Pepsi 2014 Annual Report Download - page 98

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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. It
also includes support provided to our independent bottlers through funding of advertising and other marketing
activities. While most of these incentive arrangements have terms of no more than one year, certain
arrangements, such as fountain pouring rights, may extend beyond one year. Costs incurred to obtain these
arrangements 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 additional unaudited information on our sales incentives, see “Our Critical Accounting Policies”
in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Advertising and other marketing activities, reported as selling, general and administrative expenses, totaled
$3.9 billion in 2014 and 2013 and $3.7 billion in 2012, including advertising expenses of $2.3 billion in
2014, $2.4 billion in 2013 and $2.2 billion in 2012. Deferred advertising costs are not expensed until the
year first used and consist of:
• media and personal service prepayments;
• promotional materials in inventory; and
• production costs of future media advertising.
Deferred advertising costs of $42 million and $68 million as of December 27, 2014 and December 28, 2013,
respectively, are classified as prepaid expenses on our balance sheet.
Distribution Costs
Distribution costs, including the costs of shipping and handling activities, are reported as selling, general
and administrative expenses. Shipping and handling expenses were $9.7 billion in 2014, $9.4 billion in 2013
and $9.1 billion in 2012.
Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of three months or less.
Software Costs
We capitalize certain computer software and software development costs incurred in connection with
developing or obtaining computer software for internal use when both the preliminary project stage is
completed and it is probable that the software will be used as intended. Capitalized software costs include
only (i) external direct costs of materials and services utilized in developing or obtaining computer software,
(ii) compensation and related benefits for employees who are directly associated with the software project
and (iii) interest costs incurred while developing internal-use computer software. Capitalized software costs
are included in property, plant and equipment on our balance sheet and amortized on a straight-line basis
when placed into service over the estimated useful lives of the software, which approximate 5 to 10 years.
Software amortization totaled $208 million in 2014, $197 million in 2013 and $196 million in 2012. Net
capitalized software and development costs were $0.9 billion and $1.1 billion as of December 27, 2014 and
December 28, 2013, respectively.
Commitments and Contingencies
We are subject to various claims and contingencies related to lawsuits, certain taxes and environmental
matters, as well as commitments under contractual and other commercial obligations. We recognize liabilities
for contingencies and commitments when a loss is probable and estimable. For additional information on
our commitments, see Note 9 to our consolidated financial statements.
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