Pepsi 2008 Annual Report Download - page 52

50 PepsiCo, Inc. 2008 Annual Report
Management’s Discussion and Analysis
• Division Risk Committees (DRCs), comprised of cross-functional
senior management teams which meet regularly each year to
identify, assess, prioritize and address division-specic operat-
ing risks;
• PepsiCo’s Risk Management Ofce, which manages the overall
risk management process, provides ongoing guidance, tools
and analytical support to the PEC and the DRCs, identies and
assesses potential risks, and facilitates ongoing communication
between the parties, as well as to PepsiCo’s Audit Committee
and Board of Directors;
• PepsiCo Corporate Audit, which evaluates the ongoing effective-
ness of our key internal controls through periodic audit and
review procedures; and
• PepsiCo’s Compliance Ofce, which leads and coordinates
our compliance policies and practices.
Market Risks
We are exposed to market risks arising from adverse changes in:
• commodity prices, affecting the cost of our raw materials
and energy,
• foreign exchange rates, and
• interest rates.
In the normal course of business, we manage these risks through
a variety of strategies, including productivity initiatives, global
purchasing programs and hedging strategies.
In the normal course of business, we manage these risks
through a variety of strategies, including productivity initiatives,
global purchasing programs and hedging strategies. Ongoing
productivity initiatives involve the identication and effective
implementation of meaningful cost saving opportunities or ef-
ciencies. Our global purchasing programs include xed-price
purchase orders and pricing agreements. See Note 9 for further
information on our noncancelable purchasing commitments.
Our hedging strategies include the use of derivatives. Certain
derivatives are designated as either cash ow or fair value hedges
and qualify for hedge accounting treatment, while others do not
qualify and are marked to market through earnings. We do not
use derivative instruments for trading or speculative purposes.
We perform a quarterly assessment of our counterparty credit
risk, including a review of credit ratings, credit default swap rates
and potential nonperformance of the counterparty. We consider
this risk to be low, because we limit our exposure to individual,
strong creditworthy counterparties and generally settle on a
net basis.
The fair value of our derivatives uctuates based on market
rates and prices. The sensitivity of our derivatives to these market
uctuations is discussed below. See Note 10 for further discussion
of these derivatives and our hedging policies. See “Our Critical
Accounting Policies” for a discussion of the exposure of our pen-
sion plan assets and pension and retiree medical liabilities to
risks related to stock prices and discount rates.
Inationary, deationary and recessionary conditions impact-
ing these market risks also impact the demand for and pricing
of our products.
Commodity Prices
We expect to be able to reduce the impact of volatility in our
raw material and energy costs through our hedging strategies
and ongoing sourcing initiatives.
Our open commodity derivative contracts that qualify for hedge
accounting had a face value of $303 million at December 27, 2008
and $5 million at December 29, 2007. These contracts resulted in
net unrealized losses of $117 million at December 27, 2008 and
net unrealized gains of less than $1 million at December 29, 2007.
At the end of 2008, the potential change in fair value of com-
modity derivative instruments, assuming a 10% decrease in the
underlying commodity price, would have increased our net unre-
alized losses in 2008 by $19 million.
Our open commodity derivative contracts that do not qualify
for hedge accounting had a face value of $626 million at
December 27, 2008 and $105 million at December 29, 2007.
These contracts resulted in net losses of $343 million in 2008
and net gains of $3 million in 2007. At the end of 2008, the
potential change in fair value of commodity derivative instruments,
assuming a 10% decrease in the underlying commodity price,
would have increased our net losses in 2008 by $34 million.
Foreign Exchange
Financial statements of foreign subsidiaries are translated into
U.S. dollars using period-end exchange rates for assets and
liabilities and weighted-average exchange rates for revenues and
expenses. Adjustments resulting from translating net assets are
reported as a separate component of accumulated other compre-
hensive loss within shareholders’ equity under the caption cur-
rency translation adjustment.