Johnson & Johnson - Index

Johnson & Johnson - report - Index

nation at each balance sheet date. The Company periodically
reviews its investments in equity securities for impairment and
adjusts these investments to their fair value when a decline in
market value is deemed to be other than temporary.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at cost. The
Company utilizes the straight-line method of depreciation
over the estimated useful lives of the assets:
Building and building equipment 20-40 years
Land and leasehold improvements 10-20 years
Machinery and equipment 2-13 years
The Company capitalizes certain computer software and development
costs, included in machinery and equipment, when
incurred in connection with developing or obtaining computer
software for internal use. Capitalized software costs are amortized
over the estimated useful lives of the software, which
generally range from 3 to 5 years.
The Company reviews long-lived assets to assess recoverability
using undiscounted cash flows. When necessary, charges
for impairments of long-lived assets are recorded for the amount
by which the present value of future cash flows is less than the
carrying value of these assets.
REVENUE RECOGNITION
The Company recognizes revenue from product sales when the
goods are shipped or delivered and title and risk of loss pass to
the customer. Provisions for certain rebates, sales incentives,
trade promotions, product returns and discounts to customers
are accounted for as reductions in sales in the same period the
related sales are recorded.
Product discounts granted are based on the terms of
arrangements with direct, indirect and other market participants,
as well as market conditions, including prices charged by competitors.
Rebates, the largest being the Medicaid rebate provision,
are estimated based on sales terms, historical experience,
trend analysis and projected market conditions in the various
markets served. The Company evaluates market conditions for
products or groups of products primarily through the analysis of
wholesaler and other third party sell-through and market
research data, as well as internally generated information.
Sales returns are generally estimated and recorded based on
historical sales and returns information. Products that exhibit
unusual sales or return patterns due to dating, competition or
other marketing matters are specifically investigated and analyzed
as part of the accounting for sales return accruals. Sales returns
allowances represent a reserve for products that may be returned
due to expiration, destruction in the field, or in specific areas, product
recall. The returns reserve is based on historical return trends
by product and by market as a percent to gross sales.
Promotional programs, such as product listing allowances
and cooperative advertising arrangements, are recorded in the
year incurred. Continuing promotional programs include
coupons and volume-based sales incentive programs. The
redemption cost of consumer coupons is based on historical
redemption experience by product and value. Volume-based
incentive programs are based on the estimated sales volumes for
the incentive period and are recorded as products are sold. The
Company also earns service revenue for co-promotion of certain
products and includes it in sales to customers. Promotional
arrangements containing customer acceptance criteria are evaluated
to determine the appropriate amounts to be deferred.
In addition, the Company enters into collaboration arrangements,
which contain multiple revenue generating activities. The
revenue for these arrangements is recognized as each activity is
performed or delivered, based on the relative fair value. Upfront
fees received as part of these arrangements, for which no further
performance obligations exist, are recognized as revenue on the
earlier of receipt of payment or collection is assured. If performance
obligations exist, the Company will defer the upfront fees
and recognize as earned over the obligation period.
SHIPPING AND HANDLING
Shipping and handling costs incurred were $934 million, $693 million
and $736 million in 2007, 2006 and 2005, respectively, and
are included in selling, marketing and administrative expense. The
amount of revenue received for shipping and handling is less than
0.5% of sales to customers for all periods presented.
INVENTORIES
Inventories are stated at the lower of cost or market determined
by the first-in, first-out method.
INTANGIBLE ASSETS AND GOODWILL
SFAS No. 142 requires that goodwill and non-amortizable intangible
assets be assessed annually for impairment. The Company
completed the annual impairment test for 2007 in the fiscal
fourth quarter and no impairment was determined. Future
impairment tests will be performed annually in the fiscal fourth
quarter, or sooner if a triggering event occurs.
Intangible assets that have finite useful lives continue to be
amortized over their useful lives, and are reviewed for impairment
when warranted by economic conditions. See Note 7 for
further details on Intangible Assets.
FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. SFAS
No. 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive
income, depending on whether the derivative is designated as
part of a hedge transaction, and if so, the type of hedge transaction.
The Company uses forward exchange contracts to manage
its exposure to the variability of cash flows, primarily related to
the foreign exchange rate changes of future intercompany product
and third party purchases of raw materials denominated in
foreign currency. The Company also uses currency swaps to manage
currency risk primarily related to borrowings. Both of these
types of derivatives are designated as cash flow hedges. Additionally,
the Company uses forward exchange contracts to offset its
exposure to certain foreign currency assets and liabilities. These
forward exchange contracts are not designated as hedges and
therefore, changes in the fair values of these derivatives are
recognized in earnings, thereby offsetting the current earnings
effect of the related foreign currency assets and liabilities.
The designation as a cash flow hedge is made at the entrance
date into the derivative contract. At inception, all derivatives are
expected to be highly effective. Changes in the fair value of a
derivative that is designated as a cash flow hedge and is highly
effective are recorded in accumulated other comprehensive
NOTES TO CONSOLIDA TED FINANCIAL ST A TEMENTS 53