Canon 2004 Annual Report Download - page 61

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as either a hedge of the fair value of a recognized asset or liability
or of an unrecognized firm commitment (“fair value” hedge), or a
hedge of a forecasted transaction or the variability of cash flows
to be received or paid related to a recognized asset or liability
(“cash flow” hedge). Canon formally documents all relationships
between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various
hedge 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 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
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 hedged item. Gains and losses
from hedging ineffectiveness are included in other income
(deductions). Gains and losses excluded from the assessment of
hedge effectiveness (time value component) are included in other
income (deductions).
Canon also uses certain derivative financial instruments which
are not designated as hedges. Canon records these derivative
financial instruments on the consolidated balance sheets at fair
value. The changes in fair values are immediately recorded in
earnings.
(w) Guarantees
Canon recognizes, at the inception of a guarantee, a liability for
the fair value of the obligation it has undertaken in issuing
guarantees.
(x) New Accounting Standards
In March 2004, the Emerging Issues Task Force reached a
consensus on Issue No. 03-1 (“EITF 03-1”), “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments.” EITF 03-1 provides guidance on other-than-
temporary impairment models for marketable debt and equity
securities accounted for under Statement of Financial Accounting
Standards (“SFAS”) No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS 115”), and non-marketable
equity securities accounted for under the cost method. The EITF
developed a basic three-step model to evaluate whether an
investment is other-than-temporarily impaired. The Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position
EITF 03-1-1 in September 2004 which delayed the effective date
of the recognition and measurement provisions of EITF 03-1. The
adoption of EITF 03-1 is not expected to have a material effect on
Canon’s consolidated results of operations and financial position.
In November 2004, the FASB issued SFAS No. 151, “Inventory
Costs – an amendment of ARB No. 43, Chapter 4” (“SFAS 151”).
SFAS 151 amends the guidance in ARB No. 43, Chapter 4,
“Inventory Pricing,” to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs be recognized as current-
period charges regardless of whether they meet the criterion of
“so abnormal” as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is required to be adopted by
Canon in the first quarter beginning January 1, 2006. Canon is
currently evaluating the effect that the adoption of SFAS 151 will
have on its consolidated results of operations and financial
condition but does not expect SFAS 151 to have a material impact.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets – an amendment of APB
Opinion No. 29” (“SFAS 153”). SFAS 153 eliminates the exception
from fair value measurement for nonmonetary exchanges of
similar productive assets in paragraph 21(b) of APB Opinion No.
29, “Accounting for Nonmonetary Transactions,” and replaces it
with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS
153 is effective for the fiscal periods beginning after June 15,
2005 and is required to be adopted by Canon in the first quarter
beginning January 1, 2006. Canon is currently evaluating the
effect that the adoption of SFAS 153 will have on its consolidated
results of operations and financial condition but does not expect it
to have a material impact.
(y) Reclassification
Certain reclassifications have been made to the prior years’
consolidated financial statements to conform with the
presentation used for the year ended December 31, 2004.