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Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Certain reclassifications were made to 1997 and 1996 amounts to conform with the 1998 presentation.
Principles of Consolidation
Revenue Recognition
Marketing Costs
Stock-Based Compensation
Derivative Instruments
The differential to be paid or received on a currency swap related to non-U.S. dollar denominated debt is charged or credited to income as the differential occurs. This is fully offset by the corresponding gain or loss recognized in income on the currency translation of the debt, as both amounts are based upon the same exchange rates. The currency differential not yet settled in cash is reflected in the Consolidated Balance Sheet under the appropriate current or noncurrent receivable or payable caption. If a currency swap position were to be terminated prior to maturity, the gain or loss realized upon termination would be immediately recognized in income.
Gains and losses on futures contracts designated as hedges of future commodity purchases are deferred and included in the cost of the hedged commodity when purchased. Changes in the value of such contracts used to hedge commodity purchases are highly correlated to the changes in the value of the purchased commodity. If the degree of correlation between the futures contracts and the purchased commodity were to significantly diminish during the contract term, subsequent changes in the value of the futures contracts would be recognized in income. If a futures contract were to be terminated, the gain or loss realized upon termination would be included in the cost of the hedged commodity when purchased.
Cash Equivalents
Inventories
Property, Plant and Equipment
Intangible Assets
Recoverability of Long-Lived Assets to be Held and Used in the Business
Accounting and Reporting Changes
As of December 28, 1997, we adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, issued in June 1997. SFAS 130 requires the reporting and display of comprehensive income, which is composed of net income and other comprehensive income or loss items, in a full set of general purpose financial statements. Other comprehensive income or loss items are revenues, expenses, gains and losses that under generally accepted accounting principles are excluded from net income and reflected as a component of equity, such as currency translation and minimum pension liability adjustments.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is effective for our fiscal year beginning 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in the Consolidated Balance Sheet and measure those instruments at fair value. We are currently assessing the effects of adopting SFAS 133, and have not yet made a determination of the impact adoption will have on our consolidated financial statements.
The financial statements include the consolidated accounts of PepsiCo, Inc. and its controlled affiliates. Intercompany balances and transactions have been eliminated. Investments in Unconsolidated Affiliates, over which we exercise significant influence but not control, are accounted for by the equity method. Our share of the net income or loss of such unconsolidated affiliates is included in selling, general and administrative expenses.
We recognize revenue when products are delivered to customers. Sales terms generally do not allow a right to return.
Marketing costs are reported in selling, general and administrative expenses and include costs of advertising and other marketing activities. Advertising expenses were $1.9 billion in 1998 and $1.8 billion in both 1997 and 1996. Deferred advertising expense, classified as prepaid expenses in the Consolidated Balance Sheet, was $34 million in 1998 and $53 million in 1997. Deferred advertising costs are expensed in the year first used and consist of:
We measure stock-based compensation cost as the excess of the quoted market price of PepsiCo capital stock at the grant date over the amount the employee must pay for the stock (exercise price). Our policy is to generally grant stock options with an exercise price equal to the stock price at the date of grant and accordingly, no compensation cost is recognized.
The interest differential to be paid or received on an interest rate swap is recognized as an adjustment to interest expense as the differential occurs. The interest differential not yet settled in cash is reflected in the Consolidated Balance Sheet as a receivable or payable under the appropriate current asset or liability caption. If an interest rate swap position were to be terminated, the gain or loss realized upon termination would be deferred and amortized to interest expense over the remaining term of the underlying debt instrument it was intended to modify. However, if the underlying debt instrument were to be settled prior to maturity, the gain or loss realized upon termination would be recognized immediately.
Cash equivalents represent funds temporarily invested, with maturities of three months or less. All other investment portfolios are primarily classified as short-term investments.
Inventories are valued at the lower of cost (computed on the average, first-in, first-out or last-in, first-out method) or net realizable value.
Property, plant and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.
Intangible assets are amortized on a straight-line basis over appropriate periods, generally ranging from 20 to 40 years.
All long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows.
As of December 28, 1997, we adopted Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, issued by The American Institute of Certified Public Accountants in March 1998. The SOP requires capitalization of certain costs related to computer software developed or obtained for internal use which we had previously expensed in
selling, general and administrative expenses. The amount capitalized under the SOP in 1998 was $42 million.