Pepsi 2014 Annual Report Download - page 125

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105
accounting treatment was not material for all periods presented. Derivatives used to hedge commodity price
risk that do not qualify for hedge accounting treatment are marked to market each period with the resulting
gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and
administrative expenses, depending on the underlying commodity. These gains and losses are subsequently
reflected in division results when the divisions recognize the cost of the underlying commodity in operating
profit.
Our open commodity derivative contracts had a notional value of $1.2 billion as of December 27, 2014 and
$1.4 billion as of December 28, 2013.
Foreign Exchange
Our operations outside of the U.S. generate 49% of our net revenue, with Russia, Mexico, Canada, the United
Kingdom and Brazil comprising approximately 23% of our net revenue in 2014. As a result, we are exposed
to foreign exchange risks.
Additionally, we are exposed to foreign exchange risk from foreign currency purchases and foreign currency
assets and liabilities created in the normal course of business. We manage this risk through sourcing purchases
from local suppliers, negotiating contracts in local currencies with foreign suppliers and through the use of
derivatives, primarily forward contracts with terms of no more than two years. Exchange rate gains or losses
related to foreign currency transactions are recognized as transaction gains or losses in our income statement
as incurred.
Our foreign currency derivatives had a total notional value of $2.7 billion as of December 27, 2014 and $2.5
billion as of December 28, 2013. Ineffectiveness for those derivatives that qualify for hedge accounting was
not material for all periods presented. For foreign currency derivatives that do not qualify for hedge accounting
treatment, all losses and gains were offset by changes in the underlying hedged items, resulting in no material
net impact on earnings.
Interest Rates
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax
consequences and overall financing strategies. We use various interest rate derivative instruments including,
but not limited to, interest rate swaps, cross-currency interest rate swaps, Treasury locks and swap locks to
manage our overall interest expense and foreign exchange risk. These instruments effectively change the
interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness has been swapped
to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-
currency interest rate swaps match the principal, interest payment and maturity date of the related debt. Our
Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating
to forecasted debt transactions.
The notional values of the interest rate derivative instruments outstanding as of December 27, 2014 and
December 28, 2013 were $9.3 billion and $7.9 billion, respectively. Ineffectiveness, for those interest rate
derivative instruments that qualify for cash flow hedge accounting were not material for all periods presented.
As of December 27, 2014, approximately 25% of total debt, after the impact of the related interest rate
derivative instruments, was exposed to variable rates, compared to 31% as of December 28, 2013.
Available-for-Sale Securities
Investments in debt and equity marketable securities, other than investments accounted for under the equity
method, are classified as available-for-sale. All highly liquid investments with original maturities of three