Pepsi 2010 Annual Report Download - page 59

Management’s Discussion and Analysis
58 PepsiCo, Inc. 2010 Annual Report
Our Critical Accounting Policies
An appreciation of our critical accounting policies is neces-
sary to understand our financial results. These policies may
require management to make dicult and subjective judg-
ments regarding uncertainties, and as a result, such estimates
may significantly impact our financial results. The precision
of these estimates and the likelihood of future changes depend
on a number of underlying variables and a range of possible out-
comes. Other than our accounting for pension plans, our critical
accounting policies do not involve the choice between alterna-
tive methods of accounting. We applied our critical accounting
policies and estimation methods consistently in all material
respects, and for all periods presented, and have discussed these
policies with our Audit Committee.
Our critical accounting policies arise in conjunction with
thefollowing:
• revenue recognition;
• goodwill and other intangible assets;
• income tax expense and accruals; and
• pension and retiree medical plans.
Revenue Recognition
Our products are sold for cash or on credit terms. Our credit
terms, which are established in accordance with local and indus-
try practices, typically require payment within 30 days of deliv-
ery in the U.S., and generally within 30 to 90 days internationally,
and may allow discounts for early payment. We recognize rev-
enue upon shipment or delivery to our customers based on writ-
ten 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replace damaged and out-of-date products from store shelves to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 consumers receive the product quality and freshness
they expect. Similarly, our policy for certain warehouse-distrib-
uted products is to replace damaged and out-of-date products.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anticipated damaged and out-of-date products.
Our policy is to provide customers with product when needed.
In fact, our commitment to freshness and product dating serves
to regulate the quantity of product shipped or delivered. In addi-
tion, DSD products are placed on the shelf by our employees with
customer shelf space and storerooms limiting the quantity of
product. For product delivered through our other distribution
networks, we monitor customer inventory levels.
As discussed in “Our Customers,” we oer sales incentives
and discounts through various programs to customers and con-
sumers. Sales incentives and discounts are accounted for as a
reduction of revenue and totaled $29.1billion in 2010, $12.9bil-
lion in 2009 and $12.5billion in 2008. Sales incentives include
payments to customers for performing merchandising activities
on our behalf, such as payments for in-store displays, payments
to gain distribution of new products, payments for shelf space
and discounts to promote lower retail prices. A number of our
sales incentives, such as bottler funding to independent bottlers
and customer volume rebates, are based on annual targets, and
accruals are established during the year for the expected payout.
These accruals are based on contract terms and our historical
experience with similar programs and require management
judgment with respect to estimating customer participation and
performance levels. Dierences between estimated expense
and actual incentive costs are normally insignificant and are
recognized in earnings in the period such dierences are deter-
mined. The terms of most of our incentive arrangements do not
exceed a year, and therefore do not require highly uncertain long-
term estimates. For interim reporting, we estimate total annual
sales incentives for most of our programs and record a pro rata
share in proportion to revenue. Certain arrangements, such as
fountain pouring rights, may extend beyond one year. Payments
made to obtain these rights 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 both December25,
2010 and December 26, 2009, are included in current assets and
other assets on our balance sheet.
We estimate and reserve for our bad debt exposure based on
our experience with past due accounts and collectibility, the
aging of accounts receivable and our analysis of customer data.
Bad debt expense is classified within selling, general and admin-
istrative expenses in our income statement.
Goodwill and Other Intangible Assets
We sell products under a number of brand names, many of which
were developed by us. The brand development costs are expensed
as incurred. We also purchase brands in acquisitions. Upon
acquisition, the purchase price is first allocated to identifiable
assets and liabilities, including brands, based on estimated fair
value, with any remaining purchase price recorded as good-
will. Determining fair value requires significant estimates and
assumptions based on an evaluation of a number of factors, such
as marketplace participants, product life cycles, market share,
consumer awareness, brand history and future expansion expec-
tations, amount and timing of future cash flows and the discount
rate applied to the cash flows.
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 spend-
ing 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
expectations, as well as the macroeconomic environment of the
countries in which the brand is sold.