Amended Annual and Transition Report (foreign Private Issuer) (20-f/a)

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

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

For the fiscal year ended December 31, 2018

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

For the transition period from to

☐	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


		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

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.

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.

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

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

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.

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.

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.

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

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

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

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

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.

Canon Inc. and Subsidiaries

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.

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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)

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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

105

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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

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

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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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Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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.

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

111

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Notes to Consolidated Financial Statements (continued)

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.

112

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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.

113

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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

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.

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

114

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Goodwill and Other Intangible Assets (continued)

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.

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

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.

115

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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.

116

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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	)

117

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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

2018

2017

2018

2017

(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

2018

2017

2018

2017

(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

2018

2017

2018

2017

(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

118

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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

119

Canon Inc. and Subsidiaries

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

120

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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

121

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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,

122

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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.

123

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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.

124

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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

125

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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

126

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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.

127

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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.

128

Canon Inc. and Subsidiaries

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.

129

Canon Inc. and Subsidiaries

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.

130

Canon Inc. and Subsidiaries

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

131

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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

132

Canon Inc. and Subsidiaries

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

133

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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

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

134

Canon Inc. and Subsidiaries

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

Consolidated net income

266,742

266,381

361

Less: Net income attributable to noncontrolling interests

13,987

13,936

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

135

Canon Inc. and Subsidiaries

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	%)

136

Canon Inc. and Subsidiaries

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.

137

Canon Inc. and Subsidiaries

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

138

Canon Inc. and Subsidiaries

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

)

139

Canon Inc. and Subsidiaries

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.

140

Canon Inc. and Subsidiaries

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

)

141

Canon Inc. and Subsidiaries

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.

142

Canon Inc. and Subsidiaries

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

143

Canon Inc. and Subsidiaries

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

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.

144

Canon Inc. and Subsidiaries

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.

145

Canon Inc. and Subsidiaries

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

146

Canon Inc. and Subsidiaries

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

147

Canon Inc. and Subsidiaries

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.

148

Canon Inc. and Subsidiaries

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

149

Item 19. Exhibits

List of exhibits


12		Certifications of Chairman and CEO and Executive Vice President and CFO pursuant to Section 302 of the Sarbanes-Oxley Act

13		Certification of Chairman and CEO and Executive Vice President and CFO pursuant to Section 906 of the Sarbanes-Oxley Act

150

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

151

Grafico Azioni Canon (PK) (USOTC:CAJFF)
Storico
Da Nov 2024 a Dic 2024