Johnson and Johnson 2015 Annual Report Download - page 38

See Notes 1 and 21 to the Consolidated Financial Statements for further information regarding product liability and legal
proceedings.
Long-Lived and Intangible Assets: The Company assesses changes in economic conditions and makes assumptions
regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill
and intangible assets. As these assumptions and estimates may change over time, it may or may not be necessary for the
Company to record impairment charges.
Employee Benefit Plans: The Company sponsors various retirement and pension plans, including defined benefit,
defined contribution and termination indemnity plans, which cover most employees worldwide. These plans are based on
assumptions for the discount rate, expected return on plan assets, mortality rates, expected salary increases, health care
cost trend rates and attrition rates. See Note 10 to the Consolidated Financial Statements for further details on these rates
and the effect a rate change to the health care cost trend would have on the Company’s results of operations.
Stock Based Compensation: The Company recognizes compensation expense associated with the issuance of equity
instruments to employees for their services. Based on the type of equity instrument, the fair value is estimated on the date
of grant using either the Black-Scholes option valuation model or a combination of both the Black-Scholes option
valuation model and Monte Carlo valuation model, and is expensed in the financial statements over the service period. The
input assumptions used in determining fair value are the expected life, expected volatility, risk-free rate and expected
dividend yield. For performance share units the fair market value is calculated for each of the three component goals at the
date of grant. The fair values for the sales and earnings per share goals of each performance share unit were estimated on
the date of grant using the fair market value of the shares at the time of the award, discounted for dividends, which are not
paid on the performance share units during the vesting period. The fair value for the relative total shareholder return goal of
each performance share unit was estimated on the date of grant using the Monte Carlo valuation model. See Note 17 to
the Consolidated Financial Statements for additional information.
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently
issued accounting pronouncements not yet adopted as of January 3, 2016.
Economic and Market Factors
The Company is aware that its products are used in an environment where, for more than a decade, policymakers,
consumers and businesses have expressed concerns about the rising cost of health care. In response to these concerns,
the Company has a long-standing policy of pricing products responsibly. For the period 2005—2015, in the United
States, the weighted average compound annual growth rate of the Company’s net price increases for health care products
(prescription and over-the-counter drugs, hospital and professional products) was below the U.S. Consumer Price Index
(CPI).
The Company operates in certain countries where the economic conditions continue to present significant challenges. The
Company continues to monitor these situations and take appropriate actions. Inflation rates continue to have an effect on
worldwide economies and, consequently, on the way companies operate. The Company has accounted for operations in
Venezuela as highly inflationary, as the prior three-year cumulative inflation rate surpassed 100%. In the face of increasing
costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and
periodic price increases.
The Venezuelan government has established alternative systems and offerings of various foreign currency exchanges.
During 2015, the Company primarily utilized the official government rate of 6.3 Bolivares Fuertes to one U.S. Dollar in
preparing its consolidated financial statements. During 2014, the Company applied to settle an outstanding dividend
payable at one of the alternative foreign exchange rates. As a result, the Company has applied this alternative exchange
rate to translate certain transactions, as appropriate. Through the fourth quarter of 2015, the number of the Company’s
transactions conducted at the official rate declined from prior quarters. As a result, the Company determined that it was no
longer likely that all outstanding net monetary assets would be settled at the official government rate of 6.3 Bolivares
Fuertes to one U.S. Dollar. Therefore, the Company recorded a charge of $161 million to revalue its net monetary assets
in Venezuela at one of the government’s alternative exchange rates (SIMADI) and impair its non-monetary assets. After the
revaluation, as of January 3, 2016, the Company’s Venezuelan subsidiaries represented less than 0.1% of the Company’s
consolidated assets and liabilities. Due to continuing uncertain economic conditions in Venezuela, it is possible that
additional charges may be recorded in the future. Any additional charges are not expected to have a material adverse
effect on the Company’s 2016 full year results.
26 •Johnson & Johnson 2015 Annual Report