Canon 2013 Annual Report Download - page 39

FINANCIAL OVERVIEW 37
for example to bankruptcy filings or deterioration in the
customer’s operating results or financial position. If circum-
stances related to customers change, estimates of the recov-
erability of receivables are 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 inven-
tories and principally the first-in, first-out method for over-
seas 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 salabil-
ity and for indications of obsolescence to determine if inven-
tories should be written-down to market value. Judgments
and estimates must be made and used in connection with
establishing such allowances in any accounting period. In
estimating the market value of its inventories, Canon consid-
ers 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
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 esti-
mates and assumptions.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation
is calculated principally by the declining-balance 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 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 oper-
ating segment level. All goodwill is assigned to the report-
ing unit or units that benefit from the synergies arising 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 impair-
ment charge in the amount by which the carrying amount
of a reporting unit’s goodwill exceeds its implied fair value.
Fair value of a reporting unit is determined primarily based
on the discounted cash flow analysis which involves estimates
of projected future cash flows and discount rates. Estimates
of projected future cash flow are primarily based on Canon’s
forecast of future growth rates. Estimates of discount rates
are determined based on the weighted average cost of capital,
which considers primarily market and industry data as well as
specific risk factors. Intangible assets with finite useful lives
consist primarily of software, license fees, patented technolo-
gies 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 estimated useful life of 5 years.
Income tax uncertainties
Canon considers many factors when evaluating and estimat-
ing income tax uncertainties. These factors include an evalua-
tion of the technical merits of the tax positions as well as the
amounts and probabilities of the outcomes that could be real-
ized upon settlement. The actual resolutions of those uncer-
tainties 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
valuations. Inherent in these valuations are key assump-
tions, including discount rates and expected return on plan
assets. Management must consider current market condi-
tions, including changes in interest rates, in selecting these
assumptions. Other assumptions include assumed rate of
increase in compensation levels, mortality rate, and with-
drawal rate. Changes in assumptions inherent in the valu-
ation are reasonably likely to occur from period to period.
Actual results that differ from the assumptions are accumu-
lated and amortized over future periods and, therefore, gen-
erally affect future pension expenses. While management
believes that the assumptions used are appropriate, the dif-
ferences may affect employee retirement and severance ben-
efit costs in the future.
In preparing its financial statements for 2013, Canon esti-
mated a weighted-average discount rate used to determine