Canon 2006 Annual Report Download - page 42

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by Canon. Service revenue is derived primarily from maintenance
contracts on equipment sold to customers and is recognized
over the term of the contract.
Canon offers service maintenance contracts for most office
imaging products for which the customer typically pays a base
service fee plus a variable amount based on usage. Revenue
from these service maintenance contracts is recognized as
services are provided.
Revenue from the sale of equipment under sales-type
leases is 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 leases or direct-financing
leases 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.
Estimated product warranty costs are recorded at the time
revenue is recognized and is included in selling, general and
administrative expenses. Estimates for accrued product warranty
costs 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.
Allowance for Doubtful Receivables
Allowance for doubtful receivables is determined using a com-
bination of factors to ensure that Canon’s trade and financing
receivables are not overstated due to uncollectibility. Canon
maintains an allowance for doubtful receivables for all customers
based on a variety of factors, including the length of time
receivables are past due, trends in overall weighted average risk
rating of the total portfolio, macroeconomic conditions, signifi-
cant one-time events and historical experience. Also, Canon
records specific reserves for individual accounts when Canon
becomes aware of a customer’s inability to meet its financial
obligations to Canon, such as in the case of bankruptcy filings
or deterioration in the customer’s operating results or financial
position. If circumstances related to customers change, estimates
of the recoverability of receivables would be further adjusted.
Valuation of Inventories
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the average method for
domestic inventories and the first-in, first-out method for
overseas inventories. Market value is the estimated selling price
in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make a sale.
Canon routinely reviews its inventories for their salability and
for indications of obsolescence to determine if inventories
should be written-down to market value. Judgments and esti-
mates must be made and used in connection with establishing
such allowances in any accounting period. In estimating the
market value of its inventories, Canon considers the age of the
inventories and the likelihood of spoilage or changes in market
demand for its inventories.
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 pro-
ceedings, 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.
Valuation of 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 judg-
ments 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 recogni-
tion of significant valuation allowances to these deferred tax
asset balances. When Canon determines that certain deferred
tax assets may not be recoverable, the amounts which may
not be realized are charged to income tax expense and will
adversely affect net income.
Employee Retirement and Severance Benefit Plans
Canon has significant employee retirement and severance
benefit obligations which are recognized based on 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 assump-
tions. 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 in the future.
Actual results that differ from the assumptions are
accumulated and amortized over future periods and, therefore,
generally affect future pension expenses. While management
believes that the assumptions used are appropriate, the
differences may affect employee retirement and severance
benefit costs in the future.