Pepsi 2015 Annual Report Download - page 64

Table of Contents
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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. Costs incurred 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 $321 million as of December 26, 2015 and $355 million as of December 27,
2014 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.
We estimate and reserve for our bad debt exposure based on our experience with past due accounts and
collectibility, the aging of accounts receivable and our analysis of customer data. Bad debt expense is classified
within selling, general and administrative expenses in our income statement.
Goodwill and Other Intangible Assets
We sell products under a number of brand names, many of which were developed by us. Brand development
costs are expensed as incurred. We also purchase brands and other intangible assets in acquisitions. In a
business combination, the consideration is first assigned to identifiable assets and liabilities, including brands
and other intangible assets, based on estimated fair values, with any excess recorded as goodwill. Determining
fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such
as marketplace participants, product life cycles, market share, consumer awareness, brand history and future
expansion expectations, amount and timing of future cash flows and the discount rate applied to the cash
flows.
We believe that a brand has an indefinite life if it has a history of strong revenue and cash flow performance
and we have the intent and ability to support the brand with marketplace spending for the foreseeable future.
If these perpetual brand criteria are not met, brands are amortized over their expected useful lives, which
generally range from five to 40 years. Determining the expected life of a brand requires management judgment
and is based on an evaluation of a number of factors, including market share, consumer awareness, brand
history, future expansion expectations and regulatory restrictions, as well as the macroeconomic environment
of the countries in which the brand is sold.
In connection with previous acquisitions, we reacquired certain franchise rights which provided the exclusive
and perpetual rights to manufacture and/or distribute beverages for sale in specified territories. In determining
the useful life of these franchise rights, many factors were considered, including the pre-existing perpetual
bottling arrangements, the indefinite period expected for these franchise rights to contribute to our future
cash flows, as well as the lack of any factors that would limit the useful life of these franchise rights to us,