20-F/A 1 d767189d20fa.htm FORM 20-F/A FORM 20-F/A
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F/A

(Amendment No.1)

 

     

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

     

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

 

     

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

 

     

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number 001-15122

 

CANON KABUSHIKI KAISHA

(Exact name of Registrant in Japanese as specified in its charter)

CANON INC.

(Exact name of Registrant in English as specified in its charter)

JAPAN

(Jurisdiction of incorporation or organization)

30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan

(Address of principal executive offices)

Sachiho Tanino, +81-3-3758-2111, +81-3-5482-9680, 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan

(Name, Telephone, Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class        Trading Symbol         Name of each exchange on which registered

(1)  Common Stock (the “shares”)

    CAJ      New York Stock Exchange*

(2)  American Depositary Shares (“ADSs”), each of which represents one share

         New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

 

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 

*

Not for trading, but only for technical purposes in connection with the registration of ADSs.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2018, 1,079,749,823 shares of common stock, including 16,460,829 ADSs, were outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ☑     No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐     No  ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑     No   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑     No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☑    Accelerated filer  ☐    Non-accelerated filer  ☐    Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☑

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board   ☐

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐     Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐     No  ☑

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page number  

Explanatory Note

     1  

Item 18.

   Financial Statements      90  
   Reports of Independent Registered Public Accounting Firm      91  
   Consolidated Balance Sheets      93  
   Consolidated Statements of Income      94  
   Consolidated Statements of Comprehensive Income      95  
   Consolidated Statements of Equity      96  
   Consolidated Statements of Cash Flows      98  
   Notes to Consolidated Financial Statements      99  
   Schedule II—Valuation and Qualifying Accounts      149  

Item 19.

   Exhibits      150  

SIGNATURES

     151  

 

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Table of Contents

Explanatory Note

This Amendment No. 1 on Form 20-F/A has been filed by Canon Inc. (the “Company”) to amend the annual report on Form 20-F for the fiscal year ended December 31, 2018 filed on March 28, 2019. This amendment presents Item 18. The only change to Item 18 is to add the conformed signature of our independent registered public accounting firm, Ernst & Young ShinNihon LLC, to the audit reports, which were inadvertently omitted in the original filing. Manually signed versions of the reports were received by the Company from Ernst & Young ShinNihon LLC prior to the original filing.

The Company does not intend to revise, update, amend or restate the information presented in any other items of such annual report on Form 20-F or reflect any events that have occurred after the filing of such annual report on Form 20-F. Among other things, forward-looking statements and risk factors contained in such annual report on Form 20-F have not been revised to reflect events, results or developments that have occurred or facts that became known to the Company after filing such annual report on Form 20-F, and such forward-looking statements and risk factors should be read in their historical context.

In addition, the Company submits the unchanged consolidated financial statements of the Company and currently dated certifications of our principal executive officer and our principal financial officer pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

 

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Item 18. Financial Statements

 

     Page number  
Consolidated financial statements of Canon Inc. and Subsidiaries:       

Reports of Ernst  & Young ShinNihon LLC, Independent Registered Public Accounting Firm

     91  

Consolidated Balance Sheets as of December 31, 2018 and 2017

     93  

Consolidated Statements of Income for the years ended December  31, 2018, 2017 and 2016

     94  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016

     95  

Consolidated Statements of Equity for the years ended December  31, 2018, 2017 and 2016

     96  

Consolidated Statements of Cash Flows for the years ended December  31, 2018, 2017 and 2016

     98  

Notes to Consolidated Financial Statements

     99  

Schedule:

  

Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016

     149  

All other schedules are omitted as permitted by the rules and regulations of the Securities and Exchange Commission as not applicable.

 

90


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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Canon Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 18 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 28, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young ShinNihon LLC

We have served as the Company’s auditor for SEC reporting purposes since 2004, and as its Japanese statutory auditor since 1978.

Tokyo, Japan

March 28, 2019

 

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Canon Inc.

Opinion on Internal Control over Financial Reporting

We have audited Canon Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Canon Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 18 and our report dated March 28, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young ShinNihon LLC

Tokyo, Japan

March 28, 2019

 

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Canon Inc. and Subsidiaries

Consolidated Balance Sheets

 

     December 31  
     2018     2017  
     (Millions of yen)  

Assets

    

Current assets:

    

Cash and cash equivalents (Note 1)

     520,645       721,814  

Short-term investments (Note 2)

     956       1,965  

Trade receivables, net (Notes 3 and 15)

     612,953       650,872  

Inventories (Notes 4 and 15)

     611,281       570,033  

Prepaid expenses and other current assets (Notes 6, 15 and 18)

     304,346       287,965  
  

 

 

   

 

 

 

Total current assets

     2,050,181       2,232,649  

Noncurrent receivables (Note 19)

     18,230       35,444  

Investments (Note 2)

     42,556       48,320  

Property, plant and equipment, net (Notes 5 and 6)

     1,090,992       1,126,620  

Intangible assets, net (Notes 7 and 8)

     391,021       420,972  

Goodwill (Notes 7 and 8)

     908,511       936,722  

Other assets (Notes 6, 11 and 12)

     397,974       397,564  
  

 

 

   

 

 

 

Total assets

     4,899,465       5,198,291  
  

 

 

   

 

 

 

Liabilities and equity

    

Current liabilities:

    

Short-term loans and current portion of long-term debt (Note 9)

     38,527       39,328  

Trade payables (Note 10)

     352,489       380,654  

Accrued income taxes (Note 12)

     41,264       77,501  

Accrued expenses (Notes 11, 15 and 19)

     321,137       330,188  

Other current liabilities (Notes 5, 15 and 18)

     276,237       281,809  
  

 

 

   

 

 

 

Total current liabilities

     1,029,654       1,109,480  

Long-term debt, excluding current installments (Notes 9 and 20)

     361,962       493,238  

Accrued pension and severance cost (Note 11)

     382,789       365,582  

Other noncurrent liabilities (Note 12)

     107,147       133,816  
  

 

 

   

 

 

 

Total liabilities

     1,881,552       2,102,116  

Commitments and contingent liabilities (Note 19)

    

Equity:

    

Canon Inc. shareholders’ equity:

    

Common stock

    

Authorized 3,000,000,000 shares;
issued 1,333,763,464 shares in 2018 and 2017

     174,762       174,762  

Additional paid-in capital

     404,389       401,386  

Legal reserve (Note 13)

     67,116       66,879  

Retained earnings (Note 13)

     3,508,908       3,429,312  

Accumulated other comprehensive income (loss) (Note 14)

     (269,071     (143,228

Treasury stock, at cost; 254,013,641 shares in 2018 and
254,007,681 shares in 2017

     (1,058,502     (1,058,481
  

 

 

   

 

 

 

Total Canon Inc. shareholders’ equity

     2,827,602       2,870,630  

Noncontrolling interests

     190,311       225,545  
  

 

 

   

 

 

 

Total equity

     3,017,913       3,096,175  
  

 

 

   

 

 

 

Total liabilities and equity

     4,899,465       5,198,291  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Canon Inc. and Subsidiaries

Consolidated Statements of Income

 

     Years ended December 31  
     2018     2017     2016  
     (Millions of yen)  

Net sales (Note 15)

      

Products and Equipment

     3,194,724       3,521,156       2,986,188  

Services

     757,213       558,859       415,299  
  

 

 

   

 

 

   

 

 

 
     3,951,937       4,080,015       3,401,487  

Cost of sales (Notes 5, 8, 11, 15 and 19)

      

Products and Equipment

     1,762,171       1,875,581       1,574,679  

Services

     354,212       213,880       154,810  
  

 

 

   

 

 

   

 

 

 
     2,116,383       2,089,461       1,729,489  
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,835,554       1,990,554       1,671,998  
  

 

 

   

 

 

   

 

 

 

Operating expenses (Notes 1, 5, 8, 11, 15, 16, 19 and 21):

      

Selling, general and administrative expenses

     1,176,760       1,301,666       1,149,036  

Research and development expenses

     315,842       333,371       306,537  

Impairment losses on goodwill

           33,912        
  

 

 

   

 

 

   

 

 

 
     1,492,602       1,668,949       1,455,573  
  

 

 

   

 

 

   

 

 

 

Operating profit

     342,952       321,605       216,425  

Other income (deductions):

      

Interest and dividend income

     6,604       6,012       4,762  

Interest expense

     (797     (818     (1,061

Other, net (Notes 1, 2, 11, 14 and 18)

     14,133       27,085       24,525  
  

 

 

   

 

 

   

 

 

 
     19,940       32,279       28,226  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     362,892       353,884       244,651  

Income taxes (Note 12)

     96,150       98,024       82,681  
  

 

 

   

 

 

   

 

 

 

Consolidated net income

     266,742       255,860       161,970  

Less: Net income attributable to noncontrolling interests

     13,987       13,937       11,320  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Canon Inc.

     252,755       241,923       150,650  
  

 

 

   

 

 

   

 

 

 
     (Yen)  

Net income attributable to Canon Inc. shareholders per share (Note 17):

      

Basic

     234.09       222.88       137.95  

Diluted

     234.08       222.88       137.95  

Cash dividends per share

     160.00       160.00       150.00  

See accompanying Notes to Consolidated Financial Statements.

 

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Canon Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

 

     Years ended December 31  
     2018     2017     2016  
     (Millions of yen)  

Consolidated net income

     266,742       255,860       161,970  

Other comprehensive income (loss), net of tax (Note 14):

      

Foreign currency translation adjustments

     (93,146     47,090       (107,666

Net unrealized gains and losses on securities

     (141     (9,362     997  

Net gains and losses on derivative instruments

     488       2,588       (2,948

Pensionliability adjustments

     (30,570     21,207       (70,355
  

 

 

   

 

 

   

 

 

 
     (123,369     61,523       (179,972
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     143,373       317,383       (18,002

Less: Comprehensive income attributable to noncontrolling interests

     6,918       18,807       1,745  
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Canon Inc.

     136,455       298,576       (19,747
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Canon Inc. and Subsidiaries

Consolidated Statements of Equity

 

    Common
stock
    Additional
paid-in
capital
    Legal
reserve
    Retained
earnings
    Accumulated
other
comprehensive

income (loss)
    Treasury
stock
    Total
Canon Inc.
shareholders’
equity
    Non-
controlling
interests
    Total
equity
 
    (Millions of yen)  

Balance at December 31, 2015

    174,762       401,358       65,289       3,365,158       (29,742     (1,010,410     2,966,415       218,048       3,184,463  

Equity transactions with noncontrolling interests and other

      27           258         285       (5,270     (4,985

Dividends to Canon Inc. shareholders

          (163,810         (163,810       (163,810

Dividends to noncontrolling interests

                  (4,077     (4,077

Acquisition of subsidiaries

                  1,047       1,047  

Transfer to legal reserve

        1,269       (1,269                  

Comprehensive income:

                 

Net income

          150,650           150,650       11,320       161,970  

Other comprehensive income (loss), net of tax (Note 14):

                 

Foreign currency translation adjustments

            (101,257       (101,257     (6,409     (107,666

Net unrealized gains and losses on securities

            1,196         1,196       (199     997  

Net gains and losses on derivative instruments

            (2,924       (2,924     (24     (2,948

Pension liability adjustments

            (67,412       (67,412     (2,943     (70,355
             

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

                (19,747     1,745       (18,002
             

 

 

   

 

 

   

 

 

 

Repurchases and reissuance of treasury stock

          (1       (13     (14       (14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

    174,762       401,385       66,558       3,350,728       (199,881     (1,010,423     2,783,129       211,493       2,994,622  

Equity transactions with noncontrolling interests and other

      1               1       (1      

Dividends to Canon Inc. shareholders

          (162,887         (162,887       (162,887

Dividends to noncontrolling interests

                  (4,814     (4,814

Acquisition of subsidiaries

                  60       60  

Transfer to legal reserve

        321       (321                  

Comprehensive income:

                 

Net income

          241,923           241,923       13,937       255,860  

Other comprehensive income (loss), net of tax (Note 14):

                 

Foreign currency translation adjustments

            44,168         44,168       2,922       47,090  

Net unrealized gains and losses on securities

            (9,767       (9,767     405       (9,362

Net gains and losses on derivative instruments

            2,562         2,562       26       2,588  

Pension liability adjustments

            19,690         19,690       1,517       21,207  
             

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

                298,576       18,807       317,383  
             

 

 

   

 

 

   

 

 

 

Repurchases of treasury stock

              (50,036     (50,036       (50,036

Reissuance of treasury stock

          (131       1,978       1,847         1,847  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

    174,762       401,386       66,879       3,429,312       (143,228     (1,058,481     2,870,630       225,545       3,096,175  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Canon Inc. and Subsidiaries

Consolidated Statements of Equity (continued)

 

    Common
stock
    Additional
paid-in
capital
    Legal
reserve
    Retained
earnings
    Accumulated
other
comprehensive

income (loss)
    Treasury
stock
    Total
Canon Inc.
shareholders’
equity
    Non-
controlling
interests
    Total
equity
 
    (Millions of yen)  

Cumulative effects of accounting standard update – adoption of ASU No.2014-09

          (106         (106     (76     (182

Cumulative effects of accounting standard update – adoption of ASU No. 2016-01

          5,343       (5,343                    

Equity transactions with noncontrolling interests and other

      3,003           (4,200       (1,197     (36,518     (37,715

Dividends to Canon Inc. shareholders

          (178,159         (178,159       (178,159

Dividends to noncontrolling interests

                  (5,558     (5,558

Transfers to legal reserve

        237       (237                  

Comprehensive income:

                 

Net income

          252,755           252,755       13,987       266,742  

Other comprehensive income (loss), net of tax (Note 14):

                 

Foreign currency translation adjustments

            (89,823       (89,823     (3,323     (93,146

Net unrealized gains and losses on securities

            (141       (141           (141

Net gains and losses on derivative instruments

            488         488             488  

Pension liability adjustments

            (26,824       (26,824     (3,746     (30,570
             

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

                136,455       6,918       143,373  
             

 

 

   

 

 

   

 

 

 

Repurchases of treasury stock

              (25     (25       (25

Reissuance of treasury stock

          0         4       4         4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018

    174,762       404,389       67,116       3,508,908       (269,071     (1,058,502     2,827,602       190,311       3,017,913  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Consolidated Statements of Cash Flows

 

    Years ended December 31  
    2018     2017     2016  
    (Millions of yen)  

Cash flows from operating activities:

     

Consolidated net income

    266,742       255,860       161,970  

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

     

Depreciation and amortization

    251,554       261,881       250,096  

Loss on disposal of fixed assets

    5,726       6,935       5,203  

Equity in earnings of affiliated companies

    (1,414     (1,196     (890

Impairment losses on goodwill (Notes 8 and 21)

          33,912        

Gain on securities contributed to retirement benefit trust (Note 2)

          (17,836      

Deferred income taxes

    (11,849     (17,603     7,188  

(Increase) decrease in trade receivables

    (17,724     3,563       (4,155

(Increase) decrease in inventories

    (61,755     2,967       6,156  

Increase (decrease) in trade payables

    (31,212     4,951       56,844  

Increase (decrease) in accrued income taxes

    (35,284     46,296       (16,456

Increase (decrease) in accrued expenses

    2,541       18,503       (5,256

Increase (decrease) in accrued (prepaid) pension and severance cost

    (17,738     522       5,489  

Other, net (Note 6)

    15,706       (8,198     34,094  
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    365,293       590,557       500,283  

Cash flows from investing activities:

     

Purchases of fixed assets (Note 5)

    (191,399     (189,484     (206,971

Proceeds from sale of fixed assets (Note 5)

    9,634       26,444       6,177  

Purchases of securities

    (2,311     (2,220     (84

Proceeds from sale and maturity of securities

    1,615       970       1,181  

Decrease in time deposits, net

    401       3,373       15,414  

Acquisitions of businesses, net of cash acquired (Note 7)

    (13,346     (6,557     (649,570

Other, net

    (209     2,464       (3,272
 

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (195,615     (165,010     (837,125

Cash flows from financing activities:

     

Proceeds from issuance of long-term debt (Note 9)

    439       1,570       610,552  

Repayments of long-term debt (Note 9)

    (136,094     (126,578     (856

Increase (decrease) in short-term loans, net (Note 9)

    2,501       5,628       (80,580

Transactions with noncontrolling interests

    (37,942           (4,993

Dividends paid

    (178,159     (162,887     (163,810

Repurchases and reissuance of treasury stock

    (21     (50,034     (14

Other, net

    (5,554     (8,163     (4,607
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (354,830     (340,464     355,692  

Effect of exchange rate changes on cash and cash equivalents

    (16,017     6,538       (22,270
 

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    (201,169     91,621       (3,420

Cash and cash equivalents at beginning of year

    721,814       630,193       633,613  
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

    520,645       721,814       630,193  
 

 

 

   

 

 

   

 

 

 

Supplemental disclosure for cash flow information:

     

Cash paid during the year for:

     

Interest

    749       1,026       738  

Income taxes

    131,616       71,473       76,714  

See accompanying Notes to Consolidated Financial Statements.

 

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Notes to Consolidated Financial Statements

 

1.   Basis of Presentation and Significant Accounting Policies

 

(a)

Description of Business

Canon Inc. (the “Company”) and subsidiaries (collectively “Canon”) is one of the world’s leading manufacturers in such fields as office products, imaging system products, medical system products and industry and other products. Office products consist mainly of office multifunction devices (“MFDs”), laser multifunction printers (“MFPs”), laser printers, digital continuous feed presses, digital sheet-fed presses, wide-format printers and document solutions. Imaging system products consist mainly of interchangeable-lens digital cameras, digital compact cameras, digital camcorders, digital cinema cameras, interchangeable lenses, compact photo printers, inkjet printers, large format inkjet printers, commercial photo printers, image scanners, multimedia projectors, broadcast equipment and calculators. Medical system products consist mainly of digital radiography systems, diagnostic X-ray systems, computed tomography (“CT”) systems, magnetic resonance imaging (“MRI”) systems, diagnostic ultrasound systems, clinical chemistry analyzers and ophthalmic equipment. Industry and other products consist mainly of semiconductor lithography equipment, FPD (Flat panel display) lithography equipment, vacuum thin-film deposition equipment, organic LED (“OLED”) panel manufacturing equipment, die bonders, micromotors, network cameras, handy terminals and document scanners. Sales are made principally under the Canon brand name, almost entirely through sales subsidiaries. These subsidiaries are responsible for marketing and distribution, and primarily sell to retail dealers in their geographic area. Further segment information is described in Note 22.

Canon sells laser printers on an OEM basis to HP Inc.; such sales constituted 13.6%, 13.1% and 14.8% of consolidated net sales for the years ended December 31, 2018, 2017 and 2016, respectively, and are included in the Office Business Unit.

Canon’s manufacturing operations are conducted primarily at 30 plants in Japan and 18 overseas plants which are located in countries or regions such as the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and Philippines.

 

(b)

Basis of Presentation

The Company and its domestic subsidiaries maintain their books of account in conformity with financial accounting standards of Japan. Foreign subsidiaries maintain their books of account in conformity with financial accounting standards of the countries of their domicile.

Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with U.S. generally accepted accounting principles (“U.S. GAAP”). These adjustments were not recorded in the statutory books of account.

 

(c)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries and those variable interest entities where the Company or its consolidated subsidiaries are the primary beneficiaries. All significant intercompany balances and transactions have been eliminated.

 

(d)

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant estimates and assumptions are

 

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Notes to Consolidated Financial Statements (continued)

 

1.   Basis of Presentation and Significant Accounting Policies (continued)

 

(d)   Use of Estimates (continued)

 

reflected in valuation and disclosure of accounts including: revenue recognition, allowance for doubtful receivables, inventories, long-lived assets, goodwill and other intangible assets with indefinite useful lives, environmental liabilities, deferred tax assets, uncertain tax positions and employee retirement and severance benefit obligations. Actual results could differ materially from those estimates.

 

(e)

Translation of Foreign Currencies

Assets and liabilities of the Company’s subsidiaries located outside Japan with functional currencies other than Japanese yen are translated into Japanese yen at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the year. Gains and losses resulting from translation of financial statements are excluded from earnings and are reported in other comprehensive income (loss).

Gains and losses resulting from foreign currency transactions, including foreign exchange contracts, and translation of assets and liabilities denominated in foreign currencies are included in other income (deductions) in the consolidated statements of income. Foreign currency exchange gains and losses were net losses of ¥6,044 million, ¥9,775 million and ¥2 million for the years ended December 31, 2018, 2017 and 2016, respectively.

 

(f)

Cash Equivalents

All highly liquid investments acquired with original maturities of three months or less are considered to be cash equivalents. Certain debt securities with original maturities of less than three months, classified as available-for-sale securities of ¥70,500 million at December 31, 2018 and 2017, respectively, are included in cash and cash equivalents in the consolidated balance sheets.

 

(g)

Investments

Investments consist primarily of time deposits with original maturities of more than three months, debt and equity securities and investments in affiliated companies.

Canon classifies investments in debt securities as available-for-sale securities. Canon does not hold any trading securities which are bought and held primarily for the purpose of sale in the near term, or any held-to-maturity securities. Canon reports investments with maturities of less than one year as short-term investments.

Available-for-sales debt securities and equity securities with readily determinable fair value that are not accounted for under the equity method are recorded at fair value which is determined based on quoted market prices, projected discounted cash flows or other valuation techniques as appropriate. The changes in fair value are recognized in net income for equity securities and in other comprehensive income for available-for-sales debt securities.

Available-for-sale debt securities are regularly reviewed for other-than-temporary declines in the carrying amount based on criteria that include the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and Canon’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. For available-for-sale securities for which the declines are deemed to be other-than-temporary and there is

 

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Notes to Consolidated Financial Statements (continued)

 

1.   Basis of Presentation and Significant Accounting Policies (continued)

 

(g)   Investments (continued)

 

no intent to sell, the impairment are separated into the amount related to credit loss, which is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income (loss). For available-for-sale securities for which the declines are deemed to be other-than-temporary and there is an intent to sell, the impairments in their entirety are recognized in earnings. Canon recognizes an impairment loss to the extent by which the cost basis of the investment exceeds the fair value of the investment.

Canon measures non-marketable equity securities without readily determinable fair value at cost, minus impairment, if any, plus or minus changes resulting from observables price changes in orderly transactions for the identical or a similar investment of the same issuer.

Realized gains and losses are determined by the average cost method and reflected in earnings.

Investments in affiliated companies over which Canon has the ability to exercise significant influence, but does not hold a controlling financial interest, are accounted for by the equity method.

 

(h)   Allowance for Doubtful Receivables

Allowance for doubtful trade and finance receivables is maintained for all customers based on a combination of factors, including aging analysis, macroeconomic conditions and historical experience. An additional reserve for individual accounts is recorded when Canon becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. When all collection options are exhausted including legal recourse, the accounts or portions thereof are deemed to be uncollectable and charged against the allowance.

 

(i)

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the average method for domestic inventories and principally by the first-in, first-out method for overseas inventories.

 

(j)

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant and equipment, and acquired intangible assets 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. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset and the estimated undiscounted future cash flows expected to be generated by the asset. 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 carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

 

(k)

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.

 

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Notes to Consolidated Financial Statements (continued)

 

1.   Basis of Presentation and Significant Accounting Policies (continued)

 

(k)   Property, Plant and Equipment (continued)

 

The depreciation period ranges from 3 years to 60 years for buildings and 1 year to 20 years for machinery and equipment.

Assets leased to others under operating leases are stated at cost and depreciated to the estimated residual value of the assets by the straight-line method over the lease term, generally from 2 years to 5 years.

 

(l)

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. All goodwill is assigned to the reporting 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 recognizes an impairment charge in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Intangible assets with finite useful lives consist primarily of software, trademarks, patents and developed technology, license fees and customer relationships, which are amortized using the straight-line method. The estimated useful lives of software are from 3 years to 7 years, trademarks are 15 years, patents and developed technology are from 7 years to 17 years, license fees are 7 years, and customer relationships are from 11 years to 15 years, respectively. Certain costs incurred in connection 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 environmental 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 estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating 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 temporary 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 technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and

 

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Notes to Consolidated Financial Statements (continued)

 

1.   Basis of Presentation and Significant Accounting Policies (continued)

 

(n)   Income Taxes (continued)

 

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. Shareholders per Share

Basic net income attributable to Canon Inc. shareholders 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. shareholders 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, imaging system and medical system products, industrial equipment, supplies and related services under separate contractual arrangements. Revenue is recognized when, or as, control of promised goods or services transfers to customers in an amount that reflects the consideration to which Canon expects to be entitled in exchange for transferring these goods or services. For further information, please refer to Note 15.

 

(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 ¥58,729 million, ¥61,207 million and ¥58,707 million for the years ended December 31, 2018, 2017 and 2016, respectively.

 

(t)

Shipping and Handling Costs

Shipping and handling costs totaled ¥54,844 million, ¥52,953 million and ¥44,296 million for the years ended December 31, 2018, 2017 and 2016, respectively, 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-

 

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Notes to Consolidated Financial Statements (continued)

 

1.   Basis of Presentation and Significant Accounting Policies (continued)

 

(u)   Derivative Financial Instruments (continued)

 

management objective and strategy for undertaking 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 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 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 values 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 issuing guarantees.

 

(w)   Recent Accounting Guidance

Recently adopted accounting guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) Section C – Background Information and Basis for Conclusions, which is a new accounting standard related to revenue from contracts with customers, as amended. (Accounting Standards Codification (“ASC”) 606) This standard requires an entity to recognize revenue when promised goods or services 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. Canon adopted this standard from the quarter beginning January 1, 2018 with modified retrospective method of adoption to contracts that were not completed as of the adoption. The cumulative-effects to the retained earnings and the impact on the consolidated result of operations for the year ended December 31, 2018 from the adoption of this standard were not material. For further information, please refer to Note 15.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes the requirement that equity investments that do not result in consolidation and are not accounted for under the equity method be measured at fair value with changes in the fair value recognized in net income. Canon adopted this standard from the quarter beginning January 1, 2018, and Canon recognized a cumulative-effect adjustment to retained earnings of ¥5,343 million as of January 1, 2018 for the unrealized gains, net of tax, on available-for-sale equity securities previously recognized in accumulated other comprehensive income.

 

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Notes to Consolidated Financial Statements (continued)

 

1.   Basis of Presentation and Significant Accounting Policies (continued)

 

(w)   Recent Accounting Guidance (continued)

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-entity Transfers of Assets other than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this guidance eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of this guidance are intellectual property and property, plant, and equipment. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. Canon adopted this standard from the quarter beginning January 1, 2018. The adoption of this guidance did not have a material impact on its consolidated results of operation and financial condition.

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an entity to disaggregate the service cost component from the other components of net benefit cost and present it in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component, such as in other income (deductions) in the income statement. The amendments also allow only the service cost component to be eligible for capitalization (for example, as a cost of internally manufactured inventory). The amendments were to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost, and prospectively for the capitalization of the service cost component of net benefit cost. Canon adopted this guidance from the quarter beginning January 1, 2018. The adoption of the new presentation requirement of the service cost component and the other components of net benefit cost resulted in reclassification of ¥2,137 million and ¥1,835 million from cost of sales, ¥4,419 million and ¥4,161 million from selling, general and administrative expenses and ¥3,318 million and ¥6,445 million from research and development expenses into other income (deductions) for the years ended December 31, 2017 and 2016, respectively. Please refer to Note 11 for additional information. The adoption of the capitalization of the service cost component of net benefit cost did not have a material impact on its consolidated results of operations and financial condition.

Recently issued accounting guidance not yet adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) Section A – Leases: Amendments to the FASB Accounting Standards Codification, which requires lessees to recognize most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current guidance. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. FASB also modified the definition of lease. Additionally, the guidance expands qualitative and quantitative disclosures related to lease. The guidance is effective for annual reporting periods beginning after December 15, 2018. Canon applies the guidance from the quarter beginning after January 1, 2019. Canon applies the package of practical expedients that allows us not to reassess whichever any existing contracts at or expired contracts prior to the adoption date are or contain leases, lease classification and whichever initial direct costs qualify for capitalization, in addition to short term lease exception. Canon also adopts the transition method which no restatement of comparative periods and no reassessment of land easements not previously accounted for as a lease that exist at or expired prior to the adoption date are required. The right of use assets for operating leases recognized at January 1, 2019 is ¥125,649 million almost same as the lease obligations and are included in noncurrent assets and liabilities in the accompanying consolidated balance sheets. Canon does not expect the adoption of this guidance such

 

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Notes to Consolidated Financial Statements (continued)

 

1.   Basis of Presentation and Significant Accounting Policies (continued)

 

(w)   Recent Accounting Guidance—(Continued)

 

as the modification the definition of lease and the changes in lessor accounting to have material impact on its consolidated results of operation.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends existing guidance to simplify the application of the hedge accounting in certain situations and enable an entity to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and requires an entity to present the earnings effect of the hedging instrument in the same income statement line item which the earnings effect of the hedged item is reported. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. This guidance is effective for Canon from the quarter beginning January 1, 2019. Gains and losses resulting from derivative financial instruments designated as cash flow hedges associated with forecasted intercompany sales, which are currently included in other income (deductions) in the consolidated statements of income, will be included in net sales after the adoption of this guidance. Canon does not expect other material impacts from the adoption on its consolidated results of operation and financial condition.

 

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Notes to Consolidated Financial Statements (continued)

 

2.   Investments

The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale debt securities and equity securities included in short-term investments and investments by major security type at December 31, 2018 and 2017 are as follows:

 

     December 31, 2018  
     Cost      Gross
unrealized
holding
gains
     Gross
unrealized
holding
losses
     Fair
value
 
     (Millions of yen)  

Current:

  

Corporate bonds

     630                      630  
  

 

 

    

 

 

    

 

 

    

 

 

 
     630                      630  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Cost      Gross
unrealized
holding
gains
     Gross
unrealized
holding
losses
     Fair
value
 
     (Millions of yen)  

Current:

  

Corporate bonds

     1,222                      1,222  
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,222                      1,222  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noncurrent:

           

Government bonds

     305               16        289  

Corporate bonds

     640        182               822  

Fund trusts*

     122        2               124  

Equity securities*

     10,965        11,612        1,676        20,901  
  

 

 

    

 

 

    

 

 

    

 

 

 
     12,032        11,796        1,692        22,136  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

After the adoption of ASU No. 2016-01, equity investments are measured at fair value with changes in the fair value recognized in net income from the quarter beginning January 1, 2018.

Maturities of available-for-sale debt securities included in short-term investments in the accompanying consolidated balance sheet are as follows at December 31, 2018:

 

     Cost      Fair value  
     (Millions of yen)  

Due within one year

             630                630  
  

 

 

    

 

 

 
     630        630  
  

 

 

    

 

 

 

The unrealized and realized gains and losses related to debt securities were not significant for the years ended December 31, 2018, 2017 and 2016, respectively.

 

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Notes to Consolidated Financial Statements (continued)

 

2.   Investments (continued)

 

The unrealized and realized gains and losses related to equity securities for the year ended December 31, 2018 are as follows:

 

     Millions of yen  
     Year ended
December 31, 2018
 

Net gains and (losses) recognized during the period on equity securities

     (6,092

Less: Net gains and (losses) recognized during the period on equity securities sold during the period

                 675  
  

 

 

 

Unrealized gains and (losses) recognized during the period on equity securities still held at December 31.

     (6,767
  

 

 

 

Gross realized gains related to equity securities were ¥18,514 million and ¥750 million for the years ended December 31, 2017 and 2016, respectively. Gross realized losses, including write-downs for impairments that were other-than-temporary, were ¥42 million and ¥1,032 million for the years ended December 31, 2017, 2016, respectively.

During the year ended December 31, 2017, Canon contributed certain marketable equity securities, not including those of its subsidiaries and affiliated companies, to an established employee retirement benefit trust, with no cash proceeds there on. The fair value of those securities at the time of contribution was ¥30,473 million. Upon contribution of those available-for-sale securities, the unrealized gains amounting to ¥17,836 million were realized and were included in “Other, net” in the consolidated statements of income.

The carrying amount of non-marketable equity securities without readily determinable fair value totaled ¥4,629 million at December 31, 2018. Aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥3,760 million at December 31, 2017. The impairment or other adjustments resulting from observable price changes recorded during the year ended December 31, 2018 and 2017 were not significant.

Time deposits with original maturities of more than three months are ¥326 million and ¥743 million at December 31, 2018 and 2017, respectively, and are included in short-term investments in the accompanying consolidated balance sheets.

Investments in affiliated companies accounted for by the equity method amounted to ¥21,312 million and ¥20,496 million at December 31, 2018 and 2017, respectively. Canon’s share of the net earnings in affiliated companies accounted for by the equity method, included in other income (deductions), were earnings of ¥1,414 million, ¥1,196 million and ¥890 million for the years ended December 31, 2018, 2017 and 2016 respectively.

 

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3.   Trade Receivables

Trade receivables are summarized as follows:

 

     December 31  
     2018     2017  
     (Millions of yen)  

Notes

     29,878       37,077  

Accounts

     594,552       627,173  
  

 

 

   

 

 

 
     624,430       664,250  

Less allowance for doubtful receivables

     (11,477     (13,378
  

 

 

   

 

 

 
     612,953       650,872  
  

 

 

   

 

 

 

 

4.   Inventories

Inventories are summarized as follows:

 

     December 31  
     2018      2017  
     (Millions of yen)  

Finished goods

     393,820        377,632  

Work in process

     165,003        144,251  

Raw materials

     52,458        48,150  
  

 

 

    

 

 

 
     611,281        570,033  
  

 

 

    

 

 

 

 

5.   Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and are summarized as follows:

 

     December 31  
     2018     2017  
     (Millions of yen)  

Land

     272,443       274,551  

Buildings

     1,629,927       1,638,202  

Machinery and equipment

     1,793,499       1,804,982  

Construction in progress

     67,045       46,940  
  

 

 

   

 

 

 
     3,762,914       3,764,675  

Less accumulated depreciation

     (2,671,922     (2,638,055
  

 

 

   

 

 

 
     1,090,992       1,126,620  
  

 

 

   

 

 

 

Depreciation expenses for the years ended December 31, 2018, 2017 and 2016 were ¥175,771 million, ¥189,712 million and ¥199,133 million, respectively.

Amounts due for purchases of property, plant and equipment were ¥32,433 million and ¥23,432 million at December 31, 2018 and 2017, respectively, and are included in other current liabilities in the accompanying consolidated balance sheets. Fixed assets presented in the consolidated statements of cash flows include property, plant and equipment and intangible assets.

 

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6.   Finance Receivables and Operating Leases

Finance receivables represent financing leases which consist of sales-type leases and direct-financing leases resulting from the sales of Canon’s and complementary third-party products. These receivables typically have terms ranging from 1 year to 7 years. The components of the finance receivables, which are included in prepaid expenses and other current assets, and other assets in the accompanying consolidated balance sheets, are as follows:

 

     December 31  
     2018     2017  
     (Millions of yen)  

Total minimum lease payments receivable

     351,198       361,686  

Unguaranteed residual values

     12,661       15,055  

Executory costs

     (2,112     (2,216

Unearned income

     (31,007     (32,286
  

 

 

   

 

 

 
     330,740       342,239  

Less allowance for credit losses

     (2,675     (2,681
  

 

 

   

 

 

 
     328,065       339,558  

Less current portion

     (111,629     (120,186
  

 

 

   

 

 

 
     216,436       219,372  
  

 

 

   

 

 

 

The activity in the allowance for credit losses is as follows:

 

     Years ended December 31  
     2018     2017  
     (Millions of yen)  

Balance at beginning of year

     2,681       2,325  

Charge-offs

     (1,284     (1,523

Provision

     938       1,436  

Translation adjustments and other

     340       443  
  

 

 

   

 

 

 

Balance at end of year

     2,675       2,681  
  

 

 

   

 

 

 

Canon has policies in place to ensure that its products are sold to customers with an appropriate credit history, and continuously monitors its customers’ credit quality based on information including length of period in arrears, macroeconomic conditions, initiation of legal proceedings against customers and bankruptcy filings. The allowance for credit losses of finance receivables are evaluated collectively based on historical experience of credit losses. An additional reserve for individual accounts is recorded when Canon becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings. Finance receivables which are past due or individually evaluated for impairment at December 31, 2018 and 2017 are not significant.

The cost of equipment leased to customers under operating leases included in property, plant and equipment, net at December 31, 2018 and 2017 was ¥120,457 million and ¥103,078 million, respectively. Accumulated depreciation on equipment under operating leases at December 31, 2018 and 2017 was ¥82,698 million and ¥78,307 million, respectively.

 

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Notes to Consolidated Financial Statements (continued)

 

6.   Finance Receivables and Operating Leases (continued)

 

The following is a schedule by year of the future minimum lease payments to be received under financing leases and noncancelable operating leases at December 31, 2018.

 

     Financing leases      Operating leases  
     (Millions of yen)  

Year ending December 31:

     

2019

     127,068        9,207  

2020

     98,772        6,409  

2021

     66,719        2,917  

2022

     37,181        1,202  

2023

     14,792        317  

Thereafter

     6,666        60  
  

 

 

    

 

 

 
     351,198        20,112  
  

 

 

    

 

 

 

Canon has a syndication arrangement to sell its entire interests in finance receivables to a third-party financial institution. The transactions under the arrangement are accounted for as sales in accordance with ASC 860 “Transfers and Servicing.” The finance receivables sold and derecognized from its consolidated balance sheet was ¥21,909 million during the year ended December 31, 2018 and the amount remained uncollected was ¥22,956 million as of December 31, 2018. This amount includes uncollected finance receivables which were sold before 2018. Cash proceeds from the transaction are included in other, net under the cash flow from operating activities in the consolidated statement of cash flows. Canon continues to provide collection and administrative services for the financial institution. The amount associated with the servicing liability measured at fair value was not material as of December 31, 2018. Canon also retains limited recourse obligations which cover credit defaults. The recourse obligation was not material as of December 31, 2018.

There were no significant transfers of finance receivables for the years ended December 31, 2017 and 2016.

 

7.   Acquisitions

On March 17, 2016, Canon entered into a Shares and Other Securities Transfer Agreement with Toshiba Corporation and acquired the share options for consideration of cash to acquire all the ordinary shares of Toshiba Medical Systems Corporation which was renamed as Canon Medical Systems Corporation (“CMSC”), as of January 4, 2018, which was exercisable upon the clearances of necessary competition regulatory authorities. As such clearances were obtained, Canon exercised the share options and acquired all the ordinary shares of CMSC on December 19, 2016. The acquisition date was December 19, 2016 and the purchase price was ¥665,498 million, which approximates the fair value at that date.

The acquisition was accounted for using the acquisition method of accounting. Acquisition-related costs were expensed as incurred and were not material.

Under Phase V of the Excellent Global Corporation Plan, a five-year initiative that Canon has been implementing since 2016, “embracing the challenge of new growth through a grand strategic transformation” has been set as a basic policy. With regard to “strengthening and growing new businesses, and creating future businesses,” a particularly important strategy, Canon intends to develop medical system business within the realm of “safety and security,” as a next-generation pillar of growth.

CMSC is one of the leading global companies in the medical equipment industry. Within the field of medical X-ray CT systems in particular, CMSC is the overwhelming market share leader in Japan and has been steadily

 

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7.   Acquisitions (continued)

 

increasing its global market share. By maximizing the combination of both companies’ management resources, Canon aims to solidify its business foundation for medical system that can contribute to the world.

The purchase price allocation was based on estimated fair values of the assets acquired and liabilities assumed at acquisition date. Since the acquisition date of CMSC was near the balance sheet date in 2016, and CMSC is composed of various entities located around the world, the purchase price allocation was preliminary at December 31, 2016. The purchase price allocation was finalized in the fourth quarter of 2017. The certain underlying inputs for inventories and intangible assets have been updated during the measurement period. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at acquisition date.

 

     Preliminary      Measurement
Period
Adjustment
    Final  
     (Millions of yen)  

Cash and cash equivalents

     25,301              25,301  

Other current assets

     169,545        (1,962     167,583  

Intangible assets

     227,500        627       228,127  

Other noncurrent assets

     42,975              42,975  
  

 

 

    

 

 

   

 

 

 

Total assets acquired

     465,321        (1,335     463,986  
  

 

 

    

 

 

   

 

 

 

Current liabilities

     199,223        (877     198,346  

Noncurrent liabilities

     92,231        (1,049     91,182  
  

 

 

    

 

 

   

 

 

 

Total liabilities assumed

     291,454        (1,926     289,528  
  

 

 

    

 

 

   

 

 

 

Noncontrolling interest

     1,047              1,047  
  

 

 

    

 

 

   

 

 

 

Net identifiable assets acquired

     172,820        591       173,411  
  

 

 

    

 

 

   

 

 

 

Goodwill

     492,678        (591     492,087  
  

 

 

    

 

 

   

 

 

 

Net assets acquired

     665,498              665,498  
  

 

 

    

 

 

   

 

 

 

Intangible assets acquired, which are subject to amortization, mainly consist of customer relationships of ¥143,600 million, and patents and developed technology of ¥73,000 million. Canon has estimated the amortization period for the customer relationships, and patents and developed technology to be 15 years and 10 years, respectively. The weighted average amortization period for all intangible assets is approximately 13 years.

Goodwill recorded is attributable primarily to expected synergies from combining operations of CMSC and Canon, such as accelerating entry into new fields, further improvement in quality through shared production technology and expanding business domains through the enhancement of R&D capabilities. None of the goodwill is expected to be deductible for tax purposes.

Canon acquired businesses other than that described above during the years ended December 31, 2018 and 2017 that were not material to its consolidated financial statements.

 

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8.   Goodwill and Other Intangible Assets

Intangible assets subject to amortization acquired during the year ended December 31, 2018, including those recorded from businesses acquired, totaled ¥48,004 million, which primarily consist of software of ¥36,859 million, and patent and developed technology of ¥6,109 million. The weighted average amortization periods for intangible assets in total acquired during the year ended December 31, 2018 are approximately 6 years. The weighted average amortization periods for software, and patent and developed technology acquired during the year ended December 31, 2018 are approximately 5 years and 11 years, respectively.

Intangible assets subject to amortization acquired during the year ended December 31, 2017, including those recorded from businesses acquired, totaled ¥35,112 million, which primarily consist of software of ¥33,437 million and customer relationships of ¥1,203 million. The weighted average amortization periods for intangible assets in total acquired during the year ended December 31, 2017 are approximately 5 years. The weighted average amortization periods for software and customer relationships acquired during the year ended December 31, 2017 are approximately 5 years and 8 years, respectively.

The components of intangible assets subject to amortization at December 31, 2018 and 2017 were as follows:

 

     December 31, 2018      December 31, 2017  
     Gross
carrying
amount
     Accumulated
amortization
     Gross
carrying
amount
     Accumulated
amortization
 
     (Millions of yen)  

Software

     362,130        244,188        342,322        217,654  

Customer relationships

     156,679        27,263        162,832        22,463  

Patents and developed technology

     123,831        36,029        121,886        27,085  

Trademarks

     44,449        12,062        48,823        9,890  

License fees

     16,071        6,461        13,565        6,375  

Other

     19,319        9,859        18,592        8,136  
  

 

 

    

 

 

    

 

 

    

 

 

 
     722,479        335,862        708,020        291,603  
  

 

 

    

 

 

    

 

 

    

 

 

 

Aggregate amortization expense for the years ended December 31, 2018, 2017 and 2016 was ¥75,783 million, ¥72,169 million and ¥50,963 million, respectively. Estimated amortization expense for intangible assets currently held for the next five years ending December 31 is ¥68,730 million in 2019, ¥54,115 million in 2020, ¥46,067 million in 2021, ¥37,158 million in 2022, and ¥31,202 million in 2023.

Intangible assets not subject to amortization other than goodwill at December 31, 2018 and 2017 were not significant.

For management reporting purposes, goodwill is not allocated to the segments. Goodwill has been allocated to its respective segment for impairment testing.

 

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8.   Goodwill and Other Intangible Assets (continued)

 

The changes in the carrying amount of goodwill by segment for the years ended December 31, 2018 and 2017 were as follows:

 

     Year ended December 31, 2018  
     Office     Imaging
System
    Medical
System
    Industry
and Others
    Unallocated     Total  
           (Millions of yen)  

Goodwill – gross

     135,125       52,561       499,915       283,577               —       971,178  

Accumulated impairment losses

     (22,069                 (12,387           (34,456
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at beginning of year

     113,056       52,561       499,915       271,190             936,722  

Goodwill acquired during the year

                 1,521       6,106             7,627  

Translation adjustments and other

     (5,966     (3,891     (540     (25,441           (35,838
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill – gross

     127,860       48,670       500,896       263,513             940,939  

Accumulated impairment losses

     (20,770                 (11,658           (32,428
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

     107,090       48,670       500,896       251,855             908,511  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

Year ended December 31, 2017

 
     Office     Imaging
System
    Medical
System
    Industry
and Others
    Unallocated
*1
    Total  
           (Millions of yen)  

Balance at beginning of year *3

     124,993       49,034             269,719       492,678       936,424  

Goodwill acquired during the year

     857       236             2,394             3,487  

Transfer *1

                 499,855       (7,177     (492,678      

Impairment loss *2, 3

     (21,721                 (12,191           (33,912

Translation adjustments and other *3

     8,927       3,291       60       18,445             30,723  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

     113,056       52,561       499,915       271,190             936,722  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*1

Canon did not complete the allocation of goodwill to the segments for impairment testing which was attributable to the acquisition of CMSC as of December 31, 2016. Based on the realignment of Canon’s internal reporting and management structure, Canon newly established Medical System Business Unit effective at the beginning of the second quarter of 2017. Goodwill related to CMSC as well as goodwill related to certain medical business which was previously included in Industry and Others Business Unit have been transferred to Medical System Business Unit.

 

*2

After entering the commercial printing business through the acquisition of Océ N.V. in 2010, the market environment surrounding this business has become significantly competitive and rapid technological changes have required increasing investments into R&D. These factors resulted in lower operating margin than expected, which led to the decline in the estimated fair value of this business which was determined based on the income approach. As the result of the annual goodwill impairment test as of October 1, 2017, it was determined that the estimated fair value of commercial printing business was less than its carrying value of the reporting unit. Based on the accounting policy described in Note 1, Canon recognized an impairment charge of ¥33,912 million representing the excess of the carrying amount over the reporting unit’s fair value.

 

*3

Based on the realignment of Canon’s internal reporting and management structure, from the beginning of the third quarter of 2018, Canon has reclassified certain businesses from Office Business Unit to Industry

 

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  and Others Business Unit. The goodwill balance at the beginning of the year ended December 31, 2017 has been restated to reflect the transfer of ¥11,263 million in goodwill between the segments. Impairment loss of ¥12,191 million and translation adjustments and other of ¥928 million for the year ended December 31, 2017 related to the reclassified business were restated from Office Business Unit to Industry and Others Business Unit, accordingly.

 

9.   Short-Term Loans and Long-Term Debt

Short-term loans consisting of bank borrowings at December 31, 2018 and 2017 were ¥35,887 million and ¥33,398 million, respectively. The weighted average interest rate on short-term borrowings outstanding at December 31, 2018 and 2017 were 0.43% and 0.52%, respectively.

Long-term debt consisted of the following:

 

     December 31  
     2018     2017  
     (Millions of yen)  

Loan from the banks; bearing interest of 0.07% at December 31, 2018 and 0.06% at December 31, 2017 *1

     360,000       490,000  

Other debt *2

     4,602       9,168  
  

 

 

   

 

 

 
     364,602       499,168  

Less current portion

     (2,640     (5,930
  

 

 

   

 

 

 
     361,962       493,238  
  

 

 

   

 

 

 

 

*1

Canon entered into the unsecured revolving credit facility contracts expiring in December 2021. Canon prepaid ¥130,000 million of the loan with cash flows generated during the year ended December 31, 2018. The outstanding loans under the credit facilities are ¥360,000 million at a floating interest of 0.07% and Canon has no unused credit facilities as of December 31, 2018.

 

*2

The other debt consisted of term-loans and capital lease obligations as of December 31, 2018 and 2017.

The aggregate annual maturities of long-term debt outstanding at December 31, 2018 were as follows:

 

     (Millions of yen)  

Year ending December 31:

  

2019

     2,640  

2020

     638  

2021

     360,805  

2022

     427  

2023

     82  

Thereafter

     10  
  

 

 

 
     364,602  
  

 

 

 

Both short-term and long-term bank loans are primarily made under general agreements which provide that security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all obligations due to the bank.

 

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10.   Trade Payables

Trade payables are summarized as follows:

 

     December 31  
     2018      2017  
     (Millions of yen)  

Notes

     68,140        81,002  

Accounts

     284,349        299,652  
  

 

 

    

 

 

 
     352,489        380,654  
  

 

 

    

 

 

 

 

11.   Employee Retirement and Severance Benefits

The Company and certain of its subsidiaries have contributory and noncontributory defined benefit pension plans covering substantially all of their employees. Benefits payable under the plans are based on employee earnings and years of service. The Company and certain of its subsidiaries also have defined contribution pension plans covering substantially all of their employees. CMSC temporarily participated in Toshiba Corporate Pension Funds (“Toshiba Funds”) after CMSC was acquired by Canon in 2016. In April 2018, CMSC established a new pension provision which provides participants an equivalent level of benefits as compared to the Toshiba Funds. As of December 31, 2018, a majority of plan participants have been transferred from the Toshiba Funds into the new pension provision. Participants who have not transferred are still part of Toshiba Funds as of December 31, 2018. Canon calculated the projected benefit obligations for the participants with Toshiba Funds based on the benefit level of Toshiba Funds and included the proportional share of the plan assets of CMSC to which they have legal right in the following tables.

 

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11.   Employee Retirement and Severance Benefits (continued)

 

Obligations and funded status

Reconciliations of beginning and ending balances of the projected benefit obligations and the fair value of the plan assets are as follows:

 

     Japanese plans     Foreign plans  
     December 31     December 31  
     2018     2017     2018     2017  
     (Millions of yen)     (Millions of yen)  

Change in benefit obligations:

        

Projected benefit obligations at beginning of year

     929,630       906,007       423,579       392,086  

Service cost

     31,241       30,889       7,982       6,962  

Interest cost

     5,419       5,689       8,691       8,691  

Plan participants’ contributions

                 1,535       1,644  

Actuarial (gain) loss

     (1,844     11,112       (24,297     (1,760

Benefits paid

     (33,477     (29,020     (10,135     (7,884

Acquisition

           4,239              

Plan amendments

     (3,963     1,149       3,257       (1,069

Curtailments and settlements

           (435     (1,149      

Foreign currency exchange rate changes

                 (23,514     24,909  
  

 

 

   

 

 

   

 

 

   

 

 

 

Projected benefit obligations at end of year

     927,006       929,630       385,949       423,579  

Change in plan assets:

        

Fair value of plan assets at beginning of year

     735,513       667,436       254,020       224,939  

Actual return on plan assets

     (38,010     47,376       (6,042     14,262  

Employer contributions

     12,651       43,468       22,393       7,160  

Plan participants’ contributions

                 1,535       1,644  

Benefits paid

     (27,459     (23,967     (10,135     (7,884

Acquisition

           1,223              

Settlements

           (23     (1,150      

Foreign currency exchange rate changes

                 (11,979     13,899  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

     682,695       735,513       248,642       254,020  
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status at end of year

     (244,311     (194,117     (137,307     (169,559
  

 

 

   

 

 

   

 

 

   

 

 

 

Employer contributions for the year ended December 31, 2017 include contribution of equity securities to a retirement benefit trust. The fair value of those securities at the time of contribution was ¥30,473 million.

Amounts recognized in the consolidated balance sheets at December 31, 2018 and 2017 are as follows:

 

     Japanese plans     Foreign plans  
     December 31     December 31  
     2018     2017     2018     2017  
     (Millions of yen)     (Millions of yen)  

Other assets

     1,536       1,695       1,306       1,215  

Accrued expenses

     (679           (992     (1,004

Accrued pension and severance cost

     (245,168     (195,812     (137,621     (169,770
  

 

 

   

 

 

   

 

 

   

 

 

 
     (244,311     (194,117     (137,307     (169,559
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to Consolidated Financial Statements (continued)

 

11.   Employee Retirement and Severance Benefits (continued)

Obligations and funded status (continued)

 

Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2018 and 2017 before the effect of income taxes are as follows:

 

     Japanese plans     Foreign plans  
     December 31     December 31  
     2018     2017     2018     2017  
     (Millions of yen)     (Millions of yen)  

Actuarial loss

     267,355       221,106       95,121       105,883  

Prior service credit

     (48,392     (57,430     (227     (3,638
  

 

 

   

 

 

   

 

 

   

 

 

 
      218,963        163,676          94,894        102,245  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accumulated benefit obligation for all defined benefit plans was as follows:

 

     Japanese plans      Foreign plans  
     December 31      December 31  
     2018      2017      2018      2017  
     (Millions of yen)      (Millions of yen)  

Accumulated benefit obligation

      893,154          894,329          371,653          402,390   

The projected benefit obligations and the fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets, and the accumulated benefit obligations and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are as follows:

 

     Japanese plans     Foreign plans  
     December 31     December 31  
     2018     2017     2018     2017  
     (Millions of yen)     (Millions of yen)  

Plans with projected benefit obligations in excess of plan assets:

        

Projected benefit obligations

     918,736       924,536       384,167       420,383  

Fair value of plan assets

     672,889       728,724       245,554       249,609  

Plans with accumulated benefit obligations in excess of plan assets:

        

Accumulated benefit obligations

     891,204       889,652       369,215       394,840  

Fair value of plan assets

      670,826         728,724         244,826         245,247   

 

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Notes to Consolidated Financial Statements (continued)

 

11.   Employee Retirement and Severance Benefits (continued)

 

Components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss)

Net periodic benefit cost for Canon’s employee retirement and severance defined benefit plans for the years ended December 31, 2018, 2017 and 2016 consisted of the following components:

 

     Japanese plans     Foreign plans  
     Years ended December 31     Years ended December 31  
     2018     2017     2016     2018     2017     2016  
     (Millions of yen)     (Millions of yen)  

Service cost

     31,241       30,889       29,367       7,982       6,962       6,816  

Interest cost

     5,419       5,689       8,238       8,691       8,691       8,792  

Expected return on plan assets

     (21,983     (20,493     (19,443     (12,601     (10,722     (10,012

Amortization of prior service credit

     (13,001     (12,860     (13,230     (217     (83     85  

Amortization of actuarial loss

     11,900       14,220       10,944       5,108       5,747       2,185  

(Gain) loss on curtailments and settlements

           (63                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     13,576       17,382       15,876       8,963       10,595       7,866  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service cost component of net periodic benefit cost for Canon’s employee retirement and severance defined benefit plans is included in cost of sales and operating expenses in the consolidated statements of income. The components other than the service cost component are included in other, net of other income (deductions) in the consolidated statements of income.

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 are summarized as follows:

 

     Japanese plans     Foreign plans  
     Years ended December 31     Years ended December 31  
     2018     2017     2016     2018     2017     2016  
     (Millions of yen)     (Millions of yen)  

Current year actuarial (gain) loss

     58,149       (15,771     53,076       (5,654     (5,300      47,365  

Current year prior service credit

     (3,963     1,149       (4,734        3,257       (1,069      

Amortization of actuarial loss

     (11,900     (14,220     (10,944     (5,108     (5,747     (2,185

Amortization of prior service credit

     13,001       12,860       13,230       217               83       (85

Curtailments and settlements

           19             (63            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     55,287       (15,963     50,628       (7,351     (12,033     45,095  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The estimated prior service credit and actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next year are summarized as follows:

 

     Japanese plans     Foreign plans  
     (Millions of yen)     (Millions of yen)  

Prior service credit

     (11,887     (57

Actuarial loss

     15,230       4,852  

 

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Notes to Consolidated Financial Statements (continued)

 

11.   Employee Retirement and Severance Benefits (continued)

 

Assumptions

Weighted-average assumptions used to determine benefit obligations are as follows:

 

     Japanese plans     Foreign plans  
     December 31     December 31  
     2018     2017     2018     2017  

Discount rate

     0.6     0.6     2.4     2.2

Assumed rate of increase in future compensation levels

     2.6     2.6     1.9     1.8

Weighted-average assumptions used to determine net periodic benefit cost are as follows:

 

     Japanese plans     Foreign plans  
     Years ended December 31     Years ended December 31  
     2018     2017     2016     2018     2017     2016  

Discount rate

     0.6     0.7     1.1     2.2     2.2     3.0

Assumed rate of increase in future compensation levels

     2.6     2.6     3.0     1.8     2.1     2.0

Expected long-term rate of return on plan assets

     2.9     3.1     3.1     4.4     4.2     4.4

Canon determines the expected long-term rate of return based on the expected long-term return of the various asset categories in which it invests. Canon considers the current expectations for future returns and the actual historical returns of each plan asset category.

Plan assets

Canon’s investment policies are designed to ensure adequate plan assets are available to provide future payments of pension benefits to eligible participants. Taking into account the expected long-term rate of return on plan assets, Canon formulates a “model” portfolio comprised of the optimal combination of equity securities and debt securities. Plan assets are invested in individual equity and debt securities using the guidelines of the “model” portfolio in order to produce a total return that will match the expected return on a mid-term to long-term basis. Canon evaluates the gap between expected return and actual return of invested plan assets on an annual basis to determine if such differences necessitate a revision in the formulation of the “model” portfolio. Canon revises the “model” portfolio when and to the extent considered necessary to achieve the expected long-term rate of return on plan assets.

Canon’s model portfolio for Japanese plans consists of three major components: approximately 25% is invested in equity securities, approximately 50% is invested in debt securities, and approximately 25% is invested in other investment vehicles, primarily consisting of investments in life insurance company general accounts.

Outside Japan, investment policies vary by country, but the long-term investment objectives and strategies remain consistent. Canon’s model portfolio for foreign plans has been developed as follows: approximately 35% is invested in equity securities, approximately 25% is invested in debt securities, and approximately 40% is invested in other investment vehicles, primarily consisting of investments in real estate assets.

The equity securities are selected primarily from stocks that are listed on the securities exchanges. Prior to investing, Canon has investigated the business condition of the investee companies, and appropriately diversified investments by type of industry and other relevant factors. The debt securities are selected primarily from government bonds, public debt instruments, and corporate bonds. Prior to investing, Canon has investigated the

 

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Notes to Consolidated Financial Statements (continued)

 

11.   Employee Retirement and Severance Benefits (continued)

Plan assets (continued)

 

quality of the issue, including rating, interest rate, and repayment dates, and has appropriately diversified the investments. Pooled funds are selected using strategies consistent with the equity and debt securities described above. As for investments in life insurance company general accounts, the contracts with the insurance companies include a guaranteed interest rate and return of capital. With respect to investments in foreign investment vehicles, Canon has investigated the stability of the underlying governments and economies, the market characteristics such as settlement systems and the taxation systems. For each such investment, Canon has selected the appropriate investment country and currency.

The three levels of input used to measure fair value are more fully described in Note 21. The fair values of Canon’s pension plan assets at December 31, 2018 and 2017, by asset category, are as follows:

 

    December 31, 2018  
    Japanese plans     Foreign plans  
    Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
    (Millions of yen)  

Equity securities:

               

Japanese companies (a)

    67,283                   67,283                       —        

Foreign companies

    5,451                   5,451       8,567                   8,567  

Pooled funds (b)

          137,712             137,712             49,312             49,312  

Debt securities:

               

Government bonds (c)

    137,858                   137,858                          

Municipal bonds

          1,483             1,483             2,642             2,642  

Corporate bonds

          12,595             12,595             6,318             6,318  

Pooled funds (d)

          140,712             140,712             59,419             59,419  

Mortgage backed securities (and other asset backed securities)

          8,489             8,489                          

Life insurance company general accounts

          123,747             123,747             9,019             9,019  

Other assets

          30,009       1,451       31,460             95,844             95,844  

Investment measured at net asset value

                      15,905                         17,521  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    210,592       454,747       1,451       682,695       8,567       222,554             248,642  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to Consolidated Financial Statements (continued)

 

11.   Employee Retirement and Severance Benefits (continued)

Plan assets (continued)

 

    December 31, 2017  
    Japanese plans     Foreign plans  
    Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
    (Millions of yen)  

Equity securities:

               

Japanese companies (e)

    83,765                 —       83,765                       —        

Foreign companies

    8,261                   8,261       32,240                   32,240  

Pooled funds (f)

          164,946             164,946             73,968             73,968  

Debt securities:

               

Government bonds (g)

    138,092                   138,092       9,343                   9,343  

Municipal bonds

          1,166             1,166             2,901             2,901  

Corporate bonds

          15,246             15,246             22,045             22,045  

Pooled funds (h)

          130,507             130,507             25,821             25,821  

Mortgage backed securities (and other asset backed securities)

          8,076             8,076             3             3  

Life insurance company general accounts

          126,985             126,985             8,683             8,683  

Other assets

          43,070             43,070             73,320             73,320  

Investment measured at net asset value

                      15,399                         5,696  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    230,118       489,996             735,513       41,583       206,741             254,020  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The plan’s equity securities include common stock of the Company and certain of its subsidiaries in the amounts of ¥147 million.

(b)

These funds invest in listed equity securities consisting of approximately 30% Japanese companies and 70% foreign companies for Japanese plans, and mainly foreign companies for foreign plans.

(c)

This class includes approximately 90% Japanese government bonds and 10% foreign government bonds for Japanese plans, and mainly foreign government bonds for foreign plans.

(d)

These funds invest in approximately 30% Japanese government bonds, 50% foreign government bonds, 5% Japanese municipal bonds, and 15% corporate bonds for Japanese plans. These funds invest in approximately 35% foreign government bonds and 65% corporate bonds for foreign plans.

(e)

The plan’s equity securities include common stock of the Company and certain of its subsidiaries in the amounts of ¥381 million.

(f)

These funds invest in listed equity securities consisting of approximately 30% Japanese companies and 70% foreign companies for Japanese plans, and mainly foreign companies for foreign plans.

(g)

This class includes approximately 90% Japanese government bonds and 10% foreign government bonds for Japanese plans, and mainly foreign government bonds for foreign plans.

(h)

These funds invest in approximately 30% Japanese government bonds, 45% foreign government bonds, 5% Japanese municipal bonds, and 20% corporate bonds for Japanese plans. These funds invest in approximately 70% foreign government bonds and 30% corporate bonds for foreign plans.

Each level into which assets are categorized is based on inputs used to measure the fair value of the assets, and does not necessarily indicate the risks or ratings of the assets.

Level 1 assets are comprised principally of equity securities and government bonds, which are valued using unadjusted quoted market prices in active markets with sufficient volume and frequency of transactions. Level 2 assets are comprised principally of pooled funds that invest in equity and debt securities, corporate bonds,

 

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Notes to Consolidated Financial Statements (continued)

 

11.   Employee Retirement and Severance Benefits (continued)

Plan assets (continued)

 

investments in life insurance company general accounts and other assets. Pooled funds are valued at their net asset values that are calculated by the sponsor of the fund and have daily liquidity. Corporate bonds are valued using quoted prices for identical assets in markets that are not active. Investments in life insurance company general accounts are valued at conversion value. Other assets are comprised principally of interest bearing cash and hedge funds.

The fair value of Level 3 asset, consisting of hedge funds, was ¥1,451 million at December 31, 2018. Amounts of actual returns on, purchases and sales of these assets during the year ended December 31, 2018 were not significant.

The fair values of plan assets for the participants with Toshiba Funds by each asset category are calculated based on a pro-rata basis of total plan assets of Toshiba Funds.

Contributions

Canon expects to contribute ¥13,089 million to its Japanese defined benefit pension plans and ¥19,311 million to its foreign defined benefit pension plans for the year ending December 31, 2019.

Estimated future benefit payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

 

     Japanese plans      Foreign plans  
     (Millions of yen)      (Millions of yen)  

Year ending December 31:

     

2019

     35,604        12,077  

2020

     36,896        12,214  

2021

     38,524        13,221  

2022

     41,775        13,927  

2023

     43,119        14,562  

2024 – 2028

     226,704        87,006  

Multiemployer pension plans

The amounts of cost recognized for the multiemployer pension plans primarily in the Netherlands for the years ended December 31, 2018, 2017 and 2016 were ¥4,452 million, ¥4,165 million and ¥3,482 million, respectively. The multiemployer pension plan in which the subsidiaries in the Netherlands participated was 102% funded as of December 31, 2017. The collective bargaining agreements have no expiration date. Canon is not liable for other participating employers’ obligations under the terms and conditions of the agreements.

Defined contribution plans

The amounts of cost recognized for the defined contribution pension plans of the Company and certain of its subsidiaries for the years ended December 31, 2018, 2017 and 2016 were ¥19,570 million, ¥18,979 million and ¥17,603 million, respectively.

 

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Notes to Consolidated Financial Statements (continued)

 

12.   Income Taxes

Domestic and foreign components of income before income taxes and the current and deferred income tax expense attributable to such income are summarized as follows:

 

     Year ended December 31, 2018  
     Japanese     Foreign     Total  
     (Millions of yen)  

Income before income taxes

     241,474       121,418       362,892  
  

 

 

   

 

 

   

 

 

 

Income taxes:

      

Current

     75,556       32,443       107,999  

Deferred

     (6,552     (5,297     (11,849
  

 

 

   

 

 

   

 

 

 
     69,004       27,146       96,150  
  

 

 

   

 

 

   

 

 

 

 

     Year ended December 31, 2017  
     Japanese     Foreign     Total  
     (Millions of yen)  

Income before income taxes

     276,149       77,735       353,884  
  

 

 

   

 

 

   

 

 

 

Income taxes:

      

Current

     80,225       35,402       115,627  

Deferred

     (7,453     (10,150     (17,603
  

 

 

   

 

 

   

 

 

 
     72,772       25,252       98,024  
  

 

 

   

 

 

   

 

 

 

 

     Year ended December 31, 2016  
     Japanese      Foreign      Total  
     (Millions of yen)  

Income before income taxes

     135,131        109,520        244,651  
  

 

 

    

 

 

    

 

 

 

Income taxes:

        

Current

     47,687        27,806        75,493  

Deferred

     4,126        3,062        7,188  
  

 

 

    

 

 

    

 

 

 
     51,813        30,868        82,681  
  

 

 

    

 

 

    

 

 

 

The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the aggregate, represent a statutory income tax rate of approximately 31%, 31% and 33% for the years ended December 31, 2018, 2017 and 2016, respectively.

The statutory income tax rate utilized for deferred tax assets and liabilities which are expected to be settled or realized in the future period is approximately 31%. The adjustments of deferred tax assets and liabilities for amendments to the Japanese tax regulations enacted on March 29, 2016 which have been reflected in income taxes in the consolidated statements of income for the years ended December 31, 2016 were ¥3,498 million.

The United States enacted tax reform legislation (the “Tax Reform Legislation”) on December 22, 2017. Due to the Tax Reform Legislation, the federal corporate income tax rate in the U.S. is reduced from 35% to 21% from the fiscal year commencing on January 1, 2018. The adjustment to deferred tax assets and liabilities for the tax rate change was tax benefit of ¥14,563 million for the year ended December 31, 2017. The impacts related to other changes from the Tax Reform Legislation are not material.

 

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Notes to Consolidated Financial Statements (continued)

 

12.   Income Taxes (continued)

 

A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:

 

     Years ended December 31  
     2018     2017     2016  

Japanese statutory income tax rate

     31.0     31.0     33.0

Increase (reduction) in income taxes resulting from:

      

Expenses not deductible for tax purposes *

     0.7       3.7       0.8  

Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate

     (3.0     (2.1     (3.0

Tax credit for research and development expenses

     (3.4     (4.8     (3.0

Change in valuation allowance

     0.4       1.7       (0.8

Effect of enacted changes in tax laws and rates on Japanese tax

                 1.4  

Effect of enacted changes in U.S. tax laws

           (3.6      

Other

     0.8       1.8       5.4  
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

           26.5           27.7           33.8
  

 

 

   

 

 

   

 

 

 

 

*

Expenses not deductible for tax purposes for the year ended December 31, 2017 primarily consist of impairment losses on goodwill.

Net deferred income tax assets and liabilities are included in the accompanying consolidated balance sheets under the following captions:

 

     December 31  
     2018     2017  
     (Millions of yen)  

Other assets

     160,541       150,854  

Other noncurrent liabilities

     (70,336     (90,010
  

 

 

   

 

 

 
     90,205       60,844  
  

 

 

   

 

 

 

 

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Notes to Consolidated Financial Statements (continued)

 

12.   Income Taxes (continued)

 

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 are presented below:

 

     December 31  
     2018     2017  
     (Millions of yen)  

Deferred tax assets:

    

Inventories

     10,739       11,921  

Accrued business tax

     2,361       4,705  

Accrued pension and severance cost

     105,933       98,114  

Research and development – costs capitalized for tax purposes

     4,690       5,383  

Property, plant and equipment

     33,738       33,488  

Accrued expenses

     28,015       30,126  

Net operating losses carried forward

     28,549       29,006  

Other

     38,683       38,526  
  

 

 

   

 

 

 
     252,708       251,269  

Less valuation allowance

     (30,734     (30,783
  

 

 

   

 

 

 

Total deferred tax assets

     221,974       220,486  

Deferred tax liabilities:

    

Undistributed earnings of foreign subsidiaries

     (7,615     (9,859

Tax deductible reserve

     (4,050     (4,396

Financing lease revenue

     (26,441     (38,287

Intangible assets

     (66,189     (74,377

Other

     (27,474     (32,723
  

 

 

   

 

 

 

Total deferred tax liabilities

     (131,769     (159,642
  

 

 

   

 

 

 

Net deferred tax assets

     90,205       60,844  
  

 

 

   

 

 

 

The net changes in the total valuation allowance were a decrease of ¥49 million, an increase of ¥4,096 million and a decrease of ¥6,244 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Based on the level of historical taxable income and projections for future taxable income over the periods which the net deductible temporary differences are expected to reverse, management believes it is more likely than not that Canon will realize the benefits of these deferred tax assets, net of the valuation allowance, at December 31, 2018.

At December 31, 2018, Canon had net operating losses which can be carried forward for income tax purposes of ¥186,114 million to reduce future taxable income. Periods available to reduce future taxable income vary in each tax jurisdiction and generally range from one year to an indefinite period as follows:

 

     (Millions of yen)  

Within one year

     5,854  

After one year through five years

     26,802  

After five years through ten years

     38,687  

After ten years through twenty years

     48,642  

Indefinite period

     66,129  
  

 

 

 

Total

     186,114  
  

 

 

 

 

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Notes to Consolidated Financial Statements (continued)

 

12.   Income Taxes (continued)

 

Income taxes have not been accrued on undistributed earnings of domestic subsidiaries as the tax law provides a means by which the dividends from a domestic subsidiary can be received tax free.

Canon has not recognized deferred tax liabilities of ¥27,278 million for a portion of undistributed earnings of foreign subsidiaries of ¥1,001,310 million as of December 31, 2018 because Canon currently does not expect to have such amounts distributed or paid as dividends to the Company in the foreseeable future. Deferred tax liabilities will be recognized when Canon expects that it will realize those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

     Years ended December 31  
     2018     2017     2016  
     (Millions of yen)  

Balance at beginning of year

     10,282       7,318       6,056  

Additions for tax positions of the current year

     45       2,956       2,741  

Additions for tax positions of prior years

     178       250        

Reductions for tax positions of prior years

     (17     (915     (665

Settlements with tax authorities

     (1,286           (370

Other

     (553     673       (444
  

 

 

   

 

 

   

 

 

 

Balance at end of year*

     8,649       10,282       7,318  
  

 

 

   

 

 

   

 

 

 

 

*

The total amounts of unrecognized tax benefits presented in other noncurrent liabilities in the consolidated balance sheets were offset by deferred tax assets in the amount of ¥2,043 million, ¥124 million and ¥32 million as of December 31, 2018, 2017 and 2016.

The total amounts of unrecognized tax benefits that would reduce the effective tax rate, if recognized, were ¥8,649 million and ¥10,282 million at December 31, 2018 and 2017, respectively.

Although Canon believes its estimates and assumptions of unrecognized tax benefits are reasonable, uncertainty regarding the final determination of tax examination settlements and any related litigation could affect the effective tax rate in a future period. Based on each of the items of which Canon is aware at December 31, 2018, no significant changes to the unrecognized tax benefits are expected within the next twelve months.

Canon recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes. Both interest and penalties accrued at December 31, 2018 and 2017, and interest and penalties included in income taxes for the years ended December 31, 2018, 2017 and 2016 were not significant.

Canon files income tax returns in Japan and various foreign tax jurisdictions. In Japan, Canon is no longer subject to regular income tax examinations by the tax authority for years before 2017 with few exceptions. Canon is also no longer subject to a transfer pricing examination by the tax authority for years before 2017 with few exceptions. In other major foreign tax jurisdictions, including the United States and the Netherlands, Canon is no longer subject to income tax examinations by tax authorities for years before 2009 with few exceptions. The tax authorities are currently conducting income tax examinations of Canon’s income tax returns for years after 2008 in some foreign tax jurisdictions.

 

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Notes to Consolidated Financial Statements (continued)

 

13.   Legal Reserve and Retained Earnings

The Corporation Law of Japan provides that an amount equal to 10% of distributions from retained earnings paid by the Company and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriations are required when the total amount of the additional paid-in capital and the legal reserve equals 25% of their respective stated capital. The Corporation Law of Japan also provides that additional paid-in capital and legal reserve are available for appropriations by resolution of the shareholders. Certain foreign subsidiaries are also required to appropriate their earnings to legal reserves under the laws of their respective countries.

Cash dividends and appropriations to the legal reserve charged to retained earnings for the years ended December 31, 2018, 2017 and 2016 represent dividends paid out during those years and the related appropriations to the legal reserve. Retained earnings at December 31, 2018 did not reflect current year-end dividends in the amount of ¥86,380 million which were approved by the shareholders in March 2019.

The amount available for dividends under the Corporation Law of Japan is based on the amount recorded in the Company’s nonconsolidated books of account in accordance with financial accounting standards of Japan. Such amount was ¥984,692 million at December 31, 2018.

Retained earnings at December 31, 2018 included Canon’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of ¥18,265 million.

 

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Notes to Consolidated Financial Statements (continued)

 

14.   Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 are as follows:

 

     Foreign
currency
translation
adjustments
    Unrealized
gains and
losses on
securities
    Gains and
losses on
derivative
instruments
    Pension
liability
adjustments
    Total  
     (Millions of yen)  

Balance at December 31, 2015

     87,038       14,055       182       (131,017     (29,742

Equity transactions with noncontrolling interests and other

     259                   (1     258  

Other comprehensive income (loss) before reclassifications

     (101,350     814       938       (67,511     (167,109

Amounts reclassified from accumulated other comprehensive income (loss)

     93       382       (3,862     99       (3,288
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change during the year

     (100,998     1,196       (2,924     (67,413     (170,139
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

     (13,960     15,251       (2,742     (198,430     (199,881
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity transactions with noncontrolling interests and other

                              

Other comprehensive income (loss) before reclassifications

     44,184       2,813       (1,452     14,785       60,330  

Amounts reclassified from accumulated other comprehensive income (loss)

     (16     (12,580     4,014       4,905       (3,677
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change during the year

     44,168       (9,767     2,562       19,690       56,653  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

     30,208       5,484       (180     (178,740     (143,228
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative effects of accounting standard update – adoption of ASU No. 2016-01 *

           (5,343                 (5,343

Equity transactions with noncontrolling interests and other

     (4,200                       (4,200

Other comprehensive income (loss) before reclassifications

     (89,823           (457     (29,909     (120,189

Amounts reclassified from accumulated other comprehensive income (loss)

           (141     945       3,085       3,889  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change during the year

     (94,023     (5,484     488       (26,824     (125,843
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018

     (63,815           308       (205,564     (269,071
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Represents the impact of adopting the new accounting standard related to financial instruments. Please refer to Note 1(w) for more detailed information.

 

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Notes to Consolidated Financial Statements (continued)

 

14.   Other Comprehensive Income (Loss) (continued)

 

Reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 are as follows:

 

    Amount reclassified from
accumulated other comprehensive income (loss) *1
    Year ended
December 31,
2018
    Year ended
December 31,
2017
    Year ended
December 31,
2016
   

Affected line items in

consolidated statements of income

    (Millions of yen)      

Foreign currency translation adjustments

          (39     139     Other, net
          12       (46   Income taxes
 

 

 

   

 

 

   

 

 

   
          (27     93     Consolidated net income
          11           Net income attributable to noncontrolling interests
 

 

 

   

 

 

   

 

 

   
          (16     93     Net income attributable to Canon Inc.
 

 

 

   

 

 

   

 

 

   

Unrealized gains and losses on securities

    (178     (18,472     282     Other, net
    37       5,727       (94   Income taxes
 

 

 

   

 

 

   

 

 

   
    (141     (12,745     188     Consolidated net income
          165       194     Net income attributable to noncontrolling interests
 

 

 

   

 

 

   

 

 

   
    (141     (12,580     382     Net income attributable to Canon Inc.
 

 

 

   

 

 

   

 

 

   

Gains and losses on derivative instruments

    1,341       5,772       (5,890   Other, net
    (392     (1,732     2,049     Income taxes
 

 

 

   

 

 

   

 

 

   
    949       4,040       (3,841   Consolidated net income
    (4     (26     (21   Net income attributable to noncontrolling interests
 

 

 

   

 

 

   

 

 

   
    945       4,014       (3,862   Net income attributable to Canon Inc.
 

 

 

   

 

 

   

 

 

   

Pension liability adjustments

    3,853       7,005       (16   Other, net
    (699     (1,832     164     Income taxes
 

 

 

   

 

 

   

 

 

   
    3,154       5,173       148     Consolidated net income
    (69     (268     (49   Net income attributable to noncontrolling interests
 

 

 

   

 

 

   

 

 

   
    3,085       4,905       99     Net income attributable to Canon Inc.
 

 

 

   

 

 

   

 

 

   

Total amount reclassified, net of tax and noncontrolling interests

    3,889       (3,677     (3,288  
 

 

 

   

 

 

   

 

 

   

 

*1

Amounts in parentheses indicate gains in consolidated statements of income.

 

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Notes to Consolidated Financial Statements (continued)

 

14.   Other Comprehensive Income (Loss) (continued)

 

Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments, including amounts attributable to noncontrolling interests, are as follows:

 

    Years ended December 31  
    Before-tax
amount
    Tax (expense)
or benefit
    Net-of-tax
amount
 
    (Millions of yen)  

2018:

     

Foreign currency translation adjustments

     

Amount arising during the year

    (93,955     809       (93,146

Reclassification adjustments for gains and losses realized in net income

                 
 

 

 

   

 

 

   

 

 

 

Net change during the year

    (93,955     809       (93,146

Net unrealized gains and losses on securities:

     

Amount arising during the year

                 

Reclassification adjustments for gains and losses realized in net income

    (178     37       (141
 

 

 

   

 

 

   

 

 

 

Net change during the year

    (178     37       (141

Net gains and losses on derivative instruments:

     

Amount arising during the year

    (586     125       (461

Reclassification adjustments for gains and losses realized in net income

    1,341       (392     949  
 

 

 

   

 

 

   

 

 

 

Net change during the year

    755       (267     488  

Pension liability adjustments:

     

Amount arising during the year

    (51,789     18,065       (33,724

Reclassification adjustments for gains and losses realized in net income

    3,853       (699     3,154  
 

 

 

   

 

 

   

 

 

 

Net change during the year

    (47,936     17,366       (30,570
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    (141,314     17,945       (123,369
 

 

 

   

 

 

   

 

 

 

2017:

     

Foreign currency translation adjustments

     

Amount arising during the year

    47,825       (708     47,117  

Reclassification adjustments for gains and losses realized in net income

    (39     12       (27
 

 

 

   

 

 

   

 

 

 

Net change during the year

    47,786       (696     47,090  

Net unrealized gains and losses on securities:

     

Amount arising during the year

    5,100       (1,717     3,383  

Reclassification adjustments for gains and losses realized in net income

    (18,472     5,727       (12,745
 

 

 

   

 

 

   

 

 

 

Net change during the year

    (13,372     4,010       (9,362

Net gains and losses on derivative instruments:

     

Amount arising during the year

    (2,080     628       (1,452

Reclassification adjustments for gains and losses realized in net income

    5,772       (1,732     4,040  
 

 

 

   

 

 

   

 

 

 

Net change during the year

    3,692       (1,104     2,588  

Pension liability adjustments:

     

Amount arising during the year

    20,991       (4,957     16,034  

Reclassification adjustments for gains and losses realized in net income

    7,005       (1,832     5,173  
 

 

 

   

 

 

   

 

 

 

Net change during the year

    27,996       (6,789     21,207  
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    66,102       (4,579     61,523  
 

 

 

   

 

 

   

 

 

 

 

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Notes to Consolidated Financial Statements (continued)

 

14.   Other Comprehensive Income (Loss) (continued)

 

    Years ended December 31  
    Before-tax
amount
    Tax (expense)
or benefit
    Net-of-tax
amount
 
    (Millions of yen)  

2016:

     

Foreign currency translation adjustments

     

Amount arising during the year

    (108,280     521       (107,759

Reclassification adjustments for gains and losses realized in net income

    139       (46     93  
 

 

 

   

 

 

   

 

 

 

Net change during the year

    (108,141     475       (107,666

Net unrealized gains and losses on securities:

     

Amount arising during the year

    1,184       (375     809  

Reclassification adjustments for gains and losses realized in net income

    282       (94     188  
 

 

 

   

 

 

   

 

 

 

Net change during the year

    1,466       (469     997  

Net gains and losses on derivative instruments:

     

Amount arising during the year

    1,619       (726     893  

Reclassification adjustments for gains and losses realized in net income

    (5,890     2,049       (3,841
 

 

 

   

 

 

   

 

 

 

Net change during the year

    (4,271     1,323       (2,948

Pension liability adjustments:

     

Amount arising during the year

    (95,707     25,204       (70,503

Reclassification adjustments for gains and losses realized in net income

    (16     164       148  
 

 

 

   

 

 

   

 

 

 

Net change during the year

    (95,723     25,368       (70,355
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    (206,669     26,697       (179,972
 

 

 

   

 

 

   

 

 

 

 

15.   Revenue

Revenue from sales of office products, such as office MFDs and laser printers, and imaging system products, such as digital cameras and inkjet printers, is recognized upon shipment or delivery, depending upon when the customer obtains controls of these products.

Revenue from sales of equipment that are sold with customer acceptance provisions related to their functionality including optical equipment such as semiconductor lithography equipment and FPD lithography equipment, and certain medical equipment such as CT systems and MRI systems, is recognized when the equipment is installed at the customer site and the agreed-upon specifications are objectively satisfied.

Most of Canon’s service revenue is generated from office and medical system products which is recognized over time. For the service contracts of office products, the customer typically pays a variable amount based on usage, a stated fixed fee or a stated base fee plus a variable amount which frequently include the provision of consumables as well as break fix activities. The majority portion of service revenue from the office products is recognized as billed since invoiced amount directly correlates with the value to the customer of the underlying performance obligation to date. For the service contracts of medical system products, the customer typically pays a stated fixed fee for the stand ready maintenance service and revenue is recognized ratably over the contract period.

The majority of service arrangements for office products are executed in combination with related products. Transaction prices for products and services need to be allocated to each performance obligation on a relative standalone selling price basis where significant judgements are required. Canon estimates the standalone selling price using a range of prices that would meet the allocation objective based on all the information that is

 

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Notes to Consolidated Financial Statements (continued)

 

15.   Revenue (continued)

 

reasonably available including market conditions and other observable inputs. If transaction prices of the product or service contracts are not within the acceptable range then the revenue is subject to allocation based on the estimated standalone selling prices. Canon recognizes the incremental costs of obtaining a contract as an expense when related office products are sold.

Canon also provides leasing arrangement to the customers primarily for the sales of office products. Approximately 4% of total revenue is generated from these leasing arrangements for the year ended December 31, 2018. Revenue from the sale of these products under sales-type leases is recognized at the inception of the lease. Interest 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 product leases are bundled with maintenance contracts, revenue is allocated based upon the estimated standalone selling prices of the lease and non-lease components. Lease components generally include product, financing and executory costs, while non-lease components generally consist of maintenance contracts and supplies.

The transaction prices that Canon is entitled to receive in exchange for transferring goods or services to the customer include certain forms of variable consideration, including product discounts, customer promotions and volume-based rebates mainly for imaging system products, which are sold predominantly through distributors and retailers. Canon includes estimated amounts in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Variable considerations are estimated based upon historical trends and other known factors at the time of sale, and are subsequently adjusted in each period based on current information. In addition, Canon may provide a right of return on our products for a short time period after a sale. These rights are accounted for as variable consideration when determining the transaction price, and accordingly Canon recognizes revenue based on the estimated amount to which Canon expects to be entitled after considering expected returns.

Disaggregated revenue by timing is as follows. Disaggregated revenue by business unit, product and geographic area are described in Note 22.

 

     Office      Imaging
System
     Medical
System
     Industry and
Others
     Corporate and
eliminations
    Consolidated  
     (Millions of yen)  

2018:

                

Revenue recognized at a point in time

     1,286,100        993,658        305,457        599,766        (106,318     3,078,663  

Revenue recognized over time

     521,201        14,507        132,121        205,445              873,274  

Total

     1,807,301        1,008,165        437,578        805,211        (106,318     3,951,937  

Revenue recognized over time includes primarily revenue from maintenance service in the office and medical system products and sales of certain industrial equipment which do not have alternative use and for which Canon has enforceable right to payment to the customers for the performance completed to date.

The adoption of the new revenue standard required the reconsideration of the scope of performance obligations related to service contracts, which has resulted in a change in classification of revenues between the products and service revenues. Specifically, certain revenue historically classified within products revenues, including consumables provided under the service contracts and certain outsourcing business, is currently classified within service revenues and cost of sales in the consolidated statement of income under the new revenue standard. Canon has started separating revenues and cost of sales into products and services in the consolidated statements

 

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Notes to Consolidated Financial Statements (continued)

 

15.   Revenue (continued)

 

of income starting from the quarter beginning January 1, 2018, including prior period’s presentation. However, prior period’s presentation is not retrospectively adjusted and is presented in accordance with the historical accounting policy. In addition, in conjunction with the application of the new standard, Canon has reclassified certain expenses related to service revenues from operating expenses to cost of sales in the accompanying consolidated statement of income. The amount reclassified for the year ended December 31, 2018 was ¥115,700 million. The reconsideration of the scope of performance obligations did not materially affect the timing of revenue recognition. The impacts of adoption of new revenue standard on Canon’s consolidated balance sheet as of December 31, 2018 and the consolidated statement of income for the year ended December 31, 2018 were as follows.

Consolidated Balance Sheet

 

     December 31, 2018  
     As Reported      Balance under
historical
accounting
policy
     Effect of
Change
 
     (Millions of yen)  
Assets         

Trade receivables, net

     612,953        657,419        (44,466

Inventories

     611,281        614,243        (2,962

Prepaid expenses and other current assets

     304,346        253,547        50,799  
  

 

 

    

 

 

    

 

 

 

Other assets

     397,974        397,949        25  
  

 

 

    

 

 

    

 

 

 

Total assets

     4,899,465        4,896,069        3,396  
Liabilities and equity         

Accrued expenses

     321,137        319,416        1,721  

Other current liabilities

     276,237        274,741        1,496  
  

 

 

    

 

 

    

 

 

 

Total liabilities

     1,881,552        1,878,335        3,217  
  

 

 

    

 

 

    

 

 

 

Retained earnings

     3,508,908        3,508,704        204  

Noncontrolling interests

     190,311        190,336        (25
  

 

 

    

 

 

    

 

 

 

Total equity

     3,017,913        3,017,734        179  
  

 

 

    

 

 

    

 

 

 

 

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Notes to Consolidated Financial Statements (continued)

 

15.   Revenue (continued)

 

Consolidated Statement of Income

 

     For the year ended December 31, 2018  
     As Reported      Amount under
historical
accounting
policy
     Effect of
Change
 
     (Millions of yen)  

Net sales

        

Products and Equipment

     3,194,724        3,383,566        (188,842

Services

     757,213        567,582        189,631  
  

 

 

    

 

 

    

 

 

 
     3,951,937        3,951,148        789  

Cost of sales

        

Products and Equipment

     1,762,171        1,783,798        (21,627

Services

     354,212        216,513        137,699  
  

 

 

    

 

 

    

 

 

 
     2,116,383        2,000,311        116,072  
  

 

 

    

 

 

    

 

 

 

Gross profit

     1,835,554        1,950,837        (115,283

Selling, general and administrative expenses

     1,176,760        1,292,460        (115,700
  

 

 

    

 

 

    

 

 

 

Operating profit

     342,952        342,535        417  

Income before income taxes

     362,892        362,475        417  

Income taxes

     96,150        96,094        56  
  

 

 

    

 

 

    

 

 

 

Consolidated net income

     266,742        266,381        361  

Less: Net income attributable to noncontrolling interests

     13,987        13,936        51  
  

 

 

    

 

 

    

 

 

 

Net income attributable to Canon Inc.

     252,755        252,445        310  
  

 

 

    

 

 

    

 

 

 

Canon recognized contract assets primarily for unbilled receivables mainly arising from services contracts for office products totaled to ¥42,915 million at the adoption date and included in prepaid expenses and other current assets in the consolidated balance sheet with an offsetting impact to trade receivables. Contract assets at December 31, 2018 were ¥50,799 million.

Canon typically bills to the customer when performance obligation is satisfied and collects the payment in relatively short term except for certain maintenance service of office and medical products and certain industrial equipment for which Canon occasionally receives the payment in advance from customers. The amount received in excess of revenue recognized is recognized as deferred revenue until the performance obligation for distinct goods or services are satisfied. Deferred revenue at December 31, 2018 and 2017 were ¥123,686 million and ¥125,965 million, respectively, and are included in other current liabilities in the accompanying consolidated balance sheets. Revenue recognized for the year ended December 31, 2018, which had been included in the deferred revenue balance at December 31, 2017, was ¥104,678 million.

Remaining performance obligations for products and equipment at December 31, 2018 primarily arise from the sales of certain industrial equipment, amounting to ¥72,708 million, 75% of which is expected to be recognized as revenue within one year and remaining 25% is within two years. Disclosure of remaining performance obligations is not required for the majority of service since the revenue is recognized as billed basis applying the right to invoice practical expedient or is generated from the contracts with original expected duration of less than

 

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Notes to Consolidated Financial Statements (continued)

 

15.   Revenue (continued)

 

one year. The portion of fixed maintenance service contract for office and medical products with original expected duration of more than one year is approximately 11% of total service revenue and the average remaining period for these fixed contracts as of December 31, 2018 is about 2 years.

Taxes collected from customers and remitted to governmental authorities are excluded from revenues in the consolidated statements of income.

 

16.   Stock-Based Compensation

On May 2, 2018, based on the approval of the shareholders, the Company granted stock options to its directors and executive officers to acquire 74,000 shares of common stock. Those to whom stock acquisition rights are granted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from after the date when they cease to hold any position as a director or an executive officer of the Company. These option awards have a 30 year exercisable period. The grant-date fair value per share of the stock options granted during the year ended December 31, 2018 was ¥2,948.

On May 1, 2011, based on the approval of the shareholders, the Company granted stock options to its directors, executive officers and certain employees to acquire 912,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year exercisable period. The grant-date fair value per share of the stock options granted during the year ended December 31, 2011 was ¥772.

On May 1, 2010, based on the approval of the shareholders, the Company granted stock options to its directors, executive officers and certain employees to acquire 890,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year exercisable period. The grant-date fair value per share of the stock options granted during the year ended December 31, 2010 was ¥988.

The compensation cost recognized for these stock options for the years ended December 31, 2018 was ¥218 million and 2017 and 2016 was nil, and it is included in selling, general and administrative expenses in the consolidated statements of income.

The fair value of the option award was estimated on the date of grant using the Black-Sholes option pricing model that incorporates the assumptions presented below:

 

     Year ended
December 31, 2018
 

Expected term of option (in years)

     6.0  

Expected volatility

     23.02

Dividend yield

     4.14

Risk-free interest rate

     (0.07 %) 

 

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Notes to Consolidated Financial Statements (continued)

 

16.   Stock-Based Compensation (continued)

 

A summary of option activity under the stock option plans as of and for the years ended December 31, 2018, 2017 and 2016 is presented below:

 

     Shares     Weighted-average
exercise price
     Weighted-average
remaining
contractual term
     Aggregate
intrinsic value
 
           (Yen)      (Year)      (Millions of yen)  

Outstanding at January 1, 2016

     1,296,000       4,263        0.4         

Exercised

                  

Forfeited/Expired

     (693,000     4,500        
  

 

 

         

Outstanding at December 31, 2016

     603,000       3,990        0.2         

Exercised

                  

Forfeited/Expired

     (603,000     3,990        
  

 

 

         

Outstanding at December 31, 2017

                      

Granted

     74,000       1        

Exercised

                  

Forfeited/Expired

                  
  

 

 

         

Outstanding at December 31, 2018

     74,000       1        29.3        222  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at December 31, 2018

     74,000       1        29.3        222  
  

 

 

   

 

 

    

 

 

    

 

 

 

The total fair value of shares vested during the years ended December 31, 2018 was ¥218 million and 2017 and 2016 was nil .Cash received from the exercise of stock options for the years ended December 31, 2018, 2017 and 2016 was nil.

 

17.   Net Income Attributable to Canon Inc. Shareholders per Share

A reconciliation of the numerators and denominators of basic and diluted net income attributable to Canon Inc. shareholders per share computations is as follows:

 

     Years ended December 31  
     2018      2017      2016  
     (Millions of yen)  

Net income attributable to Canon Inc.

     252,755        241,923        150,650  
     (Number of shares)  

Average common shares outstanding

     1,079,753,008        1,085,439,370        1,092,070,680  

Effect of dilutive securities:

        

Stock options

     49,319                
  

 

 

    

 

 

    

 

 

 

Diluted common shares outstanding

     1,079,802,327        1,085,439,370        1,092,070,680  
  

 

 

    

 

 

    

 

 

 
     (Yen)  

Net income attributable to Canon Inc. shareholders per share:

        

Basic

     234.09        222.88        137.95  

Diluted

     234.08        222.88        137.95  

The computation of diluted net income attributable to Canon Inc. shareholders per share for the years ended December 31, 2017 and 2016 excludes outstanding stock options because the effect would be anti-dilutive.

 

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Notes to Consolidated Financial Statements (continued)

 

18.   Derivatives and Hedging Activities

Risk management policy

Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Derivative financial instruments are comprised principally of foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized financial institutions and selected by Canon taking into account their financial condition, and contracts are diversified across a number of major financial institutions.

Foreign currency exchange rate risk management

Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange exposures principally from the exchange of U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and intercompany trade receivables that are denominated in foreign currencies. In accordance with Canon’s policy, a specific portion of foreign currency exposure resulting from forecasted intercompany sales are hedged using foreign exchange contracts which principally mature within three months.

Cash flow hedge

Changes in the fair value of derivative financial instruments designated as cash flow hedges, including foreign exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings through other income (deductions) in the same period as the hedged items affect earnings. Substantially all amounts recorded in accumulated other comprehensive income (loss) at year-end are expected to be recognized in earnings over the next twelve months. Canon excludes the time value component from the assessment of hedge effectiveness. Changes in the fair value of a foreign exchange contract for the period between the date that the forecasted intercompany sales occur and its maturity date are recognized in earnings and not considered hedge ineffectiveness.

Derivatives not designated as hedges

Canon has entered into certain foreign exchange contracts to primarily offset the earnings impact related to fluctuations in foreign currency exchange rates associated with certain assets denominated in foreign currencies. Although these foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting, the contracts are effective from an economic perspective. The changes in the fair value of these contracts are recorded in earnings immediately.

Contract amounts of foreign exchange contracts at December 31, 2018 and 2017 are set forth below:

 

     December 31  
     2018      2017  
     (Millions of yen)  

To sell foreign currencies

     230,505        272,563  

To buy foreign currencies

     30,816        46,168  

 

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Notes to Consolidated Financial Statements (continued)

 

18.   Derivatives and Hedging Activities (continued)

 

Fair value of derivative instruments in the consolidated balance sheets

The following tables present Canon’s derivative instruments measured at gross fair value as reflected in the consolidated balance sheets at December 31, 2018 and 2017.

Derivatives designated as hedging instruments

 

         Fair value  
         December 31  
   

Balance sheet location

   2018      2017  
         (Millions of yen)  

Assets:

       

Foreign exchange contracts

  Prepaid expenses and other current assets      521        255  

Liabilities:

       

Foreign exchange contracts

  Other current liabilities      323        367  

Derivatives not designated as hedging instruments

 

         Fair value  
         December 31  
   

Balance sheet location

   2018      2017  
         (Millions of yen)  

Assets:

       

Foreign exchange contracts

  Prepaid expenses and other current assets      2,622        289  

Liabilities:

       

Foreign exchange contracts

  Other current liabilities      443        2,892  

Effect of derivative instruments in the consolidated statements of income

The following tables present the effect of Canon’s derivative instruments in the consolidated statements of income for the years ended December 31, 2018, 2017 and 2016.

Derivatives in cash flow hedging relationships

 

     Years ended December 31  
     Gain (loss)
recognized in
OCI (effective
portion)
    Gain (loss) reclassified from
accumulated OCI into
income (effective portion)
    Gain (loss) recognized in income
(ineffective portion and amount
excluded from effectiveness testing)
 
         Amount             Location              Amount             Location              Amount      
     (Millions of yen)  

2018:

         

Foreign exchange contracts

     (586     Other, net        (1,341     Other, net        (682

2017:

            

Foreign exchange contracts

     (2,080     Other, net        (5,772     Other, net        (332

2016:

            

Foreign exchange contracts

     1,619       Other, net        5,890       Other, net        (311

 

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Notes to Consolidated Financial Statements (continued)

 

18.   Derivatives and Hedging Activities (continued)

Effect of derivative instruments in the consolidated statements of income (continued)

 

Derivatives not designated as hedging instruments

 

     Gain (loss) recognized in income on derivative  
     Years ended December 31  
     Location      2018      2017     2016  
            (Millions of yen)  

Foreign exchange contracts

     Other, net        5,284        (7,932     7,018  

 

19.   Commitments and Contingent Liabilities

Commitments

At December 31, 2018, commitments outstanding for the purchase of property, plant and equipment approximated ¥54,905 million, and commitments outstanding for the purchase of parts and raw materials approximated ¥120,344 million.

Canon occupies sales offices and other facilities under lease arrangements accounted for as operating leases. Deposits made under such arrangements aggregated ¥12,728 million and ¥13,740 million at December 31, 2018 and 2017, respectively, and are included in noncurrent receivables in the accompanying consolidated balance sheets. Rental expenses of cancelable and noncancelable operating leases amounted to ¥49,394 million, ¥47,619 million and ¥42,714 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Future minimum lease payments required under noncancelable operating leases that have initial or remaining lease terms in excess of one year at December 31, 2018 are as follows:

 

     (Millions of yen)  

Year ending December 31:

  

2019

     29,817  

2020

     23,402  

2021

     17,837  

2022

     13,565  

2023

     10,165  

Thereafter

     20,298  
  

 

 

 

Total future minimum lease payments

     115,084  
  

 

 

 

Guarantees

Canon provides guarantees for its employees, affiliates and other companies. The guarantees for the employees are principally made for their housing loans. The guarantees for affiliates and other companies are made for their lease obligations and bank loans to ensure that those companies operate with less financial risk.

Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract terms. The contract terms are 1 year to 30 years in case of employees with housing loans, and 1 year to 7 years in case of affiliates and other companies with lease obligations and bank loans. The maximum amount of undiscounted payments Canon would have had to make in the event of default is ¥4,458 million at December 31, 2018. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2018 were not significant.

 

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Notes to Consolidated Financial Statements (continued)

 

19.   Commitments and Contingent Liabilities (continued)

Guarantees (continued)

 

Canon also issues contractual product warranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term. Changes in accrued product warranty costs for the years ended December 31, 2018 and 2017 are summarized as follows:

 

     Years ended December 31  
     2018     2017  
     (Millions of yen)  

Balance at beginning of year

     17,452       13,168  

Additions

     18,870       18,893  

Utilization

     (14,707     (12,957

Other

     (4,297     (1,652
  

 

 

   

 

 

 

Balance at end of year

     17,318       17,452  
  

 

 

   

 

 

 

Legal proceedings

Canon is involved in various claims and legal actions arising in the ordinary course of business. Canon has recorded provisions for liabilities when it is probable that liabilities have been incurred and the amount of loss can be reasonably estimated. Canon reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of the negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Based on its experience, although litigation is inherently unpredictable, Canon believes that any damage amounts claimed in outstanding matters are not a meaningful indicator of Canon’s potential liability. In the opinion of management, any reasonably possible range of losses from outstanding matters would not have a material adverse effect on Canon’s consolidated financial position, results of operations, or cash flows.

 

20.   Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk

Fair value of financial instruments

The estimated fair values of Canon’s financial instruments at December 31, 2018 and 2017 are set forth below. The following summary excludes cash and cash equivalents, trade receivables, finance receivables, noncurrent receivables, short-term loans, trade payables and accrued expenses for which fair values approximate their carrying amounts. The summary also excludes investments and derivative instruments which are disclosed in Note 2 and Note 21, and Note 18, respectively.

 

     December 31  
     2018     2017  
     Carrying
amount
    Estimated
fair value
    Carrying
amount
    Estimated
fair value
 
     (Millions of yen)  

Long-term debt, including current installments

     (364,602     (364,570     (499,168     (499,126

 

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Notes to Consolidated Financial Statements (continued)

 

20.   Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk (continued)

Fair value of financial instruments (continued)

 

The following methods and assumptions are used to estimate the fair value in the above table.

Long-term debt

Canon’s long-term debt instruments are classified as Level 2 instruments and valued based on the present value of future cash flows associated with each instrument discounted using current market borrowing rates for similar debt instruments of comparable maturity. The levels are more fully described in Note 21.

Limitations of fair value estimates

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Concentrations of credit risk

At December 31, 2018 and 2017, one customer accounted for approximately 12% and 8% of consolidated trade receivables, respectively. Although Canon does not expect that the customer will fail to meet its obligations, Canon is potentially exposed to concentrations of credit risk if the customer failed to perform according to the terms of the contracts.

 

21.   Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is as follows:

 

Level 1

    Inputs are quoted prices in active markets for identical assets or liabilities.

Level 2

    Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3

    Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable, which reflect the reporting entity’s own assumptions about the assumptions that market participants would use in establishing a price.

 

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Notes to Consolidated Financial Statements (continued)

 

21.   Fair Value Measurements (continued)

 

Assets and liabilities measured at fair value on a recurring basis

The following tables present Canon’s assets and liabilities that are measured at fair value on a recurring basis consistent with the fair value hierarchy at December 31, 2018 and 2017.

 

     December 31, 2018  
     Level 1      Level 2      Level 3      Total  
     (Millions of yen)  

Assets:

           

Cash and cash equivalents

            70,500               70,500  

Short-term investments:

           

Available-for-sale:

           

Corporate bonds

     630                      630  

Investments:

           

Available-for-sale:

           

Government bonds

                           

Corporate bonds

                           

Fund trusts and others

     630        408               1,038  

Equity securities

     13,787                      13,787  

Prepaid expenses and other current assets:

           

Derivatives

            3,143               3,143  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     15,047        74,051               89,098  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Other current liabilities:

           

Derivatives

            766               766  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

            766               766  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Level 1      Level 2      Level 3      Total  
     (Millions of yen)  

Assets:

           

Cash and cash equivalents

            70,500               70,500  

Short-term investments:

           

Available-for-sale:

           

Corporate bonds

     1,222                      1,222  

Investments:

           

Available-for-sale:

           

Government bonds

     289                      289  

Corporate bonds

     605        217               822  

Fund trusts

     13        111               124  

Equity securities

     20,901                      20,901  

Prepaid expenses and other current assets:

           

Derivatives

            544               544  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     23,030        71,372               94,402  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Other current liabilities:

           

Derivatives

            3,259               3,259  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

            3,259               3,259  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to Consolidated Financial Statements (continued)

 

21.   Fair Value Measurements (continued)

Assets and liabilities measured at fair value on a recurring basis (continued)

 

Level 1 investments are comprised principally of Japanese equity securities, which are valued using an unadjusted quoted market price in active markets with sufficient volume and frequency of transactions. Level 2 cash and cash equivalents are valued based on market approach, using quoted prices for identical assets in markets that are not active.

Derivative financial instruments are comprised of foreign exchange contracts. Level 2 derivatives are valued using quotes obtained from counterparties or third parties, which are periodically validated by pricing models using observable market inputs, such as foreign currency exchange rates and interest rates, based on market approach.

Assets and liabilities measured at fair value on a nonrecurring basis

There were no assets or liabilities to be measured at fair value on a nonrecurring basis during the year ended December 31, 2018. The following table presents the Canon’s asset that was measured at fair value on a nonrecurring basis consistent with the fair value hierarchy and related impairment charge recognized during the year ended December 31, 2017.

 

     Year ended December 31, 2017  
     Total loss     Fair value  
    Level 1      Level 2      Level 3      Total  
           (Millions of yen)  

Asset:

             

Goodwill

     (33,912                   29,370        29,370  

Goodwill was classified as Level 3 items and valued based on an income approach using unobservable inputs. Canon performed the annual goodwill impairment test as of October 1, 2017, which indicated that the fair value of the reporting unit was less than its carrying value. Canon recognized the impairment charge for the amount representing the excess of the carrying amount over the reporting unit’s fair value. The fair value for the reporting unit was measured based on the discounted cash flow method with 6.0% of weighted average cost of capital and estimated future cash flows. Future cash flows are based on management’s estimates of projected revenues, gross profits, operating expenses, a long-term growth rate, taking into consideration industry trends and market conditions.

 

22.   Segment Information

Canon operates its business in four segments: the Office Business Unit, the Imaging System Business Unit, the Medical System Business Unit, and the Industry and Others Business Unit, which are based on the organizational structure and information reviewed by Canon’s management to evaluate results and allocate resources.

Based on the realignment of Canon’s internal reporting and management structure, from the beginning of the third quarter of 2018, Canon has reclassified certain businesses from Office Business Unit to Industry and Others Business Unit. Segment information for the year ended December 31, 2018 have reflected this change. Prior period amounts also have been restated. Canon newly established Medical System Business Unit effective at the beginning of the second quarter of 2017, and certain businesses included in Industry and Others Business Unit have been reclassified. Operating results for the year ended December 31, 2017 have been reclassified and for the year ended December 31, 2016 have not been restated since they have not been material. Total assets as of December 31, 2016 have been restated.

 

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Notes to Consolidated Financial Statements (continued)

 

22.   Segment Information (continued)

 

The primary products included in each segment are as follows:

 

Office Business Unit:

   Office multifunction devices (MFDs) / Laser multifunction printers (MFPs) / Laser printers / Digital continuous feed presses / Digital sheet-fed presses / Wide-format printers / Document solutions

Imaging System Business Unit:

   Interchangeable-lens digital cameras / Digital compact cameras / Digital camcorders / Digital cinema cameras / Interchangeable lenses / Compact photo printers /Inkjet printers / Large format inkjet printers / Commercial photo printers / Image scanners / Multimedia projectors / Broadcast equipment / Calculators

Medical System Business Unit:

   Digital radiography systems / Diagnostic X-ray systems / Computed tomography (CT) systems / Magnetic resonance imaging (MRI) systems / Diagnostic ultrasound systems / Clinical chemistry analyzers / Ophthalmic equipment

Industry and Others Business Unit:

   Semiconductor lithography equipment / FPD (Flat panel display) lithography equipment/ Vacuum thin-film deposition equipment / Organic LED (OLED) panel manufacturing equipment / Die bonders / Micromotors / Network cameras / Handy terminals / Document scanners

The accounting policies of the segments are substantially the same as those described in the significant accounting policies in Note 1. While Canon previously disclosed operating profit as segment profit, Canon has newly adopted income before income taxes as segment profit for the year ended December 31, 2018. Due to the increase of other income (deductions) from the adoption of ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Canon has changed its business performance measure. Please refer to Note 1 (w) for more detailed information about the change in the accounting standard.

 

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Notes to Consolidated Financial Statements (continued)

 

22.   Segment Information (continued)

 

Information about operating results and assets for each segment as of and for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

     Office      Imaging
System
     Medical
System
     Industry and
Others
     Corporate and
eliminations
    Consolidated  
     (Millions of yen)  

2018:

                

Net sales:

                

External customers

     1,804,002        1,007,365        437,305        703,265              3,951,937  

Intersegment

     3,299        800        273        101,946        (106,318      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     1,807,301        1,008,165        437,578        805,211        (106,318     3,951,937  

Operating cost and expenses

     1,586,497        891,210        408,739        739,665        (17,126     3,608,985  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating profit

     220,804        116,955        28,839        65,546        (89,192     342,952  

Other income (deductions)

     8,383        4,299        640        2,061        4,557       19,940  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     229,187        121,254        29,479        67,607        (84,635     362,892  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     923,261        393,004        247,282        383,568        2,952,350       4,899,465  

Depreciation and amortization

     64,964        40,541        9,365        38,582        98,102       251,554  

Capital expenditures

     48,127        25,796        7,454        24,091        95,036       200,504  

2017:

                

Net sales:

                

External customers

     1,802,542        1,135,584        434,985        706,904              4,080,015  

Intersegment

     2,240        604        1,202        85,946        (89,992      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     1,804,782        1,136,188        436,187        792,850        (89,992     4,080,015  

Operating cost and expenses

     1,615,521        962,663        414,246        752,122        13,858       3,758,410  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating profit

     189,261        173,525        21,941        40,728        (103,850     321,605  

Other income (deductions)

     6,108        2,388        564        1,339        21,880       32,279  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     195,369        175,913        22,505        42,067        (81,970     353,884  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     946,213        387,088        238,824        376,064        3,250,102       5,198,291  

Depreciation and amortization

     72,346        41,695        5,212        39,736        102,892       261,881  

Impairment losses on goodwill

     21,721                      12,191              33,912  

Capital expenditures

     46,769        28,508        8,963        16,620        80,529       181,389  

2016:

                

Net sales:

                

External customers

     1,743,039        1,094,291               564,157              3,401,487  

Intersegment

     2,957        998               82,326        (86,281      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     1,745,996        1,095,289               646,483        (86,281     3,401,487  

Operating cost and expenses

     1,583,588        953,567               641,082        6,825       3,185,062  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating profit

     162,408        141,722               5,401        (93,106     216,425  

Other income (deductions)

     7,467        2,691               1,658        16,410       28,226  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     169,875        144,413               7,059        (76,696     244,651  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     947,602        391,661        204,755        354,602        3,239,909       5,138,529  

Depreciation and amortization

     76,500        47,386               42,872        83,338       250,096  

Capital expenditures

     71,841        25,564               29,694        81,280       208,379  

 

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Notes to Consolidated Financial Statements (continued)

 

22.   Segment Information (continued)

 

Intersegment sales are recorded at the same prices used in transactions with third parties. Expenses not directly associated with specific segments are allocated based on the most reasonable measures applicable. Corporate expenses include certain corporate research and development expenses. Amortization costs of identified intangible assets resulting from the purchase price allocation of CMSC are also included in corporate expenses. Segment assets are based on those directly associated with each segment. Corporate assets primarily consist of cash and cash equivalents, investments, deferred tax assets, goodwill, identified intangible assets from acquisitions and corporate properties. Capital expenditures represent the additions to property, plant and equipment and intangible assets measured on an accrual basis.

Information about sales by product to external customers for each segment for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

     Years ended December 31  
     2018      2017      2016  
     (Millions of yen)  

Office

        

Monochrome copiers

     280,035        287,823        289,532  

Color copiers

     403,522        405,576        386,193  

Printers

     702,378        702,491        664,846  

Others

     418,067        406,652        402,468  
  

 

 

    

 

 

    

 

 

 

Total

     1,804,002        1,802,542        1,743,039  

Imaging System

        

Cameras

     599,578        702,598        666,868  

Inkjet printers

     318,382        333,721        329,066  

Others

     89,405        99,265        98,357  
  

 

 

    

 

 

    

 

 

 

Total

     1,007,365        1,135,584        1,094,291  

Medical System

        

Diagnostic equipment

     437,305        434,985         
  

 

 

    

 

 

    

 

 

 

Industry and Others

        

Lithography equipment

     199,722        193,113        121,090  

Others

     503,543        513,791        443,067  
  

 

 

    

 

 

    

 

 

 

Total

     703,265        706,904        564,157  
  

 

 

    

 

 

    

 

 

 

Consolidated

     3,951,937        4,080,015        3,401,487  
  

 

 

    

 

 

    

 

 

 

 

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Notes to Consolidated Financial Statements (continued)

 

22.   Segment Information (continued)

 

Information by major geographic area as of and for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

     2018      2017      2016  
     (Millions of yen)  

Net sales:

        

Japan

     869,577        884,828        706,979  

Americas

     1,076,402        1,107,515        963,544  

Europe

     1,015,428        1,028,415        913,523  

Asia and Oceania

     990,530        1,059,257        817,441  
  

 

 

    

 

 

    

 

 

 

Total

     3,951,937        4,080,015        3,401,487  
  

 

 

    

 

 

    

 

 

 

Long-lived assets:

        

Japan

     1,046,065        1,081,522        1,163,374  

Americas

     129,989        141,937        147,129  

Europe

     169,357        174,889        166,734  

Asia and Oceania

     136,602        149,244        164,007  
  

 

 

    

 

 

    

 

 

 

Total

     1,482,013        1,547,592        1,641,244  
  

 

 

    

 

 

    

 

 

 

Net sales are attributed to areas based on the location where the product is shipped and the service is performed to the customers. Other than in Japan and the United States, Canon does not conduct business in any individual country in which its sales in that country exceed 10% of consolidated net sales. Net sales in the United States were ¥995,245 million, ¥1,022,305 million and ¥884,083 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Long-lived assets represent property, plant and equipment and intangible assets for each geographic area.

 

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Schedule II Valuation and Qualifying Accounts

 

     Balance at
beginning
of period
     Addition-
charged to
income
     Deduction
bad debts
written off
    Translation
adjustments

and other
    Balance
at end of
period
 
     (Millions of yen)  

Year ended December 31, 2018:

            

Allowance for doubtful receivables

            

Trade receivables

     13,378        1,347        (2,789     (459     11,477  

Finance receivables

     2,681        938        (1,284     340       2,675  

Year ended December 31, 2017:

            

Allowance for doubtful receivables

            

Trade receivables

     11,075        3,574        (1,787     516       13,378  

Finance receivables

     2,325        1,436        (1,523     443       2,681  

Year ended December 31, 2016:

            

Allowance for doubtful receivables

            

Trade receivables

     12,077        1,460        (1,824     (638     11,075  

Finance receivables

     2,878        398        (978     27       2,325  

 

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the registrant certifies that it meets all of the requirements for filing on Form 20-F/A and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CANON INC.
(Registrant)
/s/ Toshizo Tanaka
Toshizo Tanaka
Executive Vice President & CFO
Canon Inc.
30-2, Shimomaruko 3-chome,
Ohta-ku, Tokyo 146-8501, Japan

Date     June 26, 2019

 

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