Canon 2002 Annual Report Download - page 52

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CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(o) Revenue Recognition
Canon recognizes revenue when persuasive evidence of an
arrangement including title transfer exists, delivery has occurred,
the sales price is fixed or determinable, and collectibility is
probable. These criteria are met for mass-merchandising
products such as printers and cameras at the time when the
product is received by the customer based on the free-on-board
destination sales terms, and for products with acceptance
provisions such as steppers at the time when the product is
received by the customer and the specific criteria of the product
is demonstrated by Canon with only certain inconsequential or
perfunctory work left to be performed by the customer.
(p) Research and Development and Advertising
The costs of research and development and advertising are
expensed as incurred.
(q) Shipping and Handling Costs
Shipping and handling costs totaled ¥39,170 million ($326,417
thousand), ¥33,835 million and ¥31,633 million for the years
ended December 31, 2002, 2001 and 2000, respectively, and
are included in selling, general and administrative expenses in
the consolidated statements of income.
(r) Derivative Financial Instruments
On January 1, 2001, Canon adopted Statement of Financial
Accounting Standards No. 133 (“SFAS 133”), “Accounting for
Derivative Instruments and Hedging Activities” and No. 138
(“SFAS 138”), “Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB
Statement No. 133”. Both standards establish accounting and
reporting standards for derivative instruments and for hedging
activities, and require that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure
those instruments at fair value.
All derivatives are recognized on the consolidated balance
sheet at their fair value. On the date the derivative contract is
entered into, Canon designates the derivative as either a hedge
of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (“fair value” hedge), a hedge of
a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability (“cash
flow” hedge), a foreign-currency fair-value or cash-flow hedge
(“foreign currency” hedge), or a hedge of a net investment in a
foreign operation. Canon formally documents all relationships
between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various
hedge transactions. This process includes linking all derivatives
that are designated as fair-value, cash-flow, or foreign-currency
hedges to specific assets and liabilities on the consolidated
impairment losses amounting to ¥503 million ($4,192
thousand) in the year ended December 31, 2002 since the
carrying amounts of the reporting units goodwill exceeded their
implied fair values.
Prior to the adoption of SFAS 142, goodwill was amortized
on a straight-line basis over the expected periods to be
benefited and assessed for recoverability by determining
whether the amortization of the goodwill balance over its
remaining life could be recovered through undiscounted future
operating cash flows of the acquired operation. All other
intangible assets were amortized on a straight-line basis over the
expected periods to be benefited. The amount of goodwill and
other intangible asset impairment, if any, was measured based
on projected discounted future operating cash flows using a
discount rate reflecting the Canon’s average cost of funds.
(l) Income Taxes
Canon accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 (“SFAS 109”),
“Accounting for Income Taxes”. Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(m) Product Warranties
A liability for the estimated product warranty related cost is
established at the time revenue is recognized and is included in
accrued expenses. Estimates for accrued product warranty cost
are primarily based on historical experience, and are affected by
ongoing product failure rates, specific product class failures
outside of the baseline experience, material usage and service
delivery costs incurred in correcting a product failure.
(n) Employee Retirement and Severance Benefits
The Company and certain of its subsidiaries have various
employee retirement and severance defined benefit plans
covering substantially all employees who meet eligibility
requirements (see note 11).