Pepsi 2014 Annual Report Download - page 63

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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However, our policy for DSD and certain chilled products is to remove and replace damaged and out-of-date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Similarly, our policy for certain warehouse-distributed products is to replace damaged and out-of-date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” in “Item 1. Business.”, 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 $35.8 billion in 2014 and $34.7 billion in both 2013 and 2012. 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 year, and therefore do not require highly uncertain long-term estimates. Certain arrangements,
such as fountain pouring rights, may extend beyond one year. Payments made to obtain these rights are
recognized over the shorter of the economic or contractual life, primarily as a reduction of revenue, and the
remaining balances of $355 million as of December 27, 2014 and $410 million as of December 28, 2013 are
included in prepaid expenses and other current assets and other assets on our balance sheet.
For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our
programs to each of our interim reporting periods in the same year that benefits from the programs. The
allocation methodology is based on our forecasted sales incentives for the full year and the proportion of
each interim period’s actual gross revenue or volume, as applicable, to our forecasted annual gross revenue
or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates
and the related allocation of sales incentives are recognized beginning in the interim period that they are
identified. In addition, we apply a similar allocation methodology for interim reporting purposes for certain
advertising and other marketing activities. See Note 2 to our consolidated financial statements for additional
information on our total marketplace spending. Our annual financial statements are not impacted by this
interim allocation methodology.
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