Coca Cola 2014 Annual Report Download - page 90

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Divestitures
During 2014, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $148 million,
which primarily represented the proceeds from the refranchising of certain of our territories in North America.
During 2013, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $872 million.
These proceeds primarily included the sale of a majority ownership interest in our previously consolidated bottling operations in the
Philippines (“Philippine bottling operations”), and separately, the deconsolidation of our bottling operations in Brazil (“Brazilian
bottling operations”).
North America Refranchising
In conjunction with implementing a new beverage partnership model in North America, the Company refranchised territories that
were previously managed by CCR to certain of our unconsolidated bottling partners. These territories border these bottlers’ existing
territories, allowing each bottler to better service local customers and provide more efficient execution. Through the execution of
comprehensive beverage agreements (“CBAs”) with each of the bottlers, we granted certain exclusive territory rights for the
distribution, promotion, marketing and sale of Company-owned and licensed beverage products as defined by the CBA. Under the
arrangement for these territories, CCR retains the rights to produce these beverage products, and the bottlers will purchase from CCR
substantially all of the related finished products needed in order to service the customers in these territories. Each CBA has a term
of 10 years and is renewable by the bottler indefinitely for successive additional terms of 10 years each. Under the CBA, the bottlers
will make ongoing quarterly payments to CCR based on their future gross profit in these territories throughout the term of the CBA,
including renewals, in exchange for the grant of the exclusive territory rights.
Contemporaneously with the grant of these rights, the Company sold the distribution assets, certain working capital items, and the
exclusive rights to distribute certain beverage brands not owned by the Company, but distributed by CCR, in each of these territories
to the respective bottlers in exchange for cash. During the year ended December 31, 2014, cash proceeds from these sales totaled
$143 million, which included proceeds of $42 million from Coca-Cola Bottling Co. Consolidated, an equity method investee. Under
the applicable accounting guidance, we were required to derecognize all of the tangible assets sold as well as the intangible assets
transferred, including distribution rights, customer relationships and an allocated portion of goodwill related to these territories. We
recognized a noncash loss of $305 million during the year ended December 31, 2014 primarily related to the derecognition of the
intangible assets transferred, which was included in the line item other income (loss) — net in our consolidated statements of income.
We expect to recover the value of the intangible assets transferred to the bottlers under the CBAs through the future quarterly
payments; however, as the payments for the territory rights are dependent on the bottlers’ future gross profit in these territories, they
are considered a form of contingent consideration.
There is diversity in practice as it relates to the accounting for contingent consideration by the seller. The seller can account for the
future contingent payments received as a gain contingency, recognizing the amounts in the income statement only after the related
contingencies are resolved and the gain is realized, which in this arrangement will be quarterly as the bottlers earn gross profit in the
transferred territories. Alternatively, the seller can record a receivable for the contingent consideration at fair value on the date of
sale and record any future differences between the payments received and this receivable in the income statement as they occur. We
elected the gain contingency treatment since the quarterly payments will be received throughout the terms of the CBAs, including all
subsequent renewals, regardless of the cumulative amount received as compared to the value of the intangible assets transferred.
Philippine Bottling Operations
On December 13, 2012, the Company and Coca-Cola FEMSA executed a share purchase agreement for the sale of a majority
ownership interest in our Philippine bottling operations. As of December 31, 2012, our Philippine bottling operations met the criteria
to be classified as held for sale, and we were required to record their assets and liabilities at the lower of carrying value or fair value
less any costs to sell based on the agreed-upon purchase price. Accordingly, we recorded a total loss of $107 million, primarily during
the fourth quarter of 2012, in the line item other income (loss) — net in our consolidated statement of income.
This transaction was completed on January 25, 2013. The Company now accounts for our remaining 49 percent ownership interest in
the Philippine bottling operations under the equity method of accounting. As a result of this transaction, we remeasured our remaining
investment in the Philippine bottling operations to fair value taking into consideration the sale price of the majority ownership
interest. Coca-Cola FEMSA has an option to purchase our remaining ownership interest in the Philippine bottling operations at any
time during the seven years following closing based on the initial purchase price plus a defined return. Coca-Cola FEMSA also has
an option exercisable during the sixth year after closing to sell its ownership interest back to the Company at a price not to exceed the
initial purchase price.