Johnson and Johnson 2012 Annual Report Download - page 41

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reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period.
The maximum length of time over which the Company is hedging transaction exposure is 18 months, excluding interest
rate swaps. The amount ultimately realized in earnings will differ as foreign exchange rates change. Realized gains and
losses are ultimately determined by actual exchange rates at maturity of the derivative.
The following table is a summary of the activity related to designated derivatives for the fiscal years ended December 30,
2012 and January 1, 2012:
Cash Flow Hedges by Income Statement Caption
Gain/(Loss)
Recognized in
Accumulated OCI(1)
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income(1)
Gain/(Loss)
Recognized in
Other
Income/Expense(2)
(Dollars in Millions) 2012 2011 2012 2011 2012 2011
Sales to customers (3) $45 (60) (58) (9) (1) (1)
Cost of products sold (3) 103 (103) (98) (154) (4) 2
Research and development expense (3) (42) 24 19 (22) (1) (1)
Interest (income)/Interest expense, net (4) 11 (406) (16) (45) – –
Other (income) expense, net (3) (65) 45 29 (2) – 1
Total $52 (500) (124) (232) (6) 1
All amounts shown in the table above are net of tax.
(1) Effective portion
(2) Ineffective portion
(3) Foreign exchange contracts
(4) Cross currency interest rate swaps
For the fiscal years ended December 30, 2012 and January 1, 2012, a gain of $48 million and a loss of $23 million,
respectively, was recognized in Other (income) expense, net, relating to foreign exchange contracts not designated as
hedging instruments.
Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based
measurement determined using assumptions that market participants would use in pricing an asset or liability. The
authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels
within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.
The fair value of a derivative financial instrument (i.e., forward exchange contract, currency swap) is the aggregation by
currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently
converted to the U.S. Dollar at the current spot foreign exchange rate. The Company does not believe that fair values of
these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that
the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position.
The Company also holds equity investments that are classified as Level 1 as they are traded in an active exchange market.
The Company did not have any other significant financial assets or liabilities which would require revised valuations under
this standard that are recognized at fair value.
The following three levels of inputs are used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Significant other observable inputs.
Level 3 – Significant unobservable inputs.
Johnson & Johnson 2012 Annual Report •33