Johnson & Johnson
TO: DR. GREIN’S TEAM
FROM: ASHNA PATEL, SHAN WANG
DATE: JANUARY 27, 2015
SUBJECT: JOHNSON & JOHNSON CASE ASSIGNMENT
This memorandum has been created to investigate the long-lived assets and implications associated with Johnson and Johnson’s accounting methods. In this memo we would like to cover five main topics: long-lived assets, depreciation and amortization, J&J policies regarding intangible assets, cash flow statements, and asset turnover/ return on assets.
In 2013, J&J reported three different types of long-lived assets on their Consolidated Balance Sheet. The first kind reported was Plant, Property, and Equipment. The second one was Intangible Assets and third was Goodwill. We will be investigating these three assets in further detail. J&J reported $16,710 million net worth of PP&E. Within this major asset category are many sub accounts: Land & Improvements, Building & Building Equipment, and Construction in Progress, Machine & Equipment, and Depreciation. Johnson & Johnson uses the straight-line depreciation method for its assets. In 2013, there was $2.7 billion of accumulated depreciation and amortization of capitalized interested; it increased about $.2 billion since 2012. Table 1 lays out the estimated useful lives of the assets. The company capitalizes certain computer software and development cost which are amortized over the span of 3-8 years. Next, we will be discussing Intangible Assets of the company. J&J reports $1,363 million worth of amortization expense. In 2012, they reported about $1,146 million. The average amortization periods for patents and trademarks and customer relations are 17 years and 24 years. Now the question is that do these significant increases in expense make sense? It makes sense that the expense increased over the past year because the assets have also increased.
During the fiscal first quarter of 2013, Johnson&Johnson adopted the Financial Accounting Standards Board (FASB) guidance and amendments related to testing indefinite-lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This update became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.
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 2013 in the fiscal fourth quarter. Future impairment tests will be performed annually in the fiscal fourth quarter, or…