Canon 2011 Annual Report Download - page 42

40 F I N A N C I A L S E C T I O N >F I N A N C I A L O V E R V I E W
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
The consolidated financial statements are prepared in accor-
dance with U.S. generally accepted accounting principles
(!GAAP") and based on the selection and application of signifi-
cant accounting policies which require management to make
significant estimates and assumptions. Canon believes that
the following are the more critical judgment areas in the
application of its accounting policies that currently affect its
financial condition and results of operations.
Revenue recognition
Canon generates revenue principally through the sale of
consumer products, equipment, supplies, and related serv-
ices under separate contractual arrangements. Canon
recognizes revenue when persuasive evidence of an arrange-
ment exists, delivery has occurred and title and risk of loss
have been transferred to the customer or services have been
rendered, the sales price is fixed or determinable, and col-
lectibility is probable.
Revenue from sales of office products, such as office net-
work digital multifunction devices and laser printers, and
consumer products, such as digital cameras and inkjet multi-
function printers, 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 semi-
conductor lithography equipment and LCD lithography
equipment that are sold with customer acceptance provi-
sions 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 demonstrated by Canon. Service revenue is
derived primarily from separately priced product mainte-
nance contracts on equipment sold to customers and is
measured at the stated amount of the contract and recog-
nized as services are provided.
Canon also offers separately priced product maintenance
contracts for most office imaging products, for which the cus-
tomer 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 the related
revenue is recognized 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 deliv-
erables 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 selling
price if such element meets the criteria for treatment as a
separate unit of accounting. 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 war-
ranty costs are based on historical experience, and are affected
by ongoing product failure rates, specific product class fail-
ures outside of the baseline experience, material usage and
service delivery costs incurred in correcting a product failure.
Allowance for doubtful receivables
Allowance for doubtful receivables is determined using a com-
bination of factors to ensure that Canon’s trade and financing
receivables are not overstated due to uncollectibility. These
factors include the length of time receivables are past due, the
credit quality of customers, macroeconomic conditions and
historical experience. Also, Canon records specific reserves for
individual accounts when Canon becomes aware of a cus-
tomer’s inability to meet its financial obligations to Canon,
such as in the case of bankruptcy filings or deterioration in
the customer’s operating results or financial position. If cir-
cumstances related to customers change, estimates of the
recoverability of receivables would be further adjusted.
Valuation of inventories
Inventories are stated at the lower of cost or market value.
Cost is determined by the average method for domestic
inventories and principally the first-in, first-out method for
overseas inventories. Market value is the estimated selling
price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to
make a sale. Canon routinely reviews its inventories for their
salability and for indications of obsolescence to determine if
inventories should be written-down to market value.
Judgments and estimates must be made and used in connec-
tion with establishing such allowances in any accounting
period. In estimating the market value of its inventories,
Canon considers the age of the inventories and the likelihood
of spoilage or changes in market demand for its inventories.
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