Johnson and Johnson 2006 Annual Report Download - page 49

MEDICAL DEVICES AND DIAGNOSTICS SEGMENT
Balance at Balance at
Beginning Payments/ End
(Dollars in Millions) of Period Accruals Other of Period
2006
Accrued rebates(1) $302 1,808 (1,816) 294
Accrued returns 170 26 (13) 183
Accrued promotions 56 104 (119) 41
Subtotal $528 1,938 (1,948) 518
Reserve for doubtful accounts93 7 (12) 88
Reserve for cash discounts15 188 (185) 18
Total $636 2,133 (2,145) 624
2005
Accrued rebates(1) $263 2,062 (2,023) 302
Accrued returns 134 225 (189) 170
Accrued promotions 73 155 (172) 56
Subtotal $470 2,442 (2,384) 528
Reserve for doubtful accounts110 21 (38) 93
Reserve for cash discounts12 168 (165) 15
Total $592 2,631 (2,587) 636
(1)Includes reserve for customer rebates of $277 million at December 31, 2006 and
$266 million at January 1, 2006, recorded as a contra asset.
The Company also earns service revenue for co-promotion of cer-
tain products. For all years presented, service revenues were less
than 2% of total revenues and are included in sales to customers.
Income Taxes: Income taxes are recorded based on amounts
refundable or payable for the current year and include the results
of any difference between U.S. GAAP accounting and U.S. tax
reporting, recorded as deferred tax assets or liabilities. The Com-
pany estimates deferred tax assets and liabilities based on cur-
rent tax regulations and rates. Changes in tax laws and rates may
affect recorded deferred tax assets and liabilities in the future.
Management believes that changes in these estimates would not
result in a material effect on the Company’s results of operations,
cash flows or financial position.
In 2005, the Company repatriated $10.8 billion of undistrib-
uted international earnings in accordance with the American
Jobs Creation Act of 2004 (AJCA), and recorded a tax charge of
$789 million during the fiscal fourth quarter of 2004. During the
fiscal second quarter of 2005, the Company recorded a tax ben-
efit of $225 million, due to the reversal of the tax liability previ-
ously recorded during the fiscal fourth quarter of 2004,
associated with a technical correction made to the AJCA in May
2005. AtDecember 31, 2006 and January 1, 2006, the cumula-
tive amount of undistributed international earnings were approx-
imately $17.9 billion and $11.9billion, respectively. The Company
intends to continue to reinvest its undistributed international
earnings to expand its international operations; therefore, no U.S.
tax expense has been recorded to cover the undistributed por-
tion not intended for repatriation.
Legal and Self Insurance Contingencies: The Company records
accruals for various contingencies including legal proceedings
and product liability cases as these arise in the normal course of
business. The accruals are based on management’s judgment as
to the probability of losses, opinions of legal counsel and, where
applicable, actuarially determined estimates. Additionally, the
Company records insurance receivable amounts from third party
insurers when recovery is probable. As appropriate, reserves
against these receivables are recorded for estimated amounts
that may not be collected from third party insurers.
Long-Lived and Intangible Assets: The Company assesses
changes in economic conditions and makes assumptions regard-
ing estimated future cash flows in evaluating the value of the
Company’s property, plant and equipment, goodwill and intangi-
ble 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 retire-
ment and pension plans, including defined benefit, defined con-
tribution and termination indemnity plans, that cover most
employees worldwide. These plans are based on assumptions for
the discount rate, expected return on plan assets, expected
salary increases and health care cost trend rates. See Note 13 for
further detail on these rates and the effect a rate change would
have on the Company’s results of operations. The Company
adopted SFAS No. 158, Employer’s Accounting for Defined Pension
and Other Postretirement Plans — an amendment of FASB State-
ments No. 87, 88, 106 and 132(R). This statement requires the
recognition of the funded status of a benefit plan in the state-
ment of financial position, and that changes in the funded status
in the year in which the changes occur be recognized through
other comprehensive income (OCI), net of tax.
Stock Options: During the fiscal first quarter of 2006, the Com-
pany adopted SFAS No. 123(R), Share Based Payment. The Com-
pany has applied the modified retrospective transition method to
implement SFAS No. 123(R). Previously reported financial state-
ments have been restated in accordance with the provisions of
SFAS No. 123(R). See Note 10 for further information regarding
stock options.
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), Share Based Payment. This state-
ment 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 pay-
ment transactions (such as employee stock options and
restricted stock units). The statement requires the measurement
of the cost of employee services 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). The Company adopted this
statement in the fiscal first quarter of 2006, applying the modi-
fied retrospective transition method. Previously reported finan-
cial statements have been restated to reflect the adoption of
SFAS No. 123(R).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 47