Pepsi 2014 Annual Report Download - page 99

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Research and Development
We engage in a variety of research and development activities and continue to invest to accelerate growth
to drive innovation globally. These activities principally involve production, processing and packaging and
include: development of new ingredients and products; reformulation and improvement in the quality of
existing products; improvement and modernization of manufacturing processes; improvements in product
quality, safety and integrity; development of, and improvements in, packaging technology and dispensing
equipment; and efforts focused on identifying opportunities to transform, grow and broaden our product
portfolio, including the development of sweetener alternatives and flavor modifiers to reduce added sugar,
and recipes that allow us to reduce sodium levels in certain of our products. We also made investments to
minimize our impact on the environment, including innovation in our packaging to make it increasingly
sustainable, and developed and implemented new technologies to enhance the quality and value of our current
and future products, as well as made investments to incorporate into our operations best practices and
technology to support sustainable agriculture and to minimize our impact on the environment. We continue
to make investments to conserve energy and raw materials, reduce waste in our facilities, recycle containers,
use renewable resources and optimize package design to use fewer materials. Consumer research is excluded
from research and development costs and included in other marketing costs. Research and development costs
were $718 million, $665 million and $552 million in 2014, 2013 and 2012, respectively, and are reported
within selling, general and administrative expenses.
Goodwill and Other Intangible Assets
Indefinite-lived intangible assets and goodwill are not amortized and are assessed for impairment at least
annually, using either a qualitative or quantitative approach. We perform this annual assessment during our
third quarter. Where we use the qualitative assessment, first we determine if, based on qualitative factors, it
is more likely than not that an impairment exists. Factors considered include macroeconomic, industry and
competitive conditions, legal and regulatory environment, historical financial performance and significant
changes in the brand or reporting unit. If the qualitative assessment indicates that it is more likely than not
that an impairment exists, then a quantitative assessment is performed.
The quantitative assessment requires an analysis of several estimates including future cash flows or income
consistent with management’s strategic business plans, annual sales growth rates and the selection of
assumptions underlying a discount rate (weighted average cost of capital) based on market data available at
the time. In the quantitative assessment of indefinite-lived intangible assets, if the carrying amount of the
indefinite-lived intangible asset exceeds its estimated fair value, as determined by its discounted cash flows
or another income-based approach, an impairment loss is recognized in an amount equal to that excess.
Quantitative assessment of goodwill is performed using a two-step impairment test at the reporting unit level.
A reporting unit can be a division or business within a division. The first step compares the carrying value
of a reporting unit, including goodwill, with its estimated fair value, as determined by its discounted cash
flows. If the carrying value of a reporting unit exceeds its estimated fair value, we complete the second step
to determine the amount of goodwill impairment loss that we should record, if any. In the second step, we
determine an implied fair value of the reporting unit’s goodwill by allocating the estimated fair value of the
reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible
assets). The amount of impairment loss is equal to the excess of the carrying value of the goodwill over the
implied fair value of that goodwill. Quantitative assessments described above are primarily based on expected
future levels of sales and operating profit which are inputs from our annual long-range planning process that
are used to estimate future cash flows. Additionally, they are also impacted by estimates of discount rates,
perpetuity growth assumptions and other factors. Significant management judgment is necessary to estimate
the impact of competitive operating, macroeconomic and other factors to estimate future levels of sales,
operating profit or cash flows. All assumptions used in our impairment evaluations for nonamortizable
intangible assets, such as forecasted growth rates and weighted average cost of capital, are based on the best
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