Pepsi 2007 Annual Report Download - page 43

total annual sales incentives for most
of our programs and record a pro rata
share in proportion to revenue. Certain
arrangements, such as fountain pouring
rights, may extend beyond one year. The
costs incurred to obtain incentive arrange-
ments are recognized over the shorter
of the economic or contractual life, as a
reduction of revenue, and the remaining
balances of $287 million at year-end 2007
and $297 million at year-end 2006 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. Bad
debt expense is classifi ed within selling,
general and administrative expenses in
our income statement.
Brand and Goodwill Valuations
We sell products under a number of brand
names, many of which were developed
by us. The brand development costs are
expensed as incurred. We also purchase
brands in acquisitions. Upon acquisition,
the purchase price is fi rst allocated to
identifi able assets and liabilities, includ-
ing brands, based on estimated fair
value, with any remaining purchase price
recorded as goodwill. Determining fair
value requires signifi cant estimates and
assumptions based on an evaluation of a
number of factors, such as marketplace
participants, product life cycles, market
share, consumer awareness, brand his-
tory and future expansion expectations,
amount and timing of future cash fl ows
and the discount rate applied to the
cash fl ows.
We believe that a brand has an
indefi nite life if it has a history of strong
revenue and cash fl ow performance, and
we have the intent and ability to support
the brand with marketplace spending for
the foreseeable future. If these perpetual
brand criteria are not met, brands are
amortized over their expected useful
lives, which generally range from fi ve to
40 years. Determining the expected life
of a brand requires management judg-
ment and is based on an evaluation of
a number of factors, including market
share, consumer awareness, brand history
and future expansion expectations, as well
as the macroeconomic environment of the
countries in which the brand is sold.
Perpetual brands and goodwill, includ-
ing the goodwill that is part of our non-
controlled bottling investment balances,
are not amortized. Perpetual brands and
goodwill are assessed for impairment at
least annually. If the carrying amount of a
perpetual brand exceeds its fair value, as
determined by its discounted cash fl ows,
an impairment loss is recognized in an
amount equal to that excess. Goodwill is
evaluated using a two-step impairment
test at the reporting unit level. A reporting
unit can be a division or business within
a division. The fi rst step compares the
book value of a reporting unit, including
goodwill, with its fair value, as determined
by its discounted cash fl ows. 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 second step, we determine an implied
fair value of the reporting unit’s goodwill
by allocating the fair value of the report-
ing unit to all of the assets and liabilities
other than goodwill (including any unrec-
ognized 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 evaluated
for impairment upon a signifi cant change
in the operating or macroeconomic
environment. If an evaluation of the
undiscounted future cash fl ows indicates
impairment, the asset is written down to
its estimated fair value, which is based on
its discounted future cash fl ows.
Management judgment is necessary
to evaluate the impact of operating and
macroeconomic changes and to estimate
future cash fl ows. Assumptions used
in our impairment evaluations, such as
forecasted growth rates and our cost of
capital, are based on the best available
market information and are consistent
with our internal forecasts and operat-
ing 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
29, 2007, we had $6.4 billion of per-
petual brands and goodwill, of which
approximately 60% related to Tropicana
and Walkers.
We did not recognize any
impairment charges for
perpetual brands or goodwill
in the years presented.
Determining the expected life of
a brand requires management
judgment and is based on an
evaluation of a number of factors,
including market share, consumer
awareness, brand history and
future expansion expectations,
as well as the macroeconomic
environment of the countries in
which the brand is sold.
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