Canon 2007 Annual Report Download - page 48

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leases are bundled with product maintenance contracts, revenue
is first allocated considering the relative fair value of the lease
and non-lease deliverables based upon the estimated relative
fair values of each element. Lease deliverables generally include
equipment, financing and executory costs, while non-lease
deliverables generally consist of product maintenance contracts
and supplies.
For all other arrangements with multiple elements, Canon
allocates revenue to each element based on its relative fair value
if such element meets the criteria for treatment as a separate
unit of accounting as prescribed in the Emerging Issues Task
Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with
Multiple Deliverables.” Otherwise, revenue is deferred until the
undelivered elements are fulfilled and accounted for as a single
unit of accounting.
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.
Estimated product warranty costs are recorded at the time
revenue is recognized and are included in selling, general and
administrative expenses. Estimates for accrued product warranty
costs 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 com-
bination of factors to ensure that Canon’s trade and financing
receivables are not overstated due to uncollectibility. Canon
maintains an allowance for doubtful receivables 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, signifi-
cant 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 esti-
mates 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.
Property, plant and equipment and
accounting change
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.
Effective April 1, 2007, the Company and its domestic sub-
sidiaries elected to change the declining-balance method of
depreciating machinery and equipment from the fixed-percent-
age-on-declining base application to the 250% declining-bal-
ance application. Estimated residual values were also reduced
in conjunction with this change. The Company and its domes-
tic subsidiaries believe that the 250% declining-balance appli-
cation is preferable because it provides a better matching of
the allocation of cost of machinery and equipment with associ-
ated revenues in light of increasingly short product life cycles.
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 pro-
ceedings, such costs may not be covered by insurance and may
be material. The liabilities for environmental remediation and
other environmental costs are accrued when it is considered
probable and costs can be reasonably estimated.
Income taxes
As more fully disclosed in the Notes to Consolidated Financial
Statements, Canon adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—an interpretation
of FASB Statement No. 109,” on January 1, 2007. Canon
considers many factors when evaluating and estimating income
tax uncertainties. These factors include an evaluation of the
technical merits of the tax positions as well as the amounts and
probabilities of the outcomes that could be realized upon
settlement. The actual resolutions of those uncertainties will
inevitably differ from those estimates, and such differences
may be material to the financial statements.
Valuation of 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 judg-
ments 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 these factors may require possible recognition of