Canon 2006 Annual Report Download - page 87

Download and view the complete annual report

Please find page 87 of the 2006 Canon annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 96

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96

85
December 31 Thousands of
Millions of yen U.S. dollars
2006 2005 2006
To sell foreign currencies ¥ 717,136 645,188 $6,026,353
To buy foreign currencies 51,189 46,424 430,160
(19) Derivatives and Hedging Activities
Risk management policy
Canon operates internationally, exposing it to the risk of
changes in foreign currency exchange rates and interest rates.
Derivative financial instruments are comprised principally of
foreign exchange contracts and interest rate swaps utilized by
the Company and certain of its subsidiaries to reduce these risks.
Canon assesses foreign currency exchange rate risk and interest
rate risk by continually monitoring changes in these exposures
and by evaluating hedging opportunities. Canon does not hold
or issue derivative financial instruments for trading purposes.
Canon is also exposed to credit-related losses in the event of
non-performance by counterparties to derivative financial
instruments, but it is not expected that any counterparties will
fail to meet their obligations, because most of the counterparties
are internationally recognized financial institutions and contracts
are diversified across a number of major financial institutions.
Foreign currency exchange rate risk management
Canon’s international operations expose Canon to the risk of
changes in foreign currency exchange rates. Canon uses
foreign exchange contracts to manage certain foreign currency
exchange exposures principally from the exchange of U.S.
dollar and euro into Japanese yen. These contracts are primarily
used to hedge the foreign currency exposure of forecasted
intercompany sales and intercompany trade receivables which
are denominated in foreign currencies. In accordance with
Canon’s policy, a specific portion of foreign currency exposure
resulting from forecasted intercompany sales are hedged using
foreign exchange contracts which principally mature within
three months.
Interest rate risk management
Canon’s exposure to the risk of changes in interest rates relates
primarily to its debt obligations. The variable-rate debt obliga-
tions expose Canon to variability in their cash flows due to
change in interest rates. To manage the variability in cash flows
caused by interest rate changes, Canon enters into interest rate
swaps when it is determined to be appropriate based on
market conditions. The interest rate swaps change variable-rate
debt obligations to fixed-rate debt obligations by primarily
entering into pay-fixed, receive-variable interest rate swaps.
Fair value hedge
Derivative financial instruments designated as fair value hedges
principally relate to interest rate swaps associated with fixed
rate debt obligations. Changes in fair values of the hedged
debt obligations and derivative financial instruments designated
as fair value hedges of these debt obligations are recognized in
other income (deductions). There is no hedging ineffectiveness
or net gains or losses excluded from the assessment of hedge
effectiveness for the year ended December 31, 2004 as the
critical terms of the interest rate swaps match the terms of the
hedged debt obligations.
Cash flow hedge
Changes in the fair value of derivative financial instruments
designated as cash flow hedges, including foreign exchange
contracts associated with forecasted intercompany sales and
interest rate swaps associated with variable rate debt obligations,
are reported in accumulated other comprehensive income (loss).
These amounts are subsequently reclassified into earnings
through other income (deductions) in the same period as the
hedged items affect earnings. Substantially all amounts
recorded in accumulated other comprehensive income (loss) at
year-end are expected to be recognized in earnings over the
next twelve months. Canon excludes the time value component
from the assessment of hedge effectiveness.
The amount of the hedging ineffectiveness was not material
for the years ended December 31, 2006, 2005 and 2004. The
amount of net gains or losses excluded from the assessment of
hedge effectiveness (time value component) which was recorded
in other income (deductions) was net losses of ¥5,917 million
($49,723 thousand), ¥3,725 million and ¥2,096 million for the
years ended December 31, 2006, 2005 and 2004, respectively.
Derivatives not designated as hedges
Canon has entered into certain foreign exchange contracts to
manage its foreign currency exposures. These foreign exchange
contracts have not been designated as hedges. Accordingly,
the changes in fair value of the contracts are recorded in
earnings immediately.
Contract amounts of foreign exchange contracts at
December 31, 2006 and 2005 are set forth below: