Pepsi 2015 Annual Report Download - page 66

Table of Contents
49
Income Tax Expense and Accruals
Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us
in the various jurisdictions in which we operate. Significant judgment is required in determining our annual
tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return
positions are fully supportable, we believe that certain positions are subject to challenge and that we likely
will not succeed. We adjust these reserves, as well as the related interest, in light of changing facts and
circumstances, such as the progress of a tax audit. See “Imposition of new taxes, disagreements with tax
authorities or additional tax liabilities could adversely affect our business, financial condition or results of
operations.” in “Item 1A. Risk Factors.”
An estimated annual effective tax rate is applied to our quarterly operating results. In the event there is a
significant or unusual item recognized in our quarterly operating results, the tax attributable to that item is
separately calculated and recorded at the same time as that item. We consider the tax adjustments from the
resolution of prior year tax matters to be among such items.
Tax law requires items to be included in our tax returns at different times than the items are reflected in our
financial statements. As a result, our annual tax rate reflected in our financial statements is different than that
reported in our tax returns (our cash tax rate). Some of these differences are permanent, such as expenses
that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense.
These temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent
items that can be used as a tax deduction or credit in our tax returns in future years for which we have already
recorded the tax benefit in our income statement. We establish valuation allowances for our deferred tax
assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax liabilities generally represent tax expense recognized in our
financial statements for which payment has been deferred, or expense for which we have already taken a
deduction in our tax return but have not yet recognized as expense in our financial statements.
In 2015, our annual tax rate was 26.1% compared to 25.1% in 2014, as discussed in “Other Consolidated
Results.” The tax rate increased 1.0 percentage point compared to the prior year reflecting the impact of the
Venezuela impairment charges, which had no accompanying tax benefit, partially offset by the favorable
resolution with the IRS of substantially all open matters related to the audits for taxable years 2010 and 2011.
Pension and Retiree Medical Plans
Our pension plans cover certain full-time employees in the United States and certain international employees.
Benefits are determined based on either years of service or a combination of years of service and earnings.
Certain U.S. and Canada retirees are also eligible for medical and life insurance benefits (retiree medical) if
they meet age and service requirements. Generally, our share of retiree medical costs is capped at specified
dollar amounts, which vary based upon years of service, with retirees contributing the remainder of the cost.
In addition, the Company has been phasing out certain Company subsidies of retiree medical benefits.
In the fourth quarter of 2014, the Company offered certain former employees who had vested benefits in our
U.S. defined benefit pension plans the option of receiving a one-time lump sum payment equal to the present
value of the participant’s pension benefit (payable in cash or rolled over into a qualified retirement plan or
Individual Retirement Account (IRA)). As a result, we recorded a pension lump sum settlement charge in
corporate unallocated expenses of $141 million ($88 million after-tax or $0.06 per share). See “Items Affecting
Comparability” and Note 7 to our consolidated financial statements.