Canon 2003 Annual Report Download - page 65

63
Thousands of
Millions of yen U.S. dollars
2003 2002 2001 2003
Service cost — benefits earned during the year ¥29,024 39,206 36,553 $271,252
Interest cost on projected benefit obligation 20,806 19,270 20,341 194,449
Expected return on plan assets (13,959) (14,523) (13,636) (130,458)
Net amortization 10,636 11,841 8,755 99,402
¥46,507 55,794 52,013 $434,645
Weighted-average assumptions:
Discount rate 2.7% 2.7% 2.7%
Assumed rate of increase in future compensation levels 2.0% 3.4% 3.3%
Expected long-term rate of return on plan assets 3.6% 3.5% 3.5%
(11) Employee Retirement and Severance Benefits
The Company and certain of its subsidiaries have contributory and
noncontributory defined benefit plans covering substantially all
employees after one year of service. Other subsidiaries sponsor
unfunded retirement and severance plans. Benefits payable under
the plans are based on employee earnings and years of service. The
contributory plans mainly represent the Employees’ Pension Fund
plans (“EPFs”), composed of the substitutional portions based on
the pay-related part of the old age pension benefits prescribed by
the Welfare Pension Insurance Law in Japan and the corporate
portions based on contributory defined benefit pension
arrangements established at the discretion of the Company and its
subsidiaries. Management considers that substitutional portions of
the EPFs, which are administered by a board of trustees composed
of management and labor representatives, represent welfare
pension plans carried on behalf of the Japanese government. These
contributory and noncontributory plans are funded in conformity
with the funding requirements of applicable Japanese governmental
regulations.
In January 2003, the Emerging Issues Task Force reached a
final consensus on Issue 03-2 (“EITF 03-2”), “Accounting for the
Transfer to the Japanese Government of the Substitutional Portion
of Employee Pension Fund Liabilities”. EITF 03-2 addresses
accounting for a transfer to the Japanese government of a
substitutional portion of an EPF. EITF 03-2 requires employers to
account for the entire separation process of a substitutional portion
from an entire plan (including a corporate portion) upon completion
of the transfer to the government of the substitutional portion of the
benefit obligation and related plan assets as the culmination of a
series of steps in a single settlement transaction. Under this
approach, the difference between the fair value of the obligation
and the assets required to be transferred to the government should
be accounted for and separately disclosed as a subsidy. In the year
ended December 31, 2003, the government approved applications
submitted by the Company and certain of its domestic subsidiaries
for an exemption from the obligation to pay benefits for future
employee service related to the substitutional portion. On January
30, 2004, management submitted another application for
separation of the remaining substitutional portion (that is, the
benefit obligation related to past services). After Canon’s
applications are approved by the government, the remaining benefit
obligation of the substitutional portion (that amount earned by past
services) as well as the related government-specified portion of the
plan assets of the EPF will be transferred to the government.
Accordingly, there has been no effect on Canon’s consolidated
financial statements for the year ended December 31, 2003. The
aggregate effect of this separation will be determined based on the
Company’s total pension benefits obligation as of the date the
transfer is completed and the amount of plan assets required to be
transferred. Based on the Company’s current estimates as to the
total amount of such pension benefits obligation and the amount of
plan assets required to be transferred, Canon’s management does
not presently expect that this separation will have a significant effect
on Canon’s financial condition or results of operation. However, the
final amount of the impact could be significantly different
depending on any change in the amounts of the pension benefit
obligation or plan assets to be transferred.
In December 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132
(revised 2003) (“SFAS 132R”), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits”. SFAS 132R revises
and prescribes employers’ disclosures about pension plans and
other postretirement benefit plans; it does not change the
measurement or recognition of those plans. SFAS 132R retains the
disclosure requirements contained in the original SFAS 132. It also
requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans
and other postretirement benefit plans. SFAS 132R is generally
effective for fiscal years ending after December 15, 2003.
Net periodic benefit cost included in selling, general and
administrative expenses for Canon’s employee retirement and
severance defined benefit plans for the years ended December
31,
2003, 2002 and 2001 consisted of the following components: