Summary
Johnson & Johnson (JNJ) has filed an 8-K report detailing the adoption of SFAS No. 123(R), Share-Based Payment, effective for its fiscal first quarter of 2006. The company elected to use the modified retrospective transition method, which required restating previously issued consolidated financial statements for fiscal years 2003, 2004, and 2005. This restatement reflects the impact of accounting for share-based payments under the new standard, which generally requires expensing stock options and other equity awards.
Key Highlights
- 1Adoption of SFAS No. 123(R) for share-based payment accounting, effective Q1 2006.
- 2Utilized the modified retrospective transition method for adoption.
- 3Previously reported financial statements for 2003, 2004, and 2005 have been adjusted.
- 4The adoption impacts the recognition of expenses related to stock options and other equity awards.
- 5Key financial information, including Management's Discussion and Analysis and consolidated financial statements for 2005, are incorporated by reference.
- 6The filing includes Exhibit 12 (Ratio of Earnings to Fixed Charges) and Exhibit 13 (relevant sections of the 2005 Annual Report to Shareholders).
Frequently Asked Questions
SFAS No. 123(R), Share-Based Payment, is a U.S. accounting standard that requires companies to recognize the cost of employee stock options and other equity-based compensation in their financial statements. Johnson & Johnson is adopting it as required by accounting regulations to provide a more accurate reflection of the cost of employee compensation.
This method means that Johnson & Johnson has restated its financial results for prior periods (2003-2005) to reflect the new accounting standard. This allows for a more consistent comparison of financial performance over time compared to a prospective approach, which would only apply the new rules to future awards.
The adoption of SFAS No. 123(R) generally leads to an increase in reported expenses, as the fair value of stock options and other equity awards must now be recognized over their vesting period. This can result in lower reported net income and earnings per share in periods where significant share-based awards are granted or expensed.
The filing incorporates by reference Exhibit 13, which includes pages 28 through 66 of the company's 2005 Annual Report to Shareholders. This section contains the adjusted Management's Discussion and Analysis, Consolidated Financial Statements, and Notes to Consolidated Financial Statements, which would detail the impact of adopting SFAS No. 123(R).