Pepsi 2007 Annual Report Download - page 42

OUR CRITICAL ACCOUNTING POLICIES 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.
Revenue Recognition
Our products are sold for cash or on credit
terms. Our credit terms, which are estab-
lished in accordance with local and indus-
try practices, typically require payment
within 30 days of delivery in the U.S., and
generally within 30 to 90 days interna-
tionally, and may allow discounts 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 products 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is to replace damaged and out-of-date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 historical experi-
ence 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for anticipated damaged and out-of-date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 $11.3 billion in 2007,
$10.1 billion in 2006 and $8.9 billion in
2005. Sales incentives include payments
to customers for performing merchan-
dising 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 expe-
rience 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 insignifi cant and are
recognized in earnings in the period such
differences are determined. The terms of
most of our incentive arrangements do
not exceed a year, and therefore do not
require highly uncertain long-term esti-
mates. For interim reporting, we estimate
Our critical accounting policies arise in conjunction
with the following:
• revenue recognition,
• brand and goodwill valuations,
• income tax expense and accruals, and
• pension and retiree medical plans.
Our policy for DSD and chilled
products is to remove and
replace damaged and out-of-date
products from store shelves to
ensure that consumers receive
the product quality and freshness
they expect.
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