Pepsi 2013 Annual Report Download - page 61

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we determine if, based on qualitative factors, it is more likely than not that an impairment does not exist.
Factors considered include macroeconomic, industry and competitive conditions, legal and regulatory
environment, historical financial performance and significant changes in the brand or reporting unit. If the
qualitative assessment indicates a potential impairment then a quantitative assessment is performed.
The quantitative assessment requires an analysis of several estimates including future cash flows or income
consistent with management’s strategic business plans, annual sales growth rates and the selection of a
discount rate based on market data available at the time. In the quantitative assessment of indefinite-lived
intangible assets, if the carrying amount of the indefinite-lived intangible asset exceeds its fair value, as
determined by its discounted cash flows or another income-based approach, an impairment loss is recognized
in an amount equal to that excess. Quantitative assessment of goodwill is performed 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 reporting unit, including goodwill, with its fair value, as determined
by its discounted cash flows. Discounted cash flows are primarily based on growth rates for sales and operating
profit 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 complete 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 intangible assets are only evaluated for impairment upon a significant change in the operating
or macroeconomic environment. 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 or
another income-based approach.
Significant management judgment is necessary to evaluate the impact of operating and macroeconomic
changes and to estimate future cash flows or sales. Assumptions used in our impairment 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 “Risk Factors” in Item 1A. and “Our Business Risks.”
We did not recognize any impairment charges for goodwill in the three years ended December 28, 2013,
December 29, 2012 and December 31, 2011. In addition, as of December 28, 2013, we did not have any
reporting units that were at risk of failing the first step of the goodwill impairment test. We recognized no
impairment charges for nonamortizable intangible assets in 2013. In 2012 and 2011, we recognized
impairment charges in Europe for other nonamortizable intangible assets of $23 million and $14 million,
respectively.
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 various 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 likely
will 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. See “Imposition of new taxes, disagreements with tax
authorities or additional tax liabilities could adversely impact our financial performance.” in “Risk Factors”
in Item 1A.