Pepsi 2012 Annual Report Download - page 52

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and out-of-date products.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 customer shelf space and storerooms
limiting the quantity of product. For product delivered through
our other distribution networks, we monitor customer inven-
tory levels.
As discussed in “Our Customers,” we offer sales incen-
tives and discounts through various programs to customers
and consumers. Total marketplace spending includes sales
incentives, discounts, advertising and other marketing activi-
ties. Sales incentives and discounts are primarily accounted
for as a reduction of revenue and totaled $34.7 billion in
2012, $34.6 billion in 2011 and $29.1 billion in 2010. Sales
incentives and discounts include payments to customers 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. Sales incentives and discounts
also include support provided to our independent bottlers
through funding of advertising and other marketing activi-
ties. 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 customer participation and performance levels.
Differences between estimated expense and actual incen-
tive costs are normally insignificant and are recognized in
earnings in the period such differences are determined. The
terms of most of our incentive arrangements do not exceed a
year, and therefore do not require highly uncertain long-term
estimates. Certain arrangements, such as fountain pouring
rights, 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 revenue, and the remain-
ing balances of $335million as of December 29, 2012 and
$313million as of December31, 2011 are included in current
assets and other assets on our balance sheet.
For interim reporting, our policy is to allocate our fore-
casted full-year sales incentives for most of our programs to
each of our interim reporting periods in the same year that
benefits from the programs. The allocation methodology is
based on our forecasted sales incentives for the full year and
the proportion of each interim period’s actual gross revenue
and volume, as applicable, to our forecasted annual gross
revenue and volume, as applicable. Based on our review of
the forecasts at each interim period, any changes in estimates
and the related allocation of sales incentives are recognized
in the interim period as they are identified. In addition, we
apply a similar allocation methodology for interim reporting
purposes for advertising and other marketing activities. See
Note2 to our consolidated financial statements for additional
information on our total marketplace spending. Our annual
financial statements are not impacted by this interim alloca-
tion 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 classified 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 acqui-
sitions. In a business combination, the consideration is first
assigned to identifiable assets and liabilities, including brands,
based on estimated fair values, with any excess recorded as
goodwill. Determining fair value requires significant estimates
and assumptions based on an evaluation of a number of fac-
tors, such as marketplace participants, product life cycles,
market share, consumer awareness, brand history and future
expansion expectations, amount and timing of future cash
flows and the discount rate applied to the cash flows.
We believe that a brand has an indefinite life if it has a
history of strong revenue and cash flow 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
five to 40years. Determining the expected life of a brand
requires management judgment and is based on an evalua-
tion of a number of factors, including market share, consumer
awareness, brand history, future expansion expectations and
regulatory restrictions, as well as the macroeconomic environ-
ment 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 deter-
mined by its discounted cash flows, 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 first step compares the book value of a report-
ing unit, including goodwill, with its fair value, as determined
by its discounted cash flows. Discounted cash flows are pri-
marily based on growth rates for sales and operating profit
Management’s Discussion and Analysis
2012 PEPSICO ANNUAL REPORT50