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. As a result of exchange restrictions and other operating restrictions, we do not have control over our Venezuelan subsidiaries. As such, our Venezuelan subsidiaries are not included within our consolidated financial results for any period presented.

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, including merchandising activities, 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.

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 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 of each division is as follows:



	2018		2017		2016
FLNA	13	%	13	%	14	%
QFNA	1	%	1	%	2	%
NAB	18	%	18	%	22	%
Latin America	8	%	7	%	7	%
ESSA	9	%	9	%	11	%
AMENA	8	%	9	%	10	%
Corporate unallocated expenses	43	%	43	%	34	%

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 are reflected in division results. The variance between the fixed discount rate used to determine the service cost reflected in division results and the discount rate as disclosed in Note 7 is reflected in corporate unallocated expenses.

Derivatives

We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, agricultural products 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 of each division are as follows:



	Net Revenue						Operating Profit^(b)
	2018^(a)		2017		2016		2018			2017^(c)			2016^(c)
FLNA	$	16,346	$	15,798	$	15,549	$	5,008		$	4,793		$	4,612
QFNA	2,465		2,503		2,564		637			640			649
NAB	21,072		20,936		21,312		2,276			2,700			2,947
Latin America	7,354		7,208		6,820		1,049			924			904
ESSA	11,523		11,050		10,216		1,364			1,316			1,061
AMENA	5,901		6,030		6,338		1,172			1,073			619
Total division	64,661		63,525		62,799		11,506			11,446			10,792
Corporate unallocated expenses	—		—		—		(1,396		)	(1,170		)	(988		)
	$	64,661	$	63,525	$	62,799	$	10,110		$	10,276		$	9,804

(a)

Our primary performance obligation is the distribution and sales of beverage products and food and snack products to our customers, each comprising approximately 50% of our consolidated net revenue. Internationally, our Latin America segment is predominantly a food and snack business, ESSA’s beverage business and food and snack business are each approximately 50% of the segment’s net revenue and AMENA’s beverage business and food and snack business are approximately 35% and 65%, respectively, of the segment’s net revenue. Beverage revenue from company-owned bottlers, which primarily includes our consolidated bottling operations in our NAB and ESSA segments, is approximately 40% of our consolidated net revenue. Generally, our finished goods beverage operations produce higher net revenue, but lower operating margins as compared to concentrate sold to authorized bottling partners for the manufacture of finished goods beverages. See Note 2 for additional information.


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


(c)	Reflects the retrospective adoption of guidance requiring the presentation of non-service cost components of net periodic benefit cost below operating profit. See Note 2 for additional information.

Corporate Unallocated Expenses

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

Other Division Information

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



	Total Assets				Capital Spending
	2018		2017		2018		2017		2016
FLNA	$	6,577	$	5,979	$	840	$	665	$	801
QFNA	870		804		53		44		41
NAB	29,878		28,592		945		904		769
Latin America	6,458		4,976		492		481		507
ESSA^(a)	17,410		13,556		479		481		439
AMENA	6,433		5,668		323		308		381
Total division	67,626		59,575		3,132		2,883		2,938
Corporate^(b)	10,022		20,229		150		86		102
	$	77,648	$	79,804	$	3,282	$	2,969	$	3,040


(a)	In 2018, the change in assets was primarily related to our acquisition of SodaStream.


(b)	Corporate assets consist principally of certain cash and cash equivalents, restricted cash, short-term investments, derivative instruments, property, plant and equipment and tax assets. In 2018, the change in assets was primarily due to a decrease in short-term investments and cash and cash equivalents. Refer to the cash flow statement for additional information.

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



	Amortization of Intangible Assets						Depreciation and Other Amortization
	2018		2017		2016		2018		2017		2016
FLNA	$	7	$	7	$	7	$	457	$	449	$	435
QFNA	—		—		—		45		47		50
NAB	31		31		37		821		780		809
Latin America	5		5		5		253		245		211
ESSA	23		22		18		331		329		321
AMENA	3		3		3		237		257		294
Total division	69		68		70		2,144		2,107		2,120
Corporate	—		—		—		186		194		178
	$	69	$	68	$	70	$	2,330	$	2,301	$	2,298

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



	Net Revenue						Long-Lived Assets^(a)
	2018		2017		2016		2018		2017
United States	$	37,148	$	36,546	$	36,732	$	29,169	$	28,418
Mexico	3,878		3,650		3,431		1,404		1,205
Russia ^(b)	3,191		3,232		2,648		3,926		4,708
Canada	2,736		2,691		2,692		2,565		2,739
United Kingdom	1,743		1,650		1,737		759		817
Brazil	1,335		1,427		1,305		639		777
All other countries ^(c)	14,630		14,329		14,254		12,169		9,200
	$	64,661	$	63,525	$	62,799	$	50,631	$	47,864


(a)	Long-lived assets represent property, plant and equipment, indefinite-lived 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 in 2017 primarily reflects appreciation of the Russian ruble. Change in long-lived assets in 2018 primarily reflects depreciation of the Russian ruble.


(c)	Change in long-lived assets in 2018 primarily related to our acquisition of SodaStream.