Canon 2015 Annual Report Download - page 58

CANON ANNUAL REPORT 2015
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in connection with developing or obtaining internal-use soft-
ware are capitalized. These costs consist primarily of payments
made to third parties and the salaries of employees working
on such software development. Costs incurred in connection
with developing internal-use software are capitalized at the
application development stage. In addition, Canon develops
or obtains certain software to be sold where related costs are
capitalized after establishment of technological feasibility.
(m) Environmental Liabilities
Liabilities for environmental remediation and other environ-
mental costs are accrued when environmental assessments or
remedial efforts are probable and the costs can be reasonably
estimated. Such liabilities are adjusted as further information
develops or circumstances change. Costs of future obligations
are not discounted to their present values.
(n) Income Taxes
Deferred tax assets and liabilities are recognized for the esti-
mated 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 liabili-
ties 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.
Canon recognizes the financial statement effects of tax posi-
tions when it is more likely than not, based on the technical
merits, that the tax positions will be sustained upon examina-
tion by the tax authorities. Benefits from tax positions that meet
the more-likely-than-not recognition threshold are measured at
the largest amount of benefit that is greater than 50% likely of
being realized upon settlement. Interest and penalties accrued
related to unrecognized tax benefits are included in income taxes
in the consolidated statements of income.
(o) Stock-Based Compensation
Canon measures stock-based compensation cost at the grant
date, based on the fair value of the award, and recognizes the
cost on a straight-line basis over the requisite service period,
which is the vesting period.
(p) Net Income Attributable to Canon Inc.
Shareholders per Share
Basic net income attributable to Canon Inc. shareholders
per share is computed by dividing net income attributable
to Canon Inc. by the weighted-average number of com-
mon shares outstanding during each year. Diluted net income
attributable to Canon Inc. shareholders per share includes the
effect from potential issuances of common stock based on the
assumptions that all stock options were exercised.
(q) 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 rec-
ognizes 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 digital cameras
and inkjet printers, is recognized upon shipment or delivery, depend-
ing upon when title and risk of loss transfer to the customer.
Canon also offers separately priced product maintenance
contracts 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 related revenue is rec-
ognized ratably over the lease term. When equipment leases
are bundled with product maintenance contracts, revenue is
allocated based upon the estimated relative fair value of the
lease and non-lease deliverables. Lease deliverables generally
include equipment, financing and executory costs, while non-
lease deliverables generally consist of product maintenance
contracts and supplies.
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.
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. Canon regularly adjusts its
estimates each period in the ordinary course of establishing
sales incentive program accruals based on current information.
Canon also provides price protection to certain resellers of its
products, and records reductions to sales for the estimated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS