Canon 2006 Annual Report Download - page 76

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(13) Employee Retirement and Severance Benefits
The Company and certain of its subsidiaries have contributory
and noncontributory defined benefit plans covering substan-
tially all employees after one year of service. Other subsidiaries
sponsor unfunded retirement and severance plans. Benefits
payable under the plans are based on employee earnings and
years of service.
The contributory plans in Japan mainly represented the
Employees’ Pension Fund plans (“EPFs”), composed of the
substitutional portions based on the pay-related part of the old
age pension benefits prescribed by the Welfare Pension Insurance
Law and the corporate portions based on contributory defined
benefit pension arrangements established at the discretion of
the Company and its subsidiaries. The substitutional portions
of the EPFs represented welfare pension plans carried on behalf
of the Japanese government. These contributory and noncon-
tributory plans were funded in conformity with the funding
requirements of applicable Japanese governmental regulations.
In January 2003, the EITF reached a final consensus on EITF
Issue No. 03-2, “Accounting for the Transfer to the Japanese
Government of the Substitutional Portion of Employee Pension
Fund Liabilities” (“EITF 03-2”), which addresses accounting for
atransfer to the Japanese government of a substitutional por-
tion of an EPF. During the year ended December 31, 2003, the
Company and certain of its domestic subsidiaries received
approval from the government for an exemption from the obli-
gation to pay benefits for future employee service related to the
substitutional portion. During the year ended December 31,
2004, the Company and certain of its domestic subsidiaries
received approval to separate the remaining substitutional
portion related to past service by their employees. During the
year ended December 31, 2004, the Company and certain of
its domestic subsidiaries also completed the transfer of the
substitutional portion of the benefit obligation and the related
government-specified portion of the plan assets which were
computed by the government, and were relieved of all related
obligations. Canon accounted for the entire process at the
completion of the transfer to the government of the substitu-
tional portion of the benefit obligation and the related plan
assets as a single settlement transaction in accordance with
EITF 03-2. As a result, Canon recognized a settlement loss of
¥69,651 million for the year ended December 31, 2004, which
was determined based on the proportion of the projected ben-
efit obligation settled to the total projected benefit obligation
immediately prior to the separation. Canon also recognized a
subsidy from the government of ¥86,792 million, which was
calculated as the difference between the obligation settled and
the assets transferred to the government. The net gain of
¥17,141 million was included in selling, general and administra-
tive expenses for the year ended December 31, 2004.
Effective January 1, 2007, Canon and certain of its domestic
subsidiaries have amended their defined benefit pension plans,
and the projected benefit obligation has decreased by ¥101,620
million ($853,950 thousand). In conjunction therewith, Canon
and certain of its domestic subsidiaries also have implemented a
defined contribution pension plan for certain future pension
benefits attributable to employees’ future services.
Canon uses a measurement date of December 31 for the
majority of its plans.
On December 31, 2006, Canon adopted the recognition
and disclosure provisions of SFAS 158. SFAS 158 required
Canon to recognize the funded status (i.e., the difference
between the fair value of plan assets and the projected benefit
obligations) of its pension plans in the December 31, 2006
consolidated balance sheet, with a corresponding adjustment
to accumulated other comprehensive income (loss), net of tax.
The adjustment to accumulated other comprehensive income
(loss) at adoption represents the unrecognized actuarial loss,
unrecognized prior service cost, and unrecognized net transi-
tion obligation, all of which were previously netted against the
plans' funded status in the consolidated balance sheet pur-
suant to the provisions of SFAS 87. These amounts will be
subsequently recognized as net periodic benefit cost pursuant
to Canon’s historical accounting policy for amortizing such
amounts. Further, actuarial gains and losses that arise in sub-
sequent periods and are not recognized as net periodic benefit
cost in the same periods will be recognized as a component of
other comprehensive income (loss). Those amounts will be
subsequently recognized as a component of net periodic ben-
efit cost on the same basis as the amounts recognized in accu-
mulated other comprehensive income (loss) at adoption of
SFAS 158.
The incremental effects of adopting the provisions of SFAS
158 on the accompanying consolidated balance sheet at
December 31, 2006 are presented in the following table. The
adoption of SFAS 158 had no effect on the consolidated state-
ment of income for the years ended December 31, 2006, or for
any prior period presented, and it will not effect Canon’s oper-
ating results in future periods. Had Canon not been required to
adopt SFAS 158 at December 31, 2006, it would have recog-
nized an additional minimum liability pursuant to the provisions
of SFAS 87. The effect of recognizing the additional minimum
liability is included in the table below in the column labeled
“Before application of SFAS 158.”
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CANON INC. AND SUBSIDIARIES