Canon 2007 Annual Report Download - page 71

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reported as a separate component of other comprehensive
income (loss) until realized. Held-to-maturity securities are
recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts.
Available-for-sale and held-to-maturity securities are
regularly 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 impair-
ment 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.
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.
Non-marketable equity securities in companies over which
Canon does not have the ability to exercise significant influence
are stated at cost and reviewed periodically for impairment.
(i) Allowance for Doubtful Receivables
Allowance for doubtful trade and finance receivables is
maintained 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 circumstances related to
customers change, estimates of the recoverability 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.
(j) 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.
(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
comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of the asset exceeds its estimated
undiscounted future cash flows, an impairment charge is rec-
ognized 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 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
subsidiaries elected to change the declining-balance method of
depreciating machinery and equipment from the fixed-percentage-
on-declining base application to the 250% declining-balance
application. Estimated residual values were also reduced in
conjunction with this change. The Company and its domestic
subsidiaries believe that the 250% declining-balance application
is preferable because it provides a better matching of the allo-
cation of cost of machinery and equipment with associated
revenues in light of increasingly short product life cycles.
In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 154, “Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3,” this change in depreciation methods repre-
sents a change in accounting estimate effected by a change in
accounting principle. Accordingly, the affects of the change
are accounted for prospectively beginning with the period of
change and prior period results have not been restated. The
change in depreciation methods caused an increase in deprecia-
tion expense by ¥63,773 million ($559,412 thousand) for the
year ended December 31, 2007. Net income, basic net income
per share and diluted net income per share decreased by ¥32,321
million ($283,518 thousand), ¥24.99 ($0.22) and ¥24.99
($0.22), respectively, for the year ended December 31, 2007.
The depreciation period ranges from 3 years to 60 years for
buildings and 1 year 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 other 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 primarily
of payments made to third parties and the salaries of employees
working on such software development. Costs incurred in con-
nection 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.