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

Principles of Consolidation:

The consolidated financial statements include Mondelēz International, as well as our wholly owned and majority owned subsidiaries. We account for investments in which we exercise significant influence (20%-50% ownership interest) under the equity method of accounting. We use the cost method of accounting for investments in which we have an ownership interest of less than 20% and in which we do not exercise significant influence. Non-controlling interest in subsidiaries consists of the equity interest of non-controlling investors in consolidated subsidiaries of Mondelēz International. All intercompany transactions are eliminated.

Note 1.   Summary of Significant Accounting Policies

Description of Business:

Mondelēz International, Inc. (formerly Kraft Foods Inc.) was incorporated in 2000 in the Commonwealth of Virginia. Mondelēz International, Inc., through its subsidiaries (collectively “Mondelēz International,” “we,” “us” and “our”), sells food and beverage products to consumers in approximately 165 countries.

Discontinued Operation:

On October 1, 2012, we completed the spin-off of our former North American grocery business, Kraft Foods Group, Inc. (“Kraft Foods Group”) by distributing 100% of the outstanding shares of common stock of Kraft Foods Group to holders of our Common Stock (the “Spin-Off”). We retained our global snacks business along with other food and beverage categories. The divested Kraft Foods Group business is presented as a discontinued operation on the consolidated statements of earnings for all periods presented. The Kraft Foods Group other comprehensive earnings, changes in equity and cash flows are included within our consolidated statements of comprehensive earnings, equity and cash flows through October 1, 2012. See Note 2, Divestitures and Acquisition, for additional information.

Segment Reorganization:

Effective January 1, 2013, we reorganized our operations and management into five reportable operating segments:

•

Latin America (formerly in our Developing Markets segment)

•

Asia Pacific (formerly in our Developing Markets segment)

•

Eastern Europe, Middle East & Africa (“EEMEA”) (formerly in our Developing Markets segment)

•

Europe (now includes certain European operations previously managed within the EEMEA segment)

•

North America

We changed and flattened our operating structure to reflect our greater concentration of operations in high-growth emerging markets and to further enhance collaboration across regions, expedite decision making and drive greater efficiencies to fuel our growth. Coincident with the change in segment structure, segment operating income for our North America region also changed to include all U.S. pension plan expenses, a portion of which was previously excluded from segment operating results evaluated by management as the costs were centrally managed. We have presented our segment results reflecting these changes for all periods presented.

Principles of Consolidation:

The consolidated financial statements include Mondelēz International, as well as our wholly owned and majority owned subsidiaries. We account for investments in which we exercise significant influence (20%-50% ownership interest) under the equity method of accounting. We use the cost method of accounting for investments in which we have an ownership interest of less than 20% and in which we do not exercise significant influence. Non-controlling interest in subsidiaries consists of the equity interest of non-controlling investors in consolidated subsidiaries of Mondelēz International. All intercompany transactions are eliminated.

Accounting Calendar Changes:

In 2013, the majority of our operating subsidiaries report results as of the last calendar day of the period. In connection with moving to this common consolidation date, in the first quarter of 2013, we changed the consolidation date for our Europe segment from the last Saturday of each period to the last calendar day of each period. The change in the consolidation date for our Europe segment had a favorable impact of $37 million on net revenues and $6 million on operating income in 2013. At this time, primarily our North American operating subsidiaries continue to report results as of the last Saturday of the period.

Prior to these changes, in 2012 and 2011, the majority of our operating subsidiaries reported results as of the last Saturday of the year. In 2011, the last Saturday of the year also fell on December 31, and so our 2011 results included one more week of operating results (“53^rd week”) than 2013 or 2012, which each had 52 weeks. In 2011, we also changed the consolidation dates for certain operations of our Europe, Latin America and EEMEA segments. Previously, these operations primarily reported results two weeks prior to the end of the period. Subsequent to the 2011 changes, the majority of our Europe segment reported results as of the last Saturday of each period and certain operations within our Latin America and EEMEA segments began to report results as of the last calendar day of the period or the last Saturday of the period. These changes and the 53^rd week in 2011 resulted in a favorable impact to net revenues of $679 million and a favorable impact of $93 million to operating income in 2011.

 

We believe these changes are preferable and will improve business planning and financial reporting by better matching the close dates of the operating subsidiaries and bringing the reporting dates closer to the period-end date. As the effect to prior-period results was not material, we have not revised prior-period results.

Revision of Financial Statements:

In finalizing our 2013 results, we identified certain out-of-period, non-cash income tax-related errors in prior interim and annual periods. These errors are not material to any previously reported financial results; however, we have revised our first through third quarter 2013 and prior-year financial statements in these consolidated financial statements and accompanying notes to reflect these items in the appropriate periods. The net effect of the revision was to lower tax expense in years prior to 2013. The impact of the revision to 2013 results through the third quarter was a $59 million reduction of net earnings related to both current and prior-year corrections. The impact of the revision to fiscal years prior to 2013 was an increase in cumulative net earnings of $94 million.

We evaluated the cumulative impact of the errors on prior periods under the guidance in Accounting Standards Codification (“ASC”) 250-10, Accounting Changes and Error Corrections, and the guidance from the Securities Exchange Commission (“SEC”) in Staff Accounting Bulletin (“SAB”) No. 99, Materiality. We also evaluated the impact of correcting the errors through an adjustment to our financial statements under the guidance in ASC 250-10 relating to SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. We concluded that these errors were not material, individually or in the aggregate, to any of the prior reporting periods, and therefore, amendments of previously filed reports were not required. We plan to revise our quarterly results for 2013 when we file subsequent reports on Form 10-Q. Our revised quarterly financial data for the years ended December 31, 2013 and December 31, 2012 is presented in Note 18, Quarterly Financial Data (unaudited).

The effects of the prior period corrections on the annual consolidated financial statements are detailed below. For periods prior to January 1, 2011, our consolidated statements of equity reflect a $28 million cumulative correction to retained earnings as of January 1, 2011.

Consolidated Statement of Earnings

 

		For the Years Ended December 31,
		2012												2011
		Reported				Correction				Revised				Reported				Correction				Revised
		(in millions, except per share data)
Provision for income taxes			207				(39	)			168				143				(27	)			116
Earnings from continuing operations			1,567				39				1,606				1,737				27				1,764
Net earnings			3,055				39				3,094				3,547				27				3,574
Net earnings attributable to Mondelēz International			3,028				39				3,067				3,527				27				3,554
Net earnings attributable to Mondelēz International:
Per share, basic (continuing operations)		$	0.87			$	0.03			$	0.90			$	0.97			$	0.02			$	0.99
Per share, diluted (continuing operations)		$	0.86			$	0.02			$	0.88			$	0.97			$	0.02			$	0.99
Net earnings attributable to Mondelēz International:
Per share, basic		$	1.70			$	0.03			$	1.73			$	2.00			$	0.01			$	2.01
Per share, diluted		$	1.69			$	0.02			$	1.71			$	1.99			$	0.02			$	2.01

 

Consolidated Statement of Comprehensive Earnings

 

		For the Years Ended December 31,
		2012												2011
		Reported				Correction				Revised				Reported				Correction				Revised
		(in millions)
Net earnings			3,055				39				3,094				3,547				27				3,574
Translation adjustment			791				(32	)			759				(1,245	)			–				(1,245	)
Total other comprehensive losses			(298	)			(32	)			(330	)			(2,757	)			–				(2,757	)
Comprehensive earnings			2,757				7				2,764				790				27				817
Comprehensive earnings attributable to Mondelēz International			2,724				7				2,731				780				27				807

Consolidated Balance Sheet

 

		As of December 31,
		2012
		Reported				Correction				Revised
		(in millions)
Current deferred income taxes			542				51				593
Total current assets			15,622				51				15,673
Goodwill			25,801				(61	)			25,740
Other assets			1,475				9				1,484
Total Assets			75,478				(1	)			75,477
Other current liabilities			2,858				(3	)			2,855
Total current liabilities			14,873				(3	)			14,870
Non-current deferred income taxes			6,302				(67	)			6,235
Other liabilities			3,038				8				3,046
Total Liabilities			43,123				(62	)			43,061
Retained earnings			10,457				94				10,551
Accumulated other comprehensive losses			(2,633	)			(33	)			(2,666	)
Total Mondelēz International Shareholders’ Equity			32,215				61				32,276

Consolidated Statements of Cash Flows

 

		For the Years Ended December 31,
		2012												2011
		Reported				Correction				Revised				Reported				Correction				Revised
		(in millions)
Net earnings			3,055				39				3,094				3,547				27				3,574
Deferred income tax (benefit) / provision			410				(41	)			369				(351	)			–				(351	)
Other non-cash expense, net			48				(4	)			44				81				1				82
Change in other current liabilities			(1,166	)			6				(1,160	)			676				(28	)			648
Net cash provided by operating activities			3,923				–				3,923				4,520				–				4,520

 

Use of Estimates:

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require us to make estimates and assumptions that affect a number of amounts in our consolidated financial statements. Significant accounting policy elections, estimates and assumptions include, among others, pension and benefit plan assumptions, valuation assumptions of goodwill and intangible assets, useful lives of long-lived assets, marketing program accruals, insurance and self-insurance reserves and income taxes. We base our estimates on historical experience and other assumptions that we believe are reasonable. If actual amounts differ from estimates, we include the revisions in our consolidated results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material effect on our consolidated financial statements.

Foreign Currency, including Highly Inflationary Accounting:

We translate the results of operations of our foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. We record currency translation adjustments as a component of equity. Realized exchange gains and losses on transactions are recorded in earnings.

As prescribed by U.S. GAAP for highly inflationary economies, we began accounting for the results of our Venezuelan subsidiaries in U.S. dollars on January 1, 2010. We use the official Venezuelan bolivar exchange rate to translate the results of our Venezuelan operations into U.S. dollars. During 2012 and 2011, we recorded immaterial foreign currency impacts related to our highly inflationary accounting for Venezuela.

On February 8, 2013, the Venezuelan government announced the devaluation of the official Venezuelan bolivar exchange rate from 4.30 bolivars to 6.30 bolivars to the U.S. dollar and the elimination of the second-tier, government-regulated SITME exchange rate previously applied to value certain types of transactions. In connection with the announced changes, we recorded a $54 million unfavorable foreign currency charge related to the devaluation of our net monetary assets in Venezuela. The charge was recorded in selling, general and administrative expenses within our Latin America segment. We also incurred net unfavorable devaluation-related foreign currency impacts within our pre-tax earnings of $67 million during the year ended December 31, 2013 related to translating the earnings of our Venezuelan subsidiary to the U.S. dollar at the new exchange rate.

On March 19, 2013, the Venezuelan government announced a new auction-based currency transaction program referred to as SICAD. SICAD allows entities in specific sectors to bid for U.S. dollars to be used for specified import transactions. The minimum exchange rate to be offered under SICAD is 6.30 bolivars to the U.S. dollar. As of the week ended December 30, 2013, the published SICAD rate offered was 11.30 bolivars to the U.S. dollar. To date, availability of U.S. dollars at either exchange rate continues to be limited.

On January 24, 2014, the Venezuelan government announced the expansion of the SICAD auction program to prospective dividends and royalties and new profit margin controls. As our Venezuelan subsidiaries declare dividends or pay royalties in the future, based on the availability of U.S. dollars exchanged under the SICAD program, the realized exchange losses on payments made in U.S. dollars would be recognized in earnings. On profit level controls, we continue to evaluate the announced measures and will look to protect net revenues and profitability.

In light of the current difficult macroeconomic environment in Venezuela, we continue to monitor and actively manage our investment and exposures in Venezuela. In 2013, our net revenues in Venezuela were approximately $800 million. At December 31, 2013, our net monetary assets denominated in the Venezuelan bolivar were $257 million in U.S. dollars applying the official exchange rate. If the official exchange rate were to devalue further or if the currently less favorable SICAD exchange rate were extended to apply to a greater portion of our net monetary assets in Venezuela, we could recognize a material devaluation charge in earnings. At this time, this has not occurred and we continue to monitor the currency developments in Venezuela and to take protective measures against currency devaluation such as converting monetary assets into non-monetary assets which we can use in our business.

On January 23, 2014, the Central Bank of Argentina adjusted its currency policy, removed its currency stabilization measures and allowed the Argentine peso exchange rate to float relative to the U.S. dollar. The value of the Argentine peso relative to the U.S. dollar fell by 15% on that day and further volatility in the exchange rate is likely. At this time, based on the current state of Argentine currency rules and regulations, the business environment remains challenging, however, we do not expect the existing controls and restrictions to have a material adverse effect on our business, financial condition or results of operations. In 2013, our net revenues in Argentina were approximately $800 million. We continue to monitor developments in Argentina and explore additional measures to protect our operations and net monetary position there.

 

Cash and Cash Equivalents:

Cash and cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less.

Inventories:

Inventories are stated at the lower of cost or market. We value all our inventories using the average cost method. We also record inventory allowances for overstocked and obsolete inventories due to ingredient and packaging changes.

Long-Lived Assets:

Property, plant and equipment are stated at historical cost and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from 3 to 20 years and buildings and building improvements over periods up to 40 years.

We review long-lived assets, including amortizable intangible assets, for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of assets held for use, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, the loss is calculated based on estimated fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

Software Costs:

We capitalize certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are included in property, plant and equipment and amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed seven years.

Goodwill and Non-Amortizable Intangible Assets:

We test goodwill and non-amortizable intangible assets for impairment at least annually on October 1. We assess goodwill impairment risk by first performing a qualitative review of entity-specific, industry, market and general economic factors for each reporting unit. If significant potential goodwill impairment risk exists for a specific reporting unit, we apply a two-step quantitative test. The first step compares the reporting unit’s estimated fair value with its carrying value. We estimate a reporting unit’s fair value using a 20-year projection of discounted cash flows which incorporates planned growth rates, market-based discount rates and estimates of residual value. For reporting units within our North America and Europe geographic units, we used a market-based, weighted-average cost of capital of 6.6% to discount the projected cash flows of those operations. For our Latin America, Asia Pacific and EEMEA reporting units, we used a risk-rated discount rate of 9.6%. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, industry and economic conditions and our actual results and conditions may differ over time. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value.

We test non-amortizable intangible assets for impairment by first performing a qualitative review by assessing events and circumstances that could affect the fair value or carrying value of the indefinite-lived intangible asset. If significant potential impairment risk exists for a specific non-amortizable intangible asset, we quantitatively test for impairment by comparing the fair value of each intangible asset with its carrying value. Fair value of non-amortizable intangible assets is determined using planned growth rates, market-based discount rates and estimates of royalty rates. If the carrying value of the asset exceeds its fair value, the intangible asset is considered impaired and is reduced to its estimated fair value. We record intangible asset impairment charges within asset impairment and exit costs.

Definite-lived intangible assets are amortized over their estimated useful lives and evaluated for impairment as long-lived assets.

Insurance and Self-Insurance:

We use a combination of insurance and self-insurance for a number of risks, including workers’ compensation, general liability, automobile liability, product liability and our obligation for employee healthcare benefits. We estimate the liabilities associated with these risks by evaluating and making judgments about historical claims experience and other actuarial assumptions and the estimated impact on future results.

 

Revenue Recognition:

We recognize revenues when title and risk of loss pass to customers, which generally occurs upon shipment or delivery of goods. Revenues are recorded net of consumer incentives and trade promotions and include all shipping and handling charges billed to customers. Our shipping and handling costs are classified as part of cost of sales. A provision for product returns and allowances for bad debts is also recorded as reductions to revenues within the same period that the revenue is recognized.

Marketing and Research and Development:

We promote our products with advertising, consumer incentives and trade promotions. These programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. We expense advertising costs either in the period the advertising first takes place or as incurred. Consumer incentive and trade promotion activities are recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization and redemption rates. For interim reporting purposes, advertising and consumer incentive expenses are charged to operations as a percentage of volume, based on estimated volume and related expense for the full year. We do not defer costs on our year-end consolidated balance sheet and all marketing costs are recorded as an expense in the year incurred. Advertising expense was $1,721 million in 2013, $1,815 million in 2012 and $1,860 million in 2011. We expense product research and development costs as incurred. Research and development expense was $471 million in 2013, $462 million in 2012 and $511 million in 2011. We record marketing and research and development expenses within selling, general and administrative expenses.

Environmental Costs:

Throughout the countries in which we do business, we are subject to local, national and multi-national environmental laws and regulations relating to the protection of the environment. We have programs across our business units designed to meet applicable environmental compliance requirements.

In the United States, the laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). CERCLA imposes joint and severable liability on each potentially responsible party. As of December 31, 2013 and 2012, our subsidiaries were involved in one active proceeding in the U.S. under a state equivalent of CERCLA related to our current operations. As of December 31, 2013 and 2012, we had accrued an immaterial amount for environmental remediation. Based on information currently available, we believe that the ultimate resolution of the existing environmental remediation and our compliance with environmental laws and regulations will not have a material effect on our financial results.

Employee Benefit Plans:

We provide a range of benefits to our current and retired employees. Depending upon jurisdictions, tenure, presence of a union, job level and other factors, these include pension benefits, postretirement health care benefits and postemployment benefits, consisting primarily of severance. We provide pension coverage for certain employees of our non-U.S. subsidiaries through separate plans. Local statutory requirements govern many of these plans. For salaried and non-union hourly employees hired in the U.S. after January 1, 2009, we discontinued benefits under our U.S. pension plans, and we replaced them with an enhanced company contribution to our employee savings plan. Additionally, we will be freezing the U.S. pension plans for current salaried and non-union hourly employees effective December 31, 2019. Pension accruals for all salaried and non-union employees who are currently earning pension benefits will end on December 31, 2019, and continuing pay and service will be used to calculate the pension benefits through December 31, 2019. Our U.S., Canadian and U.K. subsidiaries provide health care and other benefits to most retired employees. Local government plans generally cover health care benefits for retirees outside the U.S., Canada, and United Kingdom. Our postemployment benefit plans cover most salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees.

Financial Instruments:

We use certain financial instruments to manage our foreign currency exchange rate, commodity price and interest rate risks. We monitor and manage these exposures as part of our overall risk management program which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. A principal objective of our risk management strategies is to reduce significant, unanticipated earnings fluctuations that may arise from volatility in foreign currency exchange rates, commodity prices and interest rates, principally through the use of derivative instruments.

 

We use a combination of primarily foreign currency forward contracts, futures, options and swaps; commodity forward contracts, futures and options; and interest rate swaps to manage our exposure to cash flow variability, protect the value of our existing foreign currency assets and liabilities and protect the value of our debt. See Note 9, Financial Instruments, to the consolidated financial statements for more information on the types of derivative instruments we use.

We record derivative financial instruments at fair value in our consolidated balance sheets within other current assets or other current liabilities due to their relatively short-term duration. Cash flows from derivative instruments are classified in the consolidated statements of cash flows based on the nature of the derivative instrument. Changes in the fair value of a derivative that is designated as a cash flow hedge, to the extent that the hedge is effective, are recorded in accumulated other comprehensive earnings / (losses) and reclassified to earnings when the hedged item affects earnings. Changes in fair value of economic hedges and the ineffective portion of all hedges are recognized in current period earnings. Changes in the fair value of a derivative that is designated as a fair value hedge, along with the changes in the fair value of the related hedged asset or liability, are recorded in earnings in the same period. We use foreign currency denominated debt to hedge a portion of our net investment in foreign operations against adverse movements in exchange rates, with changes in the value of the debt recorded within currency translation adjustment in accumulated other comprehensive earnings / (losses).

In order to qualify for hedge accounting, a specified level of hedging effectiveness between the derivative instrument and the item being hedged must exist at inception and throughout the hedged period. We must also formally document the nature of and relationship between the derivative and the hedged item, as well as our risk management objectives, strategies for undertaking the hedge transaction and method of assessing hedge effectiveness. Additionally, for a hedge of a forecasted transaction, the significant characteristics and expected term of the forecasted transaction must be specifically identified, and it must be probable that the forecasted transaction will occur. If it is no longer probable that the hedged forecasted transaction will occur, we would recognize the gain or loss related to the derivative in earnings.

When we use derivatives, we are exposed to credit and market risks. Credit risk exists when a counterparty to a derivative contract might fail to fulfill its performance obligations under the contract. We minimize our credit risk by entering into transactions with counterparties with high quality, investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties. We also maintain a policy of requiring that all significant, non-exchange traded derivative contracts with a duration of one year or longer are governed by an International Swaps and Derivatives Association master agreement. Market risk exists when the value of a derivative or other financial instrument might be adversely affected by changes in market conditions and foreign currency exchange rates, commodity prices, or interest rates. We manage market risk by limiting the types of derivative instruments and derivative strategies we use and the degree of market risk that we plan to hedge through the use of derivative instruments.

Commodity cash flow hedges – We are exposed to price risk related to forecasted purchases of certain commodities that we primarily use as raw materials. We enter into commodity forward contracts primarily for wheat, soybean and vegetable oils, sugar and other sweeteners and cocoa. Commodity forward contracts generally are not subject to the accounting requirements for derivative instruments and hedging activities under the normal purchases exception. We also use commodity futures and options to hedge the price of certain input costs, including wheat, soybean and vegetable oils, sugar and other sweeteners and cocoa. Some of these derivative instruments are highly effective and qualify for hedge accounting treatment. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes.

Foreign currency cash flow hedges – We use various financial instruments to mitigate our exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. These instruments may include foreign exchange forward contracts, futures, options and swaps. Based on the size and location of our businesses, we use these instruments to hedge our exposure to certain currencies, including the euro, pound sterling and Canadian dollar.

Interest rate cash flow and fair value hedges – We manage interest rate volatility by modifying the pricing or maturity characteristics of certain liabilities so that the net impact on expense is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate liabilities appreciate or depreciate in market value. We expect the effect of this unrealized appreciation or depreciation to be substantially offset by our gains or losses on the derivative instruments that are linked to these hedged liabilities. We use derivative instruments, including interest rate swaps that have indices related to the pricing of specific liabilities as part of our interest rate risk management strategy. As a matter of policy, we do not use highly leveraged derivative instruments for interest rate risk management. We use interest rate swaps to economically convert a portion of our fixed-rate debt into variable-rate debt. Under the interest rate swap contracts, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts, which is calculated based on an agreed-upon notional amount. We also use interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment.

Hedges of net investments in foreign operations – We have numerous investments in our foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in foreign currency exchange rates. We use foreign currency denominated debt to hedge our net investment in foreign operations against adverse movements in exchange rates. We designated our euro and pound sterling denominated borrowings as a net investment hedge of a portion of our overall European operations. The gains and losses on our net investment in these designated European operations are economically offset by losses and gains on our euro and pound sterling denominated borrowings. The change in the debt’s value is recorded in the currency translation adjustment component of accumulated other comprehensive earnings / (losses).

Income Taxes:

We recognize tax benefits in our financial statements when uncertain tax positions are assessed more likely than not to be sustained upon audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

We recognize deferred tax assets for deductible temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.

New Accounting Pronouncements:

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which requires companies to present an unrecognized tax benefit as a reduction to a deferred tax asset when the right of offset exists. The update will be effective for fiscal years beginning after December 15, 2013. We currently comply with the prescribed accounting presentation so that adopting the new guidance will have no impact on the presentation of our financial statements.

In July 2013, the FASB issued an accounting standards update which permits the inclusion of the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes in addition to the interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (“LIBOR”). The guidance is effective for new or redesignated hedging relationships we enter into on or after July 17, 2013. The adoption of this guidance did not have an impact on our financial statements, but will allow us to use another U.S. benchmark interest rate in derivative transactions we designate as hedges for accounting purposes in the future.

In March 2013, the FASB issued an accounting standards update on a parent company’s accounting for the cumulative translation adjustment (“CTA”) upon derecognition of certain subsidiaries or groups of assets within a foreign entity or an investment in a foreign entity. We adopted the new requirement on January 1, 2014. Application of the standard is primarily expected to impact the net gain or loss recognized on divestitures of foreign subsidiaries after January 1, 2014.

In February 2013, the FASB issued an accounting standards update, clarifying how entities are required to measure obligations resulting from joint and several liability arrangements. We adopted the new standard on January 1, 2014 and it did not have an effect on our consolidated financial results as we do not have any material arrangements that fall within the scope of the standard at this time.

In February 2013, the FASB issued an accounting standards update, clarifying the reporting of significant reclassifications from components of accumulated other comprehensive income (“AOCI”) and the related impacts primarily on the statement of earnings. The guidance is effective for fiscal and interim reporting periods beginning after December 15, 2012. We adopted the guidance effective January 1, 2013 and disclose reclassifications from accumulated other comprehensive income and their impact on our condensed consolidated financial statements in Note 14, Reclassifications from Accumulated Other Comprehensive Income.

Reclassifications:

Our condensed consolidated cash flow statements reflect commercial paper with original maturities greater than 90 days on a gross basis in both periods. We also reclassified 2012 and prior period segment information to reflect our business and segment reorganization discussed in Note 1, Summary of Significant Accounting Policies, and Note 17, Segment Reporting.

 

Subsequent Events:

We evaluated subsequent events and included all accounting and disclosure requirements related to material subsequent events in our consolidated financial statements and related notes. See Notes 1. Summary of Significant Accounting Policies and 8. Debt and Borrowing Arrangements.

Revenue Recognition:

We recognize revenues when title and risk of loss pass to customers, which generally occurs upon shipment or delivery of goods. Revenues are recorded net of consumer incentives and trade promotions and include all shipping and handling charges billed to customers. Our shipping and handling costs are classified as part of cost of sales. A provision for product returns and allowances for bad debts is also recorded as reductions to revenues within the same period that the revenue is recognized.