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Notes to Consolidated Financial Statements

Note 1. 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 based on our economic ownership interest. We do not control these other affiliates, as our ownership in these other affiliates is generally less than 50%. Equity income or loss from our anchor bottlers is recorded as bottling equity income in our income statement. Bottling equity income also includes any changes in our ownership interests of our anchor bottlers. Bottling equity income includes $147 million of pre-tax gains on our sales of PBG and PAS stock in 2008 and $174 million and $186 million of pre-tax gains on our sales of PBG stock in 2007 and 2006, respectively. See Note 8 for additional information on our significant noncontrolled bottling affiliates. Income or loss from other noncontrolled affiliates is recorded as a component of selling, general and administrative expenses. 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.

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, 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 on-going 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.

See “Our Divisions” below and for additional unaudited information on items affecting the comparability of our consolidated results, see “Items Affecting Comparability” in Management’s Discussion and Analysis.

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. Certain reclassifications were made to prior years’ amounts to conform to the 2008 presentation.

Our Divisions

We manufacture or use contract manufacturers, market and sell a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages, and foods in approximately 200 countries with our largest operations in North America (United States and Canada), Mexico and the United Kingdom. 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. 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

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 2008 was approximately 29% to FLNA, 4% to QFNA, 7% to LAF, 23% to PAB, 13% to UKEU, 13% to MEAA and 11% to corporate unallocated expenses. We had similar allocations of stock-based compensation expense to our divisions in 2007 and 2006. 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 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.

Derivatives

We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, fruit and other raw materials. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the resulting gains and losses reflected in corporate unallocated expenses. These derivatives hedge underlying commodity price risk and were not entered into for speculative purposes. These gains and losses are subsequently reflected in division results when the divisions take delivery of the underlying commodity. Therefore, division results reflect the contract purchase price of these commodities.

In 2007, we expanded our commodity hedging program to include derivative contracts used to mitigate our exposure to price changes associated with our purchases of fruit. In addition, in 2008, we entered into additional contracts to further reduce our exposure to price fluctuations in our raw material and energy costs. The majority of these contracts do not qualify for hedge accounting treatment and are marked to market with the resulting gains and losses recognized in corporate unallocated expenses within selling, general and administrative expenses. These gains and losses are subsequently reflected in divisional results.

Pepsico Organization Chart
                                     
   
2008
   
2007
   
2006
   
2008
   
2007
   
2006
 
 
Net Revenue
 
Operating Profit(a)
 
FLNA
$
12,507
 
$
11,586
 
$
10,844
 
$
2,959
 
$
2,845
 
$
2,615
 
QFNA
 
1,902
   
1,860
   
1,769
   
582
   
568
   
554
 
LAF
 
5,895
   
4,872
   
3,972
   
897
   
714
   
655
 
PAB
 
10,937
   
11,090
   
10,362
   
2,026
   
2,487
   
2,315
 
UKEU
 
6,435
   
5,492
   
4,750
   
811
   
774
   
700
 
MEAA
 
5,575
   
4,574
   
3,440
   
667
   
535
   
401
 
Total division
 
43,251
   
39,474
   
35,137
   
7,942
   
7,923
   
7,240
 
Corporate – net impact of mark-to-market on commodity hedges
 
   
   
   
(346
)
 
19
   
(18
)
Corporate – other
 
   
   
   
(661
)
 
(772
)
 
(720
)
 
$
43,251
 
$
39,474
 
$
35,137
 
$
6,935
 
$
7,170
 
$
6,502
 
(a) For information on the impact of restructuring and impairment charges on our divisions, see Note 3.
 

Net Revenue

Net Revenue

Division Operating Profit

Division Operating Profit

Corporate

Corporate includes costs of our corporate headquarters, centrally managed initiatives, such as our ongoing business transformation initiative and research and development projects, unallocated insurance and benefit programs, foreign exchange transaction gains and losses, certain commodity derivative gains and losses and certain other items.

Other Division Information

                                     
   
2008
   
2007
   
2006
   
2008
   
2007
   
2006
 
 
Total Assets
 
Capital Spending
 
FLNA
$
6,284
 
$
6,270
 
$
5,969
 
$
553
 
$
624
 
$
499
 
QFNA
 
1,035
   
1,002
   
1,003
   
43
   
41
   
31
 
LAF
 
3,023
   
3,084
   
2,169
   
351
   
326
   
235
 
PAB
 
7,673
   
7,780
   
7,129
   
344
   
450
   
516
 
UKEU
 
8,635
   
7,102
   
5,865
   
377
   
349
   
277
 
MEAA
 
3,961
   
3,911
   
2,975
   
503
   
413
   
299
 
Total division
 
30,611
   
29,149
   
25,110
   
2,171
   
2,203
   
1,857
 
Corporate(a)
 
2,729
   
2,124
   
1,739
   
275
   
227
   
211
 
Investments in bottling affiliates
 
2,654
   
3,355
   
3,081
   
   
   
 
 
$
35,994
 
$
34,628
 
$
29,930
 
$
2,446
 
$
2,430
 
$
2,068
 
(a) Corporate assets consist principally of cash and cash equivalents, short-term investments, derivative instruments and property, plant and equipment.
 
                                     
 
2008
 
2007
 
2006
   
2008
   
2007
   
2006
 
 
Amortization of Intangible Assets
 
Depreciation and Other Amortization
 
FLNA
$
9
 
$
9
 
$
9
 
$
441
 
$
437
 
$
432
 
QFNA
 
   
   
   
34
   
34
   
33
 
LAF
 
6
   
4
   
1
   
194
   
166
   
140
 
PAB
 
16
   
16
   
83
   
334
   
321
   
298
 
UKEU
 
22
   
18
   
17
   
199
   
181
   
167
 
MEAA
 
11
   
11
   
52
   
224
   
198
   
155
 
Total division
 
64
   
58
   
162
   
1,426
   
1,337
   
1,225
 
Corporate
 
   
   
   
53
   
31
   
19
 
 
$
64
 
$
58
 
$
162
 
$
1,479
 
$
1,368
 
$
1,244
 
                                     
   
2008
   
2007
   
2006
   
2008
   
2007
   
2006
 
 
Net Revenue(a)
 
Long-Lived Assets(b)
 
U.S.
$
22,525
 
$
21,978
 
$
20,788
 
$
12,095
 
$
12,498
 
$
11,515
 
Mexico
 
3,714
   
3,498
   
3,228
   
904
   
1,067
   
996
 
Canada
 
2,107
   
1,961
   
1,702
   
556
   
699
   
589
 
United Kingdom
 
2,099
   
1,987
   
1,839
   
1,509
   
2,090
   
1,995
 
All other countries
 
12,806
   
10,050
   
7,580
   
7,466
   
6,441
   
4,725
 
 
$
43,251
 
$
39,474
 
$
35,137
 
$
22,530
 
$
22,795
 
$
19,820
 
(a) Represents net revenue from businesses operating in these countries.
(b) 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.
 

Total Assets

Total Assets

Capital Spending

Capital Spending

Net Revenue

Net Revenue

Long-Lived Assets

Long-Lived Assets