Johnson and Johnson 2006 Annual Report Download - page 50

The Company implemented SFAS 151, Inventory Costs, an
amendment of ARB No. 43in the fiscal first quarter of 2006. The
adoption of this statement did not have a material effect on the
Company’s results of operations, cash flows or financial position.
In June 2006, the FASB issued FASB Interpretation 48 (FIN
48), Accounting for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109. This interpretation prescribes a recog-
nition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The interpretation also
provides guidance on derecognition, classification and other
matters. FIN 48 is effective for the fiscal year 2007 and the
Company will adopt it accordingly. The Company is assessing
the impact of the adoption of FIN 48 and currently does not
believe that the adoption will have a material effect on its results
of operations, cash flows or financial position.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measur-
ing fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. The state-
ment is effective in the fiscal first quarter of 2008 and the Com-
pany will adopt the statement at that time. The Company believes
that the adoption of SFAS No. 157 will not have a material effect
on its results of operations, cash flows or financial position.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employer’s Accounting for Defined
Pension and Other Postretirement Plans — an amendment of FASB
Statements 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. It also requires the recognition as a
component of other comprehensive income (OCI), net of tax, of
the gains or losses and prior service costs or credits that arise
during the period but are not recognized as components of net
periodic benefit cost pursuant to statements 87 or 106. The
statement also has new provisions regarding the measurement
date as well as certain disclosure requirements. The statement
was effective at fiscal year end 2006 and the Company adopted
the statement at that time.
In September 2006, the SEC issued Staff Accounting
Bulletin (SAB) 108, which expresses the Staff’s views regarding
the process of quantifying financial statement misstatements.
The bulletin was effective at fiscal year end 2006. The imple-
mentation of this bulletin had no impact on the Company’s
results of operations, cash flows or financial position.
The following accounting pronouncements became
effective in 2005 and did not have a material impact on the
Company’s results of operations, cash flows or financial position:
•FIN 47: Accounting for Conditional Asset Retirement
Obligations — an interpretation of FASB Statement No. 143.
•SFAS 153: Exchanges of Non-monetary Assets, an amendment of
APB 29.
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.
ECONOMIC AND MARKET FACTORS
Johnson & Johnson is aware that its products are used in an environ-
ment 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 1996 –
2006, in the United States, the weighted average compound annual
growth rate of Johnson & Johnson net price increases for health care
products (prescription and over-the-counter drugs, hospital andpro-
fessional products) was below the U.S. Consumer PriceIndex (CPI).
Inflation rates, even though moderate in many parts of the
world during 2006, 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, productivity
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.
The Company also operates in an environment which has
become increasingly hostile to intellectual property rights.
Generic drug firms have filed Abbreviated New Drug Applica-
tions seeking to market generic forms of most of the Company’s
key pharmaceutical products, prior to expiration of the applicable
patents covering those products. In the event the Company is not
successful in defending the patent claims challenged in Abbrevi-
ated New Drug Application filings, the generic firms will then
introduce generic versions of the product at issue, resulting in
the potential for substantial market share and revenue losses for
that product. For further information see the discussion on “Liti-
gation Against Filers of Abbreviated NewDrug Applications” in
Note 18.
LEGAL PROCEEDINGS
The Company is involved in numerous product liability cases in
the United States, many of which concern adverse reactions to
drugs and medical devices. The damages claimed are substan-
tial, and while the Company is confident of the adequacy of
the warnings and instructions for use which accompany such
products, it is not feasible to predict the ultimate outcome of
litigation. However, the Company believes that if any liability
results from such cases, it will be substantially covered by
existing amounts accrued in the Company’s balance sheet
under itsself-insurance program and by third party product
liability insurance.
The Company is also involved in a number of patent, trade-
mark and other lawsuits incidental to its business. The ultimate
legal and financial liability of the Company in respect to all
claims, lawsuits and proceedings referred to above cannot be
estimated with any certainty. However, in the Company’s opin-
ion, based on its examination of these matters, its experience
to date and discussions with counsel, the ultimate outcome
of legal proceedings, net of liabilities already accrued in the
Company’s balance sheet, is not expected to have a material
adverse effect on the Company’s financial position, although
the resolution in any reporting period of one or more of these
matters could have a significant impact on the Company’s results
of operations and cash flows for that period.
See Note 18 for further information regarding legal
proceedings.
48 JOHNSON & JOHNSON 2006 ANNUAL REPORT