Johnson and Johnson 2009 Annual Report Download - page 53

VALUATION HIERARCHY
The authoritative literature establishes a three-level hierarchy to pri-
oritize the inputs used in measuring fair value. The levels within the
hierarchy are described in the table below with Level 1 having the
highest priority and Level 3 having the lowest.
A financial instrument’s categorization within the valuation hierar-
chy is based upon the lowest level of input that is significant to the
fair value measurement.
Following is a description of the valuation methodologies used
for the investments measured at fair value.
• Short-term investments — Cash and quoted short-term instru-
ments are valued at the closing price or the amount held on deposit
by the custodian bank. Other investments are through investment
vehicles valued using the Net Asset Value (NAV) provided by the
administrator of the fund. The NAV is based on the value of the
underlying assets owned by the fund, minus its liabilities, and then
divided by the number of shares outstanding. The NAV is a quoted
price in a market that is not active and classified as Level 2.
• Government and agency securities — A limited number of these
investments are valued at the closing price reported on the major
market on which the individual securities are traded. Where quoted
prices are available in an active market, the investments are classified
within Level 1 of the valuation hierarchy. If quoted market prices are
not available for the specific security, then fair values are estimated
by using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. When quoted market prices
for a security are not available in an active market, they are classified
as Level 2.
• Debt instruments — A limited number of these investments are
valued at the closing price reported on the major market on which
the individual securities are traded. Where quoted prices are avail-
able in an active market, the investments are classified as Level 1.
If quoted market prices are not available for the specific security,
then fair values are estimated by using pricing models, quoted
prices of securities with similar characteristics or discounted cash
flows and are classified as Level 2. Level 3 debt instruments are
priced based on unobservable inputs.
• Equity securities — Common stocks are valued at the closing
price reported on the major market on which the individual securi-
ties are traded. Substantially all common stock is classified within
Level 1 of the valuation hierarchy.
• Commingled funds — The investments are public investment
vehicles valued using the NAV provided by the fund administrator.
The NAV is based on the value of the underlying assets owned by
the fund, minus its liabilities, and then divided by the number of
shares outstanding. Assets in the Level 2 category have a quoted
market price in a market that is not active.
• Insurance contracts — The instruments are issued by insurance
companies. The fair value is based on negotiated value and the
underlying investments held in separate account portfolios as well
as considering the credit worthiness of the issuer. The underlying
investments are government, asset-backed and fixed income
securities. In general, insurance contracts are classified as Level 3 as
there are no quoted prices nor other observable inputs for pricing.
• Other assets — Other assets are represented primarily by limited
partnerships and real estate investments, as well as commercial
loans and commercial mortgages that are not classified as corporate
debt. Other assets that are exchange listed and actively traded are
classified as Level 1 while inactively traded assets are classified as
Level 2. Most limited partnerships represent investments in private
equity and similar funds that are valued by the general partners.
These, as well as any other assets valued using unobservable inputs,
are classified as Level 3.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 51
The following table sets forth the trust investments measured at fair value as of January 3, 2010:
Quoted Prices Significant
in Active Other Significant
Markets for Observable Unobservable
Identical Assets Inputs Inputs
(Dollars in Millions) (Level 1) (Level 2) (Level 3) Total Assets
Short-term investment funds $ 91 358 —449
Government and agency securities —1,165 —1,165
Debt instruments 3 1,145 5 1,153
Equity securities 5,068 58 15 5,141
Commingled funds —2,673 26 2,699
Insurance contracts ——32 32
Other assets 31 171 82 284
Trust investments at fair value $5,193 5,570 160 10,923
LEVEL 3 GAINS AND LOSSES
The table below sets forth a summary of changes in the fair value of the Plan’s Level 3 assets for the year ended January 3, 2010:
Debt Equity Commingled Insurance Other Total
(Dollars in Millions) Instruments Securities Funds Contracts Assets Level 3
Balance December 28, 2008 $7 15 15 29 85 151
Realized gains (losses) ——— 3—3
Unrealized gains (losses) 2 (2) (2) —(3) (5)
Purchases, sales, issuances and settlements, net (4) 2 13 ——11
Balance January 3, 2010 $5 15 26 32 82 160