Pepsi 2007 Annual Report Download - page 62

Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements
Our fi nancial statements include the
consolidated accounts of PepsiCo, Inc.
and the affi liates that we control. In
addition, we include our share of the
results of certain other affi liates based on
our economic ownership interest. We do
not control these other affi liates, as our
ownership in these other affi liates is gen-
erally less than 50%. Our share of the net
income of our anchor bottlers is reported
in our income statement as bottling
equity income. Bottling equity income also
includes any changes in our ownership
interests of these affi liates. Bottling
equity income includes $174 million,
$186 million and $126 million of pre-tax
gains on our sales of PBG stock in 2007,
2006 and 2005, respectively. See Note 8
for additional information on our sig-
nifi cant noncontrolled bottling affi liates.
Intercompany balances and transactions
are eliminated. In 2005, we had an addi-
tional week of results (53rd week). Our
fi scal year ends on the last Saturday of
each December, resulting in an additional
week of results every fi ve or six years.
Beginning in the fi rst quarter of 2007,
income for certain non-consolidated inter-
national bottling interests was reclassifi ed
from bottling equity income and corpo-
rate unallocated results to PI’s division
operating results, to be consistent with
PepsiCo’s internal management account-
ability. Prior period amounts have been
adjusted to refl ect this reclassifi cation.
Raw materials, direct labor and plant
overhead, as well as purchasing and
receiving costs, costs directly related to
production planning, inspection costs
and raw material handling facilities, are
included in cost of sales. The costs of
moving, storing and delivering fi nished
product are included in selling, general
and administrative expenses.
The preparation of our consolidated
fi nancial statements in conformity with
generally accepted accounting prin-
ciples requires us to make estimates
and assumptions that affect reported
amounts of assets, liabilities, revenues,
expenses and disclosure of contingent
assets and liabilities. Estimates are used
in determining, among other items, sales
incentives accruals, tax reserves, stock-
based compensation, pension and retiree
medical accruals, useful lives for intangible
assets, and future cash fl ows associated
with impairment testing for perpetual
brands, goodwill and other long-lived
assets. Actual results could differ from
these estimates.
See “Our Divisions” below and for
additional unaudited information on
items affecting the comparability of our
consolidated results, see “Items Affecting
Comparability” in Management’s
Discussion and Analysis.
Tabular dollars are in millions, except
per share amounts. All per share amounts
refl ect common per share amounts, assume
dilution unless noted, and are based on
unrounded amounts. Certain reclassifi ca-
tions were made to prior years’ amounts to
conform to the 2007 presentation.
Our Divisions
We manufacture or use contract manu-
facturers, market and sell a variety of salty,
sweet and grain-based snacks, carbon-
ated and non-carbonated beverages, and
foods through our North American and
international business divisions. Our North
American divisions include the U.S. and
Canada. Division results are based on how
our Chief Executive Offi cer assesses the
performance of and allocates resources
to our divisions. For additional unaudited
information on our divisions, see “Our
Operations” in Management’s Discussion
and Analysis. The accounting policies
for the divisions are the same as those
described in Note 2, except for the follow-
ing certain allocation methodologies:
stock-based compensation expense,
•
pension and retiree medical •
expense, and
derivatives.•
Stock-Based Compensation Expense
Our divisions are held accountable for
stock-based compensation expense and,
therefore, this expense is allocated to
our divisions as an incremental employee
compensation cost. The allocation of
stock-based compensation expense in
2007 was approximately 29% to FLNA,
17% to PBNA, 34% to PI, 4% to QFNA
and 16% to corporate unallocated
expenses. We had similar allocations of
stock-based compensation expense to our
divisions in 2006 and 2005. The expense
allocated to our divisions excludes any
impact of changes in our Black-Scholes
assumptions during the year which refl ect
market conditions over which division
management has no control. Therefore,
any variances between allocated expense
and our actual expense are recognized in
corporate unallocated expenses.
Pension and Retiree Medical Expense
Pension and retiree medical service costs
measured at a fi xed discount rate, as
well as amortization of gains and losses
due to demographics, including sal-
ary experience, are refl ected in division
results for North American employees.
Division results also include interest costs,
measured at a fi xed discount rate, for
retiree medical plans. Interest costs for
the pension plans, pension asset returns
and the impact of pension funding,
and gains and losses other than those
due to demographics, are all refl ected
in corporate unallocated expenses. In
addition, corporate unallocated expenses
include the difference between the service
costs measured at a fi xed discount rate
(included in division results as noted
above) and the total service costs deter-
mined using the Plans’ discount rates as
disclosed in Note 7.
Note 1 — Basis of Presentation and Our Divisions
Basis of Presentation
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