Pepsi 2009 Annual Report Download - page 79

67PepsiCo, Inc. 2009 Annual Report
Note 2 Our Significant 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 certain 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remove and replace damaged and out-of-date products from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and out-of-date products.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 of Financial Condition and Results of
Operations. We are exposed to concentration of credit risk by our
customers, Wal-Mart and PBG. In 2009, Wal-Mart (including Sam’s)
represented approximately 13% of our total net revenue, including
concentrate sales to our bottlers which are used in finished goods
sold by them to Wal-Mart; and PBG represented approximately 6%.
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 $12.9 bil-
lion in 2009, $12.5 billion in 2008 and $11.3 billion in 2007. 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 $296 million as of December 26, 2009 and $333 million
as of December 27, 2008 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 of Financial Condition
and Results of Operations.
Other marketplace spending, which includes the costs of
advertising and other marketing activities, totaled $2.8 billion in
2009 and $2.9 billion in both 2008 and 2007 and is reported as
selling, general and administrative expenses. Included in these
amounts were advertising expenses of $1.7 billion in both 2009
and 2008 and $1.8 billion in 2007. Deferred advertising costs are
not expensed until the year first used and consist of:
• media and personal service prepayments,
• promotional materials in inventory, and
• production costs of future media advertising.
Deferred advertising costs of $143 million and $172 million at
year-end 2009 and 2008, respectively, are classified 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 $5.6 billion in
both 2009 and 2008 and $5.2 billion in 2007.
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 develop-
ing or obtaining computer software, (ii) compensation and related
benefits for employees who are directly associated with the
software project and (iii) interest costs incurred while developing
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 approximate
five to ten years. Software amortization totaled $119 million in 2009,
$58 million in 2008 and $30 million in 2007. Net capitalized software
and development costs were $1.1 billion as of December 26, 2009
and $940 million as of December 27, 2008.
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.
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