Pepsi 2013 Annual Report Download - page 59

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OUR CRITICAL ACCOUNTING POLICIES
An appreciation of our critical accounting policies is necessary to understand our financial results. These
policies may require management to make difficult and subjective judgments regarding uncertainties, and
as a result, such estimates may significantly impact our financial results. The precision of these estimates
and the likelihood of future changes depend on a number of underlying variables and a range of possible
outcomes. Other than our accounting for pension and retiree medical plans, our critical accounting policies
do not involve a choice between alternative methods of accounting. We applied our critical accounting policies
and estimation methods consistently in all material respects, and for all periods presented, and have discussed
these policies with our Audit Committee.
Our critical accounting policies are:
• revenue recognition;
• goodwill and other intangible assets;
• income tax expense and accruals; and
• pension and retiree medical plans.
Revenue Recognition
Our products are sold for cash or on credit terms. Our credit terms, which are established in accordance with
local and industry practices, typically require payment within 30 days of delivery in the U.S., and generally
within 30 to 90 days internationally, and may allow discounts for early payment. We recognize revenue upon
shipment or delivery to our customers 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However, our policy for DSD and certain chilled products is to remove and replace damaged and out-of-date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Similarly, our policy for certain warehouse-distributed products is to replace damaged and out-of-date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.
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 inventory
levels.
As discussed in “Our Customers,” 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 both 2013 and 2012, and $34.6 billion in 2011. 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 activities. 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 incentive costs are normally insignificant and are recognized in earnings in the period such differences
are determined. In addition, certain advertising and marketing costs are also based on annual targets and
recognized during the year as incurred. The terms of most of our incentive arrangements do not exceed a