Canon 2004 Annual Report Download - page 36

34
Revenues from the sale of equipment under sales-type leases
are 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 lease or direct-financing lease are
accounted for as operating leases and related revenue is
recognized over the lease term.
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 certain resellers of its products, and records
reductions to sales for the estimated impact of price
protection obligations when announced.
A liability for estimated product warranty cost is recorded
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.
Allowance for doubtful receivables
Allowance for doubtful receivables is determined using a
combination of factors to ensure that Canon’s trade and
financing receivables are not overstated due to uncollectibility.
Canon maintains a bad debt reserve for all customers based
on a variety of factors, including the length of time receivables
are past due, trends in overall weighted average risk rating of
the total portfolio, macroeconomic conditions, significant one-
time events and historical experience. Also, Canon records
specific reserves for individual accounts when Canon becomes
aware of a customer’s inability to meet its financial obligations
to Canon, such as in the case of bankruptcy filings or
deterioration in the customer’s operating results or financial
position. If circumstances related to customers change,
estimates of the recoverability of receivables would be further
adjusted.
Valuation of inventories
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the average method for
domestic inventories and 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
completion and the estimated costs necessary to make a sale.
Canon routinely reviews its inventories for their salability and
for indications 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 allowances 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.
Environmental liabilities
Canon is subject to liability for the investigation and clean-up
of environmental contamination at each of the properties that
Canon owns or operates, as well as at certain properties
Canon formerly owned or operated. Canon employs extensive
internal environmental protection programs that focus on
preventive measures. Canon conducts environmental
assessments for a number of its locations and operating
facilities. If Canon was to be held responsible for damages in
any future litigation or proceedings, such costs may not be
covered by insurance and may be material. The liability for
environmental remediation and other environmental costs is
accrued when it is considered probable and costs can be
reasonably estimated.
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 any of these factors may require possible
recognition of significant valuation allowance to these
deferred tax asset balances. When Canon determines that
certain deferred tax assets may not be recoverable, the
amounts which will 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 which are recognized based on actuarial
valuations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets.
Management must consider current market conditions,
including changes in interest rates, in selecting these
assumptions. Other assumptions include assumed rate of
increase in compensation levels, mortality rate, and
withdrawal rate. Changes in these assumptions inherent in the
valuation are reasonably likely to occur from period to period.
These changes in assumptions may lead to changes in related
employee retirement and severance benefit costs in the future.
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 fiscal 2004, Canon
estimated a discount rate of 2.7% and an expected long-term
rate of return on plan assets of 3.6%. In estimating the