Pepsi 2010 Annual Report Download - page 86

85
income taxes and any associated penalties are recorded in sell-
ing, general and administrative expenses. The gross amount of
interest accrued, reported in other liabilities, was $570million
as of December25, 2010, of which $135million was recognized
in 2010. The gross amount of interest accrued was $461million
as of December 26, 2009, of which $30million was recognized
in2009.
A rollforward of our reserves for all federal, state and foreign
tax jurisdictions, is as follows:
2010 2009
Balance, beginning of year $1,731 $1,711
Additions for tax positions related to the current year 204 238
Additions for tax positions from prior years 517 79
Reductions for tax positions from prior years (391) (236)
Settlement payments (30) (64)
Statute of limitations expiration (7) (4)
Translation and other (2) 7
Balance, end of year $2,022(a) $1,731
(a) Includes amounts related to our acquisitions of PBG and PAS.
Carryforwards and Allowances
Operating loss carryforwards totaling $9.1billion at year-end
2010 are being carried forward in a number of foreign and state
jurisdictions where we are permitted to use tax operating losses
from prior periods to reduce future taxable income. These oper-
ating losses will expire as follows: $0.4billion in 2011, $6.5billion
between 2012 and 2030 and $2.2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25, 2010, we had approximately $26.6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 designed to attract
and retain employees while also aligning employees’ inter-
ests with the interests of our shareholders. Stock options and
restricted stock units (RSU) are granted to employees under the
shareholder-approved 2007 Long-Term Incentive Plan (LTIP),
the only stock-based plan under which we currently grant stock
options and RSUs. Stock-based compensation expense was
$352million in 2010, $227million in 2009 and $238million in
2008. In 2010, $299million was recorded as stock-based com-
pensation expense and $53million was included in merger and
integration charges. $86million of the $352million recorded
in 2010 was related to the unvested acquisition-related grants
described below. Income tax benefits related to stock-based com-
pensation expense and recognized in earnings were $89million
in 2010, $67million in 2009 and $71million in 2008. At year-end
2010, 154million shares were available for future stock-based
compensation grants.
In connection with our acquisition of PBG, we issued 13.4million
stock options and 2.7million RSUs at weighted-average grant
prices of $42.89 and $62.30, respectively, to replace previously
held PBG equity awards. In connection with our acquisition of
PAS, we issued 0.4million stock options at a weighted-average
grant price of $31.72 to replace previously held PAS equity
awards. Our equity issuances included 8.3million stock options
and 0.6million RSUs which were vested at the acquisition
date and were included in the purchase price. The remaining
5.5million stock options and 2.1million RSUs issued are
unvested and are being amortized over their remaining vesting
period, up tothreeyears.
As a result of our annual benefits review in 2010, the Company
approved certain changes to our benefits programs to remain
market competitive relative to other leading global companies.
These changes included ending the Company’s broad-based
SharePower stock option program. Consequently, beginning in
2011, no new awards will be granted under the SharePower pro-
gram. Outstanding SharePower awards from 2010 and earlier
will continue to vest and be exercisable according to the terms
and conditions of the program. See Note 7 for additional informa-
tion regarding other related changes.
Method of Accounting and Our Assumptions
We account for our employee stock options 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
generally oered 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 ocers do not have a
choice and are granted 50% stock options and 50% performance-
based RSUs. Vesting of RSU awards for senior ocers is con-
tingent 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.