Pepsi 2010 Annual Report Download - page 60

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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
impairment at least annually. If the carrying amount of a perpet-
ual 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 impair-
ment 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 liabili-
ties 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 environ-
ment. 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.
In connection with our acquisitions of PBG and PAS, we reac-
quired certain franchise rights which provided PBG and PAS
with the exclusive and perpetual rights to manufacture and/or
distribute beverages for sale in specified territories. In determin-
ing the useful life of these reacquired franchise rights, we con-
sidered many factors including the existing perpetual bottling
arrangements, the indefinite period expected for the reacquired
rights to contribute to our future cash flows, as well as the lack
of any factors that would limit the useful life of the reacquired
rights to us, including legal, regulatory, contractual, competitive,
economic or other factors. Therefore, certain reacquired fran-
chise rights, as well as perpetual brands and goodwill, will not
be amortized, but instead will be tested for impairment at least
annually. Certain reacquired and acquired franchise rights are
amortizable over the remaining contractual period of the con-
tract in which the right was granted.
On December 7, 2009, we reached an agreement with DPSG to
manufacture and distribute Dr Pepper and certain other DPSG
products in the territories where they were previously sold by
PBG and PAS. Under the terms of the agreement, we made an
upfront payment of $900million to DPSG on February 26, 2010.
Based upon the terms of the agreement with DPSG, the amount of
the upfront payment has been capitalized and will not be amor-
tized, but instead will be tested for impairment at least annually.
Significant management judgment is necessary to evaluate the
impact of operating and macroeconomic changes and to estimate
future cash flows. Assumptions used in our impairment evalu-
ations, such as forecasted growth rates and our cost of capital,
are based on the best available market information and are con-
sistent 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. In addition, as of
December25, 2010, we did not have any reporting units that
were at risk of failing the first step of the goodwill impairment
test. As of December25, 2010, we had $26.4billion of perpetual
brands and goodwill, of which approximately 65% related to the
goodwill and other nonamortizable intangible assets from
the acquisitions of PBG and PAS.
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 determining 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 eective 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
among suchitems.
Tax law requires items to be included in our tax returns at
dierent times than the items are reflected in our financial state-
ments. As a result, our annual tax rate reflected in our financial
statements is dierent than that reported in our tax returns (our
cash tax rate). Some of these dierences are permanent, such as
expenses that are not deductible in our tax return, and some dif-
ferences reverse over time, such as depreciation expense. These
temporary dierences 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 statements for which pay-
ment 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 2010, our annual tax rate was 23.0% compared to 26.0% in
2009, as discussed in “Other Consolidated Results.” The tax rate
in 2010 decreased 3.0percentage points primarily reflecting the