Canon 2013 Annual Report Download - page 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 57
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 arising from each business combination. If the car-
rying 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 carrying amount of a reporting unit’s goodwill exceeds
its implied fair value.
Intangible assets with finite useful lives consist primar-
ily of software, license fees, patented technologies and cus-
tomer 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 esti-
mated useful life of 5 years. Certain costs incurred in connec-
tion with developing or obtaining internal-use software are
capitalized. These costs consist primarily of payments made
to third parties and the salaries of employees working on
such software development. Costs incurred in connection
with developing internal-use software are capitalized at the
application development stage. In addition, Canon develops
or obtains certain software to be sold where related costs are
capitalized after establishment of technological feasibility.
(m) Environmental Liabilities
Liabilities for environmental remediation and other environ-
mental costs are accrued when environmental assessments or
remedial efforts are probable and the costs can be reasonably
estimated. Such liabilities are adjusted as further information
develops or circumstances change. Costs of future obligations
are not discounted to their present values.
(n) Income Taxes
Deferred tax assets and liabilities are recognized for the esti-
mated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and oper-
ating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those tem-
porary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. Canon records a valuation allowance to
reduce the deferred tax assets to the amount that is more
likely than not realizable.
Canon recognizes the financial statement effects of tax
positions when it is more likely than not, based on the tech-
nical merits, that the tax positions will be sustained upon
examination by the tax authorities. Benefits from tax posi-
tions that meet the more-likely-than-not recognition thresh-
old are measured at the largest amount of benefit that is
greater than 50% likely of being realized upon settlement.
Interest and penalties accrued related to unrecognized tax
benefits are included in income taxes in the consolidated
statements of income.
(o) Stock-Based Compensation
Canon measures stock-based compensation cost at the grant
date, based on the fair value of the award, and recognizes the
cost on a straight-line basis over the requisite service period,
which is the vesting period.
(p) Net Income Attributable to Canon Inc.
Stockholders per Share
Basic net income attributable to Canon Inc. stockholders
per share is computed by dividing net income attributable
to Canon Inc. by the weighted-average number of common
shares outstanding during each year. Diluted net income
attributable to Canon Inc. stockholders per share includes the
effect from potential issuances of common stock based on the
assumptions that all stock options were exercised.
(q) 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.
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 related revenue
is recognized ratably over the lease term. When equipment
leases are bundled with product maintenance contracts,
revenue is allocated based upon the estimated relative fair
value of the lease and non-lease deliverables. Lease deliver-
ables generally include equipment, financing and executory
costs, while non-lease deliverables generally consist of prod-
uct maintenance contracts and supplies.
Revenue from sales of optical equipment, such as semicon-
ductor lithography equipment and FPD lithography equip-