Canon 2004 Annual Report Download - page 60

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CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Most office imaging products are sold with service
maintenance contracts for which the customer typically pays a
base service fee plus a variable amount based on usage. Revenue
from these service maintenance contracts are recognized as
services are provided.
Revenues from the sale of equipment under sales-type leases
are recognized at the inception of the lease. Income on sales-type
leases and direct-financing leases is recognized over the life of
each respective lease using the interest method. Leases not
qualifying as sales-type lease or direct-financing lease are
accounted for as operating leases and related revenue is
recognized over the lease term.
Canon records estimated reductions to sales at the time of
sale for sales incentive programs including product discounts,
customer promotions and volume-based rebates. Estimated
reductions in sales are based upon historical trends and other
known factors at the time of sale. In addition, Canon provides
price protection to certain resellers of its products, and records
reductions to sales for the estimated impact of price protection
obligations when announced.
A liability for the estimated product warranty cost is recorded
at the time revenue is recognized and is included in accrued
expenses. Estimates for accrued product warranty cost are 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.
(s) Research and Development Costs
Research and development costs are expensed as incurred.
Research and development expenses were ¥275,300 million
($2,647,115 thousand), ¥259,140 million and ¥233,669 million
for the years ended December 31, 2004, 2003 and 2002,
respectively.
(t) Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses
were ¥111,770 million ($1,074,712 thousand), ¥100,278 million
and ¥71,725 million for the years ended December 31, 2004,
2003 and 2002, respectively.
(u) Shipping and Handling Costs
Shipping and handling costs totaled ¥46,953 million ($451,471
thousand), ¥40,660 million and ¥39,170 million for the years
ended December 31, 2004, 2003 and 2002, respectively, and are
included in selling, general and administrative expenses in the
consolidated statements of income.
(v) Derivative Financial Instruments
All derivatives are recognized at fair value and are included in
prepaid expenses and other current assets, or other current
liabilities on the consolidated balance sheets. On the date the
derivative contract is entered into, Canon designates the derivative
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. 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 realizable.
(p) Issuance of Stock by Subsidiaries and
Equity Investees
The change in the Company’s proportionate share of a
subsidiary’s or equity investee’s equity resulting from the issuance
of stock by the subsidiary or equity investee is accounted for as an
equity transaction.
(q) Net Income per Share
Basic net income per share is computed by dividing net income by
the weighted-average number of common shares outstanding
during each year. Diluted net income per share includes the effect
from potential issuance of common stock based on the
assumption that all convertible debentures were converted into
common stock.
(r) Revenue Recognition
Canon generates revenue principally through the sale of
consumer products, equipment, supplies, and related services
under separate contractual arrangements. 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.
For arrangements with multiple elements, which may include
any combination of equipment, installation 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 No. 00-21 (“EITF 00-21”), “Revenue Arrangements with
Multiple Deliverables.” Otherwise, revenue is deferred until the
undelivered elements are fulfilled as a single unit of accounting.
Revenue from sales of consumer products including office
imaging products, computer peripherals, business information
products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the
customer.
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 installed at the
customer site and the specific criteria of the equipment
functionality are successfully tested and demonstrated by Canon.
Service revenue is derived primarily from maintenance contracts
on equipment sold to customers and is recognized over the term
of the contract.