Canon 2003 Annual Report Download - page 55

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o ur financial position or results of operations.
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 in sales
are based upon historical trends and other known factors at the time
of sale. In addition, Canon provides price protection to reseller
customers, and records reductions to sales for the estimated impact of
price protection when price protections are announced.
A liability for the estimated product warranty related cost is
established at the time revenue is recognized and is included in
accrued expenses. Estimates for accrued product warranty cost 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.
(o) Research and Development and Advertising
The costs of research and development and advertising are expensed
as incurred.
(p) Shipping and Handling Costs
Shipping and handling costs totaled ¥40,660 million ($380,000
thousand), ¥39,170 million and ¥33,835 million for the years ended
December 31, 2003, 2002 and 2001, respectively, and are included
in selling, general and administrative expenses in the consolidated
statements of income.
(q) Derivative Financial Instruments
Canon accounts for its derivative and hedging activities pursuant to
Statement of Financial Accounting Standards No. 133 (“SFAS 133”),
“Accounting for Derivative Instruments and Hedging Activities” and
No. 138 (“SFAS 138”), “Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement
No. 133”. Both standards establish accounting and reporting
standards for derivative instruments and for hedging activities, and
require that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value.
All derivatives are recognized on the consolidated balance sheet at
fair value. On the date the derivative contract is entered into, Canon
designates the derivative as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment
(“fair value” hedge), a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recognized
asset or liability (“cash flow” hedge), a foreign-currency fair-value or
cash-flow hedge (“foreign currency” hedge), or a hedge of a net
investment in a foreign operation. 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. This process includes linking all derivatives that
are designated as fair-value, cash-flow, or foreign-currency hedges to
specific assets and liabilities on the consolidated balance sheet or to
specific firm commitments or forecasted 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 highly effective and
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 highly effective and 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 designated
hedged item. Changes in the fair value of derivatives that are highly
effective as hedges and that are designated and qualify as foreign-
currency hedges are recorded in either earnings or other
comprehensive income (loss), depending on whether the hedge
transaction is a fair-value hedge or a cash-flow hedge. However, if a
derivative is used as a hedge of a net investment in a foreign
operation, its changes in fair value, to the extent effective as a hedge,
are recorded in the cumulative translation adjustments account within
other comprehensive income (loss).
Canon discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item, the
derivative expires or is sold, terminated, or exercised, the derivative is
dedesignated as a hedging instrument, because it is unlikely that a
forecasted transaction will occur, a hedged firm commitment no
longer meets the definition of a firm commitment, or management
determines that designation of the derivative as a hedging instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective fair-value hedge,
Canon continues to carry the derivative on the consolidated balance
sheet at its fair value, and no longer adjusts the hedged asset or
liability for changes in fair value. The adjustment of the carrying
amount of the hedged asset or liability is accounted for in the same
manner as other components of the carrying amount of that asset or
liability. When hedge accounting is discontinued because the hedged
item no longer meets the definition of a firm commitment, Canon
continues to carry the derivative on the consolidated balance sheet at
its fair value, removes any asset or liability that was recorded pursuant
to recognition of the firm commitment from the consolidated balance
sheet and recognizes any gain or loss in earnings. When hedge
accounting is discontinued
because it is probable that a forecasted
transaction will not occur, Canon continues to carry the derivative on