Note 1 — Basis of Presentation and Our Divisions

Basis of Presentation

The accompanying financial statements have been prepared in accordance with U.S. GAAP and 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 using the equity method based on our economic ownership interest, our ability to exercise significant influence over the operating or financial decisions of these affiliates or our ability to direct their economic resources. We do not control these other affiliates, as our ownership in these other affiliates is generally 50% or less. Intercompany balances and transactions are eliminated.

Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw materials 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 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, share-based compensation, pension and retiree medical accruals, amounts and 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 ongoing 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.

Effective as of the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries from our consolidated financial statements and began accounting for our investments in our wholly-owned Venezuelan subsidiaries and joint venture using the cost method of accounting. See subsequent discussion of “Venezuela.”

Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years. Our fiscal 2016 results included an extra week. While our North America results are reported on a weekly calendar basis, most of our international operations report on a monthly calendar basis. Certain operations in our ESSA segment report on a weekly calendar basis. The following chart details our quarterly reporting schedule:



Quarter	United States and Canada	International
First Quarter	12 weeks	January, February
Second Quarter	12 weeks	March, April and May
Third Quarter	12 weeks	June, July and August
Fourth Quarter	16 weeks (17 weeks for 2016)	September, October, November and December

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

Unless otherwise noted, tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Certain reclassifications were made to the prior years’ financial statements to conform to the current year presentation, including the adoption of the recently issued accounting pronouncements disclosed in Note 2.

Our Divisions

Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market, distribute and sell a wide variety of convenient and enjoyable beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories with our largest operations in North America, Mexico, Russia, the United Kingdom and Brazil. Division results are based on how our Chief Executive Officer assesses the performance of and allocates resources to our divisions and are considered our reportable segments. For additional unaudited information on our divisions, see “Our Operations” contained in “Item 1. Business.” The accounting policies for the divisions are the same as those described in Note 2, except for the following allocation methodologies:


•	share-based compensation expense;


•	pension and retiree medical expense; and


•	derivatives.

Share-Based Compensation Expense

Our divisions are held accountable for share-based compensation expense and, therefore, this expense is allocated to our divisions as an incremental employee compensation cost. The allocation of share-based compensation expense in 2017 was approximately 13% to FLNA, 1% to QFNA, 18% to NAB, 7% to Latin America, 9% to ESSA, 9% to AMENA and 43% to corporate unallocated expenses. In 2016, the allocation of share-based compensation expense was approximately 14% to FLNA, 2% to QFNA, 22% to NAB, 7% to Latin America, 11% to ESSA, 10% to AMENA and 34% to corporate unallocated expenses. We had similar allocations of share-based compensation expense to our divisions in 2015. 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 fixed discount rates, as well as amortization of costs related to certain pension plan amendments and gains and losses due to demographics (including mortality assumptions and salary experience) are reflected in division results. Division results also include interest costs, measured at fixed discount rates, 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 included in division results and 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 agricultural products, energy and metals. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses. These derivatives hedge underlying commodity price risk and were not entered into for trading or speculative purposes.

Net revenue and operating profit/(loss) of each division are as follows:



	Net Revenue						Operating Profit/(Loss)^(a)
	2017		2016		2015		2017			2016			2015
FLNA	$	15,798	$	15,549	$	14,782	$	4,823		$	4,659		$	4,304
QFNA	2,503		2,564		2,543		642			653			560
NAB	20,936		21,312		20,618		2,707			2,959			2,785
Latin America	7,208		6,820		8,228		908			887			(206		)
ESSA	11,050		10,216		10,510		1,354			1,108			1,081
AMENA	6,030		6,338		6,375		1,073			619			941
Total division	63,525		62,799		63,056		11,507			10,885			9,465
Corporate unallocated	—		—		—		(998		)	(1,100		)	(1,112		)
	$	63,525	$	62,799	$	63,056	$	10,509		$	9,785		$	8,353


(a)	For further unaudited information on certain items that impacted our financial performance, see “Item 6. Selected Financial Data.”

Corporate Unallocated

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

Other Division Information

Total assets and capital spending of each division are as follows:



	Total Assets				Capital Spending
	2017		2016		2017		2016		2015
FLNA	$	5,979	$	5,731	$	665	$	801	$	608
QFNA	804		811		44		41		40
NAB	28,592		28,172		904		769		695
Latin America	4,976		4,568		481		507		368
ESSA	13,556		12,302		481		439		404
AMENA	5,668		5,261		308		381		441
Total division	59,575		56,845		2,883		2,938		2,556
Corporate^(a)	20,229		16,645		86		102		202
	$	79,804	$	73,490	$	2,969	$	3,040	$	2,758


(a)	Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and tax assets. In 2017, the change in total Corporate assets was primarily due to an increase in short-term investments and cash and cash equivalents.

Amortization of intangible assets and depreciation and other amortization of each division are as follows:



	Amortization of Intangible Assets						Depreciation and Other Amortization
	2017		2016		2015		2017		2016		2015
FLNA	$	7	$	7	$	7	$	449	$	435	$	427
QFNA	—		—		—		47		50		51
NAB	31		37		38		780		809		813
Latin America	5		5		7		245		211		238
ESSA	22		18		20		329		321		353
AMENA	3		3		3		257		294		293
Total division	68		70		75		2,107		2,120		2,175
Corporate	—		—		—		194		178		166
	$	68	$	70	$	75	$	2,301	$	2,298	$	2,341

Net revenue and long-lived assets by country are as follows:



	Net Revenue						Long-Lived Assets^(a)
	2017		2016		2015		2017		2016
United States	$	36,546	$	36,732	$	35,266	$	28,418	$	28,382
Mexico	3,650		3,431		3,687		1,205		998
Russia ^(b)	3,232		2,648		2,797		4,708		4,373
Canada	2,691		2,692		2,677		2,739		2,499
United Kingdom	1,650		1,737		1,966		817		852
Brazil	1,427		1,305		1,289		777		796
All other countries	14,329		14,254		15,374		9,200		8,504
	$	63,525	$	62,799	$	63,056	$	47,864	$	46,404


(a)	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.


(b)	Change in net revenue and long-lived assets in 2017 primarily reflects appreciation of the Russian ruble.

Venezuela

Due to exchange restrictions and other conditions that significantly impact our ability to effectively manage our businesses in Venezuela and realize earnings generated by our Venezuelan businesses, effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investments in our Venezuelan subsidiaries and joint venture using the cost method of accounting. We recorded pre- and after-tax charges of $1.4 billion in our income statement to reduce the value of the cost method investments to their estimated fair values, resulting in a full impairment. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the end of 2017.

We do not have any guarantees related to our Venezuelan entities, and our ongoing contractual commitments to our Venezuelan businesses are not material. We will recognize income from dividends and sales of inventory to our Venezuelan entities, which have not been and are not expected to be material, to the extent cash in U.S. dollars is received. We have not received any cash in U.S. dollars from our Venezuelan entities since our deconsolidation at the end of the third quarter of 2015. We continue to monitor the conditions in Venezuela and their impact on our accounting and disclosures. For further unaudited information, see “Our Business Risks,” “Items Affecting Comparability” and “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.