Pepsi 2012 Annual Report Download - page 80

Note— Our Signicant Accounting Policies
Revenue Recognition
We recognize revenue upon shipment or delivery to our cus-
tomers based on written sales terms that do not allow for a
right of return. However, our policy for DSD and certain chilled
products is to remove and replace damaged and out-of-date
products from store shelves to ensure that consumers receive
the product quality and freshness they expect. Similarly, our
policy for certain warehouse-distributed products is to replace
damaged and out-of-date products. Based on our experience
with this practice, we have reserved for anticipated damaged
and out-of-date products. For additional unaudited informa-
tion on our revenue recognition and related policies, including
our policy on bad debts, see “Our Critical Accounting Policies”
in Management’s Discussion and Analysis. We are exposed
to concentration of credit risk by our customers, including
Wal-Mart. In 2012, Wal-Mart (including Sam’s) represented
approximately 11% of our total net revenue, including con-
centrate sales to our independent bottlers which are used in
finished goods sold by them to Wal-Mart. We have not experi-
enced credit issues with these customers.
Total Marketplace Spending
We offer sales incentives and discounts through various
programs to customers and consumers. Total marketplace
spending includes sales incentives, discounts, advertising and
other marketing activities. 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. It also includes
support provided to our independent bottlers through funding
of advertising and other marketing activities. While most of
these incentive arrangements have terms of no more than one
year, certain arrangements, such as fountain pouring rights,
may extend beyond one year. Costs incurred to obtain these
arrangements are recognized over the shorter of the eco-
nomic or contractual life, as a reduction of revenue, and the
remaining 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
additional unaudited information on our sales incentives, see
“Our Critical Accounting Policies” in Management’s Discussion
and Analysis.
Advertising and other marketing activities, reported as sell-
ing, general and administrative expenses, totaled $3.7billion
in 2012, $3.5billion in 2011 and $3.4billion in 2010, including
advertising expenses of $2.2billion in 2012 and $1.9billion
in both 2011 and 2010. Deferred advertising costs are not
expensed until the year first used and consist of:
• media and personal service prepayments;
• promotional materials in inventory; and
• production costs of future media advertising.
Deferred advertising costs of $88million and $163million
at year-end 2012 and 2011, respectively, are classified as pre-
paid expenses on our balance sheet.
Distribution Costs
Distribution costs, including the costs of shipping and handling
activities, are reported as selling, general and administrative
expenses. Shipping and handling expenses were $9.1billion in
2012, $9.2billion in 2011 and $7.7billion in 2010.
Cash Equivalents
Cash equivalents are highly liquid investments with original
maturities of three months or less.
Software Costs
We capitalize certain computer software and software devel-
opment costs incurred in connection with developing or
obtaining computer software for internal use when both the
preliminary project stage is completed and it is probable that
the software will be used as intended. Capitalized software
costs include only (i) external direct costs of materials and ser-
vices utilized in developing or obtaining computer software,
(ii) compensation and related benefits for employees who are
directly associated with the software project and (iii) inter-
est costs incurred while developing internal-use computer
software. Capitalized software costs are included in property,
plant and equipment on our balance sheet and amortized on a
straight-line basis when placed into service over the estimated
useful lives of the software, which approximate 5 to 10 years.
Software amortization totaled $196million in 2012, $156mil-
lion in 2011 and $137million in 2010. Net capitalized software
and development costs were $1.1billion as of December29,
2012 and $1.3billion as of December31, 2011.
Commitments and Contingencies
We are subject to various claims and contingencies related
to lawsuits, certain taxes and environmental matters, as well
as commitments under contractual and other commercial
obligations. We recognize liabilities for contingencies and
commitments when a loss is probable and estimable. For
additional information on our commitments, see Note9 to our
consolidated financial statements.
2012 PEPSICO ANNUAL REPORT78
Notes to Consolidated Financial Statements