Canon 2003 Annual Report Download - page 54

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CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
Canon records a valuation allowance to reduce the deferred tax
assets to the amount that is more likely than not to be realized.
(n) Revenue Recognition
Canon generates revenue principally through the sale of consumer
products, equipment, supplies and related services under separate
contractual arrangements for each. Canon recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred
and title and risk of loss have been transferred to the customer, the
sales price is fixed or determinable, and collectibility is probable.
Revenue from sales of consumer products including office
imaging products, computer peripherals, business information
products and cameras is recognized when the products are received
by customers based on the free-on-board destination sales term.
Revenue from sales of optical equipment such as steppers and
aligners sold with customer acceptance provisions related to their
functionality is recognized when the equipment is received by the
customer and the specific criteria of the equipment functionality are
successfully tested and demonstrated by Canon to the customer.
Service revenues are derived primarily from maintenance contracts on
our equipment sold to customers and are recognized over the term of
the contracts. A substantial portion of the office imaging products is
sold with service maintenance guarantee contracts for which the
customer typically pays a base service fee plus a variable amount
based on usage. Revenue from service maintenance spot contracts for
time and materials is recognized as the services are provided.
Standard service maintenance fee prices are established depending
on equipment classification and include a cost value for the estimated
services to be performed based on historical experience plus a profit
margin thereon.
Canon enters into arrangements with multiple elements, which
may include any combination of products, equipment, installment and
maintenance. Canon allocates revenue to each element based on its
relative fair value if such element meets the criteria for treatment as a
separate unit of accounting as prescribed in the Emerging Issues Task
Force Issue 00-21(“EITF 00-21”), “Revenue Arrangements with
Multiple Deliverables”: 1) a delivered item has value to customers on a
stand-alone basis, 2) there is objective and reliable evidence of fair
value of an undelivered item, and 3) the delivery of the undelivered
item must be probable and controlled by Canon if the arrangement
includes the right of return. The price charged when the element is
sold separately generally determines fair value. Otherwise, revenue is
deferred until the undelivered
elements are fulfilled as a single unit of
accounting.
EITF 00-21 was effective for revenue arrangements entered into
after June 30, 2003. EITF 00-21 did not have a material effect on
separately in the appropriate asset and liability sections of the
consolidated balance sheet.
Prior to the adoption of SFAS 144, Canon accounted for long-lived
assets in accordance with Statement of Financial Accounting
Standards No. 121 (“SFAS 121”), “Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of”.
(k) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and
equipment under capital leases are stated at the present value of
minimum lease payments.
Depreciation is calculated by the declining-balance method,
except for some assets which are depreciated by the straight-line
method, over the estimated useful lives of the assets. The depreciation
period ranges from 3 years to 60 years for buildings and 2 years to 20
years for machinery and equipment.
(l) Goodwill and Other Intangible Assets
Goodwill represents the excess cost over fair value of assets of
businesses acquired. Canon adopted the provisions of Statement of
Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and
Other Intangible Assets”, as of January 1, 2002. Pursuant to SFAS
142, goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires
that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS 144.
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 Canon’s average cost of funds.
(m) 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