Canon 2002 Annual Report Download - page 53

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balance sheet or to specific firm commitments or forecasted
transactions. Canon also formally assesses, both at the hedge’s
inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items. When it is
determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, Canon
discontinues hedge accounting prospectively.
Changes in the fair value of a derivative that is highly
effective and that is designated and qualifies as a fair-value
hedge, along with the loss or gain on the hedged asset or
liability or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk are recorded in earnings.
Changes in the fair value of a derivative that is highly effective
and that is designated and qualifies as a cash-flow hedge are
recorded in other comprehensive income (loss), until earnings
are affected by the variability in cash flows of the designated
hedged item. Changes in the fair value of derivatives that are
highly effective as hedges and that are designated and qualify as
foreign-currency hedges are recorded in either earnings or other
comprehensive income (loss), depending on whether the
hedge transaction is a fair-value hedge or a cash-flow hedge.
However, if a derivative is used as a hedge of a net investment
in a foreign operation, its changes in fair value, to the extent
effective as a hedge, are recorded in the cumulative translation
adjustments account within other comprehensive income (loss).
Canon discontinues hedge accounting prospectively when it
is determined that the derivative is no longer effective in
offsetting changes in the fair value or cash flows of the hedged
item, the derivative expires or is sold, terminated, or exercised,
the derivative is dedesignated as a hedging instrument, because
it is unlikely that a forecasted transaction will occur, a hedged
firm commitment no longer meets the definition of a firm
commitment, or management determines that designation of
the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued because it is
determined that the derivative no longer qualifies as an effective
fair-value hedge, Canon continues to carry the derivative on the
consolidated balance sheet at its fair value, and no longer
adjusts the hedged asset or liability for changes in fair value.
The adjustment of the carrying amount of the hedged asset or
liability is accounted for in the same manner as other
components of the carrying amount of that asset or liability.
When hedge accounting is discontinued because the hedged
item no longer meets the definition of a firm commitment,
Canon continues to carry the derivative on the consolidated
balance sheet at its fair value, removes any asset or liability that
was recorded pursuant to recognition of the firm commitment
from the consolidated balance sheet and recognizes any gain or
loss in earnings. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not
occur, Canon continues to carry the derivative on the
consolidated balance sheet at its fair value, and gains and losses
that were accumulated in other comprehensive income (loss)
are recognized immediately in earnings. In all other situations in
which hedge accounting is discontinued, Canon continues to
carry the derivative at its fair value on the consolidated balance
sheet, and recognizes any changes in its fair value in earnings.
Canon also uses certain derivative financial instruments
which do not meet the hedging criteria of SFAS 133 and 138.
Canon records these derivative financial instruments on the
balance sheet at fair value. The changes in fair values are
recorded in earnings immediately.
The cumulative effect adjustment upon the adoption of
SFAS 133 and 138 on January 1, 2001, net of the related
income tax effect, resulted in an increase to net income of
approximately ¥3,692 million and a decrease to other
comprehensive income (loss) of approximately ¥2,401 million.
Prior to the adoption of SFAS 133 and 138, derivative
financial instruments that were designated and effective to
hedge forecasted transactions for which there was no firm
commitment were marked to market, and gains and losses on
such derivatives were recorded in other income (deductions).
Foreign currency derivative financial instruments generally
qualified for hedge accounting if their maturity dates
corresponded to hedged existing assets and liabilities
denominated in foreign currencies, and gains and losses on
such derivative financial instruments were recognized and
recorded in other income (deductions) at end of year and at
settlement, as were the offsetting foreign exchange losses and
gains on the hedged items. Gains and losses on the hedging
derivative financial instruments that were designated and
effective as hedges of firm commitments were deferred and
recognized in income when the sale of the hedged items
occurred. Amounts receivable or payable under derivative
financial instruments used to manage interest rate risks arising
from financial assets and liabilities were recognized as a
component of interest income or expense of such related
underlying assets or liabilities.
(s) Issuance of Stock by Subsidiaries
The change in the Company’s proportionate share of subsidiary
equity resulting from issuance of stock by the subsidiaries is
accounted for as an equity transaction.