Pepsi 2009 Annual Report Download - page 57

45PepsiCo, Inc. 2009 Annual Report
operated Foreign Exchange Administration Board (CADIVI). As of
the beginning of our 2010 fiscal year, the results of our Venezuelan
businesses will be reported under hyperinflationary accounting.
This determination was made based upon Venezuela’s National
Consumer Price Index (NCPI) which indicated cumulative inflation
in Venezuela in excess of 100% for the three-year period ended
November 30, 2009. Consequently, the functional currency of
our Venezuelan entities will be changed from the bolivar fuerte
(bolivar) to the U.S. dollar. Effective January 11, 2010, the Venezuelan
government devalued the bolivar by resetting the official exchange
rate from 2.15 bolivars per dollar to 4.3 bolivars per dollar; however,
certain activities would be permitted to access an exchange rate of
2.6 bolivars per dollar. In 2010, we expect that the majority of our
transactions will be conducted at the 4.3 exchange rate, and as a
result of the change to hyperinflationary accounting and the
devaluation of the bolivar, we expect to record a one-time charge
of approximately $125 million in the first quarter of 2010. In 2009,
our operations in Venezuela comprised 7% of our cash and cash
equivalents balance and generated less than 2% of our net revenue.
Exchange rate gains or losses related to foreign currency
transactions are recognized as transaction gains or losses in our
income statement as incurred. We may enter into derivatives,
primarily forward contracts with terms of no more than two years,
to manage our exposure to foreign currency transaction risk. Our
foreign currency derivatives had a total face value of $1.2 billion as
of December 26, 2009 and $1.4 billion as of December 27, 2008.
The contracts that qualify for hedge accounting resulted in net
unrealized losses of $20 million as of December 26, 2009 and net
unrealized gains of $111 million as of December 27, 2008. At the
end of 2009, we estimate that an unfavorable 10% change in the
exchange rates would have increased our net unrealized losses by
$86 million. The contracts that do not qualify for hedge accounting
resulted in net gains of $1 million in 2009 and net losses of $28 million
in 2008. All losses and gains were offset by changes in the underly-
ing hedged items, resulting in no net material impact on earnings.
Interest Rates
We centrally manage our debt and investment portfolios consider-
ing investment opportunities and risks, tax consequences and
overall financing strategies. We use various interest rate derivative
instruments including, but not limited to, interest rate swaps,
cross currency interest rate swaps, Treasury locks and swap locks
to manage our overall interest expense and foreign exchange risk.
These instruments effectively change the interest rate and currency
of specific debt issuances. Our interest rate and cross currency
swaps are generally entered into concurrently with the issuance
of the debt that they modified. The notional amount, interest
payment and maturity date of the interest rate and cross currency
swaps match the principal, interest payment and maturity date of
the related debt. Our Treasury locks and swap locks are entered into
to protect against unfavorable interest rate changes relating to
forecasted debt transactions.
Assuming year-end 2009 variable rate debt and investment
levels, a 1-percentage-point increase in interest rates would have
increased net interest expense by $3 million in 2009.
Risk Management Framework
The achievement of our strategic and operating objectives will
necessarily involve taking risks. Our risk management process is
intended to ensure that risks are taken knowingly and purposefully.
As such, we leverage an integrated risk management framework
to identify, assess, prioritize, manage, monitor and communicate
risks across the Company. This framework includes:
• The PepsiCo Risk Committee (PRC), comprised of a cross-
functional, geographically diverse, senior management group
which meets regularly to identify, assess, prioritize and address
strategic and reputational risks;
• Division Risk Committees (DRCs), comprised of cross-functional
senior management teams which meet regularly to identify,
assess, prioritize and address division-specific operating risks;
• PepsiCo’s Risk Management Office, which manages the overall
risk management process, provides ongoing guidance, tools
and analytical support to the PRC and the DRCs, identifies and
assesses potential risks, and facilitates ongoing communication
between the parties, as well as to PepsiCo’s Audit Committee
and Board of Directors;
• PepsiCo Corporate Audit, which evaluates the ongoing
effectiveness of our key internal controls through periodic audit
and review procedures; and
• PepsiCo’s Compliance Department, which leads and coordi-
nates our compliance policies and practices.
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