Canon 2012 Annual Report Download - page 62

Strategy Business Units Management System FINANCIAL SECTION
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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. During the year
ended December 31, 2012, Canon revised its estimates for
sales incentive programs accrual. This change in estimate
caused an increase in net income attributable to Canon Inc.
by ¥10,785 million ($123,966 thousand), and an increase in
basic and diluted net income attributable to Canon Inc. stock-
holders per share by ¥9.19 ($0.11) each. 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 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 gov-
ernmental 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 ¥83,134 million ($955,563 thousand), ¥81,232
million and ¥94,794 million for the years ended December
31, 2012, 2011 and 2010, respectively.
(t) Shipping and Handling Costs
Shipping and handling costs totaled ¥38,499 million
($442,517 thousand), ¥43,308 million and ¥56,306 million for
the years ended December 31, 2012, 2011 and 2010, 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 deriv-
ative 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 deriv-
ative 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 June 2011, the Financial Accounting Standards Board
(“FASB”) issued an amendment which requires presenta-
tion of net income and other comprehensive income in one
continuous statement or in two separate but consecutive
statements, which is applied retrospectively for all periods
presented. Canon adopted this amended guidance from the
quarter beginning January 1, 2012. This adoption did not
have a material impact on Canon’s consolidated results of
operations and financial condition.
In February 2013, the FASB issued an amendment
which requires entities to provide information about the
amounts reclassified out of accumulated other comprehen-
sive income by component, and to present, either on the
face of the statement where net income is presented or in
the notes, significant amounts reclassified out of accumu-
lated other comprehensive income by the respective line
items of net income. Canon will adopt this amended guid-
ance from the quarter beginning January 1, 2013, and does
not expect the adoption of this guidance to have a mate-
rial impact on Canon’s consolidated results of operations
and financial condition.