Johnson and Johnson 2013 Annual Report Download - page 38

Financial Instruments
As required by U.S. GAAP, all derivative instruments are recorded on the balance sheet at fair value. 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, with Level 1 having the highest
priority and Level 3 having the lowest. 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.
The Company documents all relationships between hedged items and derivatives. The overall risk management strategy
includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are:
(1) minimize foreign currency exposure’s impact on the Company’s financial performance; (2) protect the Company’s cash
flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and
(4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on Financial
Instruments.
Product Liability
Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are
adjusted periodically as additional information becomes available.
As a result of cost and availability factors, effective November 1, 2005, the Company ceased purchasing third-party
product liability insurance. The Company has self insurance through a wholly-owned captive insurance company. In
addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are
probable and amounts can be reasonably estimated. Based on the availability of prior coverage, receivables for insurance
recoveries related to product liability claims are recorded on an undiscounted basis, when it is probable that a recovery will
be realized. As appropriate, reserves against these receivables are recorded for estimated amounts that may not be
collected from third-party insurers.
Concentration of Credit Risk
Global concentration of credit risk with respect to trade accounts receivables continues to be limited due to the large
number of customers globally and adherence to internal credit policies and credit limits. Recent economic challenges in
Italy, Spain, Greece and Portugal (the Southern European Region) have impacted certain payment patterns, which have
historically been longer than those experienced in the U.S. and other international markets. The total net trade accounts
receivable balance in the Southern European Region was approximately $2.3 billion as of December 29, 2013 and
approximately $2.1 billion as of December 30, 2012. Approximately $1.3 billion as of December 29, 2013 and
approximately $1.2 billion as of December 30, 2012 of the Southern European Region net trade accounts receivable
balance related to the Company’s Consumer, Vision Care and Diabetes Care businesses as well as certain
Pharmaceutical and Medical Devices and Diagnostics customers which are in line with historical collection patterns.
The remaining balance of net trade accounts receivable in the Southern European Region has been negatively impacted
by the timing of payments from certain government owned or supported health care customers as well as certain
distributors of the Pharmaceutical and Medical Devices and Diagnostics local affiliates. The total net trade accounts
receivable balance for these customers were approximately $1.0 billion at December 29, 2013 and $0.9 billion at
December 30, 2012. The Company continues to receive payments from these customers and in some cases late payment
premiums. For customers where payment is expected over periods of time longer than one year, revenue and trade
receivables have been discounted over the estimated period of time for collection. Allowances for doubtful accounts have
been increased for these customers, but have been immaterial to date. The Company will continue to work closely with
these customers on payment plans, monitor the economic situation and take appropriate actions as necessary.
Research and Development
Research and development expenses are expensed as incurred. Upfront and milestone payments made to third parties in
connection with research and development collaborations are expensed as incurred up to the point of regulatory approval.
Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful
life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated
amortization.
28 •Johnson & Johnson 2013 Annual Report