Pepsi 2011 Annual Report Download - page 67

increase or decrease to our provision for income taxes and would
impact our eective tax rate. In addition, we accrue interest related
to reserves for income taxes in our provision for income taxes
and any associated penalties are recorded in selling, general and
administrative expenses. The gross amount of interest accrued,
reported in other liabilities, was $660million as of December31,
2011, of which $90million was recognized in 2011. The gross amount
of interest accrued was $570million as of December25, 2010, of
which $135million was recognized in 2010.
A rollforward of our reserves for all federal, state and foreign tax
jurisdictions, is as follows:
2011 2010
Balance, beginning of year $ 2,022 $ 1,731
Additions for tax positions related to the current year 233 204
Additions for tax positions from prior years 147 517
Reductions for tax positions from prior years (46) (391)
Settlement payments (156) (30)
Statute of limitations expiration (15) (7)
Translation and other (18) (2)
Balance, end of year $ 2,167 $ 2,022
Carryforwards and Allowances
Operating loss carryforwards totaling $10.0billion at year- end 2011
are being carried forward in a number of foreign and state jurisdic-
tions where we are permitted to use tax operating losses from prior
periods to reduce future taxable income. These operating losses will
expire as follows: $0.1billion in 2012, $8.2billion between 2013 and
2031 and $1.7billion may be carried forward indenitely. We estab-
lish 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31, 2011, we had approximately $34.1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’ interests 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 $343million in 2011, $352million in 2010
and $227million in 2009. In 2011, $326million was recorded as stock-
based compensation expense, $13million was included in merger
and integration charges and $4million was included in restructur-
ing charges. In 2010, $299million was recorded as stock- based
compensation 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 benets related to stock- based com-
pensation expense and recognized in earnings were $101million in
2011, $89million in 2010 and $67million in 2009. At year- end 2011,
136million shares were available for future stock- based compensa-
tion grants.
In connection with our acquisition of PBG in 2010, 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 previ-
ously held PBG equity awards. In connection with our acquisition
of PAS in 2010, 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 were unvested at the issuance
date and are being amortized over their remaining vesting period,
up to three years from the issuance date.
As a result of our annual benets review in 2010, the Company
approved certain changes to our benets 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 were granted under the SharePower program.
Outstanding SharePower awards from 2010 and earlier continue to
vest and are exercisable according to the terms and conditions of
the program. See Note 7 for additional information 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 compen-
sation 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, through 2011, are granted 50% stock options and 50%
performance- based RSUs.
Beginning in 2012, senior ocers will be granted 60% market
stock units and 40% long- term cash awards, each of which will be
subject to pre- established performance targets. Vesting of RSU
awards for senior ocers is contingent upon the achievement of pre-
established performance targets approved by the Compensation
Committee of the Board of Directors. RSU expense is based on the
PepsiCo, Inc.  Annual Report
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Notes to Consolidated Financial Statements