Pepsi 2012 Annual Report Download - page 77

Tabular dollars are in millions, except per share amounts.All
per share amounts reflect common per share amounts,assume
dilution unless noted, and are based on unrounded amounts.
Certain reclassifications were made to prior years’ amounts to
conform to the 2012 presentation.
Our Divisions
We manufacture or use contract manufacturers, market
and sell a variety of salty, convenient, sweet and grain-based
snacks, carbonated and non-carbonated beverages, dairy
products and other foods in over 200 countries and terri-
tories with our largest operations in North America (United
States and Canada), Russia, Mexico, the United Kingdom and
Brazil. Division results are based on how our Chief Executive
Officer assesses the performance of and allocates resources
to our divisions. For additional unaudited information on our
divisions, see “Our Operations” in Management’s Discussion
and Analysis. The accounting policies for the divisions are the
same as those described in Note2, except for the following
allocation methodologies:
• stock-based compensation expense;
• pension and retiree medical expense; and
• derivatives.
Stock-Based Compensation Expense
Our divisions are held accountable for stock-based compensa-
tion expense and, therefore, this expense is allocated to our
divisions as an incremental employee compensation cost. The
allocation of stock-based compensation expense in 2012 was
approximately 16% to FLNA, 2% to QFNA, 5% to LAF, 25%
to PAB, 14% to Europe, 12% to AMEA and 26% to corporate
unallocated expenses. We had similar allocations of stock-
based compensation expense to our divisions in 2011 and
2010. The expense allocated to our divisions excludes any
impact of changes in our assumptions during the year which
reflect market conditions over which division management
has no control. Therefore, any variances between allocated
expense and our actual expense are recognized in corporate
unallocated expenses.
Pension and Retiree Medical Expense
Pension and retiree medical service costs measured at a fixed
discount rate, as well as amortization of costs related to cer-
tain pension plan amendments and gains and losses due to
demographics, including salary experience, are reflected in
division results for North American employees. Division results
also include interest costs, measured at a fixed discount rate,
for retiree medical plans. Interest costs for the pension plans,
pension asset returns and the impact of pension funding, and
gains and losses other than those due to demographics, are all
reflected in corporate unallocated expenses. In addition, cor-
porate unallocated expenses include the difference between
the service costs measured at a fixed discount rate (included
in division results as noted above) and the total service costs
determined using the plans’ discount rates as disclosed in
Note7 to our consolidated financial statements.
Derivatives
We centrally manage commodity derivatives on behalf of our
divisions. These commodity derivatives include agricultural
products, metals and energy. Certain of these commodity
derivatives do not qualify for hedge accounting treatment
and are marked to market with the resulting gains and losses
recognized in corporate unallocated expenses. These gains
and losses are subsequently reflected in division results when
the divisions take delivery of the underlying commodity.
Therefore, the divisions realize the economic effects of the
derivative without experiencing any resulting mark-to-market
volatility, which remains in corporate unallocated expenses.
These derivatives hedge underlying commodity price risk and
were not entered into for speculative purposes.
2012 PEPSICO ANNUAL REPORT 75
Notes to Consolidated Financial Statements