Canon 2015 Annual Report Download - page 39

CANON ANNUAL REPORT 2015 37
STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA
except for certain assets which are depreciated by the straight-
line method over the estimated useful lives of the assets.
Goodwill and other intangible assets
Goodwill and other intangible assets with indefinite useful
lives are not amortized, but are instead tested for impairment
annually in the fourth quarter of each year, or more frequently
if indicators of potential impairment exist. Canon performs
its impairment test of goodwill using the two-step approach
at the reporting unit level, which is one level below the oper-
ating segment level. All goodwill is assigned to the report-
ing unit or units that benefit from the synergies arising from
each business combination. If the carrying amount assigned
to the reporting unit exceeds the fair value of the reporting
unit, Canon performs the second step to measure an impair-
ment charge in the amount by which the carrying amount of
a reporting unit’s goodwill exceeds its implied fair value. Fair
value of a reporting unit is determined primarily based on
the discounted cash flow analysis which involves estimates of
projected future cash flows and discount rates. Estimates of
projected future cash flows are primarily based on Canon’s
forecast of future growth rates. Estimates of discount rates
are determined based on the weighted average cost of capi-
tal, which considers primarily market and industry data as well
as specific risk factors. Canon has completed its impairment
test in the fourth quarter of 2015 and determined that there
were no reporting units that were at risk of failing the impair-
ment test as the fair value of each reporting unit exceeded its
respective carrying amount. Intangible assets with finite use-
ful lives consist primarily of software, trademarks, patents and
developed technology, license fees and customer relationships,
which are amortized using the straight-line method. The esti-
mated useful lives of software are from 3 years to 5 years,
trademarks are 15 years, patents and developed technology
are from 7 years to 16 years, license fees are 7 years, and cus-
tomer relationships are from 8 years to 15 years, respectively.
Income tax uncertainties
Canon considers many factors when evaluating and estimating
income tax uncertainties. These factors include an evaluation of
the technical merits of the tax positions as well as the amounts
and probabilities of the outcomes that could be realized upon
settlement. The actual resolutions of those uncertainties will
inevitably differ from those estimates, and such differences may
be material to the financial statements.
Valuation of deferred tax assets
Canon currently has significant deferred tax assets, which
are subject to periodic recoverability assessments. Realization
of Canon’s deferred tax assets is principally dependent upon
its achievement of projected future taxable income. Canon’s
judgments regarding future profitability may change due to
future market conditions, its ability to continue to successfully
execute its operating restructuring activities and other factors.
Any changes in these factors may require possible recognition
of significant valuation allowances to reduce the net carrying
value of these deferred tax asset balances. When Canon deter-
mines that certain deferred tax assets may not be recover-
able, the amounts, which may not be realized, are charged to
income tax expense and will adversely affect net income.
Employee retirement and severance benefit plans
Canon has significant employee retirement and severance
benefit obligations that are recognized based on actuarial val-
uations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets.
Management must consider current market conditions, includ-
ing changes in interest rates, in selecting these assumptions.
Other assumptions include assumed rate of increase in com-
pensation levels, mortality rate, and withdrawal rate. Changes
in assumptions inherent in the valuation are reasonably likely
to occur from period to period. Actual results that differ
from the assumptions are accumulated and amortized over
future periods and, therefore, generally affect future pension
expenses. While management believes that the assumptions
used are appropriate, the differences may affect employee
retirement and severance benefit costs in the future.
In preparing its financial statements for 2015, Canon esti-
mated a weighted-average discount rate used to determine
benefit obligations of 1.1% for Japanese plans and 3.0%
for foreign plans and a weighted-average expected long-
term rate of return on plan assets of 3.1% for Japanese plans
and 5.6% for foreign plans. In estimating the discount rate,
Canon uses available information about rates of return on
high-quality fixed-income government and corporate bonds
currently available and expected to be available during the
period to the maturity of the pension benefits. Canon estab-
lishes the expected long-term rate of return on plan assets
based on management’s expectations of the long-term
return of the various plan asset categories in which it invests.
Management develops expectations with respect to each plan
asset category based on actual historical returns and its cur-
rent expectations for future returns.
Decreases in discount rates lead to increases in actuarial pen-
sion benefit obligations which, in turn, could lead to an increase
in service cost and amortization cost through amortization of
actuarial gain or loss, a decrease in interest cost, and vice versa.
For 2015, a decrease of 50 basis points in the discount rate
increases the projected benefit obligation by approximately
¥92,006 million. The net effect of changes in the discount rate,
as well as the net effect of other changes in actuarial assump-
tions and experience, is deferred until subsequent periods.
Decreases in expected returns on plan assets may increase
net periodic benefit cost by decreasing the expected return
amounts, while differences between expected value and
actual fair value of those assets could affect pension expense
in the following years, and vice versa. For 2015, a change
of 50 basis points in the expected long-term rate of return
on plan assets would cause a change of approximately
¥4,222 million in net periodic benefit cost. Canon multiplies