Pepsi 2008 Annual Report Download - page 55

53PepsiCo, Inc. 2008 Annual Report
Amortizable brands are only evaluated for impairment upon a
signicant change in the operating or macroeconomic environment.
If an evaluation of the undiscounted future cash ows indicates
impairment, the asset is written down to its estimated fair value,
which is based on its discounted future cash ows.
Management judgment is necessary to evaluate the impact
of operating and macroeconomic changes and to estimate future
cash ows. Assumptions used in our impairment evaluations,
such as forecasted growth rates and our cost of capital, are based
on the best available market information and are consistent with
our internal forecasts and operating plans. These assumptions
could be adversely impacted by certain of the risks discussed in
“Our Business Risks.”
We did not recognize any impairment charges for perpetual brands
or goodwill in the years presented.
We did not recognize any impairment charges for perpetual
brands or goodwill in the years presented. As of December 27,
2008, we had $6.3 billion of perpetual brands and goodwill, of
which approximately 55% related to Tropicana and Walkers.
INCOME TAX EXPENSE AND ACCRUALS
Our annual tax rate is based on our income, statutory tax rates
and tax planning opportunities available to us in the various juris-
dictions in which we operate. Signicant judgment is required in
determining our annual tax rate and in evaluating our tax posi-
tions. We establish reserves when, despite our belief that our tax
return positions are fully supportable, we believe that certain
positions are subject to challenge and that we may not succeed.
We adjust these reserves, as well as the related interest, in light
of changing facts and circumstances, such as the progress of a
tax audit.
An estimated effective tax rate for a year is applied to our
quarterly operating results. In the event there is a signicant or
unusual item recognized in our quarterly operating results, the
tax attributable to that item is separately calculated and recorded
at the same time as that item. We consider the tax adjustments
from the resolution of prior year tax matters to be such items.
Tax law requires items to be included in our tax returns at
different times than the items are reected in our nancial state-
ments. As a result, our annual tax rate reected in our nancial
statements is different than that reported in our tax returns (our
cash tax rate). Some of these differences are permanent, such
as expenses that are not deductible in our tax return, and some
differences reverse over time, such as depreciation expense. These
temporary differences create deferred tax assets and liabilities.
Deferred tax assets generally represent items that can be used
as a tax deduction or credit in our tax returns in future years for
which we have already recorded the tax benet in our income
statement. We establish valuation allowances for our deferred tax
assets if, based on the available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Deferred tax liabilities generally represent tax expense
recognized in our nancial statements for which payment has
been deferred, or expense for which we have already taken a
deduction in our tax return but have not yet recognized as
expense in our nancial statements.
In 2008, our annual tax rate was 26.8% compared to 25.9% in
2007 as discussed in “Other Consolidated Results.” The tax rate in
2008 increased 0.9 percentage points primarily due to the absence
of the tax benets recognized in the prior year related to the favor-
able resolution of certain foreign tax matters, partially offset by
lower taxes on foreign results in the current year. In 2009, our
annual tax rate is expected to be approximately the same as 2008.
PENSION AND RETIREE MEDICAL PLANS
Our pension plans cover full-time employees in the U.S. and
certain international employees. Benets are determined based on
either years of service or a combination of years of service and
earnings. U.S. and Canada retirees are also eligible for medical
and life insurance benets (retiree medical) if they meet age and
service requirements. Generally, our share of retiree medical costs
is capped at specied dollar amounts which vary based upon years
of service, with retirees contributing the remainder of the cost.
Our Assumptions
The determination of pension and retiree medical plan obligations
and related expenses requires the use of assumptions to estimate
the amount of the benets that employees earn while working, as
well as the present value of those benets. Annual pension and
retiree medical expense amounts are principally based on four
components: (1) the value of benets earned by employees for
working during the year (service cost), (2) increase in the liability
due to the passage of time (interest cost), and (3) other gains and
losses as discussed below, reduced by (4) expected return on
plan assets for our funded plans.