Canon 2003 Annual Report Download - page 30

28
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 of significant customers.
Significant changes in required reserves have been recorded in
recent periods and may occur in the future depending on the
financial status of customers under the current environment. In
case the 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. Any changes, in
any of these factors may require possible recognition of significant
valuation allowance to these deferred tax asset balances. In case
Canon considers that deferred tax assets may not be recovered,
the unrecoverable amounts should be included in income taxes in
the statements of income and may adversely affect net income.
Employee retirement and severance benefit plan
Canon has significant employee retirement and severance benefit
obligations which are developed from actuarial valuations. Inherent
in these valuations are key assumptions, including discount rates
and expected return on plan assets. Management must consider
current market conditions, including changes in interest rates, in
selecting these assumptions. Other assumptions include assumed
rate of increase in compensation levels, mortality rate, and
withdrawal rate. Changes in these assumptions inherent in the
valuation are reasonably likely to occur from period to period.
These changes in assumptions may lead to changes in related
employee retirement and severance benefit costs or credits, in the
future.
Actual net periodic benefit cost may differ from net periodic
benefit cost estimated at the beginning of a period due to changes
in assumptions regarding the discount rate that would in turn affect
service costs, changes in assumptions regarding the expected
long-term rate of return on plan assets that would in turn affect
interest cost on projected benefit obligations, and changes in
assumptions regarding net amortization. The revised discount rate
and expected rate of increase in future compensation levels are
used to calculate net periodic benefit cost for the following fiscal
year, unless more current valuations of plan assets and obligations
are available.
In preparing its financial statements for fiscal 2003, Canon
estimated a discount rate of 2.7% and an expected long-term rate
of return on plan assets of 3.6%. In estimating the discount rate,
Canon determines which of its long-term debt securities have the
same maturity period as the remaining service period, and
matches this period with the remaining life expectancy of Canon’s
participants. In addition, in determining the discount rate, Canon
takes into account estimations with respect to future changes
expected by management in the interest rates of its debt securities.
Canon establishes the expected long-term rate of return on plan
assets based on managements’ expectations of the long-term
return of the various plan asset categories in which it invests.
Management develops expectations with respect to each plan
asset category based on actual historical returns and its current
expectations for future returns.
Decreases in discount rates lead to increases in actuarial
pension benefit obligations which, in turn, could lead to an
increase in amortization cost through amortization of actuarial gain
or loss, and vice versa. A decrease of 50 basis points in the
discount rate increases the projected benefit obligation by
approximately nine percent. The net effect of changes in the
discount rate, as well as the net effect of other changes in actuarial
assumptions and experience, are deferred until subsequent
periods, as permitted by Statement of Financial Accounting
Standards No. 87, “Employers’ Accounting for Pensions”.
Increases in expected return on plan assets may decrease net
periodic benefit cost by increasing expected return amounts, while
differences between expected value and actual fair value of those
assets could affect adversely net income in the following years, and
vice versa. For fiscal 2004, if a change of 50 basis points in the
expected long-term rate of return on plan assets is to occur, that
may cause a change of approximately ¥2,360 million in net
periodic benefit cost. Canon multiplies management’s expected
long-term rate of return on plan assets by the value of its plan
assets, such value being calculated by taking into account
potential changes in the fair value of the plan assets, to arrive at