Canon 2013 Annual Report Download - page 60

Strategy FINANCIAL SECTION
58 Corporate DataBusiness Segment Corporate Structure
ment 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.
For all other arrangements with multiple elements, Canon
allocates revenue to each element based on its relative selling
price if such element meets the criteria for treatment as a sep-
arate 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. Canon regularly
adjusts its estimates each period in the ordinary course of
establishing sales incentive program accruals based on cur-
rent information. During the year ended December 31, 2012,
Canon revised its estimates for sales incentive program accru-
als based on new information which was not available at the
time that the accrual was established due to unique circum-
stances, such as the earthquake in Japan and the flooding
in Thailand that occurred in 2011 as well as a recent shift in
usage of incentive programs from mail-in rebates to instant
rebates. This change in estimate caused an increase in net
income attributable to Canon Inc. of ¥10,785 million, and
an increase in basic and diluted net income attributable to
Canon Inc. stockholders per share of ¥9.19 each. During the
years ended December 31, 2013 and 2011, such adjustments
were not significant. Canon also 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 govern-
mental authorities are excluded from revenues in the consoli-
dated 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 ¥86,398 million ($822,838 thousand), ¥83,134
million and ¥81,232 million for the years ended December 31,
2013, 2012 and 2011, respectively.
(t) Shipping and Handling Costs
Shipping and handling costs totaled ¥47,460 million
($452,000 thousand), ¥38,499 million and ¥43,308 million
for the years ended December 31, 2013, 2012 and 2011, 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 current
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 relationships
between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking vari-
ous 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 transactions are highly
effective in offsetting changes in cash flows of hedged items.
When it is determined that a derivative 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 derivative that is designated and quali-
fies 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 hedg-
ing ineffectiveness are included in other income (deductions).
Gains and losses related to the components of hedging instru-
ments 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 February 2013, the FASB issued an amendment which
requires entities to provide information about the amounts
reclassified out of accumulated other comprehensive income
by component, and to present, either on the face of the state-
ment where net income is presented or in the notes, sig-
nificant amounts reclassified out of accumulated other
comprehensive income by the respective line items of net
income. Canon adopted this amended guidance from the
quarter beginning January 1, 2013. This adoption did not
have a material impact on Canon’s consolidated results of
operations and financial condition. See Note 14 of the Notes
to Consolidated Financial Statements.