Canon 2014 Annual Report Download - page 59

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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 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 discounts,
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 current informa-
tion. During the year ended December 31, 2012, Canon revised
its estimates for sales incentive program accruals based on
new information which was not available at the time that the
accrual was established due to unique circumstances, 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,
2014 and 2013, such adjustments were not significant. Canon
also provides price protection to certain resellers of its prod-
ucts, 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 ¥79,765 million, ¥86,398 million and ¥83,134
million for the years ended December 31, 2014, 2013 and
2012, respectively.
(t) Shipping and Handling Costs
Shipping and handling costs totaled ¥49,576 million, ¥47,460
million and ¥38,499 million for the years ended December
31, 2014, 2013 and 2012, respectively, and are included in sell-
ing, 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 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 comprehen-
sive 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 May 2014, the Financial Accounting Standards Board
(“FASB”) issued a new accounting standard related to reve-
nue from contracts with customers. This standard requires
an entity to recognize revenue when promised goods or ser-
vices are transferred to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods or services. This standard is effective
for annual reporting periods beginning after December 15,
2016 and is required to be adopted by Canon from the quarter
beginning January 1, 2017. Early adoption is not permitted.
This standard may be applied retrospectively to each prior
reporting period presented or retrospectively with the cumu-
lative effect of initially applying this standard recognized at
the date of initial application. Canon has not selected a tran-
sition method and is currently evaluating the effect that the
adoption of this standard will have on its consolidated results
of operations and financial condition.