##### Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM 20-F/A (Amendment No.1)  ☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR  ☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 OR  ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from
 to OR  ☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report Commission file number 001-15122  CANON
KABUSHIKI KAISHA (Exact name of Registrant in Japanese as specified in its charter) CANON INC. (Exact name of Registrant in English as specified in its charter) JAPAN (Jurisdiction of incorporation or organization) 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo
146-8501, Japan (Address of principal executive offices) Sachiho Tanino, +81-3-3758-2111, +81-3-5482-9680, 30-2, Shimomaruko 3-chome, Ohta-ku,
Tokyo 146-8501, Japan (Name, Telephone, Facsimile number and Address of Company
Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act.  Title of each class



Trading Symbol



Name of each exchange on which registered(1)  Common Stock (the shares)



CAJ



New York Stock Exchange*(2)  American Depositary Shares (ADSs), each of which represents one share







New York Stock Exchange Securities registered or to be registered pursuant to Section 12(g) of the Act. None (Title of Class)   Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act. None (Title of Class)  *
Not for trading, but only for technical purposes in connection with the registration of ADSs. Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period
covered by the annual report. As of December 31, 2018, 1,079,749,823 shares of common stock, including 16,460,829 ADSs,
were outstanding. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.     Yes  ☑     No  ☐ If this
report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.    Yes  ☐     No  ☑ Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑     No   ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑
    No   ☐ Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of large accelerated filer, accelerated filer, and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer  ☑

Accelerated filer  ☐

Non-accelerated filer  ☐

Emerging growth company  ☐ If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.  ☐  The term new or revised financial accounting standard refers to any update issued by
the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. Indicate by check
mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:  U.S. GAAP  ☑

International Financial Reporting Standards as issued by the International Accounting Standards Board   ☐

Other  ☐ If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow.    Item 17  ☐     Item 18  ☐ If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes  ☐     No  ☑




---

##### Table of Contents

TABLE OF CONTENTS  Page numberExplanatory Note


1Item 18.

Financial Statements


90Reports of Independent Registered Public Accounting Firm


91Consolidated Balance Sheets


93Consolidated Statements of Income


94Consolidated Statements of Comprehensive Income


95Consolidated Statements of Equity


96Consolidated Statements of Cash Flows


98Notes to Consolidated Financial Statements


99Schedule IIValuation and Qualifying Accounts


149Item 19.

Exhibits


150SIGNATURES


151  i




---

##### Table of Contents

Explanatory Note This Amendment No. 1 on Form 20-F/A has been filed by Canon Inc. (the Company) to
amend the annual report on Form 20-F for the fiscal year ended December 31, 2018 filed on March 28, 2019. This amendment presents Item 18. The only change to Item 18 is to add the conformed signature
of our independent registered public accounting firm, Ernst & Young ShinNihon LLC, to the audit reports, which were inadvertently omitted in the original filing. Manually signed versions of the reports were received by the Company from
Ernst & Young ShinNihon LLC prior to the original filing. The Company does not intend to revise, update, amend or restate the
information presented in any other items of such annual report on Form 20-F or reflect any events that have occurred after the filing of such annual report on Form 20-F.
Among other things, forward-looking statements and risk factors contained in such annual report on Form 20-F have not been revised to reflect events, results or developments that have occurred or facts that
became known to the Company after filing such annual report on Form 20-F, and such forward-looking statements and risk factors should be read in their historical context. In addition, the Company submits the unchanged consolidated financial statements of the Company and currently dated certifications of our principal executive
officer and our principal financial officer pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  1




---

##### Table of Contents

Item 18. Financial Statements  Page numberConsolidated financial statements of Canon Inc. and Subsidiaries:Reports of Ernst 
& Young ShinNihon LLC, Independent Registered Public Accounting Firm


91Consolidated Balance Sheets as of December 31, 2018 and 2017


93Consolidated Statements of Income for the years ended December 
31, 2018, 2017 and 2016


94Consolidated Statements of Comprehensive Income for the years ended December 31,
 2018, 2017 and 2016


95Consolidated Statements of Equity for the years ended December 
31, 2018, 2017 and 2016


96Consolidated Statements of Cash Flows for the years ended December 
31, 2018, 2017 and 2016


98Notes to Consolidated Financial Statements


99Schedule:Schedule II  Valuation and Qualifying Accounts for the years ended December 31,
 2018, 2017 and 2016


149 All other schedules are omitted as permitted by the rules and regulations of the Securities and Exchange
Commission as not applicable.  90




---

##### Table of Contents

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  91




---

##### Table of Contents

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  92




---

##### Table of Contents

Canon Inc. and Subsidiaries Consolidated Balance Sheets  December 312018


2017(Millions of yen)AssetsCurrent assets:Cash and cash equivalents (Note 1)


520,645



721,814Short-term investments (Note 2)


956



1,965Trade receivables, net (Notes 3 and 15)


612,953



650,872Inventories (Notes 4 and 15)


611,281



570,033Prepaid expenses and other current assets(Notes 6, 15 and 18)


304,346



287,965Total current assets


2,050,181



2,232,649Noncurrent receivables (Note 19)


18,230



35,444Investments (Note 2)


42,556



48,320Property, plant and equipment, net (Notes 5 and 6)


1,090,992



1,126,620Intangible assets, net (Notes 7 and 8)


391,021



420,972Goodwill (Notes 7 and 8)


908,511



936,722Other assets (Notes 6, 11 and 12)


397,974



397,564Total assets


4,899,465



5,198,291Liabilities and equityCurrent liabilities:Short-term loans and current portion of long-term debt (Note 9)


38,527



39,328Trade payables (Note 10)


352,489



380,654Accrued income taxes (Note 12)


41,264



77,501Accrued expenses (Notes 11, 15 and 19)


321,137



330,188Other current liabilities (Notes 5, 15 and 18)


276,237



281,809Total current liabilities


1,029,654



1,109,480Long-term debt, excluding current installments (Notes 9 and 20)


361,962



493,238Accrued pension and severance cost (Note 11)


382,789



365,582Other noncurrent liabilities (Note 12)


107,147



133,816Total liabilities


1,881,552



2,102,116Commitments and contingent liabilities (Note 19)Equity:Canon Inc. shareholders equity:Common stockAuthorized 3,000,000,000 shares; issued 1,333,763,464 shares in 2018 and 2017


174,762



174,762Additional paid-in capital


404,389



401,386Legal reserve (Note 13)


67,116



66,879Retained earnings (Note 13)


3,508,908



3,429,312Accumulated 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



2,870,630Noncontrolling interests


190,311



225,545Total equity


3,017,913



3,096,175Total liabilities and equity


4,899,465



5,198,291 See accompanying Notes to Consolidated Financial Statements.  93




---

##### Table of Contents

Canon Inc. and Subsidiaries Consolidated Statements of Income  Years ended December 312018


2017


2016(Millions of yen)Net sales (Note 15)Products and Equipment


3,194,724



3,521,156



2,986,188Services


757,213



558,859



415,2993,951,937



4,080,015



3,401,487Cost of sales (Notes 5, 8, 11, 15 and 19)Products and Equipment


1,762,171



1,875,581



1,574,679Services


354,212



213,880



154,8102,116,383



2,089,461



1,729,489Gross profit


1,835,554



1,990,554



1,671,998Operating expenses (Notes 1, 5, 8, 11, 15, 16, 19 and 21):Selling, general and administrative expenses


1,176,760



1,301,666



1,149,036Research and development expenses


315,842



333,371



306,537Impairment losses on goodwill






33,912



1,492,602



1,668,949



1,455,573Operating profit


342,952



321,605



216,425Other income (deductions):Interest and dividend income


6,604



6,012



4,762Interest expense


(797
)


(818
)


(1,061
)Other, net (Notes 1, 2, 11, 14 and 18)


14,133



27,085



24,52519,940



32,279



28,226Income before income taxes


362,892



353,884



244,651Income taxes (Note 12)


96,150



98,024



82,681Consolidated net income


266,742



255,860



161,970Less: Net income attributable to noncontrolling interests


13,987



13,937



11,320Net 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



137.95Diluted


234.08



222.88



137.95Cash dividends per share


160.00



160.00



150.00 See accompanying Notes to Consolidated Financial Statements.  94




---

##### Table of Contents

Canon Inc. and Subsidiaries Consolidated Statements of Comprehensive Income  Years ended December 312018


2017


2016(Millions of yen)Consolidated net income


266,742



255,860



161,970Other 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
)


997Net 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



1,745Comprehensive income (loss) attributable to Canon Inc.


136,455



298,576



(19,747
) See accompanying Notes to Consolidated Financial Statements.  95




---

##### Table of Contents

Canon Inc. and Subsidiaries Consolidated Statements of Equity  Commonstock


Additionalpaid-incapital


Legalreserve


Retainedearnings


Accumulatedothercomprehensiveincome (loss)


Treasurystock


TotalCanon Inc.shareholdersequity


Non-controllinginterests


Totalequity(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



3,184,463Equity 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



1,047Transfer to legal reserve










1,269



(1,269
)


















Comprehensive income:Net income














150,650











150,650



11,320



161,970Other 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
)


997Net 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



2,994,622Equity 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



60Transfer to legal reserve










321



(321
)


















Comprehensive income:Net income














241,923











241,923



13,937



255,860Other comprehensive income (loss), net of tax (Note 14):Foreign currency translation adjustments


















44,168







44,168



2,922



47,090Net 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



2,588Pension liability adjustments


















19,690







19,690



1,517



21,207Total comprehensive income (loss)


























298,576



18,807



317,383Repurchases of treasury stock






















(50,036
)


(50,036
)






(50,036
)Reissuance of treasury stock














(131
)






1,978



1,847







1,847Balance 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  96




---

##### Table of Contents

Canon Inc. and Subsidiaries Consolidated Statements of Equity (continued)  Commonstock


Additionalpaid-incapital


Legalreserve


Retainedearnings


Accumulatedothercomprehensiveincome (loss)


Treasurystock


TotalCanon Inc.shareholdersequity


Non-controllinginterests


Totalequity(Millions of yen)Cumulative effects of accounting standard update  adoption of ASU No.2014-09














(106
)










(106
)


(76
)


(182
)Cumulative effects of accounting standard update  adoption of ASU No. 2016-01














5,343



(5,343
)














Equity transactions with noncontrolling interests and other






3,003











(4,200
)






(1,197
)


(36,518
)


(37,715
)Dividends to Canon Inc. shareholders














(178,159
)










(178,159
)






(178,159
)Dividends to noncontrolling interests






























(5,558
)


(5,558
)Transfers to legal reserve










237



(237
)


















Comprehensive income:Net income














252,755











252,755



13,987



266,742Other 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







488Pension liability adjustments


















(26,824
)






(26,824
)


(3,746
)


(30,570
)Total comprehensive income (loss)


























136,455



6,918



143,373Repurchases of treasury stock






















(25
)


(25
)






(25
)Reissuance of treasury stock














0







4



4







4Balance 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.  97




---

##### Table of Contents

Canon Inc. and Subsidiaries Consolidated Statements of Cash Flows  Years ended December 312018


2017


2016(Millions of yen)Cash flows from operating activities:Consolidated net income


266,742



255,860



161,970Adjustments to reconcile consolidated net income to net cash provided by operating
activities:Depreciation and amortization


251,554



261,881



250,096Loss on disposal of fixed assets


5,726



6,935



5,203Equity 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



6,156Increase (decrease) in trade payables


(31,212
)


4,951



56,844Increase (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



5,489Other, net (Note 6)


15,706



(8,198
)


34,094Net cash provided by operating activities


365,293



590,557



500,283Cash 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



6,177Purchases of securities


(2,311
)


(2,220
)


(84
)Proceeds from sale and maturity of securities


1,615



970



1,181Decrease in time deposits, net


401



3,373



15,414Acquisitions 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



610,552Repayments 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
)


355,692Effect 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



633,613Cash and cash equivalents at end of year


520,645



721,814



630,193Supplemental disclosure for cash flow information:Cash paid during the year for:Interest


749



1,026



738Income taxes


131,616



71,473



76,714 See accompanying Notes to Consolidated Financial Statements.  98




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements  1.

Basis of Presentation and Significant Accounting Policies  (a)
Description of Business Canon Inc. (the Company) and subsidiaries (collectively Canon) is one of the worlds leading manufacturers in such
fields as office products, imaging system products, medical system products and industry and other products. Office products consist mainly of office multifunction devices (MFDs), laser multifunction printers (MFPs), laser
printers, digital continuous feed presses, digital sheet-fed presses, wide-format printers and document solutions. Imaging system products consist mainly of
interchangeable-lens digital cameras, digital compact cameras, digital camcorders, digital cinema cameras, interchangeable lenses, compact photo printers, inkjet printers, large format inkjet printers, commercial photo printers, image scanners,
multimedia projectors, broadcast equipment and calculators. Medical system products consist mainly of digital radiography systems, diagnostic X-ray systems, computed tomography (CT) systems,
magnetic resonance imaging (MRI) systems, diagnostic ultrasound systems, clinical chemistry analyzers and ophthalmic equipment. Industry and other products consist mainly of semiconductor lithography equipment, FPD (Flat panel display)
lithography equipment, vacuum thin-film deposition equipment, organic LED (OLED) panel manufacturing equipment, die bonders, micromotors, network cameras, handy terminals and document scanners. Sales are made principally under the Canon
brand name, almost entirely through sales subsidiaries. These subsidiaries are responsible for marketing and distribution, and primarily sell to retail dealers in their geographic area. Further segment information is described in Note 22. Canon sells laser printers on an OEM basis to HP Inc.; such sales constituted 13.6%, 13.1% and 14.8% of consolidated net sales for the years
ended December 31, 2018, 2017 and 2016, respectively, and are included in the Office Business Unit. Canons manufacturing
operations are conducted primarily at 30 plants in Japan and 18 overseas plants which are located in countries or regions such as the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and Philippines.  (b)
Basis of Presentation The Company and its domestic subsidiaries maintain their books of account in conformity with financial accounting standards of Japan. Foreign
subsidiaries maintain their books of account in conformity with financial accounting standards of the countries of their domicile. Certain
adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with U.S. generally accepted accounting principles (U.S. GAAP). These adjustments were not recorded in the
statutory books of account.  (c)
Principles of Consolidation The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries and those variable interest entities
where the Company or its consolidated subsidiaries are the primary beneficiaries. All significant intercompany balances and transactions have been eliminated.  (d)
Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant
estimates and assumptions are  99




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (d)

Use of Estimates (continued)  reflected in valuation and disclosure of accounts including: revenue recognition, allowance for doubtful receivables, inventories, long-lived assets, goodwill and other intangible assets with
indefinite useful lives, environmental liabilities, deferred tax assets, uncertain tax positions and employee retirement and severance benefit obligations. Actual results could differ materially from those estimates.  (e)
Translation of Foreign Currencies Assets and liabilities of the Companys subsidiaries located outside Japan with functional currencies other than Japanese yen are
translated into Japanese yen at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the year. Gains and losses resulting from translation of financial
statements are excluded from earnings and are reported in other comprehensive income (loss). Gains and losses resulting from foreign
currency transactions, including foreign exchange contracts, and translation of assets and liabilities denominated in foreign currencies are included in other income (deductions) in the consolidated statements of income. Foreign currency exchange
gains and losses were net losses of ¥6,044 million, ¥9,775 million and ¥2 million for the years ended December 31, 2018, 2017 and 2016, respectively.  (f)
Cash Equivalents All highly liquid investments acquired with original maturities of three months or less are considered to be cash equivalents. Certain debt
securities with original maturities of less than three months, classified as available-for-sale securities of ¥70,500 million at December 31, 2018 and
2017, respectively, are included in cash and cash equivalents in the consolidated balance sheets.  (g)
Investments Investments consist primarily of time deposits with original maturities of more than three months, debt and equity securities and investments
in affiliated companies. Canon classifies investments in debt securities as available-for-sale securities. Canon does not hold any trading securities which are bought and held primarily for the purpose of sale in the near term, or any held-to-maturity securities. Canon reports investments with maturities of less than one year as short-term investments. Available-for-sales debt securities and equity securities with
readily determinable fair value that are not accounted for under the equity method are recorded at fair value which is determined based on quoted market prices, projected discounted cash flows or other valuation techniques as appropriate. The
changes in fair value are recognized in net income for equity securities and in other comprehensive income for available-for-sales debt securities. Available-for-sale debt securities are regularly reviewed for
other-than-temporary declines in the carrying amount based on criteria that include the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and Canons
intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. For available-for-sale securities for
which the declines are deemed to be other-than-temporary and there is  100




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (g)

Investments (continued)  no intent to sell, the impairment are separated into the amount related to credit loss, which is recognized in earnings and the amount related to all other factors is recognized in other
comprehensive income (loss). For available-for-sale securities for which the declines are deemed to be other-than-temporary and there is an intent to sell, the
impairments in their entirety are recognized in earnings. Canon recognizes an impairment loss to the extent by which the cost basis of the investment exceeds the fair value of the investment. Canon measures non-marketable equity securities without readily determinable fair value at cost, minus
impairment, if any, plus or minus changes resulting from observables price changes in orderly transactions for the identical or a similar investment of the same issuer. Realized gains and losses are determined by the average cost method and reflected in earnings. Investments in affiliated companies over which Canon has the ability to exercise significant influence, but does not hold a controlling
financial interest, are accounted for by the equity method.  (h)

Allowance for Doubtful Receivables Allowance for doubtful trade and finance receivables is
maintained for all customers based on a combination of factors, including aging analysis, macroeconomic conditions and historical experience. An additional reserve for individual accounts is recorded when Canon becomes aware of a customers
inability to meet its financial obligations, such as in the case of bankruptcy filings. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. When all collection options are exhausted
including legal recourse, the accounts or portions thereof are deemed to be uncollectable and charged against the allowance.  (i)
Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined by the average method for domestic inventories and
principally by the first-in, first-out method for overseas inventories.  (j)
Impairment of Long-Lived Assets Long-lived assets, such as property, plant and equipment, and acquired intangible assets subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset and the estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.  (k)
Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is calculated principally by the declining-balance method, except for certain
assets which are depreciated by the straight-line method over the estimated useful lives of the assets.  101




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (k)

Property, Plant and Equipment (continued)  The depreciation period ranges from 3 years to 60 years for buildings and 1 year to 20 years
for machinery and equipment. Assets leased to others under operating leases are stated at cost and depreciated to the estimated residual
value of the assets by the straight-line method over the lease term, generally from 2 years to 5 years.  (l)
Goodwill and Other Intangible Assets Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment annually in the
fourth quarter of each year, or more frequently if indicators of potential impairment exist. All goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination. If the carrying amount
assigned to the reporting unit exceeds the fair value of the reporting unit, Canon recognizes an impairment charge in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Intangible assets with finite useful lives consist primarily of software, trademarks, patents and developed technology, license fees and
customer relationships, which are amortized using the straight-line method. The estimated useful lives of software are from 3 years to 7 years, trademarks are 15 years, patents and developed technology are from 7 years to 17 years, license fees are
7 years, and customer relationships are from 11 years to 15 years, respectively. Certain costs incurred in connection with developing or obtaining internal-use software are capitalized. These costs consist
primarily of payments made to third parties and the salaries of employees working on such software development. Costs incurred in connection with developing internal-use software are capitalized at the
application development stage. In addition, Canon develops or obtains certain software to be sold where related costs are capitalized after establishment of technological feasibility.  (m)
Environmental Liabilities Liabilities for environmental remediation and other environmental costs are accrued when environmental assessments or remedial efforts are
probable and the costs can be reasonably estimated. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values.  (n)
Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Canon records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not realizable. Canon
recognizes the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and  102




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (n)

Income Taxes (continued)  penalties accrued related to unrecognized tax benefits are included in income taxes in the consolidated statements of income.  (o)
Stock-Based Compensation Canon measures stock-based compensation cost at the grant date, based on the fair value of the award, and recognizes the cost on a
straight-line basis over the requisite service period, which is the vesting period.  (p)
Net Income Attributable to Canon Inc. Shareholders per Share Basic net income attributable to Canon Inc. shareholders per share is computed by dividing net income attributable to Canon Inc. by the
weighted-average number of common shares outstanding during each year. Diluted net income attributable to Canon Inc. shareholders per share includes the effect from potential issuances of common stock based on the assumptions that all stock options
were exercised.  (q)
Revenue Recognition Canon generates revenue principally through the sale of office, imaging system and medical system products, industrial equipment, supplies and
related services under separate contractual arrangements. Revenue is recognized when, or as, control of promised goods or services transfers to customers in an amount that reflects the consideration to which Canon expects to be entitled in exchange
for transferring these goods or services. For further information, please refer to Note 15.  (r)
Research and Development Costs Research and development costs are expensed as incurred.  (s)
Advertising Costs Advertising costs are expensed as incurred. Advertising expenses were ¥58,729 million, ¥61,207 million and
¥58,707 million for the years ended December 31, 2018, 2017 and 2016, respectively.  (t)
Shipping and Handling Costs Shipping and handling costs totaled ¥54,844 million, ¥52,953 million and ¥44,296 million for the years ended
December 31, 2018, 2017 and 2016, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.  (u)
Derivative Financial Instruments All derivatives are recognized at fair value and are included in prepaid expenses and other current assets, or other current liabilities in the
consolidated balance sheets. Canon uses and designates certain derivatives as a hedge of a forecasted transaction or the variability of
cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). Canon formally documents all relationships between hedging instruments and hedged items, as well as its
risk-  103




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (u)

Derivative Financial Instruments (continued)  management objective and strategy for undertaking various hedge transactions. Canon also formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon
discontinues hedge accounting prospectively. Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income (loss), until earnings are affected by the variability in cash
flows of the hedged item. Gains and losses from hedging ineffectiveness are included in other income (deductions). Gains and losses related to the components of hedging instruments excluded from the assessment of hedge effectiveness are included in
other income (deductions). Canon also uses certain derivative financial instruments which are not designated as hedges. The changes in
fair values of these derivative financial instruments are immediately recorded in earnings. Canon classifies cash flows from derivatives
as cash flows from operating activities in the consolidated statements of cash flows.  (v)
Guarantees Canon recognizes, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing guarantees.  (w)

Recent Accounting Guidance Recently adopted accounting guidance In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers (Topic 606) Section C  Background Information and Basis for Conclusions, which is a new accounting standard related to revenue from contracts with customers, as amended. (Accounting Standards Codification
(ASC) 606) This standard requires an entity to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. Canon adopted this standard from the quarter beginning January 1, 2018 with modified retrospective method of adoption to contracts that were not completed as of the adoption. The cumulative-effects to the retained earnings
and the impact on the consolidated result of operations for the year ended December 31, 2018 from the adoption of this standard were not material. For further information, please refer to Note 15. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments  Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance
includes the requirement that equity investments that do not result in consolidation and are not accounted for under the equity method be measured at fair value with changes in the fair value recognized in net income. Canon adopted this standard
from the quarter beginning January 1, 2018, and Canon recognized a cumulative-effect adjustment to retained earnings of ¥5,343 million as of January 1, 2018 for the unrealized gains, net of tax, on
available-for-sale equity securities previously recognized in accumulated other comprehensive income.  104




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (w)

Recent Accounting Guidance (continued)  In October 2016, the FASB issued ASU
No. 2016-16, Income Taxes (Topic 740): Intra-entity Transfers of Assets other than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset
other than inventory when the transfer occurs. Consequently, the amendments in this guidance eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of this guidance
are intellectual property and property, plant, and equipment. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period
of adoption. Canon adopted this standard from the quarter beginning January 1, 2018. The adoption of this guidance did not have a material impact on its consolidated results of operation and financial condition. In March 2017, the FASB issued ASU No. 2017-07, Compensation  Retirement Benefits (Topic
715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an entity to disaggregate the service cost component from the other components of net benefit cost and present it in the same
line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component, such as in
other income (deductions) in the income statement. The amendments also allow only the service cost component to be eligible for capitalization (for example, as a cost of internally manufactured inventory). The amendments were to be applied
retrospectively for the presentation of the service cost component and the other components of net benefit cost, and prospectively for the capitalization of the service cost component of net benefit cost. Canon adopted this guidance from the quarter
beginning January 1, 2018. The adoption of the new presentation requirement of the service cost component and the other components of net benefit cost resulted in reclassification of ¥2,137 million and ¥1,835 million from cost
of sales, ¥4,419 million and ¥4,161 million from selling, general and administrative expenses and ¥3,318 million and ¥6,445 million from research and development expenses into other income (deductions) for the
years ended December 31, 2017 and 2016, respectively. Please refer to Note 11 for additional information. The adoption of the capitalization of the service cost component of net benefit cost did not have a material impact on its consolidated
results of operations and financial condition. Recently issued accounting guidance not yet adopted In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) Section A  Leases:
Amendments to the FASB Accounting Standards Codification, which requires lessees to recognize most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current guidance. For lessors, the
standard modifies the classification criteria and the accounting for sales-type and direct financing leases. FASB also modified the definition of lease. Additionally, the guidance expands qualitative and quantitative disclosures related to lease.
The guidance is effective for annual reporting periods beginning after December 15, 2018. Canon applies the guidance from the quarter beginning after January 1, 2019. Canon applies the package of practical expedients that allows us not to
reassess whichever any existing contracts at or expired contracts prior to the adoption date are or contain leases, lease classification and whichever initial direct costs qualify for capitalization, in addition to short term lease exception. Canon
also adopts the transition method which no restatement of comparative periods and no reassessment of land easements not previously accounted for as a lease that exist at or expired prior to the adoption date are required. The right of use assets for
operating leases recognized at January 1, 2019 is ¥125,649 million almost same as the lease obligations and are included in noncurrent assets and liabilities in the accompanying consolidated balance sheets. Canon does not expect the
adoption of this guidance such  105




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (w)

Recent Accounting Guidance(Continued)  as the modification the definition of lease and the changes in lessor accounting to have material impact on its consolidated results of operation. In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities, which amends existing guidance to simplify the application of the hedge accounting in certain situations and enable an entity to better portray the economic results of an entitys risk
management activities in its financial statements. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and requires an entity to present the earnings effect of the hedging instrument in the same income
statement line item which the earnings effect of the hedged item is reported. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the
beginning of the period of adoption. This guidance is effective for Canon from the quarter beginning January 1, 2019. Gains and losses resulting from derivative financial instruments designated as cash flow hedges associated with forecasted
intercompany sales, which are currently included in other income (deductions) in the consolidated statements of income, will be included in net sales after the adoption of this guidance. Canon does not expect other material impacts from the adoption
on its consolidated results of operation and financial condition.  106




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  2.

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


Grossunrealizedholdinggains


Grossunrealizedholdinglosses


Fairvalue(Millions of yen)Current:Corporate bonds


630











630630











630December 31, 2017Cost


Grossunrealizedholdinggains


Grossunrealizedholdinglosses


Fairvalue(Millions of yen)Current:Corporate bonds


1,222











1,2221,222











1,222Noncurrent:Government bonds


305







16



289Corporate bonds


640



182







822Fund trusts*


122



2







124Equity securities*


10,965



11,612



1,676



20,90112,032



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



630630



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.  107




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  2.

Investments (continued)  The unrealized and realized gains and losses related to equity securities for the year ended
December 31, 2018 are as follows:  Millions of yenYear endedDecember 31, 2018Net 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


675Unrealized 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.  108




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  3.

Trade Receivables Trade receivables are summarized as follows:  December 312018


2017(Millions of yen)Notes


29,878



37,077Accounts


594,552



627,173624,430



664,250Less allowance for doubtful receivables


(11,477
)


(13,378
)612,953



650,872  4.

Inventories Inventories are summarized as follows:  December 312018


2017(Millions of yen)Finished goods


393,820



377,632Work in process


165,003



144,251Raw materials


52,458



48,150611,281



570,033  5.

Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated
depreciation and are summarized as follows:  December 312018


2017(Millions of yen)Land


272,443



274,551Buildings


1,629,927



1,638,202Machinery and equipment


1,793,499



1,804,982Construction in progress


67,045



46,9403,762,914



3,764,675Less 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.  109




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  6.

Finance Receivables and Operating Leases Finance receivables represent financing leases which consist
of sales-type leases and direct-financing leases resulting from the sales of Canons and complementary third-party products. These receivables typically have terms ranging from 1 year to 7 years. The components of the finance receivables, which
are included in prepaid expenses and other current assets, and other assets in the accompanying consolidated balance sheets, are as follows:  December 312018


2017(Millions of yen)Total minimum lease payments receivable


351,198



361,686Unguaranteed residual values


12,661



15,055Executory costs


(2,112
)


(2,216
)Unearned income


(31,007
)


(32,286
)330,740



342,239Less allowance for credit losses


(2,675
)


(2,681
)328,065



339,558Less current portion


(111,629
)


(120,186
)216,436



219,372 The activity in the allowance for credit losses is as follows:  Years ended December 312018


2017(Millions of yen)Balance at beginning of year


2,681



2,325Charge-offs


(1,284
)


(1,523
)Provision


938



1,436Translation adjustments and other


340



443Balance 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.  110




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  6.

Finance Receivables and Operating Leases (continued)  The following is a schedule by year of the future minimum lease payments to be received under financing
leases and noncancelable operating leases at December 31, 2018.  Financing leases


Operating leases(Millions of yen)Year ending December 31:2019


127,068



9,2072020


98,772



6,4092021


66,719



2,9172022


37,181



1,2022023


14,792



317Thereafter


6,666



60351,198



20,112 Canon has a syndication arrangement to sell its entire interests in finance receivables to a third-party financial
institution. The transactions under the arrangement are accounted for as sales in accordance with ASC 860 Transfers and Servicing. The finance receivables sold and derecognized from its consolidated balance sheet was
¥21,909 million during the year ended December 31, 2018 and the amount remained uncollected was ¥22,956 million as of December 31, 2018. This amount includes uncollected finance receivables which were sold before 2018.
Cash proceeds from the transaction are included in other, net under the cash flow from operating activities in the consolidated statement of cash flows. Canon continues to provide collection and administrative services for the financial institution.
The amount associated with the servicing liability measured at fair value was not material as of December 31, 2018. Canon also retains limited recourse obligations which cover credit defaults. The recourse obligation was not material as of
December 31, 2018. There were no significant transfers of finance receivables for the years ended December 31, 2017 and 2016.  7.

Acquisitions On March 17, 2016, Canon entered into a Shares and Other Securities Transfer
Agreement with Toshiba Corporation and acquired the share options for consideration of cash to acquire all the ordinary shares of Toshiba Medical Systems Corporation which was renamed as Canon Medical Systems Corporation (CMSC), as of
January 4, 2018, which was exercisable upon the clearances of necessary competition regulatory authorities. As such clearances were obtained, Canon exercised the share options and acquired all the ordinary shares of CMSC on December 19, 2016.
The acquisition date was December 19, 2016 and the purchase price was ¥665,498 million, which approximates the fair value at that date. The
acquisition was accounted for using the acquisition method of accounting. Acquisition-related costs were expensed as incurred and were not material. Under Phase V of the Excellent Global Corporation Plan, a five-year initiative that Canon has been implementing since 2016, embracing the challenge of
new growth through a grand strategic transformation has been set as a basic policy. With regard to strengthening and growing new businesses, and creating future businesses, a particularly important strategy, Canon intends to
develop medical system business within the realm of safety and security, as a next-generation pillar of growth. CMSC is one of the leading
global companies in the medical equipment industry. Within the field of medical X-ray CT systems in particular, CMSC is the overwhelming market share leader in Japan and has been steadily  111




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  7.

Acquisitions (continued)  increasing its global market share. By maximizing the combination of both companies management resources, Canon aims to solidify its business foundation for medical system that can
contribute to the world. The purchase price allocation was based on estimated fair values of the assets acquired and liabilities assumed at acquisition
date. Since the acquisition date of CMSC was near the balance sheet date in 2016, and CMSC is composed of various entities located around the world, the purchase price allocation was preliminary at December 31, 2016. The purchase price
allocation was finalized in the fourth quarter of 2017. The certain underlying inputs for inventories and intangible assets have been updated during the measurement period. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at acquisition date.  Preliminary


MeasurementPeriodAdjustment


Final(Millions of yen)Cash and cash equivalents


25,301







25,301Other current assets


169,545



(1,962
)


167,583Intangible assets


227,500



627



228,127Other noncurrent assets


42,975







42,975Total assets acquired


465,321



(1,335
)


463,986Current liabilities


199,223



(877
)


198,346Noncurrent liabilities


92,231



(1,049
)


91,182Total liabilities assumed


291,454



(1,926
)


289,528Noncontrolling interest


1,047







1,047Net identifiable assets acquired


172,820



591



173,411Goodwill


492,678



(591
)


492,087Net 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




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  8.

Goodwill and Other Intangible Assets Intangible assets subject to amortization acquired during the year
ended December 31, 2018, including those recorded from businesses acquired, totaled ¥48,004 million, which primarily consist of software of ¥36,859 million, and patent and developed technology of ¥6,109 million. The
weighted average amortization periods for intangible assets in total acquired during the year ended December 31, 2018 are approximately 6 years. The weighted average amortization periods for software, and patent and developed technology
acquired during the year ended December 31, 2018 are approximately 5 years and 11 years, respectively. Intangible assets subject to amortization
acquired during the year ended December 31, 2017, including those recorded from businesses acquired, totaled ¥35,112 million, which primarily consist of software of ¥33,437 million and customer relationships of
¥1,203 million. The weighted average amortization periods for intangible assets in total acquired during the year ended December 31, 2017 are approximately 5 years. The weighted average amortization periods for software and customer
relationships acquired during the year ended December 31, 2017 are approximately 5 years and 8 years, respectively. The components of intangible
assets subject to amortization at December 31, 2018 and 2017 were as follows:  December 31, 2018


December 31, 2017Grosscarryingamount


Accumulatedamortization


Grosscarryingamount


Accumulatedamortization(Millions of yen)Software


362,130



244,188



342,322



217,654Customer relationships


156,679



27,263



162,832



22,463Patents and developed technology


123,831



36,029



121,886



27,085Trademarks


44,449



12,062



48,823



9,890License fees


16,071



6,461



13,565



6,375Other


19,319



9,859



18,592



8,136722,479



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




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  8.

Goodwill and Other Intangible Assets (continued)  The changes in the carrying amount of goodwill by segment for the years ended December 31, 2018 and 2017
were as follows:  Year ended December 31, 2018Office


ImagingSystem


MedicalSystem


Industryand Others


Unallocated


Total(Millions of yen)Goodwill  gross


135,125



52,561



499,915



283,577







971,178Accumulated impairment losses


(22,069
)










(12,387
)






(34,456
)Balance at beginning of year


113,056



52,561



499,915



271,190







936,722Goodwill acquired during the year










1,521



6,106







7,627Translation adjustments and other


(5,966
)


(3,891
)


(540
)


(25,441
)






(35,838
)Goodwill  gross


127,860



48,670



500,896



263,513







940,939Accumulated impairment losses


(20,770
)










(11,658
)






(32,428
)Balance at end of year


107,090



48,670



500,896



251,855







908,511Year ended December 31, 2017Office


ImagingSystem


MedicalSystem


Industryand Others


Unallocated*1


Total(Millions of yen)Balance at beginning of year *3


124,993



49,034







269,719



492,678



936,424Goodwill acquired during the year


857



236







2,394







3,487Transfer*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







30,723Balance at end of year


113,056



52,561



499,915



271,190







936,722  *1
Canon did not complete the allocation of goodwill to the segments for impairment testing which was attributable
to the acquisition of CMSC as of December 31, 2016. Based on the realignment of Canons internal reporting and management structure, Canon newly established Medical System Business Unit effective at the beginning of the second quarter of
2017. Goodwill related to CMSC as well as goodwill related to certain medical business which was previously included in Industry and Others Business Unit have been transferred to Medical System Business Unit.  *2
After entering the commercial printing business through the acquisition of Océ N.V. in 2010, the market
environment surrounding this business has become significantly competitive and rapid technological changes have required increasing investments into R&D. These factors resulted in lower operating margin than expected, which led to the decline in
the estimated fair value of this business which was determined based on the income approach. As the result of the annual goodwill impairment test as of October 1, 2017, it was determined that the estimated fair value of commercial printing
business was less than its carrying value of the reporting unit. Based on the accounting policy described in Note 1, Canon recognized an impairment charge of ¥33,912 million representing the excess of the carrying amount over the reporting
units fair value.  *3
Based on the realignment of Canons internal reporting and management structure, from the beginning of the
third quarter of 2018, Canon has reclassified certain businesses from Office Business Unit to Industry  114




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  8.

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.  9.

Short-Term Loans and Long-Term Debt Short-term loans consisting of bank borrowings at December 31,
2018 and 2017 were ¥35,887 million and ¥33,398 million, respectively. The weighted average interest rate on short-term borrowings outstanding at December 31, 2018 and 2017 were 0.43% and 0.52%, respectively. Long-term debt consisted of the following:  December 312018


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



490,000Other debt *2


4,602



9,168364,602



499,168Less current portion


(2,640
)


(5,930
)361,962



493,238  *1
Canon entered into the unsecured revolving credit facility contracts expiring in December 2021. Canon prepaid
¥130,000 million of the loan with cash flows generated during the year ended December 31, 2018. The outstanding loans under the credit facilities are ¥360,000 million at a floating interest of 0.07% and Canon has no unused
credit facilities as of December 31, 2018.  *2
The other debt consisted of term-loans and capital lease obligations as of December 31, 2018 and 2017. The aggregate annual maturities of long-term debt outstanding at December 31, 2018 were as follows:  (Millions of yen)Year ending December 31:2019


2,6402020


6382021


360,8052022


4272023


82Thereafter


10364,602 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




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  10.

Trade Payables Trade payables are summarized as follows:  December 312018


2017(Millions of yen)Notes


68,140



81,002Accounts


284,349



299,652352,489



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




---

##### Table of Contents

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 plansDecember 31


December 312018


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



392,086Service cost


31,241



30,889



7,982



6,962Interest cost


5,419



5,689



8,691



8,691Plan participants contributions










1,535



1,644Actuarial (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
)


24,909Projected benefit obligations at end of year


927,006



929,630



385,949



423,579Change in plan assets:Fair value of plan assets at beginning of year


735,513



667,436



254,020



224,939Actual return on plan assets


(38,010
)


47,376



(6,042
)


14,262Employer contributions


12,651



43,468



22,393



7,160Plan participants contributions










1,535



1,644Benefits paid


(27,459
)


(23,967
)


(10,135
)


(7,884
)Acquisition






1,223







Settlements






(23
)


(1,150
)


Foreign currency exchange rate changes










(11,979
)


13,899Fair value of plan assets at end of year


682,695



735,513



248,642



254,020Funded 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 plansDecember 31


December 312018


2017


2018


2017(Millions of yen)


(Millions of yen)Other assets


1,536



1,695



1,306



1,215Accrued 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




---

##### Table of Contents

Canon Inc. and Subsidiaries 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 plansDecember 31


December 312018


2017


2018


2017(Millions of yen)


(Millions of yen)Actuarial loss


267,355



221,106



95,121



105,883Prior 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 plansDecember 31


December 312018


2017


2018


2017(Millions of yen)


(Millions of yen)Accumulated benefit obligation


893,154



894,329



371,653



402,390 The projected benefit obligations and the fair value of plan assets for the pension plans with projected benefit obligations
in excess of plan assets, and the accumulated benefit obligations and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are as follows:  Japanese plans


Foreign plansDecember 31


December 312018


2017


2018


2017(Millions of yen)


(Millions of yen)Plans with projected benefit obligations in excess of plan assets:Projected benefit obligations


918,736



924,536



384,167



420,383Fair value of plan assets


672,889



728,724



245,554



249,609Plans with accumulated benefit obligations in excess of plan assets:Accumulated benefit obligations


891,204



889,652



369,215



394,840Fair value of plan assets


670,826



728,724



244,826



245,247  118




---

##### Table of Contents

Canon Inc. and Subsidiaries 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 plansYears ended December 31


Years ended December 312018


2017


2016


2018


2017


2016(Millions of yen)


(Millions of yen)Service cost


31,241



30,889



29,367



7,982



6,962



6,816Interest cost


5,419



5,689



8,238



8,691



8,691



8,792Expected 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
)


85Amortization 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 plansYears ended December 31


Years ended December 312018


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
)


47,365Current 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




---

##### Table of Contents

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 plansDecember 31


December 312018


2017


2018


2017Discount 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 plansYears ended December 31


Years ended December 312018


2017


2016


2018


2017


2016Discount 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




---

##### Table of Contents

Canon Inc. and Subsidiaries 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, 2018Japanese plans


Foreign plansLevel 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











8,567Pooled funds (b)






137,712







137,712







49,312







49,312Debt securities:Government bonds (c)


137,858











137,858















Municipal bonds






1,483







1,483







2,642







2,642Corporate bonds






12,595







12,595







6,318







6,318Pooled funds (d)






140,712







140,712







59,419







59,419Mortgage backed securities (and other asset backed securities)






8,489







8,489















Life insurance company general accounts






123,747







123,747







9,019







9,019Other assets






30,009



1,451



31,460







95,844







95,844Investment measured at net asset value














15,905















17,521210,592



454,747



1,451



682,695



8,567



222,554







248,642  121




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  11.

Employee Retirement and Severance Benefits (continued) Plan assets (continued)  December 31, 2017Japanese plans


Foreign plansLevel 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











32,240Pooled funds (f)






164,946







164,946







73,968







73,968Debt securities:Government bonds (g)


138,092











138,092



9,343











9,343Municipal bonds






1,166







1,166







2,901







2,901Corporate bonds






15,246







15,246







22,045







22,045Pooled funds (h)






130,507







130,507







25,821







25,821Mortgage backed securities (and other asset backed securities)






8,076







8,076







3







3Life insurance company general accounts






126,985







126,985







8,683







8,683Other assets






43,070







43,070







73,320







73,320Investment measured at net asset value














15,399















5,696230,118



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




---

##### Table of Contents

Canon Inc. and Subsidiaries 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



12,0772020


36,896



12,2142021


38,524



13,2212022


41,775



13,9272023


43,119



14,5622024  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




---

##### Table of Contents

Canon Inc. and Subsidiaries 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, 2018Japanese


Foreign


Total(Millions of yen)Income before income taxes


241,474



121,418



362,892Income taxes:Current


75,556



32,443



107,999Deferred


(6,552
)


(5,297
)


(11,849
)69,004



27,146



96,150  Year ended December 31, 2017Japanese


Foreign


Total(Millions of yen)Income before income taxes


276,149



77,735



353,884Income taxes:Current


80,225



35,402



115,627Deferred


(7,453
)


(10,150
)


(17,603
)72,772



25,252



98,024  Year ended December 31, 2016Japanese


Foreign


Total(Millions of yen)Income before income taxes


135,131



109,520



244,651Income taxes:Current


47,687



27,806



75,493Deferred


4,126



3,062



7,18851,813



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




---

##### Table of Contents

Canon Inc. and Subsidiaries 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 312018


2017


2016Japanese 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



0.8Income 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










1.4Effect of enacted changes in U.S. tax laws






(3.6
)


Other


0.8



1.8



5.4Effective 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 312018


2017(Millions of yen)Other assets


160,541



150,854Other noncurrent liabilities


(70,336
)


(90,010
)90,205



60,844  125




---

##### Table of Contents

Canon Inc. and Subsidiaries 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 312018


2017(Millions of yen)Deferred tax assets:Inventories


10,739



11,921Accrued business tax


2,361



4,705Accrued pension and severance cost


105,933



98,114Research and development  costs capitalized for tax purposes


4,690



5,383Property, plant and equipment


33,738



33,488Accrued expenses


28,015



30,126Net operating losses carried forward


28,549



29,006Other


38,683



38,526252,708



251,269Less valuation allowance


(30,734
)


(30,783
)Total deferred tax assets


221,974



220,486Deferred 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


5,854After one year through five years


26,802After five years through ten years


38,687After ten years through twenty years


48,642Indefinite period


66,129Total


186,114  126




---

##### Table of Contents

Canon Inc. and Subsidiaries 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 312018


2017


2016(Millions of yen)Balance at beginning of year


10,282



7,318



6,056Additions for tax positions of the current year


45



2,956



2,741Additions 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




---

##### Table of Contents

Canon Inc. and Subsidiaries 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




---

##### Table of Contents

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:  Foreigncurrencytranslationadjustments


Unrealizedgains andlosses onsecurities


Gains andlosses onderivativeinstruments


Pensionliabilityadjustments


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
)


258Other 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



60,330Amounts 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



56,653Balance 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



3,889Net 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




---

##### Table of Contents

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 fromaccumulated other comprehensive income (loss) *1Year endedDecember 31,2018


Year endedDecember 31,2017


Year endedDecember 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, net37



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 taxes949



4,040



(3,841
)

Consolidated net income(4
)


(26
)


(21
)

Net income attributable to noncontrolling interests945



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 taxes3,154



5,173



148


Consolidated net income(69
)


(268
)


(49
)

Net income attributable to noncontrolling interests3,085



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




---

##### Table of Contents

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 31Before-taxamount


Tax (expense)or benefit


Net-of-taxamount(Millions of yen)2018:Foreign currency translation adjustmentsAmount 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
)


949Net change during the year


755



(267
)


488Pension 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
)


3,154Net change during the year


(47,936
)


17,366



(30,570
)Other comprehensive income (loss)


(141,314
)


17,945



(123,369
)2017:Foreign currency translation adjustmentsAmount arising during the year


47,825



(708
)


47,117Reclassification adjustments for gains and losses realized in net income


(39
)


12



(27
)Net change during the year


47,786



(696
)


47,090Net unrealized gains and losses on securities:Amount arising during the year


5,100



(1,717
)


3,383Reclassification 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
)


4,040Net change during the year


3,692



(1,104
)


2,588Pension liability adjustments:Amount arising during the year


20,991



(4,957
)


16,034Reclassification adjustments for gains and losses realized in net income


7,005



(1,832
)


5,173Net change during the year


27,996



(6,789
)


21,207Other comprehensive income (loss)


66,102



(4,579
)


61,523  131




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  14.

Other Comprehensive Income (Loss) (continued)  Years ended December 31Before-taxamount


Tax (expense)or benefit


Net-of-taxamount(Millions of yen)2016:Foreign currency translation adjustmentsAmount arising during the year


(108,280
)


521



(107,759
)Reclassification adjustments for gains and losses realized in net income


139



(46
)


93Net change during the year


(108,141
)


475



(107,666
)Net unrealized gains and losses on securities:Amount arising during the year


1,184



(375
)


809Reclassification adjustments for gains and losses realized in net income


282



(94
)


188Net change during the year


1,466



(469
)


997Net gains and losses on derivative instruments:Amount arising during the year


1,619



(726
)


893Reclassification 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



148Net 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




---

##### Table of Contents

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


ImagingSystem


MedicalSystem


Industry andOthers


Corporate andeliminations


Consolidated(Millions of yen)2018:Revenue recognized at a point in time


1,286,100



993,658



305,457



599,766



(106,318
)


3,078,663Revenue recognized over time


521,201



14,507



132,121



205,445







873,274Total


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




---

##### Table of Contents

Canon Inc. and Subsidiaries 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, 2018As Reported


Balance underhistoricalaccountingpolicy


Effect ofChange(Millions of yen)AssetsTrade 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



50,799Other assets


397,974



397,949



25Total assets


4,899,465



4,896,069



3,396Liabilities and equityAccrued expenses


321,137



319,416



1,721Other current liabilities


276,237



274,741



1,496Total liabilities


1,881,552



1,878,335



3,217Retained earnings


3,508,908



3,508,704



204Noncontrolling interests


190,311



190,336



(25
)Total equity


3,017,913



3,017,734



179  134




---

##### Table of Contents

Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  15.

Revenue (continued)  Consolidated Statement of Income  For the year ended December 31, 2018As Reported


Amount underhistoricalaccountingpolicy


Effect ofChange(Millions of yen)Net salesProducts and Equipment


3,194,724



3,383,566



(188,842
)Services


757,213



567,582



189,6313,951,937



3,951,148



789Cost of salesProducts and Equipment


1,762,171



1,783,798



(21,627
)Services


354,212



216,513



137,6992,116,383



2,000,311



116,072Gross 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



417Income before income taxes


362,892



362,475



417Income taxes


96,150



96,094



56Consolidated net income


266,742



266,381



361Less: Net income attributable to noncontrolling interests


13,987



13,936



51Net 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




---

##### Table of Contents

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 endedDecember 31, 2018Expected term of option (in years)


6.0Expected volatility


23.02
%Dividend yield


4.14
%Risk-free interest rate


(0.07
%)  136




---

##### Table of Contents

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-averageexercise price


Weighted-averageremainingcontractual term


Aggregateintrinsic value(Yen)


(Year)


(Millions of yen)Outstanding at January 1, 2016


1,296,000



4,263



0.4



Exercised






Forfeited/Expired


(693,000
)


4,500Outstanding at December 31, 2016


603,000



3,990



0.2



Exercised






Forfeited/Expired


(603,000
)


3,990Outstanding at December 31, 2017














Granted


74,000



1Exercised






Forfeited/Expired






Outstanding at December 31, 2018


74,000



1



29.3



222Exercisable 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 312018


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



1,092,070,680Effect 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



137.95Diluted


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




---

##### Table of Contents

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 312018


2017(Millions of yen)To sell foreign currencies


230,505



272,563To buy foreign currencies


30,816



46,168  138




---

##### Table of Contents

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 valueDecember 31Balance sheet location

2018


2017(Millions of yen)Assets:Foreign exchange contracts

Prepaid expenses and other current assets


521



255Liabilities:Foreign exchange contracts

Other current liabilities


323



367 Derivatives not designated as hedging instruments  Fair valueDecember 31Balance sheet location

2018


2017(Millions of yen)Assets:Foreign exchange contracts

Prepaid expenses and other current assets


2,622



289Liabilities: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 31Gain (loss)recognized inOCI (effectiveportion)


Gain (loss) reclassified fromaccumulated OCI intoincome (effective portion)


Gain (loss) recognized in income(ineffective portion and
amountexcluded 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




---

##### Table of Contents

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 derivativeYears ended December 31Location


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


29,8172020


23,4022021


17,8372022


13,5652023


10,165Thereafter


20,298Total 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




---

##### Table of Contents

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 312018


2017(Millions of yen)Balance at beginning of year


17,452



13,168Additions


18,870



18,893Utilization


(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 312018


2017Carryingamount


Estimatedfair value


Carryingamount


Estimatedfair value(Millions of yen)Long-term debt, including current installments


(364,602
)


(364,570
)


(499,168
)


(499,126
)  141




---

##### Table of Contents

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




---

##### Table of Contents

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, 2018Level 1


Level 2


Level 3


Total(Millions of yen)Assets:Cash and cash equivalents






70,500







70,500Short-term investments:Available-for-sale:Corporate bonds


630











630Investments:Available-for-sale:Government bonds














Corporate bonds














Fund trusts and others


630



408







1,038Equity securities


13,787











13,787Prepaid expenses and other current assets:Derivatives






3,143







3,143Total assets


15,047



74,051







89,098Liabilities:Other current liabilities:Derivatives






766







766Total liabilities






766







766December 31, 2017Level 1


Level 2


Level 3


Total(Millions of yen)Assets:Cash and cash equivalents






70,500







70,500Short-term investments:Available-for-sale:Corporate bonds


1,222











1,222Investments:Available-for-sale:Government bonds


289











289Corporate bonds


605



217







822Fund trusts


13



111







124Equity securities


20,901











20,901Prepaid expenses and other current assets:Derivatives






544







544Total assets


23,030



71,372







94,402Liabilities:Other current liabilities:Derivatives






3,259







3,259Total liabilities






3,259







3,259  143




---

##### Table of Contents

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, 2017Total loss


Fair valueLevel 1


Level 2


Level 3


Total(Millions of yen)Asset:Goodwill


(33,912
)










29,370



29,370 Goodwill was classified as Level 3 items and valued based on an income approach using unobservable inputs. Canon
performed the annual goodwill impairment test as of October 1, 2017, which indicated that the fair value of the reporting unit was less than its carrying value. Canon recognized the impairment charge for the amount representing the excess of
the carrying amount over the reporting units fair value. The fair value for the reporting unit was measured based on the discounted cash flow method with 6.0% of weighted average cost of capital and estimated future cash flows. Future cash
flows are based on managements estimates of projected revenues, gross profits, operating expenses, a long-term growth rate, taking into consideration industry trends and market conditions.  22.

Segment Information Canon operates its business in four segments: the Office Business Unit, the Imaging
System Business Unit, the Medical System Business Unit, and the Industry and Others Business Unit, which are based on the organizational structure and information reviewed by Canons management to evaluate results and allocate resources. Based on the realignment of Canons internal reporting and management structure, from the beginning of the third quarter of 2018, Canon has reclassified
certain businesses from Office Business Unit to Industry and Others Business Unit. Segment information for the year ended December 31, 2018 have reflected this change. Prior period amounts also have been restated. Canon newly established
Medical System Business Unit effective at the beginning of the second quarter of 2017, and certain businesses included in Industry and Others Business Unit have been reclassified. Operating results for the year ended December 31, 2017 have been
reclassified and for the year ended December 31, 2016 have not been restated since they have not been material. Total assets as of December 31, 2016 have been restated.  144




---

##### Table of Contents

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 solutionsImaging 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 / CalculatorsMedical 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 equipmentIndustry 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




---

##### Table of Contents

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


ImagingSystem


MedicalSystem


Industry andOthers


Corporate andeliminations


Consolidated(Millions of yen)2018:Net sales:External customers


1,804,002



1,007,365



437,305



703,265







3,951,937Intersegment


3,299



800



273



101,946



(106,318
)


Total


1,807,301



1,008,165



437,578



805,211



(106,318
)


3,951,937Operating cost and expenses


1,586,497



891,210



408,739



739,665



(17,126
)


3,608,985Operating profit


220,804



116,955



28,839



65,546



(89,192
)


342,952Other income (deductions)


8,383



4,299



640



2,061



4,557



19,940Income before income taxes


229,187



121,254



29,479



67,607



(84,635
)


362,892Total assets


923,261



393,004



247,282



383,568



2,952,350



4,899,465Depreciation and amortization


64,964



40,541



9,365



38,582



98,102



251,554Capital expenditures


48,127



25,796



7,454



24,091



95,036



200,5042017:Net sales:External customers


1,802,542



1,135,584



434,985



706,904







4,080,015Intersegment


2,240



604



1,202



85,946



(89,992
)


Total


1,804,782



1,136,188



436,187



792,850



(89,992
)


4,080,015Operating cost and expenses


1,615,521



962,663



414,246



752,122



13,858



3,758,410Operating profit


189,261



173,525



21,941



40,728



(103,850
)


321,605Other income (deductions)


6,108



2,388



564



1,339



21,880



32,279Income before income taxes


195,369



175,913



22,505



42,067



(81,970
)


353,884Total assets


946,213



387,088



238,824



376,064



3,250,102



5,198,291Depreciation and amortization


72,346



41,695



5,212



39,736



102,892



261,881Impairment losses on goodwill


21,721











12,191







33,912Capital expenditures


46,769



28,508



8,963



16,620



80,529



181,3892016:Net sales:External customers


1,743,039



1,094,291







564,157







3,401,487Intersegment


2,957



998







82,326



(86,281
)


Total


1,745,996



1,095,289







646,483



(86,281
)


3,401,487Operating cost and expenses


1,583,588



953,567







641,082



6,825



3,185,062Operating profit


162,408



141,722







5,401



(93,106
)


216,425Other income (deductions)


7,467



2,691







1,658



16,410



28,226Income before income taxes


169,875



144,413







7,059



(76,696
)


244,651Total assets


947,602



391,661



204,755



354,602



3,239,909



5,138,529Depreciation and amortization


76,500



47,386







42,872



83,338



250,096Capital expenditures


71,841



25,564







29,694



81,280



208,379  146




---

##### Table of Contents

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 312018


2017


2016(Millions of yen)OfficeMonochrome copiers


280,035



287,823



289,532Color copiers


403,522



405,576



386,193Printers


702,378



702,491



664,846Others


418,067



406,652



402,468Total


1,804,002



1,802,542



1,743,039Imaging SystemCameras


599,578



702,598



666,868Inkjet printers


318,382



333,721



329,066Others


89,405



99,265



98,357Total


1,007,365



1,135,584



1,094,291Medical SystemDiagnostic equipment


437,305



434,985



Industry and OthersLithography equipment


199,722



193,113



121,090Others


503,543



513,791



443,067Total


703,265



706,904



564,157Consolidated


3,951,937



4,080,015



3,401,487  147




---

##### Table of Contents

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



706,979Americas


1,076,402



1,107,515



963,544Europe


1,015,428



1,028,415



913,523Asia and Oceania


990,530



1,059,257



817,441Total


3,951,937



4,080,015



3,401,487Long-lived assets:Japan


1,046,065



1,081,522



1,163,374Americas


129,989



141,937



147,129Europe


169,357



174,889



166,734Asia and Oceania


136,602



149,244



164,007Total


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




---

##### Table of Contents

Canon Inc. and Subsidiaries Schedule II Valuation and Qualifying Accounts  Balance atbeginningof period


Addition-charged toincome


Deductionbad debtswritten off


Translationadjustmentsand other


Balanceat end ofperiod(Millions of yen)Year ended December 31, 2018:Allowance for doubtful receivablesTrade receivables


13,378



1,347



(2,789
)


(459
)


11,477Finance receivables


2,681



938



(1,284
)


340



2,675Year ended December 31, 2017:Allowance for doubtful receivablesTrade receivables


11,075



3,574



(1,787
)


516



13,378Finance receivables


2,325



1,436



(1,523
)


443



2,681Year ended December 31, 2016:Allowance for doubtful receivablesTrade receivables


12,077



1,460



(1,824
)


(638
)


11,075Finance receivables


2,878



398



(978
)


27



2,325  149




---

##### Table of Contents

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 Act13

Certification of Chairman and CEO and Executive Vice President and CFO pursuant to Section 906 of the Sarbanes-Oxley Act  150




---

##### Table of Contents

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 TanakaToshizo TanakaExecutive Vice President & CFOCanon Inc.30-2, Shimomaruko 3-chome,Ohta-ku, Tokyo 146-8501, Japan
 Date     June 26, 2019  151