Pepsi 2012 Annual Report Download - page 53

which are inputs from our annual long-range planning process.
Additionally, they are also impacted by estimates of discount
rates, perpetuity growth assumptions and other factors. If the
book value of a reporting unit exceeds its fair value, we com-
plete 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 goodwill (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 significant change in the operating or macroeconomic envi-
ronment. If an evaluation of the undiscounted future cash
flows indicates impairment, the asset is written down to its
estimated fair value, which is based on its discounted future
cash flows.
In connection with our acquisitions of PBG and PAS, we
reacquired certain franchise rights which provided PBG and
PAS with the exclusive and perpetual rights to manufacture
and/or distribute beverages for sale in specified territories.
In determining the useful life of these reacquired franchise
rights, we considered many factors, including the pre-exist-
ing perpetual bottling arrangements, the indefinite period
expected for the reacquired rights to contribute to our future
cash flows, 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 fac-
tors. 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 franchise rights are amortized over
the remaining contractual period of the contract in which the
right was granted.
Significant management judgment is necessary to evaluate
the impact of operating and macroeconomic changes and to
estimate future cash flows. Assumptions used in our impair-
ment 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 good-
will in the years presented. In addition, as of December29,
2012, we did not have any reporting units that were at risk
of failing the first step of the goodwill impairment test. We
recognized impairment charges in Europe for other nonamor-
tizable intangible assets of $23million and $14million in 2012
and 2011, respectively. We did not recognize any impairment
charges for other nonamortizable intangible assets in 2010.
As of December 29, 2012, we had $31.7billion of goodwill
and other nonamortizable intangible assets, primarily 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 vari-
ous jurisdictions in which we operate. Significant 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 annual effective tax rate is applied to our
quarterly operating results. In the event there is a significant
or unusual item recognized in our quarterly operating results,
the tax attributable to that item is separately calculated and
recorded at the same time as that item. We consider the tax
adjustments from the resolution of prior year tax matters to
be among such items.
Tax law requires items to be included in our tax returns at
different times than the items are reflected in our financial
statements. As a result, our annual tax rate reflected in our
financial statements is different than that reported in our tax
returns (our cash tax rate). Some of these differences are
permanent, such as expenses that are not deductible in our
tax return, and some differences reverse over time, such as
depreciation expense. These temporary differences create
deferred tax assets and liabilities. Deferred tax assets gener-
ally 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 benefit 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 real-
ized. Deferred tax liabilities generally represent tax expense
recognized in our financial 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 financial statements.
In 2012, our annual tax rate was 25.2% compared to 26.8%
in 2011, as discussed in “Other Consolidated Results.” The
tax rate in 2012 decreased 1.6percentage points primarily
reflecting the tax impact of a favorable tax court decision
combined with the pre-payment of Medicare subsidy liabilities,
partially offset by the tax impact of the transaction with Tingyi
and the lapping of prior year tax benefits related to a portion
of our international bottling operations.
Management’s Discussion and Analysis
2012 PEPSICO ANNUAL REPORT 51