Canon 2006 Annual Report Download - page 64

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CANON INC. AND SUBSIDIARIES
(1) Basis of Presentation and Significant Accounting Policies
(a) Description of Business
Canon Inc. (the “Company”) and subsidiaries (collectively
“Canon”) is one of the world’s leading manufacturers in such
fields as office imaging products, computer peripherals, business
information products, cameras, and optical related products.
Office imaging products consist mainly of copying machines
and digital multifunction devices. Computer peripherals consist
mainly of laser beam and inkjet printers. Business information
products consist mainly of computer information systems,
micrographics and calculators. Cameras consist mainly of single
lens reflex (“SLR”) cameras, compact cameras, digital cameras
and video camcorders. Optical related products include steppers
and aligners used in semiconductor chip production, projection
aligners used in the production of liquid crystal displays (“LCDs”),
broadcasting lenses and medical equipment. Canon’s consoli-
dated net sales for the years ended December 31, 2006, 2005
and 2004 were distributed as follows: office imaging products
28%, 31% and 33%, computer peripherals 34%, 33% and
33%, business information products 3%, 3% and 3%, cameras
25%, 23% and 22%, and optical and other products 10%,
10% and 9%, respectively.
Sales are made principally under the Canon brand name,
almost entirely through sales subsidiaries. These subsidiaries
are responsible for marketing and distribution, and primarily
sell to retail dealers in their geographical area. Approximately
75%, 74% and 73% of consolidated net sales for the years
ended December 31, 2006, 2005 and 2004 were generated
outside Japan, with 31%, 30% and 30% in the Americas,
31%, 32% and 31% in Europe, and 13%, 12% and 12% in
other areas, respectively.
Canon sells laser beam printers on an OEM basis to
Hewlett-Packard Company; such sales constituted approximately
22%, 21% and 21% of consolidated net sales for the years
ended December 31, 2006, 2005 and 2004, respectively.
Canon’s manufacturing operations are conducted primarily
at 23 plants in Japan and 17 overseas plants which are located
in countries or regions such as the United States, Germany,
France, Taiwan, China, Malaysia, Thailand and Vietnam.
(b) Basis of Presentation
The Company and its domestic subsidiaries maintain their books
of account in conformity with financial accounting standards of
Japan. Foreign subsidiaries maintain their books of account in
conformity with financial accounting standards of the countries
of their domicile.
Certain adjustments and reclassifications have been incor-
porated in the accompanying consolidated financial statements
to conform with U.S. generally accepted accounting principles.
These adjustments were not recorded in the statutory books
of account.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries and those variable
interest entities where the Company or its consolidated sub-
sidiaries are the primary beneficiaries under Financial Account-
ing Standards Board (“FASB”) Interpretation No. 46 (revised
December 2003) (“FIN 46R”), “Consolidation of Variable
Interest Entities.” All significant intercompany balances and
transactions have been eliminated.
(d) Use of Estimates
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the period. Significant estimates
and assumptions are reflected in valuation and disclosure of
revenue recognition, allowance for doubtful receivables,
valuation of inventories, environmental liabilities, valuation of
deferred tax assets and employee retirement and severance
benefit plans. Actual results could differ materially from
those estimates.
(e) Cash Equivalents and Time Deposits
All highly liquid investments acquired with an original maturity
of three months or less are considered to be cash equivalents.
Time deposits with an original maturity of more than three
months are ¥41,953 million ($352,546 thousand) and ¥6,090
million at December 31, 2006 and 2005, respectively, and are
included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets.
(f) Translation of Foreign Currencies
Assets and liabilities of the Company’s subsidiaries located
outside Japan with functional currencies other than Japanese
yen are translated into Japanese yen at the rates of exchange in
effect at the balance sheet date. Income and expense items are
translated at the average exchange rates prevailing during the
year. Gains and losses resulting from translation of financial
statements are excluded from earnings and are reported in
other comprehensive income (loss).
Gains and losses resulting from foreign currency transactions,
including foreign exchange contracts, and translation of assets
and liabilities denominated in foreign currencies are included in
other income (deductions). Foreign currency exchange losses,
net were ¥25,804 million ($216,840 thousand), ¥3,710 million
and ¥17,800 million for the years ended December 31, 2006,
2005 and 2004, respectively.