Canon 2011 Annual Report Download - page 66

64 F I N A N C I A L S E C T I O N >N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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 rev-
enue 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 dis-
counts, 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 addi-
tion, 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 in the consolidated statements
of income. 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.
Taxes collected from customers and remitted to govern-
mental authorities are excluded from revenues in the
consolidated statements of income.
(r) Research and Development Costs
Research and development costs are expensed as incurred.
(s) Advertising Costs
Advertising costs are expensed as incurred. Advertising
expenses were ¥81,232 million ($1,041,436 thousand),
¥94,794 million and ¥78,009 million for the years ended
December 31, 2011, 2010 and 2009, respectively.
(t) Shipping and Handling Costs
Shipping and handling costs totaled ¥43,308 million
($555,231 thousand), ¥56,306 million and ¥45,966 million for
the years ended December 31, 2011, 2010 and 2009, respec-
tively, and are included in selling, general and administrative
expenses in the consolidated statements of income.
(u) Derivative Financial Instruments
All derivatives are recognized at fair value and are included
in prepaid expenses and other current assets, or other cur-
rent liabilities in the consolidated balance sheets.
Canon uses and designates certain derivatives as a hedge
of a forecasted transaction or the variability of cash flows to
be received or paid related to a recognized asset or liability
(!cash flow"hedge). Canon formally documents all relation-
ships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for under-
taking various hedge transactions. Canon also formally
assesses, both at the hedge’s inception and on an ongoing
basis, whether the derivatives that are used in hedging trans-
actions are highly effective in offsetting changes in cash flows
of hedged items. When it is determined that a derivative is
not highly effective as a hedge or that it has ceased to be a
highly effective hedge, Canon discontinues hedge accounting
prospectively. Changes in the fair value of a derivative that is
designated and qualifies as a cash flow hedge are recorded in
other comprehensive income (loss), until earnings are
affected by the variability in cash flows of the hedged item.
Gains and losses from hedging ineffectiveness are included in
other income (deductions). Gains and losses related to the
components of hedging instruments excluded from the
assessment of hedge effectiveness are included in other
income (deductions).
Canon also uses certain derivative financial instruments
which are not designated as hedges. The changes in fair val-
ues of these derivative financial instruments are immediately
recorded in earnings.
Canon classifies cash flows from derivatives as cash flows
from operating activities in the consolidated statements of
cash flows.
(v) Guarantees
Canon recognizes, at the inception of a guarantee, a liability
for the fair value of the obligation it has undertaken in issu-
ing guarantees.
(w) Recently Issued Accounting Guidance
In October 2009, the Financial Accounting Standards Board
(!FASB") issued new accounting guidance for revenue recogni-
tion under multiple-deliverable arrangements. This guidance
modifies the criteria for separating consideration under mul-
tiple-deliverable arrangements and requires allocation of the
overall consideration to each deliverable using the estimated
selling price in the absence of vendor-specific objective evi-
dence or third-party evidence of selling price for deliverables.
As a result, the residual method of allocating arrangement
consideration will no longer be permitted. The guidance also
requires additional disclosures about how a vendor allocates
revenue in its arrangements and about the significant judg-
ments made and their impact on revenue recognition. This
guidance is effective for fiscal years beginning on or after
June 15, 2010 and was adopted by Canon from the quarter
beginning January 1, 2011. This adoption did not have a
material impact on Canon’s consolidated results of opera-
tions and financial condition.
In October 2009, the FASB issued new accounting guid-
ance for software revenue recognition. This guidance
modifies the scope of the software revenue recognition guid-