Johnson and Johnson 2010 Annual Report Download - page 48

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 develop-
ment costs, included in machinery and equipment, when incurred
in connection with developing or obtaining computer software for
internal use. Capitalized software costs are amortized over the
estimated useful lives of the software, which generally range from
3 to 8 years.
The Company reviews long-lived assets to assess recoverability
using undiscounted cash flows. When certain events or changes in
operating or economic conditions occur, an impairment assessment
may be performed on the recoverability of the carrying value of
these assets. If the asset is determined to be impaired, the loss is
measured based on the difference between the asset’s fair value
and its carrying value. If quoted market prices are not available, the
Company will estimate fair value using a discounted value of
estimated future cash flows.
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 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 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 expira-
tion, 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. In accordance with the
Company’s accounting policies, the Company generally issues credit
to customers for returned goods. The Company’s sales return
reserves are accounted for in accordance with U.S. GAAP guidance
for revenue recognition when right of return exists. Sales return
reserves are recorded at full sales value. Sales returns in the Con-
sumer and Pharmaceutical segments are almost exclusively not
resalable. Sales returns for certain franchises in the Medical Devices
and Diagnostics segment are typically resalable but are not mate-
rial. The Company rarely exchanges products from inventory for
returned products. The sales returns reserve for the total Company
has ranged between 1.0% and 1.2% of annual sales to customers
during the prior three fiscal reporting years 2008–2010.
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 rev-
enue for co-promotion of certain products and includes it in sales
to customers. These arrangements are evaluated to determine the
appropriate amounts to be deferred.
SHIPPING AND HANDLING
Shipping and handling costs incurred were $945 million, $964 mil-
lion and $1,017 million in 2010, 2009 and 2008, 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.
INTANGIBLE ASSETS AND GOODWILL
The authoritative literature on U.S. GAAP requires that goodwill
and intangible assets with indefinite lives be assessed annually for
impairment. The Company completed the annual impairment test
for 2010 in the fiscal fourth quarter and no impairment was deter-
mined. 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 5 for further
details on Intangible Assets and Goodwill.
FINANCIAL INSTRUMENTS
As required by U.S. GAAP, all derivative instruments are 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.
46 JOHNSON & JOHNSON 2010 ANNUAL REPORT