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82 PepsiCo, Inc. 2009 Annual Report
Notes to Consolidated Financial Statements
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 modify. 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.
The notional amounts of the interest rate derivative instruments
outstanding as of December 26, 2009 and December 27, 2008 were
$5.75 billion and $2.75 billion, respectively. For those interest rate
derivative instruments that qualify for cash flow hedge accounting,
any ineffectiveness is recorded immediately. We classify both the
earnings and cash flow impact from these interest rate derivative
instruments consistent with the underlying hedged item. During
the next 12 months, we expect to reclassify net losses of $6 million
related to these hedges from accumulated other comprehensive
loss into net income.
Concurrently with the debt issuance after year-end, we
terminated $1.5 billion of interest rate derivative instruments, and
the realized loss will be amortized into interest expense over the
duration of the debt term.
As of December 26, 2009, approximately 57% of total debt,
after the impact of the related interest rate derivative instruments,
was exposed to variable rates compared to 58% as of December 2 7,
2008. In addition to variable rate long-term debt, all debt with
maturities of less than one year is categorized as variable for
purposes of this measure.
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued new accounting guidance
on fair value measurements, which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about
fair value measurements. We adopted the new guidance as of the
beginning of our 2008 fiscal year as it relates to recurring financial
assets and liabilities. As of the beginning of our 2009 fiscal year,
we adopted the new guidance as it relates to nonrecurring fair
value measurement requirements for nonfinancial assets and
liabilities. These include goodwill, other nonamortizable intangible
assets and unallocated purchase price for recent acquisitions which
are included within other assets. Our adoption did not have a
material impact on our financial statements. See Note 7 for the
fair value framework.
The fair values of our financial assets and liabilities as of
December 26, 2009 are categorized as follows:
2009
Total Level 1 Level 2 Level 3
Assets(a)
Available-for-sale securities(b) $÷71 $÷71 $÷÷– $–
Short-term investments—index funds(c) $120 $120 $÷÷– $–
Derivatives designated as hedging
instruments:
Forward exchange contracts(d) $÷11 $÷÷– $÷11 $–
Interest rate derivatives(e) 177 – 177 –
Prepaid forward contracts(f) 46 – 46 –
Commodity contracts—other(g) 8–8–
$242 $÷÷– $242 $–
Derivatives not designated as
hedging instruments:
Forward exchange contracts(d) $÷÷4 $÷÷– $÷÷4 $–
Commodity contracts—other(g) 7–7–
$÷11 $÷÷– $÷11 $–
Total asset derivatives at fair value $253 $÷÷– $253 $–
Total assets at fair value $444 $191 $253 $–
Liabilities(a)
Deferred compensation(h) $461 $121 $340 $–
Derivatives designated as hedging
instruments:
Forward exchange contracts(d) $÷31 $÷÷– $÷31 $–
Interest rate derivatives(e) 43 – 43 –
Commodity contracts—other(g) 5–5–
Commodity contracts—futures(i) 32 32––
$111 $÷32 $÷79 $–
Derivatives not designated as
hedging instruments:
Forward exchange contracts(d) $÷÷2 $÷÷– $÷÷2 $–
Commodity contracts—other(g) 60 – 60 –
Commodity contracts—futures(i) 33––
$÷65 $÷÷3 $÷62 $–
Total liability derivatives at fair value $176 $÷35 $141 $–
Total liabilities at fair value $637 $156 $481 $–
(a) Financial assets are classified on our balance sheet within other assets, with the exception of
short-term investments. Financial liabilities are classified on our balance sheet within other
current liabilities and other liabilities.
(b) Based on the price of common stock.
(c) Based on price changes in index funds used to manage a portion of market risk arising from
our deferred compensation liability.
(d) Based on observable market transactions of spot and forward rates.
(e) Based on LIBOR and recently reported transactions in the marketplace.
(f) Based primarily on the price of our common stock.
(g) Based on recently reported transactions in the marketplace, primarily swap arrangements.
(h) Based on the fair value of investments corresponding to employees’ investment elections.
(i) Based on average prices on futures exchanges.
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