Johnson and Johnson 2014 Annual Report Download - page 43

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Additionally, the Company uses interest rate swaps as an instrument to manage interest rate risk related to fixed rate
borrowings. These derivatives are treated as fair value hedges. The Company may use forward foreign exchange contracts
designated as net investment hedges. Additionally, the Company uses forward foreign exchange contracts to offset its
exposure to certain foreign currency assets and liabilities. These forward foreign 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 Company does not enter into derivative financial instruments for trading or speculative purposes, or that contain credit
risk related contingent features or requirements to post collateral. On an ongoing basis, the Company monitors
counterparty credit ratings. The Company considers credit non-performance risk to be low, because the Company enters
into agreements with commercial institutions that have at least an “A” (or equivalent) credit rating. As of December 28,
2014, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest
rate swaps and interest rate swaps of $29.6 billion, $2.4 billion and $2.2 billion, respectively.
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 designation as a cash flow hedge is made at the entrance date of 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 income until the underlying transaction affects earnings,
and are then reclassified to earnings in the same account as the hedged transaction. Gains and losses associated with
interest rate swaps are recorded to interest expense in the period in which they occur. Gains and losses on net investment
hedges are accounted for through the currency translation account and are insignificant. On an ongoing basis, the
Company assesses whether each derivative continues to be highly effective in offsetting changes of hedged items. If and
when a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if
any, is included in current period earnings in Other (income) expense, net for forward foreign exchange contracts and
cross currency interest rate swaps. For interest rate swaps designated as fair value hedges, hedge ineffectiveness, if any,
is included in current period earnings within interest expense. For the current reporting period, hedge ineffectiveness
associated with interest rate swaps are not material.
As of December 28, 2014, the balance of deferred net gains on derivatives included in accumulated other comprehensive
income was $141 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income
and Note 13. The Company expects that substantially all of the amounts related to forward foreign exchange contracts will
be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that
period. The maximum length of time over which the Company is hedging transaction exposure is 18 months, excluding
interest rate contracts. The amount ultimately realized in earnings may differ as foreign exchange rates change. Realized
gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.
The following table is a summary of the activity related to derivatives designated as cash flow hedges for the fiscal years
ended December 28, 2014 and December 29, 2013:
(Dollars in Millions)
Gain/(Loss)
Recognized In
Accumulated OCI(1)
Gain/(Loss)
Reclassified From
Accumulated OCI
Into Income(1)
Gain/(Loss)
Recognized In
Other
Income/Expense(2)
Cash Flow Hedges by Income Statement Caption 2014 2013 2014 2013 2014 2013
Sales to customers(3) $(106) 45 (3) 49 (5) 2
Cost of products sold(3) 58 271 204 69 2 23
Research and development expense(3) 39 24 7 16 – (4)
Interest (income)/Interest expense, net(4) 21 17 (15) (10) – –
Other (income) expense, net(3) 80 (13) 3 (17) – (4)
Total $92 344 196 107 (3) 17
All amounts shown in the table above are net of tax.
(1) Effective portion
(2) Ineffective portion
(3) Forward foreign exchange contracts
(4) Cross currency interest rate swaps
Johnson & Johnson 2014 Annual Report •33