Revenue Recognition Accounting Policy
PepsiCo's products are sold for cash or on credit terms. PepsiCo's credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery in the U.S., and generally within 30 to 90 days internationally, and may allow discounts for early payment. PepsiCo recognizes revenue upon shipment or delivery to customers based on written sales terms that do not allow for a right of return. However, PepsiCo's policy for DSD and certain chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, PepsiCo's policy for certain warehouse-distributed products is to replace damaged and out-of-date products. Based on experience with this practice, PepsiCo has reserved for anticipated damaged and out-of-date products.
PepsiCo's policy is to provide customers with product when needed. In fact, PepsiCo's commitment to freshness and product dating serves to regulate the quantity of product shipped or delivered. In addition, DSD products are placed on the shelf by PepsiCo's employees with customer shelf space and storerooms limiting the quantity of product. For product delivered through other distribution networks, PepsiCo monitors customer inventory levels.
PepsiCo offers sales incentives and discounts through various programs to customers and consumers. Sales incentives and discounts are accounted for as a reduction of revenue and totaled $34.6 billion in 2011, $29.1 billion in 2010 and $12.9 billion in 2009. Sales incentives include payments to customers for performing merchandising activities on PepsiCo's 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. A number of PepsiCo's sales incentives, such as bottler funding to independent bottlers and customer volume rebates, are based on annual targets, and accruals are established during the year for the expected payout. These accruals are based on contract terms and PepsiCo's historical experience with similar programs and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. The terms of most of PepsiCo's incentive arrangements do not exceed a year, and therefore do not require highly uncertain long-term estimates. Certain arrangements, such as fountain pouring rights and sponsorship contracts, may extend beyond one year. Payments made to obtain these rights are recognized over the shorter of the economic or contractual life, as a reduction of revenue, and the remaining balances of $288 million as of December 31, 2011 and $296 million as of December 25, 2010 are included in current assets and other assets on PepsiCo's balance sheet.
For interim reporting, PepsiCo's policy is to allocate forecasted full-year sales incentives for most of programs to each of interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on PepsiCo's forecasted sales incentives for the full year and the proportion of each interim period's actual gross revenue to forecasted annual gross revenue. Based on PepsiCo's review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized in the interim period as they are identified. In addition, PepsiCo applies a similar allocation methodology for interim reporting purposes for other marketplace spending, which includes the costs of advertising and other marketing activities. PepsiCo's annual financial statements are not impacted by this interim allocation methodology.
PepsiCo estimates and reserve for bad debt exposure based on experience with past due accounts and collectibility, the aging of accounts receivable and analysis of customer data. Bad debt expense is classified within selling, general and administrative expenses in PepsiCo's income statement.
Source: PepsiCo Inc., Annual Report
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