Pepsi 2009 Annual Report Download - page 84

72 PepsiCo, Inc. 2009 Annual Report
Notes to Consolidated Financial Statements
A rollforward of our reserves for all federal, state and foreign
tax jurisdictions, is as follows:
2009 2008
Balance, beginning of year $1,711 $1,461
Additions for tax positions related to the
current year 238 272
Additions for tax positions from prior years 79 76
Reductions for tax positions from prior years (236) (14)
Settlement payments (64) (30)
Statute of limitations expiration (4) (20)
Translation and other 7(34)
Balance, end of year $1,731 $1,711
CARRYFORWARDS AND ALLOWANCES
Operating loss carryforwards totaling $6.4 billion at year-end 2009
are being carried forward in a number of foreign and state jurisdic-
tions where we are permitted to use tax operating losses from prior
periods to reduce future taxable income. These operating losses
will expire as follows: $0.2 billion in 2010, $5.5 billion between 2011
and 2029 and $0.7 billion may be carried forward indefinitely. 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
As of December 26, 2009, we had approximately $21.9 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
compensation 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 classification 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 $227 million in 2009, $238 million in 2008 and
$260 million in 2007. Related income tax benefits recognized
in earnings were $67 million in 2009, $71 million in 2008 and
$77 million in 2007. Stock-based compensation cost capitalized
in connection with our ongoing business transformation initiative
was $2 million in 2009, $4 million in 2008 and $3 million in 2007.
At year-end 2009, 42 million shares were available for future
stock-based compensation grants.
METHOD OF ACCOUNTING AND OUR ASSUMPTIONS
We account for our employee stock options, which include grants
under our executive program and our broad-based SharePower
program, under the fair value method of accounting using a
Black-Scholes valuation model to measure stock option expense at
the date of grant. All stock option grants have an exercise price
equal to the fair market value of our common stock on the date of
grant and generally have a 10-year term. We do not backdate, reprice
or grant stock-based compensation awards retroactively. Repricing
of awards would require shareholder approval under the LTIP.
The fair value of stock option grants is amortized to expense
over the vesting period, generally three years. Executives who are
awarded long-term incentives based on their performance are
offered the choice of stock options or RSUs. Executives who elect
RSUs receive one RSU for every four stock options that would have
otherwise been granted. Senior officers do not have a choice and
are granted 50% stock options and 50% performance-based RSUs.
Vesting of RSU awards for senior officers is contingent upon the
achievement of pre-established performance targets approved by
the Compensation Committee of the Board of Directors. RSU
expense is based on the fair value of PepsiCo stock on the date of
grant and is amortized over the vesting period, generally three years.
Each RSU is settled in a share of our stock after the vesting period.
Our weighted-average Black-Scholes fair value assumptions
are as follows:
2009 2008 2007
Expected life 6 yrs. 6 yrs. 6 yrs.
Risk free interest rate 2.8% 3.0% 4.8%
Expected volatility 17% 16% 15%
Expected dividend yield 3.0% 1.9% 1.9%
The expected life is the period over which our employee groups
are expected to hold their options. It is based on our historical
experience with similar grants. The risk free interest rate is based on
the expected U.S. Treasury rate over the expected life. Volatility
reflects movements in our stock price over the most recent historical
period equivalent to the expected life. Dividend yield is estimated
over the expected life based on our stated dividend policy and
forecasts of net income, share repurchases and stock price.
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