Pepsi 2008 Annual Report Download - page 80

78 PepsiCo, Inc. 2008 Annual Report
Notes to Consolidated Financial Statements
While it is often difcult to predict the nal outcome or the
timing of resolution of any particular tax matter, we believe that
our reserves reect the probable outcome of known tax contin-
gencies. We adjust these reserves, as well as the related interest,
in light of changing facts and circumstances. Settlement of any
particular issue would usually require the use of cash. Favorable
resolution would be recognized as a reduction to our annual tax
rate in the year of resolution.
For further unaudited information on the impact of the resolu-
tion of open tax issues, see “Other Consolidated Results.”
In 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an interpretation of
FASB Statement No. 109, (FIN 48), which claries the accounting
for uncertainty in tax positions. FIN 48 requires that we recognize
in our nancial statements the impact of a tax position, if that
position is more likely than not of being sustained on audit, based
on the technical merits of the position. We adopted the provisions
of FIN 48 as of the beginning of our 2007 scal year.
As of December 27, 2008, the total gross amount of reserves
for income taxes, reported in other liabilities, was $1.7 billion.
Any prospective adjustments to these reserves will be recorded
as an increase or decrease to our provision for income taxes
and would impact our effective tax rate. In addition, we accrue
interest related to reserves for income taxes in our provision for
income taxes and any associated penalties are recorded in selling,
general and administrative expenses. The gross amount of interest
accrued, reported in other liabilities, was $427 million as of
December 27, 2008, of which $95 million was recognized in 2008.
The gross amount of interest accrued was $338 million as of
December 29, 2007, of which $34 million was recognized in 2007.
A rollforward of our reserves for all federal, state and foreign
tax jurisdictions, is as follows:
2008 2007
Balance, beginning of year $1,461 $1,435
FIN 48 adoption adjustment to retained earnings –(7)
Reclassication of deductible state tax and interest
benets to other balance sheet accounts –(144)
Adjusted balance, beginning of year 1,461 1,284
Additions for tax positions related to the current year 272 264
Additions for tax positions from prior years 76 151
Reductions for tax positions from prior years (14) (73)
Settlement payments (30) (174)
Statute of limitations expiration (20) (7)
Translation and other (34) 16
Balance, end of year $1,711 $1,461
CARRYFORWARDS AND ALLOWANCES
Operating loss carryforwards totaling $7.2 billion at year-end
2008 are being carried forward in a number of foreign and state
jurisdictions where we are permitted to use tax operating losses
from prior periods to reduce future taxable income. These operat-
ing losses will expire as follows: $0.3 billion in 2009, $6.2 billion
between 2010 and 2028 and $0.7 billion may be carried forward
indenitely. 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.
UNDISTRIBUTED INTERNATIONAL EARNINGS
At December 27, 2008, we had approximately $17.1 billion
of undistributed international earnings. We intend to continue
to reinvest earnings outside the U.S. for the foreseeable future
and, therefore, have not recognized any U.S. tax expense on
these earnings.
Note 6 Stock-Based Compensation
Our stock-based compensation program is a broad-based program
designed to attract and retain employees while also aligning
employees’ interests with the interests of our shareholders. A
majority of our employees participate in our stock-based com-
pensation program. This program includes both our broad-based
SharePower program which was established in 1989 to grant an
annual award of stock options to eligible employees, based upon
job level or classication and tenure (internationally), as well as
our executive long-term awards program. Stock options and
restricted stock units (RSU) are granted to employees under the
shareholder-approved 2007 Long-Term Incentive Plan (LTIP), our
only active stock-based plan. Stock-based compensation expense
was $238 million in 2008, $260 million in 2007 and $270 million
in 2006. Related income tax benets recognized in earnings were
$71 million in 2008, $77 million in 2007 and $80 million in
2006. Stock-based compensation cost capitalized in connection
with our ongoing business transformation initiative was $4 million
in 2008, $3 million in 2007 and $3 million in 2006. At year-end
2008, 57 million shares were available for future stock-based
compensation grants.