Canon 2006 Annual Report Download - page 67

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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 rec-
ognized 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 in 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 June 2006, the FASB ratified the EITF consensus on EITF Issue
No. 06-2, “Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43” (“EITF 06-2”).
EITF 06-2 provides guidance for an accrual of compensated
absences that require a minimum service period but have no
increase in the benefit even with additional years of service.
EITF 06-2 is effective for fiscal years beginning after December
15, 2006, and is required to be adopted by Canon in the first
quarter beginning January 1, 2007. The adoption of EITF 06-2
will not have a material impact on Canon’s consolidated results
of operations and financial condition.
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before
being recognized in the financial statements. It also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006
and is required to be adopted by Canon in the first quarter
beginning January 1, 2007. The adoption of FIN 48 will not
have a material impact on Canon’s consolidated results of
operations and financial condition.
In September 2006, the FASB issued Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 is effec-
tive for fiscal years beginning after November 15, 2007 and is
required to be adopted by Canon in the first quarter beginning
January 1, 2008. Canon is currently evaluating the effect that
the adoption of SFAS 157 will have on its consolidated results
of operations and financial condition but does not expect
SFAS 157 to have a material impact.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No.
87, 88, 106, and 132(R)” (“SFAS 158”). SFAS 158 requires
plan sponsors of defined benefit pension and other postretire-
ment benefit plans (collectively, “postretirement benefit plans”)
to recognize the funded status of their postretirement benefit
plans in the consolidated balance sheet, measure the fair value
of plan assets and benefit obligations as of the date of the
fiscal year-end consolidated balance sheet, and provide addi-
tional disclosures. On December 31, 2006, Canon adopted the
recognition and disclosure provisions of SFAS 158. The effect
of adopting SFAS 158 on Canon’s financial condition at
December 31, 2006 has been included in the accompanying
consolidated financial statements. SFAS 158 did not have an
effect on Canon’s consolidated financial condition at December
31, 2005. SFAS 158’s provisions regarding the change in the
measurement date of postretirement benefit plans will not
have a material impact on Canon’s consolidated results of
operations and financial condition as Canon already uses a
measurement date of December 31 for the majority of its
plans. See Note 13 for further discussion of the effect of adopt-
ing SFAS 158 on Canon’s consolidated financial statements.
In September 2006, the Securities and Exchange Commission
(“SEC”) staff published Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial State-
ments” (“SAB 108”). SAB 108 provides guidance on the con-
sideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 requires quantification of the
effects of financial statement errors on each of the balance
sheets and statements of income and the related financial
statement disclosures. SAB 108 was adopted by Canon in the
year ended December 31, 2006. The adoption of SAB 108 did