Pepsi 2007 Annual Report Download - page 81

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price fl uctuations related to a portion of
our anticipated commodity purchases,
primarily for natural gas, diesel fuel and
fruit. For those derivatives that qualify for
hedge accounting, any ineffectiveness
is recorded immediately. However, such
commodity cash fl ow hedges have not
had any signifi cant ineffectiveness for all
periods presented. We classify both the
earnings and cash fl ow impact from these
derivatives consistent with the underly-
ing hedged item. During the next 12
months, we expect to reclassify net gains
of $1 million related to cash fl ow hedges
from accumulated other comprehensive
loss into net income. Derivatives used to
hedge commodity price risks that do not
qualify for hedge accounting are marked
to market each period and refl ected in our
income statement.
Foreign Exchange
Our operations outside of the U.S. gener-
ate 44% of our net revenue, with Mexico,
the United Kingdom and Canada compris-
ing 19% of our net revenue. As a result,
we are exposed to foreign currency risks.
On occasion, we enter into hedges, pri-
marily forward contracts with terms of no
more than two years, to reduce the effect
of foreign exchange rates. Ineffectiveness
of these hedges has not been material.
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. These swaps
are entered into only with strong credit-
worthy counterparties and are settled on
a net basis.
Fair Value
All derivative instruments are recognized
on our balance sheet at fair value. The
fair value of our derivative instruments is
generally based on quoted market prices.
Book and fair values of our derivative and
fi nancial instruments are as follows:
2007 2006
Book Value Fair Value Book Value Fair Value
Assets
Cash and cash equivalents(a)
$910 $910 $1,651 $1,651
Short-term investments(b)
$1,571 $1,571 $1,171 $1,171
Forward exchange contracts(c)
$32 $32 $8 $8
Commodity contracts(d)
$10 $10 $2 $2
Prepaid forward contracts(e)
$74 $74 $73 $73
Interest rate swaps(f)
$36 $36 $– $–
Cross currency interest rate swaps(f)
$– $– $1 $1
Liabilities
Forward exchange contracts(c)
$61 $61 $24 $24
Commodity contracts(d)
$7 $7 $29 $29
Debt obligations $4,203 $4,352 $2,824 $2,955
Interest rate swaps(g)
$– $– $4 $4
Cross currency interest rate swaps(g)
$8 $8 $– $–
The above items are included on our balance sheet under the captions noted or as indicated below. In addition, derivatives qualify for hedge accounting unless otherwise
noted below.
(a) Book value approximates fair value due to the short maturity.
(b) Principally short-term time deposits and includes $189 million at December 29, 2007 and $145 million at December 30, 2006 of mutual fund investments used to
manage a portion of market risk arising from our deferred compensation liability.
(c) The 2007 asset includes $20 million related to derivatives that do not qualify for hedge accounting and the 2007 liability includes $5 million related to derivatives
that do not qualify for hedge accounting. The 2006 liability includes $10 million related to derivatives that do not qualify for hedge accounting. Assets are reported
within current assets and other assets, and liabilities are reported within current liabilities and other liabilities.
(d) The 2007 asset includes $10 million related to derivatives that do not qualify for hedge accounting and the 2007 liability includes $7 million related to derivatives
that do not qualify for hedge accounting. The 2006 liability includes $28 million related to derivatives that do not qualify for hedge accounting. Assets are reported
within current assets and other assets, and liabilities are reported within current liabilities and other liabilities.
(e) Included in current assets and other assets.
(f) Asset included within other assets.
(g) Reported in other liabilities.
This table excludes guarantees, including our guarantee of $2.3 billion of Bottling Group, LLC’s long-term debt. The guarantee had
a fair value of $35 million at December 29, 2007 and December 30, 2006 based on our estimate of the cost to us of transferring the
liability to an independent fi nancial institution. See Note 9 for additional information on our guarantees.
79