Canon 2007 Annual Report Download - page 49

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SUMMARY OF OPERATIONS
Thousands of
Millions of yen U.S. dollars
2007 change 2006 change 2005 2007
Net sales ¥4,481,346 +7.8% ¥4,156,759 +10.7% ¥3,754,191 $39,310,053
Operating profit 756,673 +7.0 707,033 +21.3 583,043 6,637,482
Income before income taxes and minority interests 768,388 +6.8 719,143 +17.5 612,004 6,740,246
Net income 488,332 +7.2 455,325 +18.5 384,096 4,283,614
CONSOLIDATED RESULTS OF OPERATIONS
significant valuation allowances to reduce the net carrying value
of these deferred tax asset balances. When Canon determines
that certain deferred tax assets may not be recoverable, the
amounts which may 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 that 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 assump-
tions. 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. 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 2007,
Canon estimated a weighted-average discount rate of 2.5%
for Japanese plans and 4.5% for foreign plans and a weighted-
average expected long-term rate of return on plan assets of
3.9% for Japanese plans and 6.0% for foreign plans. In estimat-
ing the discount rate, Canon uses available information about
rates of return on high-quality fixed-income governmental and
corporate bonds currently available and expected to be available
during the period to the maturity of the pension benefits.
Canon establishes the expected long-term rate of return on plan
assets based on management’s expectations of the long-term
return of the various plan asset categories in which it invests.
Management develops expectations with respect to each plan
asset category based on actual historical returns and its current
expectations for future returns.
Decreases in discount rates lead to increases in actuarial
pension benefit obligations which, in turn, could lead to an
increase in service cost and amortization cost through amorti-
zation of actuarial gain or loss, a decrease in interest cost, and
vice versa. A decrease of 50 basis points in the discount rate
increases the projected benefit obligation by approximately
9%. The net effect of changes in the discount rate, as well as
the net effect of other changes in actuarial assumptions and
experience, are deferred until subsequent periods, as permitted
by the Statement of Financial Accounting Standards (“SFAS”)
No. 87, “Employers’ Accounting for Pensions.”
Decreases in expected return on plan assets may increase
net periodic benefit cost by decreasing expected return amounts,
while differences between expected value and actual fair value
of those assets could affect pension expense in the following
years, and vice versa. For fiscal 2008, if a change of 50 basis
points in the expected long-term rate of return on plan assets is
to occur, that may cause a change of approximately ¥3,022
million in net periodic benefit cost. Canon multiplies manage-
ment’s expected long-term rate of return on plan assets by the
value of its plan assets, to arrive at the expected return on plan
assets that is included in pension income (expense). Canon
defers recognition of the difference between this expected
return on plan assets and the actual return on plan assets. The
net deferral affects the value of plan assets in future fiscal years
and, ultimately, future pension income (expense).
On December 31, 2006, Canon adopted the recognition
and disclosure provisions of SFAS 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”
(“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.
Effective January 1, 2007, Canon and certain of its domestic
subsidiaries have amended their funded defined benefit pension
plans, and the projected benefit obligation has decreased by
¥101,620 million (U.S.$891 million), primarily due to the modi-
fication of the pattern of future benefit payments. This
decrease is amortized as a reduction of net periodic benefit
cost over the employee’s average remaining service period. The
amount is approximately ¥5,834 million (U.S.$51 million) per
year. In conjunction therewith, Canon and certain of its
domestic subsidiaries have implemented an unfunded retire-
ment and severance plan and a defined contribution pension
plan for certain future pension benefits attributable to
employee’s future services.