Pepsi 2011 Annual Report Download - page 75

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
sugar and other sweeteners, packaging materials, oranges and
orange juice. Non- cancelable marketing commitments are primar-
ily for sports marketing. Bottler funding to independent bottlers
is not reected in our long- term contractual commitments as it is
negotiated on an annual basis. Accrued liabilities for pension and
retiree medical plans are not reected in our long- term contractual
commitments because they do not represent expected future cash
outows. See Note 7 for additional information regarding our pen-
sion 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 for further unaudited information on
our borrowings.
Note 10
Financial Instruments
We are exposed to market risks arising from adverse changes in:
t DPNNPEJUZQSJDFTBòFDUJOHUIFDPTUPGPVSSBXNBUFSJBMT
and energy,
t GPSFJHOFYDIBOHFSJTLTBOE
t JOUFSFTUSBUFT
In the normal course of business, we manage these risks through
a variety of strategies, including the use of derivatives. Certain deriv-
atives are designated as either cash ow or fair value hedges and
qualify for hedge accounting treatment, while others do not qualify
and are marked to market through earnings. Cash ows from deriva-
tives used to manage commodity, foreign exchange or interest
risks are classied as operating activities. See “Our Business Risks” in
Management’s Discussion and Analysis for further unaudited infor-
mation on our business risks.
For cash ow hedges, changes in fair value are deferred in
accumulated other comprehensive loss within common sharehold-
ers’ equity until the underlying hedged item is recognized in net
income. For fair value hedges, changes in fair value are recognized
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ectiveness 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. 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 determination 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 accounting
treatment. We account for such derivatives at market value with the
resulting gains and losses reected in our income statement. We do
not use derivative instruments for trading or speculative 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 counterparty. 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 nancial institutions that we believe are creditworthy in
order to reduce our concentration of credit risk.
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 xed- price purchase orders, pricing agreements
and derivatives. In addition, risk to our supplies of certain raw mate-
rials is mitigated through purchases from multiple geographies
and suppliers. We use derivatives, with terms of no more than three
years, to economically hedge price uctuations related to a por-
tion of our anticipated commodity purchases, primarily for metals,
energy and agricultural products. For those derivatives that qualify
for hedge accounting, any ineectiveness is recorded immediately
in corporate unallocated expenses. We classify both the earnings
and cash ow impact from these derivatives consistent with the
underlying hedged item. During the next 12 months, we expect
to reclassify net losses of $59million related to these hedges from
accumulated other comprehensive loss into net income. Derivatives
used to hedge commodity price risk that do not qualify for hedge
accounting are marked to market each period and reected in our
income statement.
Our open commodity derivative contracts that qualify for hedge
accounting had a face value of $598million as of December31, 2011
and $590million as of December25, 2010. Ineectiveness for our
commodity hedges is not material.
Our open commodity derivative contracts that do not qualify
for hedge accounting had a face value of $630million as of
December31, 2011 and $266million as of December25, 2010.
Foreign Exchange
Financial statements of foreign subsidiaries are translated into
U.S.dollars using period- end exchange rates for assets and liabilities
and weighted- average exchange rates for revenues and expenses.
Adjustments resulting from translating net assets are reported
as a separate component of accumulated other comprehensive
loss within common shareholders’ equity as currency transla-
tion adjustment.
Our operations outside of the U.S. generate approximately 50%
of our net revenue, with Russia, Mexico, Canada and the United
Kingdom comprising approximately 23% of our net revenue. As a
PepsiCo, Inc.  Annual Report

Notes to Consolidated Financial Statements