Pepsi 2008 Annual Report Download - page 72

70 PepsiCo, Inc. 2008 Annual Report
Notes to Consolidated Financial Statements
See “Our Divisions” below and for additional unaudited infor-
mation on items affecting the comparability of our consolidated
results, see “Items Affecting Comparability” in Management’s
Discussion and Analysis.
Tabular dollars are in millions, except per share amounts.
All per share amounts reect common per share amounts, assume
dilution unless noted, and are based on unrounded amounts.
Certain reclassications were made to prior years’ amounts to
conform to the 2008 presentation.
OUR DIVISIONS
We manufacture or use contract manufacturers, market and
sell a variety of salty, convenient, sweet and grain-based snacks,
carbonated and non-carbonated beverages, and foods in approxi-
mately 200 countries with our largest operations in North America
(United States and Canada), Mexico and the United Kingdom.
Division results are based on how our Chief Executive Ofcer
assesses the performance of and allocates resources to our
divisions. For additional unaudited information on our divisions,
see “Our Operations” in Management’s Discussion and Analysis.
The accounting policies for the divisions are the same as those
described in Note 2, except for the following allocation
methodologies:
• stock-based compensation expense,
• pension and retiree medical expense, and
• derivatives.
Stock-Based Compensation Expense
Our divisions are held accountable for stock-based compensation
expense and, therefore, this expense is allocated to our divisions
as an incremental employee compensation cost. The allocation of
stock-based compensation expense in 2008 was approximately
29% to FLNA, 4% to QFNA, 7% to LAF, 23% to PAB, 13% to UKEU,
13% to MEAA and 11% to corporate unallocated expenses. We
had similar allocations of stock-based compensation expense to
our divisions in 2007 and 2006. The expense allocated to our
divisions excludes any impact of changes in our assumptions
during the year which reect market conditions over which
division management has no control. Therefore, any variances
between allocated expense and our actual expense are recog-
nized in corporate unallocated expenses.
Pension and Retiree Medical Expense
Pension and retiree medical service costs measured at a xed
discount rate, as well as amortization of gains and losses due
to demographics, including salary experience, are reected in
division results for North American employees. Division results
also include interest costs, measured at a xed discount rate,
Notes to Consolidated Financial Statements
Note 1 Basis of Presentation and
Our Divisions
BASIS OF PRESENTATION
Our nancial statements include the consolidated accounts of
PepsiCo, Inc. and the afliates that we control. In addition, we
include our share of the results of certain other afliates based on
our economic ownership interest. We do not control these other
afliates, as our ownership in these other afliates is generally
less than 50%. Equity income or loss from our anchor bottlers
is recorded as bottling equity income in our income statement.
Bottling equity income also includes any changes in our ownership
interests of our anchor bottlers. Bottling equity income includes
$147 million of pre-tax gains on our sales of PBG and PAS stock
in 2008 and $174 million and $186 million of pre-tax gains on
our sales of PBG stock in 2007 and 2006, respectively. See
Note 8 for additional information on our signicant noncontrolled
bottling afliates. Income or loss from other noncontrolled afli-
ates is recorded as a component of selling, general and adminis-
trative expenses. Intercompany balances and transactions are
eliminated. Our scal year ends on the last Saturday of each
December, resulting in an additional week of results every ve
or six years.
Raw materials, direct labor and plant overhead, as well as
purchasing and receiving costs, costs directly related to produc-
tion planning, inspection costs and raw material handling facilities,
are included in cost of sales. The costs of moving, storing and
delivering nished product are included in selling, general and
administrative expenses.
The preparation of our consolidated nancial statements
in conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect
reported amounts of assets, liabilities, revenues, expenses and
disclosure of contingent assets and liabilities. Estimates are used
in determining, among other items, sales incentives accruals, tax
reserves, stock-based compensation, pension and retiree medical
accruals, useful lives for intangible assets, and future cash ows
associated with impairment testing for perpetual brands, goodwill
and other long-lived assets. We evaluate our estimates on an
on-going basis using our historical experience, as well as other
factors we believe appropriate under the circumstances, such as
current economic conditions, and adjust or revise our estimates
as circumstances change. As future events and their effect cannot
be determined with precision, actual results could differ signi-
cantly from these estimates.