Canon 2005 Annual Report Download - page 62

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CANON INC. AND SUBSIDIARIES
(1) Basis of Presentation and
Significant Accounting Policies
(a) Description of Business
Canon Inc. (the “Company”) and subsidiaries (collectively
“Canon”) is one of the world’s leading manufacturers in such
fields as office imaging products, computer peripherals, busi-
ness information products, cameras, and optical related prod-
ucts. Office imaging products consist mainly of copying
machines and digital multifunction devices. Computer periph-
erals consist mainly of laser beam and inkjet printers. Business
information products consist mainly of computer information
systems, micrographics and calculators. Cameras consist mainly
of single lens reflex (“SLR”) cameras, compact cameras, digital
cameras and video camcorders. Optical related products
include steppers and aligners used in semiconductor chip pro-
duction, projection aligners used in the production of liquid
crystal displays (“LCDs”), broadcasting lenses and medical
equipment. Canon’s consolidated net sales for the years ended
December 31, 2005, 2004 and 2003 were distributed as fol-
lows: office imaging products 31%, 33% and 34%, computer
peripherals 33%, 33% and 34%, business information prod-
ucts 3%, 3% and 4%, cameras 23%, 22% and 20%, and
optical and other products 10%, 9% and 8%, respectively.
Sales are made principally under the Canon brand name,
almost entirely through sales subsidiaries. These subsidiaries are
responsible for marketing and distribution, and primarily sell to
retail dealers in their geographical area. Approximately 74%,
73% and 73% of consolidated net sales for the years ended
December 31, 2005, 2004 and 2003 were generated outside
Japan, with 30%, 30% and 33% in the Americas, 32%, 31%
and 30% in Europe, and 12%, 12% and 10% in other areas,
respectively.
Canon sells laser beam printers on an OEM basis to
Hewlett-Packard Company; such sales constituted approxi-
mately 21%, 21% and 20% of consolidated net sales for the
years ended December 31, 2005, 2004 and 2003, respectively.
Canon’s manufacturing operations are conducted primarily
at 23 plants in Japan and 17 overseas plants which are located
in countries or regions such as the United States, Germany,
France, Taiwan, China, Malaysia, Thailand and Vietnam.
(b) Basis of Presentation
The Company and its domestic subsidiaries maintain their
books of account in conformity with financial accounting stan-
dards of Japan. Foreign subsidiaries maintain their books of
account in conformity with financial accounting standards of
the countries of their domicile.
Certain adjustments and reclassifications have been incor-
porated in the accompanying consolidated financial statements
to conform with U.S. generally accepted accounting principles.
These adjustments were not recorded in the statutory books of
account.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries and those vari-
able interest entities where the Company is the primary benefi-
ciary under FASB Interpretation No. 46 (revised December
2003) (“FIN 46R”), “Consolidation of Variable Interest Enti-
ties.” All significant intercompany balances and transactions
have been eliminated.
(d) Use of Estimates
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the dis-
closure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the period. Significant estimates
and assumptions are reflected in valuation and disclosure of
revenue recognition, allowance for doubtful receivables, valua-
tion of inventories, environmental liabilities, valuation of
deferred tax assets and employee retirement and severance
benefit plans. Actual results could differ materially from those
estimates.
(e) Cash Equivalents
All highly liquid investments acquired with an original maturity
of three months or less are considered to be cash equivalents.
(f) Translation of Foreign Currencies
Assets and liabilities of the Company’s subsidiaries located out-
side Japan with functional currencies other than Japanese yen
are translated into Japanese yen at the rates of exchange in
effect at the balance sheet date. Income and expense items are
translated at the average exchange rates prevailing during the
year. Gains and losses resulting from translation of financial
statements are excluded from earnings and are reported in
other comprehensive income (loss).
Gains and losses resulting from foreign currency transac-
tions, including foreign exchange contracts, and translation of
assets and liabilities denominated in foreign currencies are
included in other income (deductions). Foreign currency
exchange losses, net were ¥3,710 million ($31,441 thousand),
¥17,800 million and ¥20,311 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
(g) Marketable Securities and Investments
Canon classifies investments in debt and marketable equity
securities as available-for-sale, or held-to-maturity securities.
Canon does not hold any trading securities which are bought
and held primarily for the purpose of sale in the near term.
Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax
effect, are reported as a separate component of other compre-
hensive income (loss) until realized. Held-to-maturity securities
are recorded at amortized cost, adjusted for the amortization
or accretion of premiums or discounts.