Johnson and Johnson 2011 Annual Report Download - page 54

52 JOHNSON & JOHNSON 2011 ANNUAL REPORT
DETERMINATION OF FAIR VALUE OF PLAN ASSETS
The Plan has an established and well-documented process for
determining fair values. Fair value is based upon quoted market
prices, where available. If listed prices or quotes are not available,
fair value is based upon models that primarily use, as inputs,
market-based or independently sourced market parameters, includ-
ing yield curves, interest rates, volatilities, equity or debt prices,
foreign exchange rates and credit curves.
While the Plan believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value
at the reporting date.
VALUATION HIERARCHY
The authoritative literature establishes a three-level hierarchy to
prioritize 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
hierarchy is based upon the lowest level of input that is significant
tothefairvaluemeasurement.
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 classi-
fied within Level 1 of the valuation hierarchy. If quoted market prices
are not available for the specific security, then fair values are esti-
mated 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,
theyareclassifiedasLevel2.
• 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 securi-
ties. 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.
The following table sets forth the trust investments measured at fair value as of January 1, 2012 and January 2, 2011:
Quoted Prices Significant
in Active Other Significant
Markets for Observable Unobservable
Identical Assets Inputs Inputs
(Level 1) (Level 2) (Level 3) Total Assets
(Dollars in Millions) 2011 2010 2011 2010 2011 2010 2011 2010
Short-term investment funds $ 161 80 632 371 ——793 451
Government and agency securities 59 69 1,528 1,484 ——1,587 1,553
Debt instruments 1 5 1,106 1,149 9 13 1,116 1,167
Equity securities 6,682 6,744 2 14 16 24 6,700 6,782
Commingled funds 8 1 3,375 3,173 33 35 3,416 3,209
Insurance contracts ————25 29 25 29
Other assets 1 10 33 150 65 82 99 242
Trust investments at fair value $6,912 6,909 6,676 6,341 148 183 13,736 13,433