Pepsi 2014 Annual Report Download - page 124

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Off-Balance-Sheet Arrangements
It is not our business practice to enter into off-balance-sheet arrangements, other than in the normal course
of business. See Note 8 regarding contracts related to certain of our bottlers.
See “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition
and Results of Operations for further unaudited information on our borrowings.
Note 10 — Financial Instruments
Derivatives
We are exposed to market risks arising from adverse changes in:
• commodity prices, affecting the cost of our raw materials and energy;
• foreign exchange rates and currency restrictions; and
• interest rates.
In the normal course of business, we manage commodity price, foreign exchange and interest rate risks
through a variety of strategies, including productivity initiatives, global purchasing programs and hedging.
Ongoing productivity initiatives involve the identification and effective implementation of meaningful cost-
saving opportunities or efficiencies, including the use of derivatives. Our global purchasing programs include
fixed-price purchase orders and pricing agreements.
Our hedging strategies include the use of derivatives. Certain derivatives are designated as either cash flow
or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked
to market through earnings. Cash flows from derivatives used to manage commodity price, foreign exchange
or interest rate risks are classified as operating activities in the Consolidated Statement of Cash Flows. We
classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged
item. See “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results
of Operations for further unaudited information on our business risks.
For cash flow hedges, the effective portion of changes in fair value are deferred in accumulated other
comprehensive loss within common shareholders’ equity until the underlying hedged item is recognized in
net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent
with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result,
any change in the value of our derivative instruments would be substantially offset by an opposite change
in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative
purposes. We perform assessments of our counterparty credit risk regularly, including reviewing netting
agreements, if any, and a review of credit ratings, credit default swap rates and potential nonperformance of
the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk
to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe
are creditworthy in order to reduce our concentration of credit risk.
Commodity Prices
We are subject to commodity price risk because our ability to recover increased costs through higher pricing
may be limited in the competitive environment in which we operate. This risk is managed through the use
of fixed-price contracts and purchase orders, pricing agreements and derivative instruments, which include
swaps and futures. In addition, risk to our supply of certain raw materials is mitigated through purchases
from multiple geographies and suppliers. We use derivatives, with terms of no more than three years, to
economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily
for agricultural products, energy and metals. Ineffectiveness for those derivatives that qualify for hedge
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