Canon 2015 Annual Report Download - page 38

CANON ANNUAL REPORT 2015
36
Revenue recognition
Canon generates revenue principally through the sale of
office and imaging system 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 transferred to the customer or services have
been rendered, the sales price is fixed or determinable, and
collectibility is probable.
Revenue from sales of office products, such as office MFDs
and laser printers, and imaging system products, such as digi-
tal cameras and inkjet printers, 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 semicon-
ductor lithography equipment and FPD lithography equipment
that are 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 functionality are successfully tested and demon-
strated by Canon. Service revenue is derived primarily from
separately priced product maintenance contracts on equip-
ment sold to customers and is measured at the stated amount
of the contract and recognized as services are provided.
Canon also offers separately priced product maintenance con-
tracts for most office products, for which the customer typi-
cally pays a stated base service fee plus a variable amount based
on usage. Revenue from these service maintenance contracts is
measured at the stated amount of the contract and recognized
as services are provided and variable amounts are earned.
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 the related revenue
is recognized ratably over the lease term. When equipment
leases are bundled with product maintenance contracts, rev-
enue is first allocated considering the relative fair value of the
lease and non-lease deliverables based upon the estimated rel-
ative fair values of each element. Lease deliverables generally
include equipment, financing and executory costs, while non-
lease deliverables generally consist of product maintenance
contracts and supplies.
For all other arrangements with multiple elements, Canon
allocates revenue to each element based on its relative selling
price if such element meets the criteria for treatment as a sep-
arate unit of accounting. Otherwise, revenue is deferred until
the undelivered elements are fulfilled and accounted for as a
single unit of accounting.
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 to 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 protec-
tion 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 war-
ranty 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 financ-
ing receivables are not overstated due to uncollectibility. These
factors include the length of time receivables are past due, the
credit quality of customers, macroeconomic conditions and
historical experience. Also, Canon records specific reserves for
individual accounts when Canon becomes aware of a custom-
er’s inability to meet its financial obligations to Canon, due
for example to bankruptcy filings or deterioration in the cus-
tomer’s operating results or financial position. If circumstances
related to customers change, estimates of the recoverability of
receivables are further adjusted.
Valuation of inventories
Inventories are stated at the lower of cost or market value.
Cost is determined by the average method for domestic inven-
tories and principally 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 comple-
tion and the estimated costs necessary to make a sale. Canon
routinely reviews its inventories for their salability and for indi-
cations of obsolescence to determine if inventories should be
written-down to market value. Judgments and estimates must
be made and used in connection with establishing such allow-
ances 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.
Impairment of long-lived assets
Long-lived assets, such as property, plant and equipment, and
acquired intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indi-
cate that the carrying amount of an asset may not be recover-
able. If the carrying amount of the asset exceeds its estimated
undiscounted future cash flows, an impairment charge is recog-
nized in the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Determining the fair value of
the asset involves the use of estimates and assumptions.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation
is calculated principally by the declining-balance method,
FINANCIAL OVERVIEW