Johnson and Johnson 2012 Annual Report Download - page 37

The Company enters into collaborative arrangements, typically with other pharmaceutical or biotechnology companies, to
develop and commercialize drug candidates or intellectual property. These arrangements typically involve two (or more)
parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the
commercial success of the activities. These collaborations usually involve various activities by one or more parties,
including research and development, marketing and selling and distribution. Often, these collaborations require upfront,
milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the
success of the asset in development. Amounts due from collaborative partners related to development activities are
generally reflected as a reduction of research and development expense because the performance of contract
development services is not central to the Company’s operations. In general, the income statement presentation for these
collaborations is as follows:
Nature/Type of Collaboration Statement of Earnings Presentation
Third-party sale of product Sales to customers
Royalties/milestones paid to collaborative partner
(post-regulatory approval)*
Cost of goods sold
Royalties received from collaborative partner Other income (expense), net
Upfront payments & milestones paid to collaborative partner
(pre-regulatory approval)
Research and development expense
Research and development payments to collaborative
partner
Research and development expense
Research and development payments received from
collaborative partner
Reduction of Research and development expense
* Milestones are capitalized as intangible assets and amortized to cost of goods sold over the useful life.
For all years presented, there was no individual project that represented greater than 5% of the total annual consolidated
research and development expense.
Advertising
Costs associated with advertising are expensed in the year incurred and are included in selling, marketing and
administrative expenses. Advertising expenses worldwide, which comprised television, radio, print media and Internet
advertising, were $2.3 billion, $2.6 billion and $2.5 billion in 2012, 2011 and 2010, respectively.
Income Taxes
Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any
difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company
estimates deferred tax assets and liabilities based on current tax regulations and rates. Changes in tax laws and rates may
affect recorded deferred tax assets and liabilities in the future.
The Company has unrecognized tax benefits for uncertain tax positions. The Company follows U.S. GAAP which
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would
not have a material effect on the Company’s results of operations, cash flows or financial position.
At December 30, 2012 and January 1, 2012, the cumulative amounts of undistributed international earnings were
approximately $49.0 billion and $41.6 billion, respectively. At December 30, 2012 and January 1, 2012, the Company’s
foreign subsidiaries held balances of cash and cash equivalents in the amounts of $14.8 billion and $24.5 billion,
respectively. The Company has not provided deferred taxes on the undistributed earnings from certain international
subsidiaries where the earnings are considered to be permanently reinvested. The Company intends to continue to
reinvest these earnings in international operations. If the Company decided at a later date to repatriate these earnings to
the U.S., the Company would be required to provide for the net tax effects on these amounts. The Company does not
determine the deferred tax liability associated with these undistributed earnings, as such determination is not practicable.
See Note 8 to the Consolidated Financial Statements for further information regarding income taxes.
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