Canon 2012 Annual Report Download - page 39

FINANCIAL OVERVIEW 37
acquired intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. If the carrying amount of the asset exceeds its
estimated undiscounted future cash flows, an impairment
charge is recognized in the amount by which the carry-
ing amount of the asset exceeds the fair value of the asset.
Determining the fair value of the asset involves the use of
estimates and assumptions.
Property, plant and equipment
Property, plant and equipment are stated at cost.
Depreciation is calculated principally by the declining-bal-
ance method, except for certain assets which are depreciated
by the straight-line method over the estimated useful lives of
the assets.
Goodwill and other intangible assets
Goodwill and other intangible assets with indefinite useful
lives are not amortized, but are instead tested for impair-
ment 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 segment level. All goodwill is assigned to the
reporting unit or units that benefit from the synergies aris-
ing from each business 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 carry-
ing amount of a reporting unit’s goodwill exceeds its implied
fair value. Determining the fair value of the reporting unit
involves the use of estimates and assumptions. Intangible
assets with finite useful lives consist primarily of software,
license fees, patented technologies and customer relation-
ships. 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.
Income tax uncertainties
Canon considers many factors when evaluating and esti-
mating income tax uncertainties. These factors include an
evaluation of the technical merits of the tax positions as well
as the amounts and probabilities of the outcomes that could
be realized upon settlement. The actual resolutions of those
uncertainties will inevitably differ from those estimates, and
such differences may be material to the financial statements.
Valuation of deferred tax assets
Canon currently has significant 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 profitability 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 significant valuation allowances to reduce the net carry-
ing value of these deferred tax asset balances. When Canon
determines that certain deferred tax assets may not be recover-
able, the amounts, which may not be realized, are charged to
income tax expense and will adversely affect net income.
Employee retirement and severance benefit plans
Canon has significant employee retirement and severance
benefit obligations that are recognized based on actuarial val-
uations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets.
Management must consider current market conditions,
including changes in interest rates, in selecting these assump-
tions. Other assumptions include assumed rate of increase
in compensation 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 benefit costs in the future.
In preparing its financial statements for fiscal 2012,
Canon estimated a weighted-average discount rate of 1.9% for
Japanese plans and 4.6% for foreign plans and a weighted-
average expected long-term rate of return on plan assets of
3.1% for Japanese plans and 5.4% for foreign plans. In esti-
mating the discount rate, Canon uses available information
about rates of return on high-quality fixed-income govern-
mental and corporate bonds currently available and expected
to be available during the period to the maturity of the pen-
sion benefits. 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 benefit obligations which, in turn, could lead to an
increase in service cost and amortization cost through amor-
tization of actuarial gain or loss, a decrease in interest cost,
and vice versa. For fiscal 2012, a decrease of 50 basis points in
the discount rate increases the projected benefit obligation
by approximately ¥83,396 million (U.S.$959 million). The net
effect of changes in the discount rate, as well as the net effect
of other changes in actuarial assumptions and experience, is
deferred until subsequent periods.
Decreases in expected returns on plan assets may increase
net periodic benefit 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 fiscal 2012, a change