Johnson and Johnson 2008 Annual Report Download - page 52

The designation as a cash flow hedge is made at the entrance
date into the derivative contract. At inception, all derivatives are
expected to be highly effective. Changes in the fair value of a deriva-
tive that is designated as a cash flow hedge and is highly effective
are recorded in accumulated other comprehensive income until the
underlying transaction affects earnings, and are then reclassified to
earnings in the same account as the hedged transaction. The fair
value of a derivative instrument (i.e., forward foreign exchange con-
tract, currency swap) is the aggregation, by currency, of all future
cash flows discounted to its present value at prevailing market
interest rates and subsequently converted to the U.S. Dollar at the
current spot foreign exchange rate.
On an ongoing basis, the Company assesses whether each
derivative continues to be highly effective in offsetting changes in
the cash flows of hedged items. If, and when, a derivative is no longer
expected to be highly effective, hedge accounting is discontinued.
Hedge ineffectiveness, if any, is included in current period earnings,
and was insignificant in 2008, 2007 and 2006.
The Company documents all relationships between hedged
items and derivatives. The overall risk management strategy
includes reasons for undertaking hedge transactions and entering
into derivatives. The objectives of this strategy are: (1) minimize
foreign currency exposure’s impact on the Company’s financial
performance; (2) protect the Company’s cash flow from adverse
movements in foreign exchange rates; (3) ensure the appropriate-
nessof financial instruments; and (4) manage the enterprise risk
associated with financial institutions.
PRODUCT LIABILITY
Accruals for product liability claims are recorded, on an undis-
counted basis, when it is probable that a liabilityhas been incurred
and the amount of the liability can be reasonably estimated based
on existing information. The accruals are adjusted periodically as
additional information becomes available. As a result of cost and
availability factors, effective November 1, 2005, the Company
ceased purchasing third-party product liability insurance. Based
on the availability of prior coverage, receivables for insurance
recoveries related to product liability claims are recorded on
an undiscounted basis, when it is probable that a recovery will
be realized.
RESEARCH AND DEVELOPMENT
Research and development expenses are expensed as incurred.
Upfront and milestone payments made to third-parties in connec-
tion with research and development collaborations are expensed as
incurred up to the point of regulatory approval. Payments made to
third-parties subsequent to regulatory approval are capitalized
and amortized over the remaining useful life of the related product.
Amounts capitalized for such payments are included in other
intangibles, net of accumulated amortization.
ADVERTISING
Costs associated with advertising are expensed in the year incurred
and areincluded in the selling, marketing and administrative
expenses. Advertising expenses worldwide, which are comprised of
television, radio, print media and Internet advertising, were $2.9 bil-
lion in 2008, $2.7 billion in 2007 and $1.9 billion in 2006.
INCOME TAXES
The Company intends to continue to reinvest its undistributed
international earnings to expand its international operations; there-
fore, no U.S. tax expense has been recorded with respect to the
undistributed portion not intended for repatriation. At December 28,
2008 and December 30, 2007, the cumulative amount of undistrib-
uted international earnings were approximately $27.7 billion and
$23.7 billion, respectively.
Deferred income taxes are recognized for tax consequences
of temporary differences by applying enacted statutory tax rates,
applicable to future years, to differences between the financial
reporting and the tax basis of existing assets and liabilities.
NET EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings avail-
able to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities
were exercised or converted into common stock using the treasury
stock method.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the
amounts reported. Estimates are used when accounting for sales
discounts, rebates, allowances and incentives, product liabilities,
income taxes, depreciation, amortization, employee benefits,
contingencies and intangible asset and liability valuations. For
instance, in determining annual pension and post-employment ben-
efit costs, the Company estimates the rate of return on plan assets,
and the cost of futurehealth carebenefits. Actual results may or
may not differ from those estimates.
ANNUAL CLOSING DATE
The Company follows the concept of a fiscal year, which ends on
the Sundaynearest tothe end of the month of December.Normally
each fiscal year consists of 52 weeks, but every five or six years, as
will be the case in 2009, the fiscal year consists of 53 weeks.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to
current year presentation.
2. Inventories
At the end of 2008 and 2007, inventories were comprised of:
(Dollars in Millions) 2008 2007
Raw materials and supplies $ 839 905
Goods in process 1,372 1,384
Finished goods 2,841 2,821
$5,052 5,110
50 JOHNSON & JOHNSON 2008 ANNUAL REPORT