Analysis: Nature of Business, Basis of Reporting, Significant Accounting Policies, Revenues Recognition

Entity Registrant Name PEPSICO INC
CIK 0000077476
Accession number 0000077476-14-000007
Link to XBRL instance http://www.sec.gov/Archives/edgar/data/77476/000007747614000007/pep-20131228.xml
Fiscal year end --12-28
Fiscal year focus 2013
Fiscal period focus FY
Current balance sheet date 2013-12-28
Current year-to-date income statement start date 2012-12-30
Commentary All disclosures seem appropriate.
NATURE OF BUSINESS concept us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock
Basis of Presentation and Our Divisions
Basis of Presentation
Our financial statements include the consolidated accounts of PepsiCo, Inc. and the affiliates that we control. In addition, we include our share of the results of certain other affiliates using the equity method based on our economic ownership interest, our ability to exercise significant influence over the operating or financial decisions of these affiliates or our ability to direct their economic resources. We do not control these other affiliates, as our ownership in these other affiliates is generally 50% or less. Intercompany balances and transactions are eliminated. Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years. In 2011, we had an additional week of results (53rd week).
The results of our Venezuelan businesses have been reported under highly inflationary accounting since the beginning of 2010. See further unaudited information in “Our Business Risks”, “Items Affecting Comparability” and “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In the first quarter of 2011, QFNA changed its method of accounting for certain U.S. inventories from the last-in, first-out (LIFO) method to the average cost method as we believe that the average cost method of accounting improves our financial reporting by better matching revenues and expenses and better reflecting the current value of inventory. The impact of this change on consolidated net income in the first quarter of 2011 was approximately $9 million (or less than a penny per share).
Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.
The preparation of our consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Estimates are used in determining, among other items, sales incentives accruals, tax reserves, stock-based compensation, pension and retiree medical accruals, amounts and useful lives for intangible assets, and future cash flows associated with impairment testing for perpetual brands, goodwill and other long-lived assets. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effect cannot be determined with precision, actual results could differ significantly from these estimates.
While our United States and Canada (North America) results are reported on a weekly calendar basis, most of our international operations report on a monthly calendar basis. The following chart details our quarterly reporting schedule for all reporting periods presented except for 2011 as noted above:
 
Quarter
  
U.S. and Canada
  
International
First Quarter
  
12 weeks
  
January, February
Second Quarter
  
12 weeks
  
March, April and May
Third Quarter
  
12 weeks
  
June, July and August
Fourth Quarter
  
16 weeks
  
September, October, November and December

See “Our Divisions” below, and for additional unaudited information on items affecting the comparability of our consolidated results, see further unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
Our Divisions
Through our operations, authorized bottlers, contract manufacturers and third parties, we make, market, sell and distribute a wide variety of convenient and enjoyable foods and beverages, serving customers 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” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 2013 was approximately 16% to FLNA, 2% to QFNA, 5% to LAF, 24% to PAB, 13% to Europe, 12% to AMEA and 28% to corporate unallocated expenses. We had similar allocations of stock-based compensation expense to our divisions in 2012 and 2011. 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 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. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market 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 net income. 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.
Net revenue and operating profit of each division are as follows:
 
Net Revenue
 
Operating Profit (a)
 
2013

 
2012

 
2011

 
2013

 
2012

 
2011

FLNA
$
14,126

 
$
13,574

 
$
13,322

 
$
3,877

 
$
3,646

 
$
3,621

QFNA
2,612

 
2,636

 
2,656

 
617

 
695

 
797

LAF
8,350

 
7,780

 
7,156

 
1,242

 
1,059

 
1,078

PAB
21,068

 
21,408

 
22,418

 
2,955

 
2,937

 
3,273

Europe
13,752

 
13,441

 
13,560

 
1,293

 
1,330

 
1,210

AMEA
6,507

 
6,653

 
7,392

 
1,174

 
747

 
887

Total division
66,415

 
65,492

 
66,504

 
11,158

 
10,414

 
10,866

Corporate Unallocated

 

 

 

 

 

Mark-to-market net (losses)/gains






(72
)

65


(102
)
Merger and integration charges






—


—


(78
)
Restructuring and impairment charges






(11
)

(10
)

(74
)
Venezuela currency devaluation
 
 
 
 
 
 
(124
)
 
—

 
—

Pension lump sum settlement charge






—


(195
)

—

53rd week






—


—


(18
)
Other






(1,246
)
 
(1,162
)
 
(961
)
 
$
66,415

 
$
65,492

 
$
66,504

 
$
9,705

 
$
9,112

 
$
9,633

(a)
For information on the impact of restructuring, impairment and integration charges on our divisions, see Note 3 to our consolidated financial statements. See also Note 15 to our consolidated financial statements for more information on our transaction with Tingyi and refranchising of our beverage business in Vietnam in our AMEA segment.

Corporate
Corporate unallocated includes costs of our corporate headquarters, centrally managed initiatives such as research and development projects, unallocated insurance and benefit programs, foreign exchange transaction gains and losses, commodity derivative gains and losses, our ongoing business transformation initiative and certain other items.
Other Division Information 
Total assets and capital spending of each division are as follows:
 
Total Assets
 
Capital Spending
 
2013


2012


2011

 
2013


2012


2011

FLNA
$
5,308


$
5,332


$
5,384

 
$
423


$
365


$
439

QFNA
983


966


1,024

 
38


37


43

LAF
4,829


4,993


4,721

 
384


436


413

PAB
30,350


30,899


31,142

 
716


702


1,006

Europe 
18,702


19,218


18,461

 
550


575


588

AMEA
5,754


5,738


6,038

 
531


510


693

Total division
65,926


67,146


66,770

 
2,642


2,625


3,182

Corporate (a)
11,552


7,492


6,112

 
153


89


157


$
77,478


$
74,638


$
72,882

 
$
2,795


$
2,714


$
3,339



(a)
Corporate assets consist principally of cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and certain pension and tax assets.

Amortization of intangible assets and depreciation and other amortization of each division are as follows:
 
Amortization of Intangible
Assets

Depreciation and
Other Amortization
 
2013


2012


2011


2013


2012


2011

FLNA
$
7


$
7


$
7


$
430


$
445


$
458

QFNA
—


—


—


51


53


54

LAF
8


10


10


253


248


238

PAB
58


59


65


863


855


865

Europe
32


36


39


525


522


522

AMEA
5


7


12


283


305


350

Total division
110


119


133


2,405


2,428


2,487

Corporate
—


—


—


148


142


117


$
110


$
119


$
133


$
2,553


$
2,570


$
2,604


 
Net revenue and long-lived assets by country are as follows:
 
Net Revenue

Long-Lived Assets(a)
 
2013


2012


2011


2013


2012


2011

U.S.
$
33,626


$
33,348


$
33,053


$
28,504


$
28,344


$
28,999

Russia
4,908


4,861


4,749


7,890


8,603


8,121

Mexico
4,347


3,955


4,782


1,226


1,237


1,027

Canada
3,195


3,290


3,364


3,067


3,294


3,097

United Kingdom
2,115


2,102


2,075


1,078


1,053


1,011

Brazil
1,835

 
1,866

 
1,838

 
1,006

 
1,134

 
1,124

All other countries
16,389


16,070


16,643


10,297


10,600


11,041


$
66,415


$
65,492


$
66,504


$
53,068


$
54,265


$
54,420



(a)
Long-lived assets represent property, plant and equipment, nonamortizable intangible assets, amortizable intangible assets and investments in noncontrolled affiliates. These assets are reported in the country where they are primarily used.
BASIS OF REPORTING concept us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock
Basis of Presentation and Our Divisions
Basis of Presentation
Our financial statements include the consolidated accounts of PepsiCo, Inc. and the affiliates that we control. In addition, we include our share of the results of certain other affiliates using the equity method based on our economic ownership interest, our ability to exercise significant influence over the operating or financial decisions of these affiliates or our ability to direct their economic resources. We do not control these other affiliates, as our ownership in these other affiliates is generally 50% or less. Intercompany balances and transactions are eliminated. Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years. In 2011, we had an additional week of results (53rd week).
The results of our Venezuelan businesses have been reported under highly inflationary accounting since the beginning of 2010. See further unaudited information in “Our Business Risks”, “Items Affecting Comparability” and “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In the first quarter of 2011, QFNA changed its method of accounting for certain U.S. inventories from the last-in, first-out (LIFO) method to the average cost method as we believe that the average cost method of accounting improves our financial reporting by better matching revenues and expenses and better reflecting the current value of inventory. The impact of this change on consolidated net income in the first quarter of 2011 was approximately $9 million (or less than a penny per share).
Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.
The preparation of our consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Estimates are used in determining, among other items, sales incentives accruals, tax reserves, stock-based compensation, pension and retiree medical accruals, amounts and useful lives for intangible assets, and future cash flows associated with impairment testing for perpetual brands, goodwill and other long-lived assets. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effect cannot be determined with precision, actual results could differ significantly from these estimates.
While our United States and Canada (North America) results are reported on a weekly calendar basis, most of our international operations report on a monthly calendar basis. The following chart details our quarterly reporting schedule for all reporting periods presented except for 2011 as noted above:
 
Quarter
  
U.S. and Canada
  
International
First Quarter
  
12 weeks
  
January, February
Second Quarter
  
12 weeks
  
March, April and May
Third Quarter
  
12 weeks
  
June, July and August
Fourth Quarter
  
16 weeks
  
September, October, November and December

See “Our Divisions” below, and for additional unaudited information on items affecting the comparability of our consolidated results, see further unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
Our Divisions
Through our operations, authorized bottlers, contract manufacturers and third parties, we make, market, sell and distribute a wide variety of convenient and enjoyable foods and beverages, serving customers 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” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 2013 was approximately 16% to FLNA, 2% to QFNA, 5% to LAF, 24% to PAB, 13% to Europe, 12% to AMEA and 28% to corporate unallocated expenses. We had similar allocations of stock-based compensation expense to our divisions in 2012 and 2011. 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 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. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market 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 net income. 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.
Net revenue and operating profit of each division are as follows:
 
Net Revenue
 
Operating Profit (a)
 
2013

 
2012

 
2011

 
2013

 
2012

 
2011

FLNA
$
14,126

 
$
13,574

 
$
13,322

 
$
3,877

 
$
3,646

 
$
3,621

QFNA
2,612

 
2,636

 
2,656

 
617

 
695

 
797

LAF
8,350

 
7,780

 
7,156

 
1,242

 
1,059

 
1,078

PAB
21,068

 
21,408

 
22,418

 
2,955

 
2,937

 
3,273

Europe
13,752

 
13,441

 
13,560

 
1,293

 
1,330

 
1,210

AMEA
6,507

 
6,653

 
7,392

 
1,174

 
747

 
887

Total division
66,415

 
65,492

 
66,504

 
11,158

 
10,414

 
10,866

Corporate Unallocated

 

 

 

 

 

Mark-to-market net (losses)/gains






(72
)

65


(102
)
Merger and integration charges






—


—


(78
)
Restructuring and impairment charges






(11
)

(10
)

(74
)
Venezuela currency devaluation
 
 
 
 
 
 
(124
)
 
—

 
—

Pension lump sum settlement charge






—


(195
)

—

53rd week






—


—


(18
)
Other






(1,246
)
 
(1,162
)
 
(961
)
 
$
66,415

 
$
65,492

 
$
66,504

 
$
9,705

 
$
9,112

 
$
9,633

(a)
For information on the impact of restructuring, impairment and integration charges on our divisions, see Note 3 to our consolidated financial statements. See also Note 15 to our consolidated financial statements for more information on our transaction with Tingyi and refranchising of our beverage business in Vietnam in our AMEA segment.

Corporate
Corporate unallocated includes costs of our corporate headquarters, centrally managed initiatives such as research and development projects, unallocated insurance and benefit programs, foreign exchange transaction gains and losses, commodity derivative gains and losses, our ongoing business transformation initiative and certain other items.
Other Division Information 
Total assets and capital spending of each division are as follows:
 
Total Assets
 
Capital Spending
 
2013


2012


2011

 
2013


2012


2011

FLNA
$
5,308


$
5,332


$
5,384

 
$
423


$
365


$
439

QFNA
983


966


1,024

 
38


37


43

LAF
4,829


4,993


4,721

 
384


436


413

PAB
30,350


30,899


31,142

 
716


702


1,006

Europe 
18,702


19,218


18,461

 
550


575


588

AMEA
5,754


5,738


6,038

 
531


510


693

Total division
65,926


67,146


66,770

 
2,642


2,625


3,182

Corporate (a)
11,552


7,492


6,112

 
153


89


157


$
77,478


$
74,638


$
72,882

 
$
2,795


$
2,714


$
3,339



(a)
Corporate assets consist principally of cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and certain pension and tax assets.

Amortization of intangible assets and depreciation and other amortization of each division are as follows:
 
Amortization of Intangible
Assets

Depreciation and
Other Amortization
 
2013


2012


2011


2013


2012


2011

FLNA
$
7


$
7


$
7


$
430


$
445


$
458

QFNA
—


—


—


51


53


54

LAF
8


10


10


253


248


238

PAB
58


59


65


863


855


865

Europe
32


36


39


525


522


522

AMEA
5


7


12


283


305


350

Total division
110


119


133


2,405


2,428


2,487

Corporate
—


—


—


148


142


117


$
110


$
119


$
133


$
2,553


$
2,570


$
2,604


 
Net revenue and long-lived assets by country are as follows:
 
Net Revenue

Long-Lived Assets(a)
 
2013


2012


2011


2013


2012


2011

U.S.
$
33,626


$
33,348


$
33,053


$
28,504


$
28,344


$
28,999

Russia
4,908


4,861


4,749


7,890


8,603


8,121

Mexico
4,347


3,955


4,782


1,226


1,237


1,027

Canada
3,195


3,290


3,364


3,067


3,294


3,097

United Kingdom
2,115


2,102


2,075


1,078


1,053


1,011

Brazil
1,835

 
1,866

 
1,838

 
1,006

 
1,134

 
1,124

All other countries
16,389


16,070


16,643


10,297


10,600


11,041


$
66,415


$
65,492


$
66,504


$
53,068


$
54,265


$
54,420



(a)
Long-lived assets represent property, plant and equipment, nonamortizable intangible assets, amortizable intangible assets and investments in noncontrolled affiliates. These assets are reported in the country where they are primarily used.
SIGNIFICANT ACCOUNTING POLICIES concept us-gaap:SignificantAccountingPoliciesTextBlock
Our Significant Accounting Policies
Revenue Recognition
We recognize revenue upon shipment or delivery to our customers based on written sales terms that do not allow for a right of return. However, our policy for DSD and certain chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, our policy for certain warehouse-distributed products is to replace damaged and out-of-date products. Based on our experience with this practice, we have reserved for anticipated damaged and out-of-date products. For additional unaudited information on our revenue recognition and related policies, including our policy on bad debts, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. We are exposed to concentration of credit risk from our customers, including Wal-Mart. In 2013, Wal-Mart (including Sam’s) represented approximately 11% of our total net revenue, including concentrate sales to our independent bottlers which are used in finished goods sold by them to Wal-Mart. We have not experienced credit issues with these customers.
Total Marketplace Spending
We offer sales incentives and discounts through various programs to customers and consumers. Total marketplace spending includes sales incentives, discounts, advertising and other marketing activities. Sales incentives and discounts are primarily accounted for as a reduction of revenue and totaled $34.7 billion in 2013 and 2012, and $34.6 billion in 2011. Sales incentives and discounts include payments to customers 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 $410 million as of December 28, 2013 and $335 million as of December 29, 2012, 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 2013, $3.7 billion in 2012 and $3.5 billion in 2011, including advertising expenses of $2.4 billion in 2013, $2.2 billion in 2012 and $1.9 billion in 2011. 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 $68 million and $88 million as of December 28, 2013 and December 29, 2012, 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 $9.4 billion in 2013, $9.1 billion in 2012 and $9.2 billion in 2011.
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 $197 million in 2013, $196 million in 2012 and $156 million in 2011. Net capitalized software and development costs were $1.1 billion as of December 28, 2013 and December 29, 2012.
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.
Research and Development
We engage in a variety of research and development activities and continue to invest to accelerate growth in these activities and to drive innovation globally. These activities principally involve production, processing and packaging and include: development of new ingredients and products; reformulation of existing products; improvement in the quality of existing products; improvement and modernization of manufacturing processes; improvements in product quality, safety and integrity; improvements in packaging technology; improvements in dispensing equipment; development and implementation of new technologies to enhance the quality and value of current and proposed product lines; efforts focused on identifying opportunities to transform and grow our product portfolio, including the development of sweetener and flavor innovation and recipes that reduce sodium levels in certain of our products. Consumer research is excluded from research and development costs and included in other marketing costs. Research and development costs were $665 million in 2013, $552 million in 2012 and $525 million in 2011 and are reported within selling, general and administrative expenses.
Other Significant Accounting Policies
Our other significant accounting policies are disclosed as follows:
•
Property, Plant and Equipment and Intangible Assets – Note 4, and for additional unaudited information on goodwill and other intangible assets see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
•
Income Taxes – Note 5, and for additional unaudited information see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
•
Stock-Based Compensation – Note 6.
•
Pension, Retiree Medical and Savings Plans – Note 7, and for additional unaudited information see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
•
Financial Instruments – Note 10, and for additional unaudited information, see “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
•
Inventories – Note 14. Inventories are valued at the lower of cost or market. Cost is determined using the average; first-in, first-out (FIFO) or last-in, first-out (LIFO) methods.
•
Translation of Financial Statements of Foreign Subsidiaries – Financial statements of foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Adjustments resulting from translating net assets are reported as a separate component of accumulated other comprehensive loss within common shareholders’ equity as currency translation adjustment.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued new accounting guidance that requires an entity to net its liability for unrecognized tax positions against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law. The provisions of this new guidance are effective as of the beginning of our 2014 fiscal year. We do not expect the adoption of this new guidance to have a material impact on our financial statements.
In February 2013, the FASB issued guidance that requires an entity to disclose information showing the effect of the items reclassified from accumulated other comprehensive income on the line items of net income. The provisions of this new guidance were effective prospectively as of the beginning of our 2013 fiscal year. Accordingly, we included enhanced footnote disclosure for the year ended December 28, 2013 in Note 13.
In July 2012, the FASB issued new accounting guidance that permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. An entity would continue to calculate the fair value of an indefinite-lived intangible asset if the asset fails the qualitative assessment, while no further analysis would be required if it passes. The provisions of the new guidance were effective for, and had no impact on, our 2013 annual indefinite-lived intangible asset impairment test results.
In December 2011, the FASB issued new disclosure requirements that are intended to enhance current disclosures on offsetting financial assets and liabilities. The new disclosures require an entity to disclose both gross and net information about derivative instruments accounted for in accordance with the guidance on derivatives and hedging that are eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The provisions of the new disclosure requirements are effective as of the beginning of our 2014 fiscal year. We do not expect the adoption of this new guidance to have a material impact on our financial statements.
REVENUE RECOGNITION concept us-gaap:RevenueRecognitionPolicyTextBlock
Revenue Recognition
We recognize revenue upon shipment or delivery to our customers based on written sales terms that do not allow for a right of return. However, our policy for DSD and certain chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, our policy for certain warehouse-distributed products is to replace damaged and out-of-date products. Based on our experience with this practice, we have reserved for anticipated damaged and out-of-date products. For additional unaudited information on our revenue recognition and related policies, including our policy on bad debts, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. We are exposed to concentration of credit risk from our customers, including Wal-Mart. In 2013, Wal-Mart (including Sam’s) represented approximately 11% of our total net revenue, including concentrate sales to our independent bottlers which are used in finished goods sold by them to Wal-Mart. We have not experienced credit issues with these customers.

*

Creative Commons License
This work is licensed under a Creative Commons License.

Valid CSS!