Pepsi 2008 Annual Report Download - page 53

Download and view the complete annual report

Please find page 53 of the 2008 Pepsi annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 104

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104

51PepsiCo, Inc. 2008 Annual Report
Our operations outside of the U.S. generate 48% of our net
revenue, with Mexico, Canada and the United Kingdom compris-
ing 19% of our net revenue. As a result, we are exposed to for-
eign currency risks. During 2008, net favorable foreign currency,
primarily due to appreciation in the euro and Chinese yuan,
partially offset by depreciation in the British pound, contributed
1 percentage point to net revenue growth. Currency declines
against the U.S. dollar which are not offset could adversely
impact our future results.
Exchange rate gains or losses related to foreign currency
transactions are recognized as transaction gains or losses in our
income statement as incurred. We may enter into derivatives to
manage our exposure to foreign currency transaction risk. Our
foreign currency derivatives had a total face value of $1.4 billion
at December 27, 2008 and $1.6 billion at December 29, 2007.
The contracts that qualify for hedge accounting resulted in net
unrealized gains of $111 million at December 27, 2008 and net
unrealized losses of $44 million at December 29, 2007. At the
end of 2008, we estimate that an unfavorable 10% change in the
exchange rates would have decreased our net unrealized gains by
$70 million. The contracts that do not qualify for hedge account-
ing resulted in a net loss of $28 million in 2008 and a net gain of
$15 million in 2007. All losses and gains were offset by changes
in the underlying hedged items, resulting in no net material
impact on earnings.
Interest Rates
We centrally manage our debt and investment portfolios consider-
ing investment opportunities and risks, tax consequences and
overall 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 specic debt issuances.
Our 2008 and 2007 interest rate swaps were entered into
concurrently with the issuance of the debt that they modied.
The notional amount, interest payment and maturity date of the
swaps match the principal, interest payment and maturity date
of the related debt.
Assuming year-end 2008 variable rate debt and investment
levels, a 1-percentage-point increase in interest rates would have
increased net interest expense by $21 million in 2008.
OUR CRITICAL ACCOUNTING POLICIES
An appreciation of our critical accounting policies is necessary to
understand our nancial results. These policies may require man-
agement to make difcult and subjective judgments regarding
uncertainties, and as a result, such estimates may signicantly
impact our nancial results. The precision of these estimates and
the likelihood of future changes depend on a number of underly-
ing variables and a range of possible outcomes. Other than our
accounting for pension plans, our critical accounting policies do
not involve the choice between alternative methods of account-
ing. We applied our critical accounting policies and estimation
methods consistently in all material respects, and for all periods
presented, and have discussed these policies with our Audit
Committee.
Our critical accounting policies arise in conjunction with the
following:
• revenue recognition,
• brand and goodwill valuations,
• income tax expense and accruals, and
• pension and retiree medical plans.
REVENUE RECOGNITION
Our products are sold for cash or on credit terms. Our credit
terms, which are established in accordance with local and indus-
try practices, typically require payment within 30 days of delivery
in the U.S., and generally within 30 to 90 days internationally,
and may allow discounts for early payment. We recognize revenue
upon shipment or delivery to our customers based on written
sales terms that do not allow for a right of return. However, our
policy for DSD and chilled products is to remove and replace
damaged and out-of-date products from store shelves to ensure
that consumers receive the product quality and freshness they
expect. Similarly, our policy for certain warehouse-distributed
products is to replace damaged and out-of-date products. Based
on our experience with this practice, we have reserved for antici-
pated damaged and out-of-date products. Our bottlers have a
similar replacement policy and are responsible for the products
they distribute.