Canon 2008 Annual Report Download - page 49

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including discount rates and expected return on plan assets.
Management must consider current market conditions, including
changes in interest rates, in selecting these assumptions. 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
benefi t costs in the future.
In preparing its fi nancial statements for fi scal 2008, Canon
estimated a weighted-average discount rate of 2.5% for Japanese
plans and 5.1% for foreign plans and a weighted-average
expected long-term rate of return on plan assets of 3.7% for
Japanese plans and 6.5% for foreign plans. In estimating the
discount rate, Canon uses available information about rates of
return on high-quality fi xed-income governmental and corporate
bonds currently available and expected to be available during the
period to the maturity of the pension benefi ts. 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 benefi t obligations which, in turn, could lead to an
increase in service cost and amortization cost through amortiza-
tion 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 benefi t 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 returns on plan assets may increase net
periodic benefi t 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 fi scal 2009, a change of 50 basis points
in the expected long-term rate of return on plan assets may cause
a change of approximately ¥2,464 million in net periodic benefi t
cost. Canon multiplies management’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
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
fi scal years and, ultimately, future pension expense.
In accordance with SFAS 158, “Employers’ Accounting for
Defi ned Benefi t Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”,
Canon recognizes the funded status (i.e., the difference between
the fair value of plan assets and the projected benefi t obligations)
of its pension plans in its consolidated balance sheets, with a
corresponding adjustment to accumulated other comprehensive
income (loss), net of tax.
Effective January 1, 2007, the Company and certain of its
domestic subsidiaries amended their funded defi ned benefi t
pension plans. Under these funded defi ned benefi t pension plans,
the lifetime pension benefi t is based upon amounts payable
during an initial period after retirement (the “guarantee period”)
and the subsequent period lasting for the remainder of the
retiree’s lifetime (the “post-guarantee period”). The Company
and certain of its domestic subsidiaries amended these plans to
increase the duration of this guarantee period from 15 years to
20 years to refl ect an increase in the average lifespan of their
employees, resulting in reduced amounts payable during each of
the guarantee and post-guarantee periods. As a result of these
changes, the projected benefi t obligation decreased by ¥101,620
million as of January 1, 2007. In conjunction with these plan
changes, the Company and certain of its domestic subsidiaries
also have implemented an unfunded retirement and severance
plan and a defi ned contribution pension plan for certain future
pension benefi ts attributable to employees’ future services.
CONSOLIDATED RESULTS OF OPERATIONS
SUMMARY OF OPERATIONS
Millions of yen
Thousands of
U.S. dollars
2008 change 2007 change 2006 2008
Net sales ¥4,094,161 –8.6% ¥4,481,346 +7.8% ¥4,156,759 $44,990,780
Operating profi t 496,074 –34.4 756,673 +7.0 707,033 5,451,363
Income before income taxes and minority interests 481,147 –37.4 768,388 +6.8 719,143 5,287,330
Net income 309,148 –36.7 488,332 +7.2 455,325 3,397,231