Johnson and Johnson 2008 Annual Report Download - page 51

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 approxi-
mates 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 comprehensive
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 appropri-
ate classification of its investment in debt and equity securities at
the time of purchase and re-evaluates such determination at each
balance sheet date. The Company periodically reviews its invest-
ments in equity securities for impairment and adjusts these invest-
ments 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 Companycapitalizes certain computer software and develop-
ment costs, included in machinery and equipment, when incurred
in connection with developing or obtaining computer software for
internal use. Capitalized softwarecosts are amortized over the
estimated useful lives of the software, which generally range from
3 to 5 years.
The Company reviewslong-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 areshipped or delivered and title and risk of loss pass to the
customer. Provisions for certain rebates, sales incentives, trade pro-
motions, 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 arrange-
ments with direct, indirect and other market participants, as well
as market conditions, including prices charged by competitors.
Rebates, the largest being the Medicaid rebate provision, are esti-
mated based on contractual 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 mattersarespecifically 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 expi-
ration, 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 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 to customers. Promotional arrangements are evaluated to
determine the appropriate amounts to be deferred.
In addition, the Company enters into collaboration arrange-
ments, which contain multiple revenue generating activities. The
revenue for these arrangements is recognized as each activity is
performed or delivered, based on the relative fair value. Upfront
fees received as part of these arrangements are deferred and
recognized as revenue earned over the obligation period.
SHIPPING AND HANDLING
Shipping and handling costs incurred were $1,017 million, $934 mil-
lion and $693 million in 2008, 2007 and 2006, 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 tocustomers for all periods presented.
INVENTORIES
Inventories are stated at the lower of cost or market determined by
the first-in, first-out method.
INTANGIBLE ASSETS AND GOODWILL
SFAS No. 142 requires that goodwill and non-amortizable intangible
assets be assessed annually for impairment. The Company com-
pleted the annual impairment test for 2008 in the fiscal fourth quar-
ter 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 impairment
when warranted by economic conditions. See Note 7 for further
details on Intangible Assets.
FINANCIAL INSTRUMENTS
The Companyfollows 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 bal-
ance 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 hedgetransaction, and if so,the type of hedgetransaction.
The Company uses forward exchange contracts to manage
its exposure to the variability of cash flows, primarily related to the
foreign exchange rate changes of future intercompany product and
third-party purchases of raw materials denominated in foreign cur-
rency. The Company also uses currency swaps to manage currency
risk primarily related to borrowings. Both of these types of deriva-
tives are designated as cash flow hedges. Additionally, the Company
uses forward exchange contracts to offset its exposure to certain
foreign currency denominated assets and liabilities. These forward
exchange contracts are not designated as hedges and therefore,
changes in the fair values of these derivatives are recognized
currently in earnings, thereby offsetting the current earnings effect
of the related foreign currency assets and liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 49