Canon 2002 Annual Report Download - page 42

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CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States, and based on the selection and application of
significant accounting policies, which require management to
make significant estimates and assumptions. Canon believes
that the following are some of the more critical judgment areas
in the application of its accounting policies that currently affect
its financial condition and results of operations.
Valuation of inventories
Inventories are stated at the lower of cost or market. Cost is
determined principally by the average method for domestic
inventories and the first-in, first-out method for overseas
inventories. Market value is the estimated selling price in the
ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make a sale.
Canon routinely reviews its inventories for their salability and for
indications of obsolescence to determine if inventories should
be written-down to market value. Judgments and estimates
must be made and used in connection with establishing such
allowances in any accounting period. In estimating the market
value of its inventories, Canon considers the age of the
inventories and the likelihood of spoilage or changes in market
demand for its inventories.
Environmental liabilities
Canon is subject to liability for the investigation and clean-up of
environmental contamination at each of the properties that
Canon owns or operates, as well as at certain properties Canon
formerly owned or operated. Canon employs extensive internal
environmental protection programs that focus on preventive
measures. Canon conducts environmental assessments for a
number of its locations and operating facilities. If Canon was to
be held responsible for damages in any future litigation or
proceedings, such costs may not be covered by insurance and
may be material. The liability for environmental remediation and
other environmental costs is accrued when it is considered
probable and costs can be reasonably estimated.
Collectibility of Receivables
Canon is required to estimate the collectibility of its notes
receivable and accounts receivable. A considerable amount of
judgment is required in assessing the ultimate realization of
these receivables including the current creditworthiness of each
customer taking into account business conditions, turnover of
receivables and financial positions for significant customers.
Significant changes in required reserves have been recorded in
recent periods and may occur in the future depending on
financial status of customers under the current environment. In
case financial quality of customers becomes worse, reserves for
each customer will increase and will adversely affect net income.
Deferred Tax Assets
Canon currently has significant deferred tax assets, which are
subject to periodic recoverability assessments. Realization of
Canon’s deferred tax assets is principally dependent upon its
achievement of projected future taxable income. Canon’s
judgments regarding future profitability may change due to future
market conditions, its ability to continue to successfully execute
its operating restructuring activities and other factors. These
changes, if any, may require possible recognition of significant
valuation allowance to these deferred tax asset balances. In case
Canon considers deferred tax assets may not recover,
unrecoverable amounts should be included in income taxes in
the statements of income and may adversely affect net income.
Recoverability of long-lived assets and
identifiable intangibles
Canon’s long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future net cash flows undiscounted and without interest
changes expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. The determination of estimated
future net cash flows involves significant judgments. Changes in
strategy and/or market conditions could significantly impact
these judgments and require impairment of recorded asset
balances that may adversely affect net income.
Employee retirement and severance benefit plan
Canon has significant employee retirement and severance
benefit costs and credits which are developed from actuarial
valuations. Inherent in these valuations are key assumptions
including discount rates and expected return on plan assets.
Canon is required to consider current market conditions,
including changes in interest rates, in selecting these
assumptions. Changes in the related employee retirement and
severance benefit costs or credits may occur in the future in
addition to changes resulting from fluctuations in Canon’s
related headcount due to changes in the assumptions. Changes
in assumptions will affect Canon’s financial figures. Decrease of
discount rates leads to increase of actuarial pension benefit
obligations that could lead to an increase in amortization cost
through amortization of actuarial gain or loss, and vice versa.
Increase of expected return on plan assets may decrease net
periodic benefit cost through increase of expected return
amount while the difference with actual fair value of those
assets could affect adversely net income in the following years,
and vice versa.