Johnson and Johnson 2015 Annual Report Download - page 51

exchanges products from inventory for returned products. The sales returns reserve for the total Company has been
approximately 1.0% of annual sales to customers during the fiscal reporting years 2015, 2014 and 2013.
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 the 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 and includes it in sales to customers.
These arrangements are evaluated to determine the appropriate amounts to be deferred or recorded as a reduction of
revenue.
Shipping and Handling
Shipping and handling costs incurred were $996 million, $1,068 million and $1,128 million in 2015, 2014 and 2013,
respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for
shipping and handling is less than 0.5% of sales to customers for all periods presented.
Inventories
Inventories are stated at the lower of cost or market determined by the first-in, first-out method.
Intangible Assets and Goodwill
The authoritative literature on U.S. GAAP requires that goodwill and intangible assets with indefinite lives be assessed
annually for impairment. The Company completed the annual impairment test for 2015 in the fiscal fourth quarter. Future
impairment tests will be performed annually in the fiscal fourth quarter, or sooner if warranted. Purchased in-process
research and development is accounted for as an indefinite lived intangible asset until the underlying project is completed,
at which point the intangible asset will be accounted for as a definite lived intangible asset, or abandoned, at which point
the intangible asset will be written off or partially impaired.
Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for
impairment when warranted by economic conditions. See Note 5 for further details on Intangible Assets and Goodwill.
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 and actuarially
determined estimates where applicable. The accruals are adjusted periodically as additional information becomes
available. The Company accrues an estimate of the legal defense costs needed to defend each matter when those costs
are probable and can be reasonably estimated.
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
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