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Notes to Consolidated Financial Statements
94 PepsiCo, Inc. 2010 Annual Report
Most long-term contractual commitments, except for our
long-term debt obligations, are not recorded on our balance
sheet. Non-cancelable operating leases primarily represent
building leases. Non-cancelable purchasing commitments are
primarily for packaging materials, oranges and orange juice.
Non-cancelable marketing commitments are primarily for
sports marketing. Bottler funding to independent bottlers is
not reflected in our long-term contractual commitments as it is
negotiated on an annual basis. Accrued liabilities for pension and
retiree medical plans are not reflected in our long-term contrac-
tual commitments because they do not represent expected future
cash outflows. See Note 7 for additional information regarding
our pension and retiree medical obligations.
O-Balance-Sheet Arrangements
It is not our business practice to enter into o-balance-sheet
arrangements, other than in the normal course of business. See
Note8 regarding contracts related to certain of our bottlers.
See “Our Liquidity and Capital Resources” in Management’s
Discussion and Analysis of Financial Condition and Results of
Operations for further unaudited information on our borrowings.
Note 10 Financial Instruments
We are exposed to market risks arising from adverse changes in:
• commodity prices, aecting the cost of our raw materials
andenergy,
• foreign exchange risks, and
• interest rates.
In the normal course of business, we manage these risks
through a variety of strategies, including the use of derivatives.
Certain derivatives are designated as either cash flow or fair
value hedges and qualify for hedge accounting treatment, while
others do not qualify and are marked to market through earnings.
Cash flows from derivatives used to manage commodity, foreign
exchange or interest risks are classified as operating activities.
See “Our Business Risks” in Management’s Discussion and
Analysis of Financial Condition and Results of Operations for
further unaudited information on our business risks.
For cash flow hedges, changes in fair value are deferred in
accumulated other comprehensive loss within common share-
holders’ equity until the underlying hedged item is recognized in
net income. For fair value hedges, changes in fair value are rec-
ognized immediately in earnings, consistent with the underlying
hedged item. Hedging transactions are limited to an underlying
exposure. As a result, any change in the value of our derivative
instruments would be substantially oset by an opposite change
in the value of the underlying hedged items. Hedging ineec-
tiveness and a net earnings impact occur when the change in
the value of the hedge does not oset the change in the value
of the underlying hedged item. Ineectiveness of our hedges
is not material. If the derivative instrument is terminated, we
continue to defer the related gain or loss and then include it as a
component of the cost of the underlying hedged item. Upon deter-
mination that the underlying hedged item will not be part of an
actual transaction, we recognize the related gain or loss in net
incomeimmediately.
We also use derivatives that do not qualify for hedge account-
ing treatment. We account for such derivatives at market value
with the resulting gains and losses reflected in our income state-
ment. We do not use derivative instruments for trading or specu-
lative purposes. We perform assessments of our counterparty
credit risk regularly, including a review of credit ratings, credit
default swap rates and potential nonperformance of the counter-
party. Based on our most recent assessment of our counterparty
credit risk, we consider this risk to be low. In addition, we enter
into derivative contracts with a variety of financial institutions
that we believe are creditworthy in order to reduce our concen-
tration of credit risk and generally settle with these financial
institutions on a net basis.
Commodity Prices
We are subject to commodity price risk because our ability to
recover increased costs through higher pricing may be limited
in the competitive environment in which we operate. This risk
is managed through the use of fixed-price purchase orders,
pricing agreements, geographic diversity and derivatives. We
use derivatives, with terms of no more than three years, to eco-
nomically hedge price fluctuations related to a portion of our
anticipated commodity purchases, primarily for natural gas,