Pepsi 2008 Annual Report Download - page 75

73PepsiCo, Inc. 2008 Annual Report
amounts were advertising expenses of $1.8 billion in both 2008
and 2007 and $1.6 billion in 2006. Deferred advertising costs are
not expensed until the year rst used and consist of:
• media and personal service prepayments,
• promotional materials in inventory, and
• production costs of future media advertising.
Deferred advertising costs of $172 million and $160 million at
year-end 2008 and 2007, respectively, are classied as prepaid
expenses on our balance sheet.
DISTRIBUTION COSTS
Distribution costs, including the costs of shipping and handling
activities, are reported as selling, general and administrative
expenses. Shipping and handling expenses were $5.3 billion in
2008, $5.1 billion in 2007 and $4.6 billion in 2006.
CASH EQUIVALENTS
Cash equivalents are investments with original maturities of three
months or less which we do not intend to rollover beyond three
months.
SOFTWARE COSTS
We capitalize certain computer software and software develop-
ment costs incurred in connection with developing or obtaining
computer software for internal use when both the preliminary
project stage is completed and it is probable that the software
will be used as intended. Capitalized software costs include
only (i) external direct costs of materials and services utilized in
developing or obtaining computer software, (ii) compensation and
related benets for employees who are directly associated with
the software project and (iii) interest costs incurred while develop-
ing internal-use computer software. Capitalized software costs are
included in property, plant and equipment on our balance sheet
and amortized on a straight-line basis when placed into service
over the estimated useful lives of the software, which approxi-
mate ve to ten years. Net capitalized software and development
costs were $940 million at December 27, 2008 and $761 million
at December 29, 2007.
COMMITMENTS AND CONTINGENCIES
We are subject to various claims and contingencies related to
lawsuits, certain taxes and environmental matters, as well as
commitments under contractual and other commercial obligations.
We recognize liabilities for contingencies and commitments when
a loss is probable and estimable. For additional information on
our commitments, see Note 9.
Note 2 Our Signicant Accounting Policies
REVENUE RECOGNITION
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 our consumers receive the product quality and
freshness that 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 anticipated damaged and out-of-date products.
For additional unaudited information on our revenue recognition
and related policies, including our policy on bad debts, see “Our
Critical Accounting Policies” in Management’s Discussion and
Analysis. We are exposed to concentration of credit risk by our
customers, Wal-Mart and PBG. In 2008, Wal-Mart (including
Sam’s) represented approximately 12% of our total net revenue,
including concentrate sales to our bottlers which are used in
nished goods sold by them to Wal-Mart; and PBG represented
approximately 8%. We have not experienced credit issues with
these customers.
SALES INCENTIVES AND OTHER MARKETPLACE SPENDING
We offer sales incentives and discounts through various programs
to our customers and consumers. Sales incentives and discounts
are accounted for as a reduction of revenue and totaled $12.5 bil-
lion in 2008, $11.3 billion in 2007 and $10.1 billion in 2006. While
most of these incentive arrangements have terms of no more than
one year, certain arrangements, such as fountain pouring rights,
may extend beyond one year. Costs incurred to obtain these
arrangements are recognized over the shorter of the economic
or contractual life, as a reduction of revenue, and the remaining
balances of $333 million at December 27, 2008 and $314 million
at December 29, 2007 are included in current assets and other
assets on our balance sheet. For additional unaudited information
on our sales incentives, see “Our Critical Accounting Policies” in
Management’s Discussion and Analysis.
Other marketplace spending, which includes the costs of
advertising and other marketing activities, totaled $2.9 billion in
2008, $2.9 billion in 2007 and $2.7 billion in 2006 and is reported
as selling, general and administrative expenses. Included in these