Johnson and Johnson 2006 Annual Report Download - page 48

Other Information
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of results of operations
and financial condition are based on the Company’s consolidated
financial statements that have been prepared in accordance with
accounting principles generally accepted in the U.S. The prepara-
tion of these financial statements requires that management
make estimates and assumptions that affect the amounts
reported for revenues, expenses, assets, liabilities and other
related disclosures. Actual results may or may not differ from
these estimates. The Company believes that the understanding
of certain key accounting policies and estimates are essential in
achieving more insight into the Company’s operating results and
financial condition. These key accounting policies include rev-
enue recognition, income taxes, legal and self insurance contin-
gencies, valuation of long-lived assets, assumptions used to
determine the amounts recorded for pensions and other
employee benefit plans and accounting for stock options.
Revenue Recognition: The Company recognizes revenue from
product sales when goods are shipped or delivered and title and
risk of loss pass to the customer. Provisions for certain rebates,
sales incentives, trade promotions, 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
arrangements with direct, indirect and other market participants,
as well as market conditions, including prices charged by com-
petitors. Rebates, the largest being the Medicaid rebate provi-
sion, are estimated based on sales 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 allowances represent a reserve for products
that may be returned due to expiration, 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.
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 derived by estimating sales volumes for
the incentive period and are recorded as products are sold.
Reasonably likely changes to assumptions used to calculate
the accruals for rebates, returns and promotions are not antici-
pated to have a material effect on the financial statements. The
Company currently discloses the impact of changes to assump-
tions in the quarterly or annual filing in which there is a financial
statement impact.
Below are tables which show the progression of accrued
rebates, returns, promotions, reserve for doubtful accounts and
reserve for cash discounts by segment of business for the years
ended December 31, 2006 and January 1, 2006.
CONSUMER SEGMENT
Balance at Balance at
Beginning Payments/ End
(Dollars in Millions) of Period Accruals Other of Period
2006
Accrued rebates(1) $144 352 (332) 164
Accrued returns 78 117 (103) 92
Accrued promotions 172 1,555 (1,516) 211
Subtotal $394 2,024 (1,951) 467
Reserve for doubtful accounts35 10 (3) 42
Reserve for cash discounts13 176 (174) 15
Total $442 2,210 (2,128) 524
2005
Accrued rebates(1) $110 635 (601) 144
Accrued returns 58 129 (109) 78
Accrued promotions 176 1,417 (1,421) 172
Subtotal $344 2,181 (2,131) 394
Reserve for doubtful accounts37 3 (5) 35
Reserve for cash discounts13 286 (286) 13
Total $394 2,470 (2,422) 442
(1)Includes reserve for customer rebates of $54 million at December 31, 2006 and $33
million at January 1, 2006, recorded as a contra asset.
PHARMACEUTICAL SEGMENT
Balance at Balance at
Beginning Payments/ End
(Dollars in Millions) of Period Accruals Other of Period
2006
Accrued rebates(1) $1,119 2,857 (2,743) 1,233
Accrued returns 287 67 (30) 324
Accrued promotions 160 625 (580) 205
Subtotal $1,566 3,549 (3,353) 1,762
Reserve for doubtful accounts36 0 (6) 30
Reserve for cash discounts29 503 (503) 29
Total $1,631 4,052 (3,862) 1,821
2005
Accrued rebates(1) $1,489 2,604(2) (2,974) 1,119
Accrued returns 265 31 (9) 287
Accrued promotions 217 540 (597) 160
Subtotal $1,971 3,175 (3,580) 1,566
Reserve for doubtful accounts59 (5) (18) 36
Reserve for cash discounts37 407 (415) 29
Total $2,067 3,577 (4,013) 1,631
(1)Includes reserve for customer rebates of $227 million at December 31, 2006 and
$172 million at January 1, 2006, recorded as a contra asset.
(2) Includes $186 million related to previously estimated performance-based rebate
allowances in managed care contracts.
46 JOHNSON & JOHNSON 2006 ANNUAL REPORT
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.