Johnson and Johnson 2009 Annual Report Download - page 43

The guidance and amendments are expected to: (a) provide princi-
ples and application guidance on whether multiple deliverables
exist, how the arrangement should be separated, and the considera-
tion allocated; (b) require an entity to allocate revenue in an
arrangement using estimated selling prices of deliverables if a ven-
dor does not have vendor-specific objective evidence or third-party
evidence of selling price; and (c) eliminate the use of the residual
method and require an entity to allocate the revenue using the
relative selling price method. The guidance significantly expands the
disclosure requirements for multiple-deliverable revenue arrange-
ments. This guidance is effective prospectively for revenue arrange-
ments entered into or materially modified in fiscal years beginning
on or after June 15, 2010. Early adoption is permitted. The Company
adopted this guidance in the first fiscal quarter of 2010. The adop-
tion will not have a material impact on the Company’s results of
operations, cash flows or financial position; however, it will expand
the disclosures for such arrangements.
The FASB issued a standard to improve financial reporting by
enterprises involved with variable interest entities. This statement
is effective for the Company beginning with the fiscal year 2010.
Earlier application is prohibited. The adoption of this standard will
not have a material impact on the Company’s results of operations,
cash flows or financial position.
CASH EQUIVALENTS
The Company considers securities with maturities of three months
or less, when purchased, to be cash equivalents.
INVESTMENTS
Short-term marketable securities are carried at cost, which approxi-
mates fair value. Investments classified as available-for-sale are
carried at estimated fair value with unrealized gains and losses
recorded as a component of accumulated other comprehensive
income. Long-term debt securities that the Company has the ability
and intent to hold until maturity are carried at amortized cost.
Management determines the appropriate classification of its
investment in debt and equity securities at the time of purchase
and re-evaluates such determination 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. If losses on these securities are considered to be
other than temporary, the loss is recognized in earnings.
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
8 years.
The Company reviews long-lived assets to assess recoverability
using undiscounted cash flows. When certain events or changes in
operating or economic conditions occur, an impairment assessment
may be performed on the recoverability of the carrying value of
these assets. If the asset is determined to be impaired, the loss is
measured based on the difference between the asset’s fair value and
its carrying value. If quoted market prices are not available, the
Company will estimate fair value using a discounted value of
estimated future cash flows.
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 pro-
motions, coupons, 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 arrange-
ments 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 esti-
mated based on contractual 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 expira-
tion, 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. In accordance with the Com-
pany’s accounting policies, the Company generally issues credit to
customers for returned goods. The Company’s sales return reserves
are accounted for in accordance with U.S. GAAP guidance regarding
revenue recognition when right of return exists. Sales return
reserves are recorded at full sales value. Sales returns in the Con-
sumer and Pharmaceutical segments are almost exclusively not
resalable. Sales returns for certain franchises in the Medical Devices
and Diagnostics segment are typically resalable but are not mate-
rial. The Company rarely exchanges products from inventory for
returned products. The sales returns reserve for the total Company
has ranged between 1.1% and 1.2% of annual net trade sales during
the prior three fiscal reporting years 2007–2009.
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 rev-
enue for co-promotion of certain products and includes it in sales to
customers. These arrangements are evaluated to determine the
appropriate amounts to be deferred.
SHIPPING AND HANDLING
Shipping and handling costs incurred were $964 million, $1,017 mil-
lion and $934 million in 2009, 2008 and 2007, 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.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 41