Johnson and Johnson 2015 Annual Report Download - page 57

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expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current
period earnings in Other (income) expense, net for forward foreign exchange contracts and cross currency interest rate
swaps. For interest rate swaps designated as fair value hedges, hedge ineffectiveness, if any, is included in current period
earnings within interest expense. For the current reporting period, hedge ineffectiveness associated with interest rate
swaps was not material.
As of January 3, 2016, the balance of deferred net losses on derivatives included in accumulated other comprehensive
income was $36 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income
and Note 13. The Company expects that substantially all of the amounts related to forward foreign exchange contracts will
be 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 contracts. The amount ultimately realized in earnings may 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 derivatives designated as cash flow hedges for the fiscal years
ended January 3, 2016 and December 28, 2014:
(Dollars in Millions)
Gain/(Loss)
Recognized In
Accumulated OCI(1)
Gain/(Loss)
Reclassified From
Accumulated OCI
Into Income(1)
Gain/(Loss)
Recognized In
Other
Income/Expense(2)
Cash Flow Hedges by Income Statement Caption 2015 2014 2015 2014 2015 2014
Sales to customers(3) $(83) (106) (126) (3) (5) (5)
Cost of products sold(3) (22) 58 122 204 14 2
Research and development expense(3) (3) 39 6 7 1 —
Interest (income)/Interest expense, net (4) (40) 21 — (15) — —
Other (income) expense, net(3) 33 80 60 3 1 —
Total $(115) 92 62 196 11 (3)
All amounts shown in the table above are net of tax.
(1) Effective portion
(2) Ineffective portion
(3) Forward foreign exchange contracts
(4) Cross currency interest rate swaps
For the fiscal years ended January 3, 2016 and December 28, 2014, a loss of $34 million and a gain of $5 million,
respectively, was recognized in Other (income) expense, net, relating to forward 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 foreign exchange contracts, interest rate contracts) 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 which are classified as Level 1 and debt securities which
are classified as Level 2. 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 2015 Annual Report •45