intended to modify.
The notional amount, interest payment
and maturity date of the swaps match the
principal, interest payment and maturity
date of the related debt. Our counterparty
credit risk is considered low because these
swaps are entered into only with strong
creditworthy counterparties and are
generally settled on a net basis.
Assuming year-end 2007 variable rate
debt and investment levels, a 1-percent-
age-point increase in interest rates would
have decreased net interest expense by
$1 million in 2007.
Risk Management Framework
The achievement of our strategic and
operating objectives will necessarily
involve taking risks. Our risk management
process is intended to ensure that risks
are taken knowingly and purposefully.
As such, we leverage an integrated risk
management framework to identify,
assess, prioritize, manage, monitor and
communicate risks across the Company.
This framework includes:
The PepsiCo Executive Committee
•
(PEC), comprised of a cross-functional,
geographically diverse, senior manage-
ment group which identifi es, assesses,
prioritizes and addresses strategic and
reputational risks;
Division Risk Committees (DRCs),
•
comprised of cross-functional senior
management teams which meet
regularly each year to identify, assess,
prioritize and address division-specifi c
operating risks;
PepsiCo’s Risk Management Offi ce,
•
which manages the overall risk man-
agement process, provides ongoing
guidance, tools and analytical support
to the PEC and the DRCs, identifi es and
assesses potential risks, and facilitates
ongoing communication between the
parties, as well as to PepsiCo’s Audit
Committee and Board of Directors;
PepsiCo Corporate Audit, which evalu-
•
ates the ongoing effectiveness of our
key internal controls through periodic
audit and review procedures; and
PepsiCo’s Compliance Offi ce, which
•
leads and coordinates our compliance
policies and practices.
We leverage an integrated
risk management framework
to identify, assess, prioritize,
manage, monitor and
communicate risks across
the Company.
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