Canon 2010 Annual Report Download - page 51
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Please find page 51 of the 2010 Canon annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.CANON ANNUAL REPORT 2010 49
Valuation of deferred tax assets
Canon currently has signifi cant 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 profi tability may change due to future
market conditions, its ability to continue to successfully exe-
cute its operating restructuring activities and other factors. Any
changes in these factors may require possible recognition of
signifi cant valuation allowances to reduce the net carrying
value of these deferred tax asset balances. When Canon deter-
mines 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 benefi t plans
Canon has signifi cant employee retirement and severance ben-
efi t obligations that are recognized based on actuarial valua-
tions. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets.
Management must consider current market conditions, includ-
ing changes in interest rates, in selecting these assumptions.
Other assumptions include assumed rate of increase in com-
pensation 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 2010, Canon
estimated a weighted-average discount rate of 2.3% for
Japanese plans and 4.9% for foreign plans and a weighted-
average expected long-term rate of return on plan assets of
3.6% for Japanese plans and 6.1% for foreign plans. In estimat-
ing 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 avail-
able 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 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 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 expe-
rience, is deferred until subsequent periods.
Decreases in expected returns on plan assets may increase
net periodic benefi t cost by decreasing the 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 2010, a change of 50
basis points in the expected long-term rate of return on plan
assets would cause a change of approximately ¥3,290 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 rec-
ognition of the difference between this expected return on plan
assets and the actual return on plan assets. The net deferral
affects future pension expense.
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.
CONSOLIDATED RESULTS OF OPERATIONS
SUMMARY OF OPERATIONS
Millions of yen
Thousands of
U.S. dollars
2010 change 2009 change 2008 2010
Net sales ¥3,706,901 +15.5% ¥3,209,201 –21.6% ¥4,094,161 $45,764,210
Operating profi t 387,552 +78.6 217,055 –56.2 496,074 4,784,593
Income before income taxes 392,863 +79.1 219,355 –54.4 481,147 4,850,160
Net income attributable to Canon Inc. 246,603 +87.3 131,647 –57.4 309,148 3,044,481