Canon 2005 Annual Report Download - page 63

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Available-for-sale and held-to-maturity securities are regu-
larly reviewed for other-than-temporary declines in carrying
value based on criteria that include the length of time and the
extent to which the market value has been less than cost, the
financial condition and near-term prospects of the issuer and
Canon’s intent and ability to retain the investment for a period
of time sufficient to allow for any anticipated recovery in
market value. When such a decline exists, Canon recognizes an
impairment loss to the extent by which the cost basis of the
investment exceeds the fair value of the investment. Fair value
is determined based on quoted market prices, projected
discounted cash flows or other valuation techniques as
appropriate.
Realized gains and losses are determined on the average
cost method and reflected in earnings.
Other securities are stated at cost and reviewed periodically
for impairment.
(h) Allowance for Doubtful Receivables
Allowance for doubtful trade and finance receivables is main-
tained for all customers based on a combination of factors,
including aging analysis, macroeconomic conditions, significant
one-time events, and historical experience. An additional
reserve for individual accounts is recorded when Canon
becomes aware of a customer’s inability to meet its financial
obligations, such as in the case of bankruptcy filings. If circum-
stances related to customers change, estimates of the recover-
ability of receivables would be further adjusted. When all
collection options are exhausted including legal recourse, the
accounts or portions thereof are deemed to be uncollectible
and charged against the allowance.
(i) 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 over-
seas inventories.
(j) Investments in Affiliated Companies
Investments in affiliated companies over which Canon has the
ability to exercise significant influence, but does not hold a
controlling financial interest, are accounted for by the equity
method.
(k) Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and
acquired intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a com-
parison of the carrying amount of the asset to estimated undis-
counted future cash flows expected to be generated by the asset.
If the carrying amount of the asset exceeds its estimated future
cash flows, an impairment charge is recognized in the amount by
which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of by sale are reported at the
lower of the carrying amount or fair value less costs to sell, and are
no longer depreciated.
(l) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated principally by the declining-balance method, except for
certain assets which are depreciated by the straight-line method
over the estimated useful lives of the assets. The depreciation
period ranges from 3 years to 60 years for buildings and 2 years to
20 years for machinery and equipment.
Assets leased to others under operating leases are stated at
cost and depreciated to the estimated residual value of the assets
by the straight-line method over the period ranging from 2 years
to 5 years.
(m) Goodwill and Other Intangible Assets
Goodwill and 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. Intangible assets with finite useful lives,
consisting primarily of software and license fees, are amortized
using the straight-line method over the estimated useful lives,
which range from 3 years to 5 years for software and 5 years to 10
years for license fees. Certain costs incurred in connection with
developing or obtaining internal use software are capitalized.
These costs consist 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.
(n) 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.
(o) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabili-
ties and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities 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.