Johnson & Johnson - Index

Johnson & Johnson - report - Index

The increase in the 2006 tax rate was mainly due to the reversal
of a tax liability of $225 million reported in the 2005 tax provision
which resulted from a technical correction to the American
Jobs Creation Act of 2004. This was partially offset by a benefit
reported in 2006 for the reversal of tax allowances of $134 million
associated with the international business.
Temporary differences and carry forwards for 2007 and
2006 are as follows:
2007 2006
Deferred Tax Deferred Tax
____________________ ____________________
(Dollars in Millions) Asset Liability Asset Liability
Employee related obligations $1,727 1,691
Stock based compensation 1,173 1,006
Depreciation (463) (450)
Non-deductible intangibles (1,554) (2,263)
International R&D capitalized
for tax 1,773 1,483
Reserves & liabilities 1,155 845
Income reported for tax purposes 487 373
Miscellaneous international 1,011 (127) 663 (298)
Capitalized intangibles 89 126
Miscellaneous U.S. 708 747
Total deferred income taxes $8,123 (2,144) 6,934 (3,011)
The difference between the net deferred tax on income per
the balance sheet and the net deferred tax above is included in
taxes on income on the balance sheet.
The Company adopted FIN No. 48, Accounting for Uncertainty
in Income Taxes effective January 1, 2007 which resulted in
the recognition of an additional $19 million of previously unrecognized
tax benefits, with the corresponding adjustment
to retained earnings. The Company had $1.3 billion of gross
unrecognized tax benefits, $1.1 billion net unrecognized tax benefits,
as of January 1, 2007 including the previous adjustment
mentioned above. The Company classifies liabilities for unrecognized
tax benefits and related interest and penalties as long-term
liabilities. Interest expense and penalties related to unrecognized
tax benefits are classified as income tax expense. During the year
ended December 30, 2007 the Company recognized $42 million
of interest income and $58 million of interest expense, with an
after-tax impact net impact of $10 million. The total amount of
accrued interest was $187 million and $171 million in 2007 and
2006, respectively.
The following table summarizes the activity related to
unrecognized tax benefits:
(Dollars in Millions) Total
Balance as of January 1, 2007 $1,262
Increases related to current year tax positions 487
Increases related to prior period tax positions 77
Decreases related to prior period tax positions (117)
Settlements (14)
Lapse of statute of limitations (42)
Balance as of December 30, 2007 $1,653
Included in the unrecognized tax benefits of approximately $1.7
billion at December 30, 2007, are $1.4 billion of potential tax
benefits that, if recognized, would affect the Company’s annual
effective tax rate. The Company conducts business and files tax
returns in numerous countries and currently has tax audits in
progress with a number of tax authorities. The U.S. Internal
Revenue Service (IRS) has completed the audit for tax years
through 1999; however, the years 1996 though 1999 remain
open while a limited number of issues are being considered at
the IRS appeals level, which the Company expects to be resolved
within the next twelve months. In other major jurisdictions where
the Company conducts business, the years remain open generally
back to the year 2001 with some jurisdictions remaining open
as far back as 1995. The Company does not expect that the total
amount of unrecognized tax benefits will significantly change
over the next twelve months. The Company does not expect a
significant payment within the next twelve months, and is not
able to provide a reasonably reliable estimate of the timing of
any future tax payments, relating to uncertain tax positions.
9. International Currency Translation
For translation of its subsidiaries operating in non-U.S. Dollar currencies,
the Company has determined that the local currencies of its
international subsidiaries are the functional currencies except those
in highly inflationary economies, which are defined as those which
have had compound cumulative rates of inflation of 100% or more
during the past three years, or where a substantial portion of its
cash flows are not in the local currency.
In consolidating international subsidiaries, balance sheet
currency effects are recorded as a component of accumulated
other comprehensive income. This equity account includes the
results of translating all balance sheet assets and liabilities at current
exchange rates, except for those located in highly inflationary
economies. The translation of balance sheet accounts for highly
inflationary economies are reflected in the operating results.
An analysis of the changes during 2007, 2006 and 2005 for
foreign currency translation adjustments is included in Note 12.
Net currency transaction and translation gains and losses
included in other (income) expense were losses of $23 million,
$18 million and $32 million in 2007, 2006 and 2005, respectively.
10. Common Stock, Stock Option Plans and
Stock Compensation Agreements
STOCK OPTIONS
At December 30, 2007, the Company had 15 stock-based compensation
plans. The shares outstanding are for contracts under
the Company’s 1995 and 2000 Stock Option Plans, the 2005
Long-Term Incentive Plan, the 2000 Stock Compensation Plan,
the 1997 Non-Employee Director’s Plan and the Centocor, Innovasive
Devices, ALZA, Inverness, and Scios Stock Option Plans.
During 2007, no options or restricted shares were granted
under any of these plans except under the 2005 Long-Term
Incentive Plan.
The compensation cost recorded under SFAS No. 123(R)
that has been charged against income for these plans was
$698 million for 2007, $659 million for 2006 and $540 million
for 2005. The total income tax benefit recognized in the income
statement for share-based compensation costs was $238 million
for 2007, $228 million for 2006 and $189 million for 2005.
Share-based compensation costs capitalized as part of inventory
were insignificant in all periods.
Stock options expire 10 years from the date of grant and
vest over service periods that range from six months to five
NOTES TO CONSOLIDA TED FINANCIAL ST A TEMENTS 57