PepsiCo Inc. (PEP) | Analysis of Income Taxes

Income Tax Accounting Policy

Annual tax rate is based on income, statutory tax rates and tax planning opportunities available to PepsiCo in the various jurisdictions in which PepsiCo operates. Significant judgment is required in determining PepsiCo's annual tax rate and in evaluating tax positions. PepsiCo establishes reserves when, despite belief that tax return positions are fully supportable, PepsiCo believes that certain positions are subject to challenge and that PepsiCo may not succeed. PepsiCo adjusts these reserves, as well as the related interest, in light of changing facts and circumstances, such as the progress of a tax audit.

An estimated effective tax rate for a year is applied to PepsiCo's quarterly operating results. In the event there is a significant or unusual item recognized in PepsiCo's quarterly operating results, the tax attributable to that item is separately calculated and recorded at the same time as that item. PepsiCo considers the tax adjustments from the resolution of prior year tax matters to be among such items.

Tax law requires items to be included in PepsiCo's tax returns at different times than the items are reflected in financial statements. As a result, PepsiCo's annual tax rate reflected in financial statements is different than that reported in tax returns (cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in PepsiCo's tax return, and some differences reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which PepsiCo has already recorded the tax benefit in income statement. PepsiCo establishes valuation allowances for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities generally represent tax expense recognized in financial statements for which payment has been deferred, or expense for which PepsiCo has already taken a deduction in tax return but have not yet recognized as expense in financial statements.

In 2011, PepsiCo's annual tax rate was 26.8% compared to 23.0% in 2010. The tax rate in 2011 increased 3.8 percentage points primarily reflecting the prior year non-taxable gain and reversal of deferred taxes attributable to PepsiCo's previously held equity interests in connection with acquisitions of PBG and PAS.

Source: PepsiCo Inc., Annual Report

Income Tax Expense (Benefit)

PepsiCo Inc., income tax expense (benefit), continuing operations

Source: Based on data from PepsiCo Inc. Annual Reports

Item	Description	The company
Current	The component of income tax expense for the period representing amounts of income taxes paid or payable (or refundable) for the period for all income tax obligations as determined by applying the provisions of relevant enacted tax laws to relevant amounts of taxable income (loss) from continuing operations.	PepsiCo Inc.'s current declined from 2009 to 2010 and from 2010 to 2011.
Deferred	The component of income tax expense for the period representing the net change in the entity's deferred tax assets and liabilities pertaining to continuing operations.	PepsiCo Inc.'s deferred declined from 2009 to 2010 but then increased from 2010 to 2011 exceeding 2009 level.
Provision for income taxes	The sum of the current income tax expense (benefit) and the deferred income tax expense (benefit) pertaining to pretax income (loss) from continuing operations; income tax expense (benefit) may include interest and penalties on tax uncertainties based on the entity's accounting policy.	PepsiCo Inc.'s provision for income taxes declined from 2009 to 2010 but then increased from 2010 to 2011 exceeding 2009 level.

Effective Income Tax Rate (EITR)

PepsiCo Inc., effective income tax rate (EITR) reconciliation

Source: Based on data from PepsiCo Inc. Annual Reports

Item	Description	The company
Annual tax rate	A ratio calculated by dividing the reported amount of income tax expense attributable to continuing operations for the period by GAAP-basis pretax income from continuing operations.	PepsiCo Inc.'s annual tax rate declined from 2009 to 2010 but then increased from 2010 to 2011 exceeding 2009 level.

Deferred Tax Assets (Liabilities), Net

PepsiCo Inc., deferred tax assets (liabilities), net

Source: Based on data from PepsiCo Inc. Annual Reports

Item	Description	The company
Gross deferred tax assets	The sum of the tax effects as of the balance sheet date of the amounts of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws (before the valuation allowance, if any, to reduce such sum amount to net realizable value). Includes any tax benefit realized in deferred tax assets for significant impacts of tax planning strategies.	PepsiCo Inc.'s gross deferred tax assets increased from 2009 to 2010 and from 2010 to 2011.
Deferred tax assets, net	The aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; net of deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value.	PepsiCo Inc.'s deferred tax assets, net increased from 2009 to 2010 but then slightly declined from 2010 to 2011.
Net deferred tax assets (liabilities)	For entities that net deferred tax assets and tax liabilities, represents the unclassified net amount of deferred tax assets and liabilities as of the balance sheet date, which result from applying the applicable enacted tax rate to net temporary differences and carryforwards pertaining to assets or liabilities. A temporary difference is a difference between the tax basis of an asset or liability and its carrying amount in the financial statements prepared in accordance with generally accepted accounting principles that will reverse in ensuing periods.	PepsiCo Inc.'s net deferred tax assets (liabilities) declined from 2009 to 2010 and from 2010 to 2011.