Pepsi 2009 Annual Report Download - page 59

47PepsiCo, Inc. 2009 Annual Report
We believe that a brand has an indefinite life if it has a history
of strong revenue and cash flow performance, and we have the
intent and ability to support the brand with marketplace spending
for the foreseeable future. If these perpetual brand criteria are not
met, brands are amortized over their expected useful lives, which
generally range from five to 40 years. Determining the expected
life of a brand requires management judgment and is based on
an evaluation of a number of factors, including market share,
consumer awareness, brand history and future expansion expecta-
tions, as well as the macroeconomic environment of the countries
in which the brand is sold.
Perpetual brands and goodwill, including the goodwill that is
part of our noncontrolled bottling investment balances, are not
amortized. Perpetual brands and goodwill are assessed for impair-
ment at least annually. If the carrying amount of a perpetual brand
exceeds its fair value, as determined by its discounted cash flows,
an impairment loss is recognized in an amount equal to that excess.
Goodwill is evaluated using a two-step impairment test at the
reporting unit level. A reporting unit can be a division or business
within a division. The first step compares the book value of a
reporting unit, including goodwill, with its fair value, as determined
by its discounted cash flows. If the book value of a reporting unit
exceeds its fair value, we complete the second step to determine
the amount of goodwill impairment loss that we should record. In
the second step, we determine an implied fair value of the reporting
unit’s goodwill by allocating the fair value of the reporting unit to
all of the assets and liabilities other than goodwill (including any
unrecognized intangible assets). The amount of impairment loss is
equal to the excess of the book value of the goodwill over the
implied fair value of that goodwill.
Amortizable brands are only evaluated for impairment upon a
significant change in the operating or macroeconomic environment.
If an evaluation of the undiscounted future cash flows indicates
impairment, the asset is written down to its estimated fair value,
which is based on its discounted future cash flows.
Management judgment is necessary to evaluate the impact
of operating and macroeconomic changes and to estimate future
cash flows. 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. As of December 26, 2009,
we had $8.3 billion of perpetual brands and goodwill, of which
approximately 60% related to our Lebedyansky, Tropicana and
Walkers businesses.
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 jurisdictions
in which we operate. Significant judgment is required in determin-
ing our annual tax rate and in evaluating our tax positions. 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 significant 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 reflected in our financial statements. As a
result, our annual tax rate reflected in our financial 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 differ-
ences 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 benefit 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 financial state-
ments 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 financial statements.
In 2009, our annual tax rate was 26.0% compared to 26.7% in 2008
as discussed in “Other Consolidated Results.” The tax rate in 2009
decreased 0.7 percentage points primarily due to the favorable
resolution of certain foreign tax matters and lower taxes on foreign
results in the current year. In 2010, our annual tax rate is expected
to be approximately the same as in 2009.
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