Pepsi 2014 Annual Report Download - page 94

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Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share
amounts, assume dilution unless noted, and are based on unrounded amounts. Certain reclassifications were
made to prior years’ amounts to conform to the current year presentation.
Our Divisions
Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market,
sell and distribute a wide variety of convenient and enjoyable foods and beverages, serving customers and
consumers in more than 200 countries and territories with our largest operations in North America, Russia,
Mexico, the United Kingdom and Brazil. Division results are based on how our Chief Executive Officer
assesses the performance of and allocates resources to our divisions. For additional unaudited information
on our divisions, see “Our Operations” contained in “Item 1. Business.” The accounting policies for the
divisions are the same as those described in Note 2, except for the following allocation methodologies:
• stock-based compensation expense;
• pension and retiree medical expense; and
• derivatives.
Stock-Based Compensation Expense
Our divisions are held accountable for stock-based compensation expense and, therefore, this expense is
allocated to our divisions as an incremental employee compensation cost. The allocation of stock-based
compensation expense in 2014 was approximately 15% to FLNA, 2% to QFNA, 6% to LAF, 24% to PAB,
13% to Europe, 10% to AMEA and 30% to corporate unallocated expenses. We had similar allocations of
stock-based compensation expense to our divisions in 2013 and 2012. The expense allocated to our divisions
excludes any impact of changes in our assumptions during the year which reflect market conditions over
which division management has no control. Therefore, any variances between allocated expense and our
actual expense are recognized in corporate unallocated expenses.
Pension and Retiree Medical Expense
Pension and retiree medical service costs measured at a fixed discount rate, as well as amortization of costs
related to certain pension plan amendments and gains and losses due to demographics (including mortality
assumptions and salary experience) are reflected in division results for North American employees. Division
results also include interest costs, measured at a fixed discount rate, for retiree medical plans. Interest costs
for the pension plans, pension asset returns and the impact of pension funding, and gains and losses other
than those due to demographics, are all reflected in corporate unallocated expenses. In addition, corporate
unallocated expenses include the difference between the service costs measured at a fixed discount rate
(included in division results as noted above) and the total service costs determined using the plans’ discount
rates as disclosed in Note 7 to our consolidated financial statements.
Derivatives
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include
agricultural products, energy and metals. Commodity derivatives 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. Therefore, the divisions realize
the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which
remains in corporate unallocated expenses. These derivatives hedge underlying commodity price risk and
were not entered into for trading or speculative purposes.
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