Pepsi 2011 Annual Report Download - page 38

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.
Perpetual brands and goodwill are not amortized and are
assessed for impairment at least annually. If the carrying amount
of a perpetual brand exceeds its fair value, as determined by its
discounted cash ows, an impairment loss is recognized in an
amount equal to that excess. Goodwill is evaluated using a two- step
impairment test at the reporting unit level. A reporting unit can be
a division or business within a division. The rst step compares the
book value of a reporting unit, including goodwill, with its fair value,
as determined by its discounted cash ows. 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, if any. 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 liabilities other than good-
will (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
signicant change in the operating or macroeconomic environment.
If an evaluation of the undiscounted future cash ows indicates
impairment, the asset is written down to its estimated fair value,
which is based on its discounted future cash ows.
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 specied territories. In determining the useful
life of these reacquired franchise rights, we considered many factors,
including the pre- existing perpetual bottling arrangements, the
indenite period expected for the reacquired rights to contribute
to our future cash ows, 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 franchise rights, as well as perpetual
brands and goodwill, are not amortized, but instead are tested for
impairment at least annually. Certain reacquired and acquired fran-
chise rights are amortized over the remaining contractual period of
the contract 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 was capitalized and is not amortized, but instead is tested
for impairment at least annually.
Signicant management judgment is necessary to evaluate the
impact of operating and macroeconomic changes and to estimate
future cash ows. Assumptions used in our impairment evaluations,
such as forecasted growth rates and our cost of capital, are based
on the best available market information and are consistent 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 goodwill in
theyears presented. In addition, as of December31, 2011, we did
nothave any reporting units that were at risk of failing the rst
stepof the goodwill impairment test. In connection with the merger
and integration of WBD in 2011, we recorded a $14million impair-
ment charge for discontinued brands. We did not recognize any
impairment charges for other nonamortizable intangible assets
in 2010 and 2009. As of December31, 2011, we had $31.4billion
of goodwill and other nonamortizable intangible assets, of which
approximately 70% related to the acquisitions of PBG, PAS and WBD.
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 jurisdic-
tions in which we operate. Signicant 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 quar-
terly operating results. In the event there is a signicant or unusual
item recognized in our quarterly operating results, the tax attribut-
able to that item is separately calculated and recorded at the same
time as that item. We consider the tax adjustments from the resolu-
tion 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 reected in our nancial
statements. As a result, our annual tax rate reected in our nan-
cial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
dierences 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 benet 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 recog-
nized in our nancial statements for which payment 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
nancial statements.
In 2011, our annual tax rate was 26.8% compared to 23.0% in
2010, as discussed in “Other Consolidated Results.” The tax
rate in 2011 increased 3.8percentage points primarily reect-
ing the prior year non- taxable gain and reversal of deferred taxes
Management’s Discussion and Analysis
PepsiCo, Inc.  Annual Report
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