Pepsi 2008 Annual Report Download - page 54

52 PepsiCo, Inc. 2008 Annual Report
Management’s Discussion and Analysis
Our policy is to provide customers with product when needed.
In fact, our commitment to freshness and product dating serves
to regulate the quantity of product shipped or delivered. In addi-
tion, DSD products are placed on the shelf by our employees
with customer shelf space limiting the quantity of product. For
product delivered through our other distribution networks, we
monitor customer inventory levels.
As discussed in “Our Customers,” we offer sales incentives and
discounts through various programs to customers and consumers.
Sales incentives and discounts are accounted for as a reduction
of revenue and totaled $12.5 billion in 2008, $11.3 billion in 2007
and $10.1 billion in 2006. Sales incentives include payments to
customers for performing merchandising activities on our behalf,
such as payments for in-store displays, payments to gain distribu-
tion of new products, payments for shelf space and discounts to
promote lower retail prices. A number of our sales incentives, such
as bottler funding and customer volume rebates, are based on
annual targets, and accruals are established during the year for
the expected payout. These accruals are based on contract terms
and our historical experience with similar programs and require
management judgment with respect to estimating customer par-
ticipation and performance levels. Differences between estimated
expense and actual incentive costs are normally insignicant and
are recognized in earnings in the period such differences are
determined. The terms of most of our incentive arrangements do
not exceed a year, and therefore do not require highly uncertain
long-term estimates. For interim reporting, we estimate total
annual sales incentives for most of our programs and record a
pro rata share in proportion to revenue. Certain arrangements,
such as fountain pouring rights, may extend beyond one year. The
costs incurred to obtain these incentive arrangements are recog-
nized over the shorter of the economic or contractual life, as a
reduction of revenue, and the remaining balances of $333 million
at year-end 2008 and $314 million at year-end 2007 are included
in current assets and other assets on our balance sheet.
We estimate and reserve for our bad debt exposure based on
our experience with past due accounts and collectibility, the aging
of accounts receivable and our analysis of customer data. Bad
debt expense is classied within selling, general and administra-
tive expenses in our income statement.
BRAND AND GOODWILL VALUATIONS
We sell products under a number of brand names, many of
which were developed by us. The brand development costs are
expensed as incurred. We also purchase brands in acquisitions.
Upon acquisition, the purchase price is rst allocated to identi-
able assets and liabilities, including brands, based on estimated
fair value, with any remaining purchase price recorded as good-
will. Determining fair value requires signicant estimates and
assumptions based on an evaluation of a number of factors, such
as marketplace participants, product life cycles, market share,
consumer awareness, brand history and future expansion expec-
tations, amount and timing of future cash ows and the discount
rate applied to the cash ows.
We believe that a brand has an indenite life if it has a history
of strong revenue and cash ow performance, and we have the
intent and ability to support the brand with marketplace spending
for the foreseeable future. If these perpetual brand criteria are
not met, brands are amortized over their expected useful lives,
which generally range from ve to 40 years. Determining the
expected life of a brand requires management judgment and is
based on an evaluation of a number of factors, including market
share, consumer awareness, brand history and future expansion
expectations, as well as the macroeconomic environment of the
countries in which the brand is sold.
Perpetual brands and goodwill, including the goodwill that
is part of our noncontrolled bottling investment balances, are
not amortized. Perpetual brands and goodwill are assessed for
impairment at least annually. If the carrying amount of a perpet-
ual brand exceeds its fair value, as determined by its discounted
cash ows, an impairment loss is recognized in an amount equal
to that excess. Goodwill is evaluated using a two-step impairment
test at the reporting unit level. A reporting unit can be a division
or business within a division. The rst step compares the book
value of a reporting unit, including goodwill, with its fair value, as
determined by its discounted cash ows. If the book value of a
reporting unit exceeds its fair value, we complete the second
step to determine the amount of goodwill impairment loss that
we should record. In the second step, we determine an implied
fair value of the reporting unit’s goodwill by allocating the fair
value of the reporting unit to all of the assets and liabilities other
than goodwill (including any unrecognized intangible assets).
The amount of impairment loss is equal to the excess of the book
value of the goodwill over the implied fair value of that goodwill.