Canon 2007 Annual Report Download - page 72

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES
products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the
customer.
Revenue from sales of optical equipment, such as steppers
and aligners that are sold with customer acceptance provisions
related to their functionality, is recognized when the equipment
is installed at the customer site and the specific criteria of the
equipment functionality are successfully tested and demon-
strated by Canon. Service revenue is derived primarily from
separately priced product maintenance contracts on equipment
sold to customers and is measured at the stated amount of the
contract and recognized as services are provided.
Canon also offers separately priced product maintenance
contracts for most office imaging products, for which the
customer typically pays a stated base service fee plus a variable
amount based on usage. Revenue from these service mainte-
nance contracts is measured at the stated amount of the
contract and recognized as services are provided and variable
amounts are earned.
Revenue from the sale of equipment under sales-type
leases is recognized at the inception of the lease. Income on
sales-type leases and direct-financing leases is recognized over
the life of each respective lease using the interest method. Leases
not qualifying as sales-type leases or direct-financing leases are
accounted for as operating leases and related revenue is recog-
nized ratably over the lease term. When equipment 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.
(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
liabilities 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.
Canon recognizes the financial statement effects of tax
positions when they are more likely than not, based on the
technical merits, that the tax positions will be sustained upon
examination by the tax authorities. Benefits from tax positions
that meet the more-likely-than-not recognition threshold are
measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon settlement.
Interest and penalties accrued related to unrecognized tax
benefits are included in income taxes in the consolidated
statements of income.
(p) Issuance of Stock by Subsidiaries and Equity Investees
The change in the Company’s proportionate share of a sub-
sidiary’s or equity investee’s equity resulting from the issuance
of stock by the subsidiary or equity investee is accounted for as
an equity transaction.
(q) Net Income per Share
Basic net income per share is computed by dividing net income
by the weighted-average number of common shares outstanding
during each year. Diluted net income per share includes the
effect from potential issuance of common stock based on the
assumption that all convertible debentures were converted into
common stock.
(r) Revenue Recognition
Canon generates revenue principally through the sale of
consumer products, equipment, supplies, and related services
under separate contractual arrangements. Canon recognizes
revenue when persuasive evidence of an arrangement exists,
delivery has occurred and title and risk of loss have been trans-
ferred to the customer or services have been rendered, the sales
price is fixed or determinable, and collectibility is probable.
Revenue from sales of consumer products including office
imaging products, computer peripherals, business information