Canon 2012 Annual Report Download - page 38

Strategy Business Units Management System FINANCIAL SECTION
36
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 sig-
nificant accounting policies which require management to
make significant estimates and assumptions. These estimates
and assumptions include future market conditions, net sales
growth rate, gross margin and discount rate. Though Canon
believes that the estimates and assumptions are reasonable,
actual future results may differ from these estimates and
assumptions. Canon believes that the following are the more
critical judgment areas in the application of its account-
ing policies that currently affect its financial condition and
results of operations.
Revenue recognition
Canon generates revenue principally through the sale of
office and imaging system products, equipment, supplies,
and related services under separate contractual arrange-
ments. 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 MFDs
and laser printers, and imaging system products, such as digi-
tal cameras and inkjet printers, is recognized upon shipment
or delivery, depending upon when title and risk of loss trans-
fer to the customer.
Revenue from sales of optical equipment, such as semi-
conductor lithography equipment and FPD lithography
equipment that are sold with customer acceptance provisions
related to their functionality, is recognized when the equip-
ment is installed at the customer site and the specific criteria
of the equipment functionality are successfully tested and dem-
onstrated 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 typi-
cally pays a stated base service fee plus a variable amount based
on usage. Revenue from these service maintenance 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 rela-
tive fair value of the lease and non-lease deliverables based
upon the estimated relative fair values of each element. Lease
deliverables 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 sell-
ing 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 to 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. Estimates for accrued product war-
ranty 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.
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 deter-
mine 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