Johnson and Johnson 2009 Annual Report Download - page 44

INTANGIBLE ASSETS AND GOODWILL
The authoritative literature on U.S. GAAP requires that goodwill and
intangible assets with indefinite lives be assessed annually for
impairment. The Company completed the annual impairment test
for 2009 in the fiscal fourth quarter and no impairment was deter-
mined. 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 5 for further
details on Intangible Assets and Goodwill.
FINANCIAL INSTRUMENTS
As required by U.S. GAAP all derivative instruments are 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 documents all relationships between hedged items
and derivatives. The overall risk management strategy includes rea-
sons for undertaking hedge transactions and entering into derivatives.
The objectives of this strategy are: (1) minimize foreign currency expo-
sure’s impact on the Company’s financial performance; (2) protect the
Company’s cash flow from adverse movements in foreign exchange
rates; (3) ensure the appropriateness of financial instruments; and
(4) manage the enterprise risk associated with financial institutions.
See Note 6 for additional information on Financial Instruments.
PRODUCT LIABILITY
Accruals for product liability claims are recorded, on an undis-
counted basis, when it is probable that a liability has been incurred
and the amount of the liability can be reasonably estimated based
on existing information. The accruals are adjusted periodically as
additional information becomes available. As a result of cost and
availability factors, effective November 1, 2005, the Company
ceased purchasing third-party product liability insurance. Based on
the availability of prior coverage, receivables for insurance recover-
ies related to product liability claims are recorded on an undis-
counted basis, when it is probable that a recovery will be realized.
RESEARCH AND DEVELOPMENT
Research and development expenses are expensed as incurred.
Upfront and milestone payments made to third-parties in connec-
tion with research and development collaborations are expensed as
incurred up to the point of regulatory approval. Payments made to
third-parties subsequent to regulatory approval are capitalized and
amortized over the remaining useful life of the related product.
Amounts capitalized for such payments are included in other
intangibles, net of accumulated amortization.
The Company enters into collaborative arrangements, typically
with other pharmaceutical or biotechnology companies, to develop
and commercialize drug candidates or intellectual property. These
arrangements typically involve two (or more) parties who are active
participants in the collaboration and are exposed to significant risks
and rewards dependent on the commercial success of the activities.
These collaborations usually involve various activities by one or
more parties, including research and development, marketing and
selling and distribution. Often, these collaborations require upfront,
milestone and royalty or profit share payments, contingent upon the
occurrence of certain future events linked to the success of the asset
in development. Amounts due from collaborative partners related to
development activities are generally reflected as a reduction of
research and development expense because the performance of
contract development services is not central to the Company’s
operations. In general, the income statement presentation for
these collaborations is as follows:
Nature/Type of Collaboration Statement of Earnings Presentation
Third-party sale of product Sales to customers
Royalties/milestones paid to
collaborative partner
(post-regulatory approval)* Cost of goods sold
Royalties received from
collaborative partner Other income (expense), net
Upfront payments & milestones
paid to collaborative partner
(pre-regulatory approval) Research expense
Research and development payments
to collaborative partner Research expense
Research and development payments
received from collaborative partner Reduction of Research expense
* Milestones are capitalized as intangible assets and amortized to cost of goods sold over
the useful life.
ADVERTISING
Costs associated with advertising are expensed in the year incurred
and are included in the selling, marketing and administrative
expenses. Advertising expenses worldwide, which are comprised of
television, radio, print media and Internet advertising, were $2.4 bil-
lion in 2009, $2.9 billion in 2008 and $2.7 billion in 2007.
INCOME TAXES
The Company intends to continue to reinvest its undistributed
international earnings to expand its international operations; there-
fore, no U.S. tax expense has been recorded with respect to the
undistributed portion not intended for repatriation. At January 3,
2010 and December 28, 2008, the cumulative amount of undistrib-
uted international earnings were approximately $32.2 billion and
$27.7 billion, respectively.
Deferred income taxes are recognized for tax consequences
of temporary differences by applying enacted statutory tax rates,
applicable to future years, to differences between the financial
reporting and the tax basis of existing assets and liabilities.
NET EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings avail-
able to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities
were exercised or converted into common stock using the treasury
stock method.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the
amounts reported. Estimates are used when accounting for sales
discounts, rebates, allowances and incentives, product liabilities,
income taxes, depreciation, amortization, employee benefits, con-
tingencies and intangible asset and liability valuations. For instance,
in determining annual pension and post-employment benefit costs,
the Company estimates the rate of return on plan assets, and the
cost of future health care benefits. Actual results may or may not
differ from those estimates.
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