Canon 2006 Annual Report Download - page 66

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CANON INC. AND SUBSIDIARIES
functionality are successfully tested and demonstrated by
Canon. Service revenue is derived primarily from maintenance
contracts on equipment sold to customers and is recognized as
services are provided.
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 are 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.
(s) Research and Development Costs
Research and development costs are expensed as incurred.
(t) Advertising Costs
Advertising costs are expensed as incurred. Advertising
expenses were ¥116,809 million ($981,588 thousand),
¥106,250 million and ¥111,770 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
(u) Shipping and Handling Costs
Shipping and handling costs totaled ¥62,626 million ($526,269
thousand), ¥50,052 million and ¥46,953 million for the years
ended December 31, 2006, 2005 and 2004, 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 in the consolidated balance sheets. On the date the
derivative contract is entered into, Canon designates the
derivative as either a hedge of the fair value of a recognized
(o) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax 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 sub-
sidiary’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 trans-
ferred 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 (“EITF”) Issue No. 00-21, “Revenue Arrange-
ments 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