Johnson and Johnson 2006 Annual Report Download - page 57

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.
CASH EQUIVALENTS
The Company considers securities with maturities of three
months or less, when purchased, to be cash equivalents.
INVESTMENTS
Short-term marketable securities are carried at cost, which
approximates fair value. Investments classified as available-for-
sale are carried at estimated fair value with unrealized gains and
losses recorded as a component of accumulated other compre-
hensive income. Long-term debt securities that the Company has
the ability and intent to hold until maturity are carried at amortized
cost, which also approximates fair value. Management determines
the appropriate classification of its investment in debt and equity
securities at the time of purchase and re-evaluates such determi-
nation at each balance sheet date. The Company periodically
reviews its investments in equity securities for impairment and
adjusts these investments to their fair value when a decline in
market value is deemed to be other than temporary.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at cost. The
Company utilizes the straight-line method of depreciation
over the estimated useful lives of the assets:
Building and building equipment 20-40 years
Land and leasehold improvements 10-20 years
Machinery and equipment 2-13 years
The Company capitalizes certain computer software and
development costs, included in machinery and equipment, when
incurred in connection with developing or obtaining computer
software for internal use. Capitalized software costs are amor-
tized over the estimated useful lives of the software, which
generally range from 3 to 5 years.
The Company reviews long-lived assets to assess recover-
ability using undiscounted cash flows. When necessary, charges
for impairments of long-lived assets are recorded for the amount
by which the present value of future cash flows is less than the
carrying value of these assets.
REVENUE RECOGNITION
The Company recognizes revenue from product sales when the
goods are shipped or delivered and title and risk of loss pass to
the customer. Provisions for certain rebates, sales incentives,
trade promotions, 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 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. Sales returns
allowances represent a reserve for products that may be returned
due to expiration, destruction in the field, or in specific areas, prod-
uct recall. The returns reserve is based on historical return trends
by product and by market as a percent togross 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 based on the estimated sales volumes for
the incentive period and are recorded as products are sold. The
Company also earns service revenue for co-promotion of certain
products and includes it in sales tocustomers.
SHIPPING AND HANDLING
Shipping and handling costs incurred were $693 million, $736 mil-
lion and $679 million in 2006, 2005 and 2004, respectively, and
are included in selling, marketing and administrative expense. The
amount of revenue received for shipping and handling is less than
0.5% of sales to customers for all periods presented.
INVENTORIES
Inventories are stated at the lower of cost or market determined
by the first-in, first-out method.
GOODWILL AND INTANGIBLE ASSETS
Effective at the beginning of fiscal year 2002 in accordance with
SFAS No. 142, the Company discontinued the amortization relat-
ing to all existing goodwill and indefinite lived intangible assets,
which are non-amortizable. SFAS No. 142 requires that goodwill
and non-amortizable intangible assets be assessed annually for
impairment. The Company completed the annual impairment
test for 2006 in the fiscal fourth quarter and no impairment was
determined. Future impairment tests will be performed annually
in the fiscal fourth quarter, or sooner if a triggering event occurs.
Intangible assets that have finite useful lives continue to be
amortized over their useful lives, and are reviewed for impair-
ment when warranted by economic conditions. See Note 7 for
further details on Intangible Assets.
FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended.
SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether the derivative is
designated as part of a hedge transaction, and if so, the type of
hedge transaction.
NOTES TO CONSOLIDATED FINANCIAL ST A TEMENTS55