Canon 2011 Annual Report Download - page 65

Strategy Business Units Management System FINANCIAL SECTION
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FINANCIAL SECTION
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. Canon performs its
impairment test of goodwill using the two-step approach at the
reporting unit level, which is one level below the operating seg-
ment level. All goodwill is assigned to the reporting unit or
units that benefit from the synergies arising from each busi-
ness combination. If the carrying amount assigned to the
reporting unit exceeds the fair value of the reporting unit,
Canon performs the second step to measure an impairment
charge in the amount by which the carrying amount of a
reporting unit’s goodwill exceeds its implied fair value.
Intangible assets with finite useful lives consist primarily of
software, license fees, patented technologies and customer
relationships. 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. Patented technologies are amortized
using the straight-line method principally over the estimated
useful life of 3 years. Customer relationships are amortized
principally using the declining-balance method over the esti-
mated useful life of 5 years. 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 connection with
developing internal use software are capitalized at the applica-
tion development stage. In addition, Canon develops or obtains
certain software to be sold where related costs are capitalized
after establishment of technological feasibility.
(m) 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 informa-
tion develops or circumstances change. Costs of future
obligations are not discounted to their present values.
(n) Income Taxes
Deferred tax assets and liabilities are recognized for the esti-
mated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operat-
ing 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 tempo-
rary 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 it is more likely than not, based on the tech-
nical merits, that the tax positions will be sustained upon
examination by the tax authorities. Benefits from tax posi-
tions that meet the more-likely-than-not recognition thresh-
old are measured at the largest amount of benefit that is
greater than 50% 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.
(o) Stock-Based Compensation
Canon measures stock-based compensation cost at the grant
date, based on the fair value of the award, and recognizes the
cost on a straight-line basis over the requisite service period,
which is the vesting period.
(p) Net Income Attributable to Canon Inc.
Stockholders per Share
Basic net income attributable to Canon Inc. stockholders per
share is computed by dividing net income attributable to
Canon Inc. by the weighted-average number of common
shares outstanding during each year. Diluted net income
attributable to Canon Inc. stockholders per share includes the
effect from potential issuances of common stock based on the
assumptions that all stock options were exercised.
(q) Revenue Recognition
Canon generates revenue principally through the sale of
office and 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 transferred to the customer or services have
been rendered, the sales price is fixed or determinable, and
collectibility is probable.
Revenue from sales of office products, such as office net-
work digital MFDs and laser printers, and consumer products,
such as digital cameras and inkjet multifunction 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 semicon-
ductor lithography equipment and LCD lithography equipment
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 equip-
ment 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 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 vari-
able 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