Johnson and Johnson 2005 Annual Report Download - page 39

Stock Options: The Company has elected to use Accounting
Principles Board Opinion No. 25,Accounting for Stock Issued
to Employees (APB 25), that does not require compensation
costs related to stock options to be charged against net income,
as all options granted under the various stock options plans
had an exercise price equal to the market value of the underly-
ing common stock at grant date. Statement of Financial
Accounting Standard (SFAS) No. 148 Accounting for Stock-
Based Compensation — Transition and Disclosure — an amend-
ment of FASB Statement No. 123, requires pro forma disclosure
of net income and earnings per share determined as if the fair
value method of accounting for stock options had been applied
in measuring compensation cost. See Notes 1 and 10 for further
information regarding stock options.
New Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R),Share
Based Payment. This statement establishes standards for the
accounting for transactions in which an entity exchanges its
equity instruments for goods and services. It focuses primarily
on accounting for transactions in which an entity obtains
employee services in share-based payment transactions (such
as employee stock options and restricted stock units). The state-
ment requires the measurement of the cost of employee ser-
vices received in exchange for an award of equity instruments
(such as employee stock options and restricted stock units) at
fair value on the grant date. That cost will be recognized over
the period during which an employee is required to provide
services in exchange for the award (the requisite service
period). On April 14, 2005 the SEC approved a new rule that
delayed the effective date of SFAS No. 123(R) for annual, rather
than interim, periods that begin after June 15, 2005. As a
result, the Company will adopt this statement in the fiscal first
quarter of 2006.
Upon adoption of this standard, the Company currently
intends to apply the modified retrospective transition method.
Previously reported financial statements will be restated
to reflect SFAS No. 123 disclosure amounts. As required by
SFAS No. 148,Accounting for Stock Based Compensation —
Transition and Disclosure — an amendment of FASB Statement
No. 123, the Company has disclosed the net income and earn-
ings per share effect had the Company applied the fair value
recognition provision of SFAS No. 123. The disclosure impact
in 2005 and 2004 was compensation expense, net of tax, of
$351 million and $329 million and earnings per share of
$0.12 and $0.11, respectively.
The Company will implement SFAS 151, Inventory Costs, an
amendment of ARB No. 43 in the fiscal first quarter of 2006.
The Company believes the adoption of this statement will not
have a material effect on its results of operations, cash flows or
financial position.
The Company implemented FIN 47,Accounting for Condi-
tional Asset Retirement Obligations — an interpretation of
FASB Statement No. 143,during the fiscal fourth quarter of
2005. The implementation of this Standard did not have a
material effect on the Company’s results of operations, cash
flows or financial position.
The Company implemented SFAS 153, Exchanges of Non-
monetary Assets, an amendment of APB 29 during the fiscal
third quarter of 2005, which did not have a material effect
on its results of operations, cash flows or financial position.
The following accounting pronouncements became effective
in 2004 and did not have a material impact on the Company’s
results of operations, cash flows or financial position.
•EITF Issue 02-14: Whether an Investor should apply the
Equity Method of Accounting to Investments other than
Common Stock.
•EITF Issue 04-1: Accounting for Preexisting Relationships
between the Parties to a Business Combination.
The following accounting pronouncements became effective
in 2003 and did not have a material impact on the Company’s
results of operations, cash flows or financial position.
•FSP FAS No. 106-1: Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003.
•SFAS No. 149: Amendment of Statement 133 on Derivative
Instruments and Hedging Activities.
•FIN 46 and FIN 46(R): Consolidation of Variable Interest
Entities – an interpretation of ARB No. 51.
Economic and Market Factors
Johnson & Johnson 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,
Johnson & Johnson has a long standing policy of pricing
products responsibly. For the period 1995–2005, in the U.S.,
the weighted average compound annual growth rate of Johnson
& Johnson net price increases for health care products (pre-
scription and over-the-counter drugs, hospital and professional
products) was below the U.S. Consumer Price Index (CPI).
Inflation rates, even though moderate in many parts of the
world during 2005, continue to have an effect on worldwide
economies and, consequently, on the way companies operate.
In the face of increasing costs, the Company strives to maintain
its profit margins through cost reduction programs, productiv-
ity improvements and periodic price increases. The Company
faces various worldwide health care changes that may result
in pricing pressures that include health care cost containment
and government legislation relating to sales, promotions
and reimbursement.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION PAGE 37