Pepsi 2007 Annual Report Download - page 71

Carryforwards and Allowances
Operating loss carryforwards totaling
$7.1 billion at year-end 2007 are being
carried forward in a number of foreign
and state jurisdictions where we are
permitted to use tax operating losses from
prior periods to reduce future taxable
income. These operating losses will expire
as follows: $0.5 billion in 2008, $5.6 billion
between 2009 and 2027 and $1.0 billion
may be carried forward indefi nitely. We
establish valuation allowances for our
deferred tax assets if, based on the avail-
able evidence, it is more likely than not
that some portion or all of the deferred
tax assets will not be realized.
Undistributed International Earnings
At December 29, 2007, we had approxi-
mately $14.7 billion of undistributed
international earnings. We intend to con-
tinue to reinvest earnings outside the U.S.
for the foreseeable future and, therefore,
have not recognized any U.S. tax expense
on these earnings.
Mexico Tax Legislation
In October 2007, Mexico enacted new tax
legislation effective January 1, 2008. The
deferred tax impact was not material and
is refl ected in our effective tax rate in 2007.
Note 6 — Stock-Based Compensation
Our stock-based compensation program
is a broad-based program designed to
attract and retain employees while also
aligning employees’ interests with the
interests of our shareholders. A majority
of our employees participate in our stock-
based compensation program, which
includes our broad-based SharePower pro-
gram established in 1989 to grant an an-
nual award of stock options to all eligible
employees, based on job level or clas-
sifi cation and, in the case of international
employees, tenure as well. In addition,
members of our Board of Directors par-
ticipate in our stock-based compensation
program in connection with their service
on our Board. Beginning in 2007, mem-
bers of our Board of Directors no longer
receive stock-based compensation grants.
Stock options and restricted stock units
(RSU) are granted to employees under the
shareholder-approved 2007 Long-Term
Incentive Plan (LTIP), our only active stock-
based plan. Stock-based compensation
expense was $260 million in 2007,
$270 million in 2006 and $311 million
in 2005. Related income tax benefi ts
recognized in earnings were $77 million in
2007, $80 million in 2006 and $87 million
in 2005. Stock-based compensation cost
capitalized in connection with our ongo-
ing business transformation initiative was
$3 million in 2007, $3 million in 2006 and
$4 million in 2005. At year-end 2007,
67 million shares were available for future
stock-based compensation grants.
Method of Accounting and
Our Assumptions
We account for our employee stock
options, which include grants under our
executive program and broad-based
SharePower program, under the fair value
method of accounting using a Black-
Scholes valuation model to measure stock
option expense at the date of grant. All
stock option grants have an exercise price
equal to the fair market value of our
common stock on the date of grant and
generally have a 10-year term. The fair
value of stock option grants is amortized
to expense over the vesting period,
generally three years. Executives who are
awarded long-term incentives based on
their performance are offered the choice
of stock options or RSUs. Executives who
elect RSUs receive one RSU for every four
stock options that would have otherwise
been granted. Senior offi cers do not have
a choice and are granted 50% stock
options and 50% RSUs. RSU expense is
based on the fair value of PepsiCo stock
on the date of grant and is amortized over
the vesting period, generally three years.
Each RSU is settled in a share of our stock
after the vesting period. Vesting of RSU
awards for senior offi cers is contingent
upon the achievement of pre-established
performance targets. There have been no
reductions to the exercise price of previ-
ously issued awards, and any repricing
of awards would require approval of
our shareholders.
On January 1, 2006, we adopted
SFAS 123R under the modifi ed prospec-
tive method. Since we had previously
accounted for our stock-based compensa-
tion plans under the fair value provisions
of SFAS 123, our adoption did not signifi -
cantly impact our fi nancial position or our
results of operations. Under SFAS 123R,
actual tax benefi ts recognized in excess of
tax benefi ts previously established upon
grant are reported as a fi nancing cash
infl ow. Prior to adoption, such excess tax
benefi ts were reported as an operating
cash infl ow.
69