I

 

 

 

 

 

II

 

 

 

 

 

III

 

 

 

IV

 

 

 

 

V

 

 

Consolidated Financial Summary

Net sales

Income before income taxes

Net income attributable to Canon Inc.

Canon Inc. stockholders’ equity

Total equity

Total assets

Canon Inc. stockholders’ equity per share (yen)

Net income attributable to Canon Inc. stockholders per share:

Basic (yen)

Diluted (yen)

Canon Inc. stockholders’ equity to total assets (%)

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

Cash and cash equivalents at end of period

Number of employees

Canon’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles.

Consumption tax is excluded from the stated amount of net sales.

Canon adopted FASB ASC810, “Consolidations” (the provisions of which were previously included in SFAS No.160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No.51”) in the first quarter beginning January 1, 2009. Prior year amounts have been reclassified or adjusted to conform to ASC810.

Description of Business

Group Entities

Number of Employees

Consolidated

Parent-alone

Business Machines

Cameras

Optical and other products

 

Total

 

Amount of production is calculated by sales price.

Consumption tax is excluded from the stated amount of production.

Business Machines

Cameras

Optical and other products

 

Total

 

Consumption tax is excluded from the stated amount of net sales.

Canon’s sales to its significant customer are summarized as follows:

Hewlett-Packard Company

    Canon Virginia, Inc.
    Virginia, U.S.

Total number of issued shares

If the Company effects a share split or a share consolidation after the date of the allotment of the share options, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen:

=Exercise Price before adjustment ×

If, after the date of allotment of share options, the Company issues common shares at a price lower than the then market price thereof or disposes common shares owned by it, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen; however, the Exercise Price will not be adjusted in the case of the exercise of share options:

     Number of Issued and Outstanding Shares +

 

The “Number of Issued and Outstanding Shares” is the number of shares already issued by the Company after subtraction of the number of shares owned by the Company. In the case of the Company’s disposal of shares owned by it, the “Number of Newly Issued Shares” will be replaced with the “Number of Own Shares to Be Disposed.”

In the case of a merger, a company split or capital reduction after the date of allotment of share options, or in any other analogous case requiring the adjustment of the Exercise Price, the Exercise Price shall be appropriately adjusted within a reasonable range.

Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s general meeting of shareholders regarding the final business term within 2 years from the end of the Ordinary General Meeting of Shareholders for the 107th Business Term of the Company.

Holders of share options will be entitled to exercise their share options for 2 years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately lose effect.

Any other conditions for the exercise of share options may be established by the Board of Directors.

If the Company effects a share split or a share consolidation after the date of the allotment of the share options, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen:

=Exercise Price before adjustment ×

If, after the date of allotment of share options, the Company issues common shares at a price lower than the then market price thereof or disposes common shares owned by it, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen; however, the Exercise Price will not be adjusted in the case of the exercise of share options:

     Number of Issued and Outstanding Shares +

 

The “Number of Issued and Outstanding Shares” is the number of shares already issued by the Company after subtraction of the number of shares owned by the Company. In the case of the Company’s disposal of shares owned by it, the “Number of Newly Issued Shares” will be replaced with the “Number of Own Shares to Be Disposed.”

In the case of a merger, a company split or capital reduction after the date of allotment of share options, or in any other analogous case requiring the adjustment of the Exercise Price, the Exercise Price shall be appropriately adjusted within a reasonable range.

Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s general meeting of shareholders regarding the final business term within 2 years from the end of the Ordinary General Meeting of Shareholders for the 108th Business Term of the Company.

Holders of share options will be entitled to exercise their share options for 2 years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately lose effect.

Issued Shares (share)

Capital Stock (millions of yen)

Additional Paid-in Capital (millions of yen)

The Chase Manhattan Bank, N.A. London Secs Lending
Omnibus Account

 

 

Shares without voting rights

 

Shares with restricted voting rights (Treasury stock, etc.)

 

Shares with restricted voting rights (Others)

 

Shares with full voting rights (Treasury stock, etc.)

 

 

Shares with full voting rights (Others)

 

Fractional unit shares

 

Total number of issued shares

 

Total voting rights held by all shareholders

 

High

 

Low

Yasuo Mitsuhashi

 

Toshiaki Ikoma

 

Junji Ichikawa

 

Akiyoshi Moroe

Newly-appointed:

 

Yukiaki Hashimoto

 

 

 

 

 

Hiroyuki Suematsu

 

Kazuhiro Akiyama

 

Consolidated Balance Sheets

 

as of September 30, 2009 and December 31, 2008

 

 

 

Consolidated Statements of Income

 

for the nine months ended September 30, 2009 and

 

for the three months ended September 30, 2009

 

 

 

Consolidated Statement of Cash Flows

 

for the nine months ended September 30, 2009

 

 

 

Notes to Consolidated Financial Statements

Current assets:

Cash and cash equivalents (Note 13)

Short-term investments (Note 2)

Trade receivables, net (Note 3)

Inventories (Note 4)

Prepaid expenses and other current assets (Note 9)

 

Total current assets

 

Noncurrent receivables (Note10)

Investments (Note 2)

Property, plant and equipment, net (Note 5)

Intangible assets, net

Other assets

 

Total assets

 

Current liabilities:

Short-term loans and current portion of long-term debt

Trade payables (Note 6)

Accrued income taxes

Accrued expenses

Other current liabilities (Note 9)

 

Total current liabilities

 

Long-term debt, excluding current instalments

Accrued pension and severance cost

Other noncurrent liabilities

 

Total liabilities

 

Commitments and contingent liabilities (Note 10)

 

Equity:

Canon Inc. stockholders’ equity (Note 7):

Common stock

(Number of authorized shares)

(Number of issued shares)

Additional paid-in capital

Legal reserve

Retained earnings

Accumulated other comprehensive income (loss)

Treasury stock, at cost

(Number of shares)

 

Total Canon Inc. stockholders’ equity

Noncontrolling interests (Notes 1 and 7)

 

Total equity (Notes 1 and 7)

 

Total liabilities and equity

 

 

Net sales

 

Cost of sales

 

Gross profit

 

Operating expenses:

Selling, general and administrative expenses (Note 13)

Research and development expenses

 

 

 

Operating profit

 

Other income (deductions):

Interest and dividend income

Interest expense

Other, net (Notes 9, 12 and 13)

 

 

 

Income before income taxes

 

Income taxes

 

Consolidated net income (Note 1)

 

Less: Net income (loss) attributable to noncontrolling interests (Note 1)

 

Net income attributable to Canon Inc. (Note 1)

 

Net income attributable to Canon Inc. stockholders per share (Note 8):

Basic

Diluted

Cash dividends per share

Cash flows from operating activities:

Consolidated net income

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

Depreciation and amortization

Loss on disposal of property, plant and equipment

Deferred income taxes

Decrease in trade receivables

Decrease in inventories

Decrease in trade payables

Decrease in accrued income taxes

Decrease in accrued expenses

Increase in accrued (prepaid) pension and severance cost

Other, net

 

Net cash provided by operating activities

 

 

Cash flows from investing activities:

Purchases of fixed assets (Note 5)

Proceeds from sale of fixed assets (Note 5)

Purchases of available-for-sale securities

Proceeds from sale and maturity of available-for-sale securities

Increase in time deposits

Acquisitions of subsidiaries, net of cash acquired

Purchases of other investments

Other, net

 

Net cash used in investing activities

 

 

Cash flows from financing activities:

Proceeds from issuance of long-term debt

Repayments of long-term debt

Decrease in short-term loans

Dividends paid

Repurchases of treasury stock, net

Other, net

 

Net cash used in financing activities

 

 

Effect of exchange rate changes on cash and cash equivalents

 

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of period

 

Cash and cash equivalents at end of period

 

 

Supplemental disclosure for cash flow information:

Cash paid during the period for:

Interest

Income taxes

The Company issued convertible debentures in the United States in May 1969 and established a program in which its American Depositary Receipts (ADRs) were traded in the U.S. over-the-counter market. Since then, under the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934, the Company has prepared its annual consolidated financial statements in accordance with U.S. generally accepted accounting principles and filed them with the U.S. Securities and Exchange Commission on Form 20-F. The Company’s ADRs were listed on the NYSE in September 2000 after being quoted on NASDAQ from February 1972 to September 2000.

Canon’s consolidated financial statements are prepared in accordance with the recognition and measurement criteria of accounting principles generally accepted in the United States. Certain disclosures have been omitted. Additionally, in the accompanying consolidated financial statements, the segment information is disclosed in conformity with financial accounting standards of Japan, not with U.S. generally accepted accounting principles.

The number of consolidated subsidiaries and affiliated companies that were accounted for on the equity basis as of September 30, 2009 is summarized as follows:

Consolidated subsidiaries

Affiliated companies

 

Total

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.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that was codified in Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principles” (the provisions of which were previously included in Statement of Financial Accounting Standards (“SFAS”) No.168, “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”), which defines that the FASB ASC will become the single source of authoritative U.S. generally accepted accounting principles. Additionally, rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of the U.S. federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASC did not change current U.S GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. This Codification is effective for fiscal years and interim periods ending after September 15, 2009 and was adopted by Canon beginning from the quarter ended September 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. However, throughout the notes to the consolidated financial statements, references that were previously made to various former authoritative U.S. GAAP pronouncements have been changed to refer to the appropriate section of the ASC.

In February 2008, the FASB issued new accounting guidance that was codified in ASC820, “Fair Value Measurements and Disclosures” (the provisions of which were previously included in Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No.157”) which delayed the effective date of previously issued guidance included in ASC820 (the provisions of which were previously included in SFAS 157, “Fair Value Measurements”) for one year for certain nonfinancial assets and liabilities. Canon adopted this guidance in the first quarter beginning January 1, 2009 for all nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 12 for the disclosures required by this guidance.

In December 2007, the FASB issued new accounting guidance that was codified in ASC805, “Business Combinations” (the provisions of which were previously included in SFAS No.141 (revised 2007), “Business Combinations”). This guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in a business combination. This guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This guidance is effective for fiscal years beginning on or after December 15, 2008 and was adopted by Canon for any business combinations with an acquisition date on or after January 1, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition as of or for the period ended September 30, 2009.

In December 2007, the FASB issued new accounting guidance that was codified in ASC810, “Consolidations” (the provisions of which were previously included in SFAS No.160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No.51”). This guidance establishes accounting and reporting guidance for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance is effective for fiscal years beginning on or after December 15, 2008 on a prospective basis, except for certain presentation and disclosure requirements, which must be applied retrospectively for all periods presented, and was adopted by Canon in the first quarter beginning January 1, 2009. Upon the adoption of this guidance, noncontrolling interests, which were previously referred to as minority interests and classified between total liabilities and stockholders’ equity on the consolidated balance sheets, are now included as a separate component of total equity. In addition, consolidated net income on the consolidated statements of income now includes the net income (loss) attributable to noncontrolling interests. These financial statement presentation requirements have been adopted retrospectively and prior year amounts in the consolidated financial statements have been reclassified or adjusted to conform to this guidance. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition.

In March 2008, the FASB issued new accounting guidance that was codified in ASC815, “Derivatives and Hedging” ” (the provisions of which were previously included in SFAS No.161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No.133”). This guidance amends and expands the disclosures previously required under ASC815. This guidance requires entities to provide greater transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, result of operations and cash flows. This guidance does not change the existing guidance relative to recognition and measurement of derivative instruments and hedging activities. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and was adopted by Canon in the first quarter beginning January 1, 2009. The adoption of this guidance did not have an impact on Canon’s consolidated results of operations and financial condition. See Note 9 for the disclosures required by this guidance.

In April 2009, the FASB issued new accounting guidance that was codified in ASC825, “Financial Instruments” (the provisions of which were previously included in FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”), which requires disclosure about fair value of financial instruments for interim periods. This guidance is effective for interim periods ending after June 15, 2009 and was adopted by Canon prospectively, beginning in the second quarter ended June 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 11 for the disclosures required by this guidance.

In April 2009, the FASB issued new accounting guidance that was codified in ASC320, “Investments-Debt and Equity Securities” (the provisions of which were previously included in FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”). This guidance amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation, coupled with the requirement to additionally disclose other-than-temporary impairments on debt and equity securities in the financial statements. This guidance is effective for interim periods ending after June 15, 2009 and was adopted by Canon prospectively, beginning in the second quarter ended June 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 2 for the disclosures required by this guidance.

In April 2009, the FASB issued new accounting guidance that was codified in ASC820, “Fair Value Measurements and Disclosures” (the provisions of which were previously included in FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”), which provides guidance for fair value measurements under circumstances where the volume and level of activity for the asset or liability have significantly decreased and identifying circumstances that indicate if a transaction is not orderly, along with the requirement of expanded disclosure. This guidance is effective for interim periods ending after June 15, 2009 and was adopted by Canon prospectively, beginning in the second quarter ended June 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 12 for the disclosures required by this guidance.

In May 2009, the FASB issued new accounting guidance that was codified in ASC855, “Subsequent Events” (the provisions of which were previously included in SFAS No.165, “Subsequent Events”). This guidance addresses the accounting treatments and disclosures that an entity shall make about events or transactions that occurred after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance is effective for fiscal years and interim periods ending after June 15, 2009 and was adopted by Canon prospectively, beginning in the second quarter ended June 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 14 for the disclosures required by this guidance.

In December 2008, the FASB issued new accounting guidance that was codified in ASC715, “Compensation-Retirement Benefits” (the provisions of which were previously included in FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”). This guidance requires additional disclosures about plan assets including investment allocation, fair value of major categories of plan assets, development of fair value measurements, and concentrations of risk. This guidance is effective for fiscal years ending after December 15, 2009 and is required to be adopted by Canon in the year ending December 31, 2009. Canon is currently evaluating the requirements of these additional disclosures, but does not expect the adoption of this guidance to have an impact on Canon’s consolidated results of operations and financial condition.

The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities by major security types are as follows:

Current:

Available-for-sale:

Government bonds

Equity securities

 

 

 

Noncurrent:

Available-for-sale:

Government bonds

Corporate debt securities

Fund trusts

Equity securities

 

 

 

Current:

Available-for-sale:

Government bonds

Fund trusts

 

 

 

 

Noncurrent:

Available-for-sale:

Government bonds

Corporate debt securities

Fund trusts

Equity securities

 

 

 

Maturities of available-for-sale debt securities and fund trusts included in short-term investments and investments in the accompanying consolidated balance sheets were as follows at September 30, 2009:

 

Due within one year

Due after one year through five years

Due after five years through ten years

 

 

 

Realized gains and losses are determined using the average cost method and are reflected in earnings. The gross realized losses, including write-downs for impairments that were other than temporary, were ¥2,378 million and ¥494 million, for the nine and three months ended September 30, 2009, respectively. The gross realized gains were not significant for the nine and three months ended September 30, 2009.

At September 30, 2009, substantially all of the available-for-sale securities with unrealized losses had been in a continuous unrealized loss position for less than 12 months.

Time deposits with original maturities of more than three months are ¥24,736 million and ¥7,430 million at September 30, 2009 and December 31, 2008, respectively, and are included in short-term investments in the accompanying consolidated balance sheets.

The aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥28,578 million and ¥10,684 million at September 30, 2009 and December 31, 2008, respectively. Investments with an aggregate cost of ¥28,100 million were not evaluated for impairment as of September 30, 2009, because (a) Canon did not estimate the fair value of those investments as it was not practicable to estimate the fair value of the investments and (b) Canon did not identify any events or changes in circumstances that might have had significant adverse effects on the fair value of those investments.

Reclassifications from accumulated other comprehensive loss for gains and losses realized in net income was ¥1,867 million and ¥373 million, for the nine and three months ended September 30, 2009, respectively.

Trade receivables are summarized as follows:

 

Notes

Accounts

Less allowance for doubtful receivables

 

 

 

Inventories are summarized as follows:

 

Finished goods

Work in process

Raw materials

 

 

 

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

 

Land

Buildings

Machinery and equipment

Construction in progress

 

 

Less accumulated depreciation

 

 

 

Fixed assets presented in the consolidated statement of cash flows includes property, plant and equipment and intangible assets.

Trade payables are summarized as follows:

 

Notes

Accounts

 

 

 

 

Balance at December 31, 2008

 

Dividends paid to stockholders of Canon Inc.

Dividends paid to noncontrolling interests

Capital transactions by consolidated subsidiaries
and affiliated companies and other

 

Comprehensive income:

Net income

Other comprehensive income (loss), net of tax
Foreign currency translation adjustments

Net unrealized gains and losses on securities

Net gains and losses on derivative instruments

Pension liability adjustments

 

Total comprehensive income

 

 

 

Balance at September 30, 2009

Net income attributable to Canon Inc.

Average common shares outstanding

Net income attributable to Canon Inc. stockholders per share:

Basic

Diluted

Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Derivative financial instruments are comprised principally of foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. 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, because most of the counterparties are internationally recognized financial institutions and contracts are diversified across a number of major financial institutions.

Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage 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, which are denominated in foreign currencies. In accordance with Canon’s risk management policy, a specific portion of the foreign currency exposure resulting from forecasted intercompany sales are hedged using foreign exchange contracts, which principally mature within three months.

Changes in the fair value of derivative financial instruments that have been designated and qualify 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 that the hedged items affect earnings. Substantially all amounts recorded in accumulated other comprehensive income (loss) as of September 30, 2009 are expected to be recognized in earnings over the next 12 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.

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.

 

To sell foreign currencies

To buy foreign currencies

Assets:

Foreign exchange contracts

Assets:

Foreign exchange contracts

Liabilities:

Foreign exchange contracts

 

Foreign exchange
contracts

 

Foreign exchange
contracts

Foreign exchange contracts

Foreign exchange contracts

As of September 30, 2009, commitments outstanding for the purchase of property, plant and equipment approximated ¥24,006 million, and commitments outstanding for the purchase of parts and raw materials approximated ¥59,560 million.

Canon occupies sales offices and other facilities under lease arrangements accounted for as operating leases. Deposits made under such arrangements aggregated ¥14,317 million and ¥14,223 million at September 30, 2009 and December 31, 2008, respectively, and are included in noncurrent receivables in the accompanying consolidated balance sheets.

Future minimum lease payments required under noncancelable operating leases are ¥15,879 million (within one year) and ¥39,367 million (after one year), at September 30, 2009.

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

For each guarantee provided, Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract periods of 1 year to 30 years, in the case of employees with housing loans, and of 1 year to 10 years, in the case of affiliates and other companies. The maximum amount of undiscounted payments Canon would have to make in the event of default is ¥19,602 million at September 30, 2009. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at September 30, 2009 were not significant.

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. Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are based on historical experience. Changes in accrued product warranty cost for the nine months ended September 30, 2009 is summarized as follows:

 

Balance at December 31, 2008

Addition

Utilization

Other

 

Balance at September 30, 2009

 

In Germany, Verwertungsgesellschaft Wort (“VG Wort”), a collecting agency representing certain copyright holders, has filed a series of lawsuits seeking to impose copyright levies upon digital products such as PCs and printers, that allegedly enable the reproduction of copyrighted materials, against the companies importing and distributing these digital products. VG Wort filed a lawsuit in January 2006 against Canon seeking payment of copyright levies on single-function printers, and the court of first instance in Düsseldorf ruled in favor of the claim by VG Wort in November 2006. Canon lodged an appeal against such decision in December 2006 before the court of appeals in Düsseldorf. Following a decision by the same court of appeals in Düsseldorf on January 23, 2007 in relation to a similar court case seeking copyright levies on single-function printers of Epson Deutschland GmbH, Xerox GmbH and Kyocera Mita Deutschland GmbH, whereby the court rejected such alleged levies, in its judgment of November 13, 2007, the court of appeals rejected VG Wort’s claim against Canon. VG Wort appealed further against said decision of the court of appeals before the Federal Supreme Court. In December 2007, for a similar Hewlett-Packard GmbH case relating to single-function printers, the Federal Supreme Court delivered its judgment in favor of Hewlett-Packard GmbH and dismissed VG Wort’s claim. VG Wort has already filed a constitutional complaint with the Federal Constitutional Court against said judgment of the Federal Supreme Court. Likewise, after rejection by the Federal Supreme Court of an appeal by VG Wort in relation to Canon’s single-function printers case in September 2008, VG Wort lodged a claim before the Federal Constitutional Court. Canon received a brief from the Federal Constitutional Court in September 2009 to enable the Court to decide on whether to accept the claim, and Canon will respond to it in a due course. In 2007, an amendment of German copyright law was carried out, and a new law has been effective from January 1, 2008 for both multi-function printers and single-function printers. The new law sets forth that the scope and tariff of copyright levies will be agreed between industry and the collecting society. Industry and the collecting society, based on the requirement under the new law, reached an agreement in December 2008. This agreement is applicable retroactively from January 1, 2008 and will remain effective through end of 2010. However, in Canon’s assessment, the final outcome of the court case regarding the single-function printers sold in Germany before January 1, 2008 remains uncertain.

Canon is involved in various claims and legal actions, including those noted above, 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, Canon believes that any damage amounts claimed in the specific matters discussed above are not a meaningful indicator of Canon’s potential liability. In the opinion of management, the ultimate disposition of the above mentioned matters would not have a material adverse effect on Canon’s consolidated financial position, results of operations, or cash flows. However, litigation is inherently unpredictable. While Canon believes that it has valid defenses with respect to legal matters pending against it, it is possible that Canon’s consolidated financial position, results of operations, or cash flows could be materially affected in any particular period by the unfavorable resolution of one or more of these matters.

The fair values of Canon’s financial instruments as of September 30, 2009 and December 31, 2008 are set forth below. The following summary excludes cash and cash equivalents, time deposits, 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 debt and equity securities disclosed in Note 2.

Long-term debt, including current installments

Foreign exchange contracts:

Assets

Liabilities

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

The fair values of Canon’s long-term debt instruments are based either on the quoted price in the most active market or the present value of future cash flows associated with each instrument discounted using Canon’s current borrowing rate for similar debt instruments of comparable maturity.

The fair values of foreign exchange contracts are measured based on the market price obtained from financial institutions.

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 judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

At September 30, 2009 and December 31, 2008, one customer accounted for approximately 20% and 19% 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.

Fair value is defined as 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. The three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described as follows:

Level 1 

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.

Assets:

Cash and cash equivalents

Available-for-sale (current):

Government bonds

Equity securities

Available-for-sale (noncurrent):

Government bonds

Corporate debt securities

Fund trusts

Equity securities

Derivatives

 

Total assets

 

Liabilities:

Derivatives

 

Total liabilities

 

Assets:

Cash and cash equivalents

Available-for-sale (current):

Government bonds

Fund trusts

Available-for-sale (noncurrent):

Government bonds

Corporate debt securities

Fund trusts

Equity securities

Derivatives

 

Total assets

 

Liabilities:

Derivatives