Pepsi 2011 Annual Report Download - page 37

Our Critical Accounting Policies
An appreciation of our critical accounting policies is necessary
to understand our nancial results. These policies may require
management to make dicult and subjective judgments regard-
ing uncertainties, and as a result, such estimates may signicantly
impact our nancial results. The precision of these estimates and
the likelihood of future changes depend on a number of underlying
variables and a range of possible outcomes. Other than our account-
ing for pension plans, our critical accounting policies do not involve
a choice between alternative 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:
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Revenue Recognition
Our products are sold for cash or on credit terms. Our credit terms,
which are established in accordance with local and industry prac-
tices, typically require payment within 30 days of delivery in the
U.S., and generally within 30 to 90 days internationally, and may
allow discounts for early payment. We recognize revenue upon
shipment or delivery to our customers based on written 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- distributed 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 addition,
DSD products are placed on the shelf by our employees with cus-
tomer 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 consumers.
Sales incentives and discounts are accounted for as a reduction of
revenue and totaled $34.6billion in 2011, $29.1billion in 2010 and
$12.9billion in 2009. Sales incentives include payments to custom-
ers 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 cus-
tomer participation and performance levels. Dierences between
estimated expense and actual incentive costs are normally insigni-
cant and are recognized in earnings in the period such dierences
are determined. The terms of most of our incentive arrangements
do not exceed a year, and therefore do not require highly uncer-
tain long- term estimates. Certain arrangements, such as fountain
pouring rights and sponsorship contracts, 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 rev-
enue, and the remaining balances of $288million as of December31,
2011 and $296million as of December25, 2010 are included in cur-
rent assets and other assets on our balance sheet.
For interim reporting, our policy is to allocate our forecasted full-
year sales incentives for most of our programs to each of our interim
reporting periods in the same year that benets from the programs.
The allocation methodology is based on our forecasted sales incen-
tives for the full year and the proportion of each interim period’s
actual gross revenue to our forecasted annual gross revenue. Based
on our review of the forecasts at each interim period, any changes
in estimates and the related allocation of sales incentives are rec-
ognized in the interim period as they are identied. In addition,
we apply a similar allocation methodology for interim reporting
purposes for other marketplace spending, which includes the costs
of advertising and other marketing activities. See Note 2 for addi-
tional information on our sales incentives and other marketplace
spending. Our annual nancial statements are not impacted by this
interim allocation methodology.
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 classied within selling, general and administrative
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. In a business
combination, the consideration is rst assigned to identiable assets
and liabilities, including brands, based on estimated fair values, with
any excess recorded as goodwill. Determining fair value requires
signicant 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 expectations, amount and timing of future cash ows
and the discount rate applied to the cash ows.
We believe that a brand has an indenite life if it has a history
of strong revenue and cash ow performance, and we have the
intent and ability to support the brand with marketplace spending
for the foreseeable future. If these perpetual brand criteria are not
met, brands are amortized over their expected useful lives, which
generally range from ve to 40 years. Determining the expected
Management’s Discussion and Analysis
PepsiCo, Inc.  Annual Report
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