Johnson and Johnson 2012 Annual Report Download - page 22

Other Information
Critical Accounting Policies and Estimates
Management’s discussion and analysis of results of operations and financial condition are based on the Company’s
consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in
the U.S. (GAAP). The preparation of these financial statements requires that management make estimates and
assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures.
Actual results may or may not differ from these estimates. The Company believes that the understanding of certain key
accounting policies and estimates are essential in achieving more insight into the Company’s operating results and
financial condition. These key accounting policies include revenue recognition, income taxes, legal and self-insurance
contingencies, valuation of long-lived assets, assumptions used to determine the amounts recorded for pensions and other
employee benefit plans and accounting for stock options.
Revenue Recognition: The Company recognizes revenue from product sales when goods are shipped or delivered, and
title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, 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 arrangements 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 estimated 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 expiration, 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 returns reserves are accounted for in accordance with the
U.S. GAAP guidance for revenue recognition when right of return exists. Sales returns reserves are recorded at full sales
value. Sales returns in the Consumer 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 material. 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 net trade sales during the fiscal reporting years 2012, 2011 and 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 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. For all years presented, service revenues
were less than 2% of total revenues and are included in sales to customers. These arrangements are evaluated to
determine the appropriate amounts to be deferred.
In addition, the Company enters into collaboration arrangements that contain multiple revenue generating activities.
Amounts due from collaborative partners for these arrangements are 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 over the
performance period. See Note 1 to the Consolidated Financial Statements for additional disclosures on collaborations.
Reasonably likely changes to assumptions used to calculate the accruals for rebates, returns and promotions are not
anticipated to have a material effect on the financial statements. The Company currently discloses the impact of changes
to assumptions in the quarterly or annual filing in which there is a material financial statement impact.
14 •Johnson & Johnson 2012 Annual Report