UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM20-F

OR

For the fiscal year ended December 31, 20132016

OR

For the transition period from                    to                    

OR

Date of event requiring this shell company report                    

Commission file number001-15122

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, Shimomaruko3-chome,Ohta-ku, Tokyo146-8501, Japan

(Address (Address of principal executive offices)

Shinichi Aoyama, +81-3-3758-2111, +81-3-5482-9680, Eiji Shimizu,+81-3-3758-2111,+81-3-5482-9680,30-2, Shimomaruko3-chome,Ohta-ku, Tokyo146-8501, 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.

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)

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, 2013, 1,136,999,4042016, 1,092,068,154 shares of common stock, including 23,634,42420,126,909 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  þ☑    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  þ☑

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  þ☑    No  ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ☑    No  ¨☐

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

Large accelerated filer  ☑            Acceleratedþfiler  ☐            Non-accelerated Accelerated filer  ¨            Non-accelerated filer  ¨☐

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

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 inRule 12b-2 of the Exchange Act).    Yes  ¨☐    No  þ☑

TABLE OF CONTENTS

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ii

iii

CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION

All information contained in this Annual Report is as of December 31, 20132016 unless otherwise specified.

References in this discussion to the “Company” are to Canon Inc. and, unless otherwise indicated, references to the financial condition or operating results of “Canon” refer to Canon Inc. and its consolidated subsidiaries.

On March 14, 2014,10, 2017, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥101.46=¥115.02= U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report “2013”“2016” refers to the Company’s fiscal year ended December 31, 2013,2016, and other fiscal years of the Company are referred to in a corresponding manner.

FORWARD-LOOKING INFORMATION

This Annual Report contains forward-looking statements and information relating to Canon that are based on beliefs of its management as well as assumptions made by and information currently available to Canon Inc. When used in this Annual Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” and“project,” “should” and similar expressions, as they relate to Canon or its management, are intended to identify forward-looking statements. Such statements, which include, but are not limited to, statements contained in “Item 3. Key Information-Risk Factors”,Factors,” “Item 4. Information on the Company”,Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”, reflect the current views and assumptions of the Company with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results, performance or achievements of Canon to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by Canon’s targeted customers, inability to meet efficiency and cost reduction objectives, changes in business strategy and various other factors, both referenced and not referenced in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Canon Inc. does not intend or assume any obligation to update these forward-looking statements.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected financial data

The following information should be read in conjunction with and qualified in its entirety by reference to the Consolidated Financial Statements of Canon Inc. and subsidiaries, including the notes thereto, included in this Annual Report.

Notes:

The following table provides the noon buying rates for Japanese yen in New York City as reported by the Federal Reserve Bank of New York expressed in Japanese yen per U.S.$1 during the periods indicated and the high and low noon buying rates for Japanese yen per U.S.$1 during the months indicated. On March 14, 2014,10, 2017, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥101.46¥115.02 = U.S.$1.

B. Capitalization and indebtedness

Not applicable.

C. Reasons for the offer and use of proceeds

Not applicable.

D. Risk factors

Canon is one of the world’s leading manufacturers of office multifunction devices (“MFDs”), plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment.

Primarily because of the nature of the business and geographic areas in which Canon operates and the highly competitive nature of the industries to which it belongs, Canon is subject to a variety of risks and uncertainties, including, but not limited to, the following:

Risks Related to Economic Environment

Economic trends in Canon’s major markets may adversely affect its operating results.

As a result of the economic downturnCanon’s business activities are deployed globally in Canon’s major markets, including Japan, the United States, Europe, Asia, and Asia, declinesin other regions. Declines in consumption and restrained investment due to economic downturn in these major markets may affect Canon’s operating results. The operating results for products such as office and industrial equipment are affected by the financial results of its corporate customers, and deterioration of their financial results has caused and may continue to cause customers to limit capital investments. Demand for Canon’s consumer products, such as cameras and inkjet printers, is discretionary. Fluctuating inventory levels, rapidRapid price declines owing to intensifying competition and declines in levels of consumer spending and corporate investment could adversely affect Canon’s operating results and financial position.

Canon’s operating and financing activities expose it to foreign currency exchange and interest rate risks that may adversely affect its revenues and profitability.

Canon derives a significant portion of its revenue from its international operations. As a result, Canon’s operating results and financial position have been and may continue to be significantly affected by changes in the value of the yen versus foreign currencies. Sales of Canon’s products denominated in foreign currencies have been and may continue to be adversely affected by the strength of the yen against foreign currencies. Conversely, a strengthening of foreign currencies against the yen will generally be favorable to Canon’s foreign currency sales. Canon’s consolidated financial statements are presented in yen. As such, the yen value of Canon’s assets and liabilities arising from foreign currency transactions have fluctuated and may continue to fluctuate. Unpredictable fluctuations may have certain effects on Canon’s consolidated financial statements. Although Canon strives to mitigate the effects of foreign currency fluctuations arising from its international business activities, Canon’s consolidated financial statements have been and may continue to be affected by currency translations from the financial statements of Canon’s foreign subsidiaries and affiliates, which are denominated in various foreign currencies. Canon is also exposed to the risk of interest rate fluctuations, which may affect the value of Canon’s financial assets and liabilities.

Canon may be adversely affected by fluctuations in the stock and bond markets.

Canon’s assets include investments in publicly traded securities. As a result, Canon’s operating results and general financial position may be affected by price fluctuations in the stock and bond markets. Volatility in financial markets and overall economic uncertainty create the risk that the actual amounts realized in the future on Canon’s investments could differ significantly from the fair values currently assigned to them. In addition, if valuations of investment assets decrease because of conditions in stock or bond markets, for example, additional funding and accruals with respect to Canon’s pension and other obligations may be required, and such funding and accruals may adversely affect Canon’s operating results and consolidated financial condition.

High prices of raw materials could negatively impact Canon’s profitability.

Increases in prices for raw materials that Canon uses in manufacturing such as steel,non-ferrous metals and petrochemical products may lead to higher production costs and Canon may not be able to pass these increased production costs onto the sales prices of its products. Such increases in prices for raw materials could adversely affect Canon’s operating results.

Risks Related to Canon’s Industries and Business Operations

A substantial portion of Canon’s business activity is conducted outside Japan, exposing Canon to the risks of international operations.

A substantial portion of Canon’s business activity is conducted outside Japan. There are a number of risks inherent in doing business in international markets, including the following:

Any inability to manage the risks inherent in Canon’s international activities could adversely affect its business and operating results.

Canon has invested and will continue to invest actively in next-generation technologies. If the markets for these technologies do not develop as Canon expects, or if its competitors produce these or competing technologies in a more timely or effective manner, Canon’s operating results may be materially adversely affected.

Canon has made and will continue to make investments in next-generation technology research and development initiatives. Canon’s competitors may achieve research and development breakthroughs in these technologies more quickly than Canon, or may achieve advances in competing technologies that render products under development by Canon uncompetitive. For several years, Canon has continued its investments in development and manufacturing in order to keep pace with technological evolution. If Canon’s business strategies diverge from market demands, Canon may not recover some or all of its investments, or may lose business opportunities, or both, which may have a material adverse effect on Canon’s operating results.

In addition, Canon has sought to develop production technology and equipment to accelerate the automation of its manufacturing processes andin-house production of key devices. If Canon cannot effectively implement these techniques, it may fail to realize cost advantages or product differentiation, and consequently lose business opportunities, which may adversely affect Canon’s operating results. While differentiation in technology and product development is an important part of Canon’s strategy, Canon must also accurately assess the demand for and commercial acceptance of new technologies and products that it develops. If Canon pursues technologies or develops products that are not well received by the market, its operating results could be adversely affected.

Entering new business areas through the development of next-generation technologies is a focal point of Canon’s corporate strategy. To the extent that Canon enters into such new business areas, Canon may not be able to establish a successful business model or may face severe competition with new competitors. If such events occur, Canon’s operating results may be adversely affected.

If Canon does not effectively manage transitions in its products and services, its operating results may decline.

Many of the business areas in which Canon competes are characterized by rapid technological advances in hardware performance, software functionality and product features; frequent introduction of new products; short product life cycles; and continued qualitative improvements to current products at stable price levels. Canon has sought to invest substantial resources into introducing appealing, innovative and cost-competitive new products. There are several risks inherent in introduction of new products and services, such as delays in development or manufacturing, unsuitable product quality during the introductory period, variations in manufacturing costs, negative impact on sales of current products, uncertainty in predicting customer demand and difficulty in effectively managing inventory levels. Moreover, if Canon is unable to respond quickly to technological innovations with respect to information systems and networks, Canon’s revenue may be significantly affected as a result of delays associated with the incorporation into its products of such new information technologies.

Canon’s revenues and gross margins also may suffer adverse effects because of the timing of product or service introductions by its competitors. This risk is exacerbated when a competitor introduces a new product immediately prior to Canon’s introduction of a similar product. If any of these risks materialize, future demand for Canon’s products and services could be reduced, and its operating results could decline.

Changes in the print environment may affect Canon’s businessbusiness.

In the business machines market for such products as MFDs, copying machines and printers, customers are increasingly looking for ways to cut costs while protecting the environment. From this perspective, Managed Print Services (“MPS”), which aim to optimize printing efficiencies in the office, have become popular in recent years. This trend could lead to a decrease in business machine print volumes.

In addition, the popularity of tablet PCs could also lead to a decrease in customer print opportunities. If Canon is unable to supply products and services that respond to these types of market trends, its operating results may be adversely affected.

Canon’s digital camera business operates in a highly competitive environment.

“Mirrorless” cameras are interchangeable lens cameras which, because they do not incorporate a mirror mechanism, are more compact and lightweight than digital single-lens-reflex (“SLR”) cameras. The growth of the mirrorless camera market has the potential to adversely affect the market for digital SLR cameras, in which Canon boasts the top market share. If the mirrorless camera market continues to grow and Canon fails to gain a leading share of that market or the digital SLR camera market shrinks relative to that market, our revenues and our overall presence in the camera market may be adversely affected.

Meanwhile, the smartphone market has been growing dramatically on a global scale. Smartphones allow users not only to take photos, but also to retouchshare them instantly on SNSs and to upload them to SNSs (“Social networking services”).it changed people’s photo taking behavior. If Canon’s compact digital cameras become less appealing compared to smartphones,cannot clearly state their advantages over smartphones’ cameras, Canon could suffer from an erosion of the compact digital camera market, with a resulting adverse effect on operating results.

Because the semiconductor lithography equipment and flat-panel-display (“FPD”) industry is highly cyclical, Canon may be adversely affected by any downturn in demand for semiconductor devices and FPD panels.

The semiconductor lithography equipment and FPD lithography equipment industry is characterized by fluctuating business cycles, the timing, length and volatility of which are difficult to predict. Recurring periods of oversupply of semiconductor devices and FPD panels have at times led to significantly reduced demand for capital equipment, including the semiconductor lithography equipment and FPD lithography equipment that Canon produces. Despite this cyclicality, Canon must maintain significant levels of research and development expenditures to remain competitive. A future cyclical downturn in the lithography equipment industry and related fluctuations in the demand for capital equipment could cause cash flow from sales to fall below the level necessary to offset Canon’s expenditures, including those arising from research and development, and could consequently have a material adverse effect on Canon’s operating results and financial condition.

Canon may not be able to adequately anticipate developments related to its medical device business, including changes to the market environment and developments related to medical device approvals, certifications and health insurance coverage.

Regarding the market for Canon’s medical equipment sold to medical institutions, mainly in the area of diagnostic imaging, it takes a long time to design, research, develop and commercialize products, because it is necessary to prove the clinical effectiveness of new technologies and new products, and obtain regulatory approvals and certifications prior to sale in individual countries. The global market for medical devices is expanding due to developing medical infrastructure in emerging countries, but in developed countries issues such as aging populations, rising health insurance costs and pressure to cut medical device costs may adversely affect Canon’s medical device business.

Canon invests in research and development of new medical device technologies based on detailed analysis of the potential technical and business prospects for such technologies. However, despite these investments, Canon may become less competitive if it cannot anticipate whether new technologies will have the expected clinical effects or developments in the market or regulatory environment for such technologies. Canon may need to significantly modify its business plans in response to these challenges and it may not be able to generate the expected returns on its investments in research and development of medical devices.

Canon’s business is subject to changes in the sales environment.

A substantial portion of Canon’s market share is concentrated in a relatively small number of large distributors, particularly in Europe and the United States. Canon’s product sales to these distributors constitute a significant percentage of its overall sales. As a result, any disruptions in its relationships with these large distributors in specific sales territories could adversely affect Canon’s ability to meet its sales targets. Any increase in the concentration of sales to these large distributors could result in a reduction of Canon’s pricing

power and adversely affect its profits. In addition, the rapid proliferation of Internet-based businesses may render conventional distribution channels obsolete. These, and other changes in Canon’s sales environment, could adversely affect Canon’s operating results.

In addition, Canon depends on Hewlett-PackardHP Inc. for a significant part of its business. As a result, Canon’s business and operating results may be affected by the policies, business and operating results of Hewlett-Packard.HP Inc. Any decision by Hewlett-PackardHP Inc. management to limit or reduce the scope of its relationship with Canon would adversely affect Canon’s business and operating results.

Canon depends on specific outside suppliers for certain key components.

Canon relies on specific outside suppliers that meet Canon’s strict criteria for quality, efficiency and environmental friendliness for critical components and special materials used in its products. In some cases, Canon may be forced to discontinue production of some or all of its products if the specific outside suppliers that

supply key components and special materials across Canon’s product lines experience unforeseen difficulties, or if such parts and special materials suffer from quality problems or are in short supply. Further, the prices of components and special materials purchased from specific outside suppliers may rise, triggered by the imbalance of supply and demand along with other factors. If such events occur as an outcome of the dependency on outside vendors, Canon’s operating results may be adversely affected.

Canon may be subject to antitrust-related lawsuits, investigations or proceedings, which may adversely affect its operating results or reputation.

A portion of Canon’s net sales consists of sales of supplies and the provision of services after the initial equipment placement. As these supplies and services have become more commoditized, the number of competitors in these markets has increased. Canon’s success in maintaining these post-placement sales will depend on its ability to compete successfully with these competitors, some of which may offer lower-priced products or services. Despite the increase in competitors, Canon currently maintains a high market share in the market for supplies. Accordingly, Canon may be subject to lawsuits, investigations or proceedings under relevant antitrust laws and regulations. Any such lawsuits, investigations or proceedings may lead to substantial costs and have an adverse effect on Canon’s operating results or reputation.

Cyclical patterns in sales of Canon’s products make planning and inventory management difficult and future financial results less predictable.

Canon generally experiences seasonal trends in the sales of its consumer-oriented products. Canon has little control over the various factors that produce these seasonal trends. Accordingly, it is difficult to predict short-term demand, placing pressure on Canon’s inventory management and logistics systems. If product supply from Canon exceeds actual demand, excess inventory will put downward pressure on selling prices and raise inefficiency in cash management, potentially reducing Canon’s revenue. Alternatively, if actual demand exceeds the supply of products, Canon’s ability to fulfill orders may be limited, which could adversely affect market share and net sales and increase the risk of unanticipated variations in its operating results.

Canon’s cooperation and alliances with, strategic investments in, and acquisitions of, third parties may not produce successfulthe anticipated improvements to its financial results. The unexpected emergence of strong competitors through mergers and acquisitions may affect Canon’s business environment.

Canon makes strategic acquisitions of other companies for the purpose of business expansion and Canon is also engaged in alliances, joint ventures, and strategic investments with other companies. Canon also makes strategic acquisitions of other companies. These activities can help Canon to promote Canon’s technological development process and expandgrow its customer base.business. However, weak business trends or disappointing performance by partners or acquired companies may adversely affect the success of such activities. In addition, theThe success of such activities may be adversely affected by the inability of Canon and its partners or acquired companies to successfully define and reach common objectives. Even if Canon and its partners or acquired companies succeed in designing a structure

that allows for the definition and achievement of common objectives, synergies may not be created between the businesses of Canon and its partners or acquired companies. IntegrationIn addition, integration of operations may take more time than expected. In connection with its acquisitions, Canon recognizes goodwill and other intangible fixed assets on its consolidated balance sheet, and the amounts recognized may be impaired if there is a decline of future cash flow. An unexpected cancellation of a major business alliance may disrupt Canon’s overall business plans and may also result in a delayed return on, or reduced recoverability of, the investment, adversely affecting Canon’s operating results and financial position.

In addition, the unexpected emergence of strong competitors through mergers and acquisitions or the formation of competitive business alliances may change the competitive environment of the business areas in which Canon participates, thereby affecting Canon’s future operating results.

Canon depends on efficient logistics services to distribute its products worldwide.

Canon depends on efficient logistics services to distribute its products worldwide. Problems with Canon’s computerized logistics systems, an outbreak of war or strife within Canon’s operating regions or regional labor

disputes, such as a dockworkers’ strike, could lead to a disruption of Canon’s operations and result not only in increased logistical costs, but also in the loss of sales opportunities owing to delays in delivery. Moreover, because demand for Canon’s consumer products may fluctuate throughout the year, transportation means, such as cargo vessels or air freight, and warehouse space must be appropriately managed to take such fluctuations into account. Failure to do so could result in either a loss of sales opportunities or the incurrence of unnecessary costs.

In addition, the increasing levels of precision required of semiconductor lithography equipment and FPD lithography equipment and the resulting increase in the value and size of such equipment in recent years have resulted in a concurrent increase in the need for sensitive handling and transportation of these products. Because of their precise nature, even a minor shock during the handling and transportation process can potentially cause irreparable damage to such products. If unforeseen accidents during the handling and transportation process render a significant portion of Canon’shigh-end precision products unmarketable, costs will increase, and Canon may lose sales opportunities and customer confidence.

Substantially higher crude oil prices and thesupply-and-demand balance of transportation means could lead to increases in the cost of freight, which could adversely affect Canon’s operating results.

Furthermore, earthquakes or volcanic eruptions may cause a breakdown of transportation facilities, such as ports or airports, or otherwise interrupt critical logistics services, which may have an adverse effect on production or sales activities.

Other Risks

Canon’s facilities, information systems and information security systems are subject to damage as a result of disasters, outages or similar events.

Canon’s headquarters functions, information systems and research and development centers are located in or near Tokyo, Japan, where the possibility of damage from earthquakes is generally higher than in other parts of the world. In addition, Canon’s facilities or offices, including those for research and development, materials procurement, manufacturing, logistics, sales and services are located throughout the world and subject to the possibility of outage or similar disruption as a result of a variety of events, including natural disasters such as earthquake, flood and terrorist attacks. Although Canon continues to establish appropriate backup structures for its facilities and information systems, there can be no assurance that Canon will be able to prevent or mitigate the effect of disruptive events or developments such as the leakage of harmful substances and shutdowns of information systems. Although Canon has implemented backup plans to permit the manufacture of its products at multiple production facilities, such plans do not cover all product models. In addition, such backup arrangements may not be adequate to maintain production quantity at sufficient levels. Such factors may adversely affect Canon’s operating activities, generate expenses relating to physical or personal damage, or hurt Canon’s brand image, and its operating results may consequently be adversely affected.

Canon’s success depends in part on the value of its brand name, and if the value of the brand is diminished, Canon’s operating results and prospects will be adversely affected.

Canon’s success depends in part on maintenance and development of the value of its brand name. The main factors which could damage its brand value are defective product quality, circulation of counterfeit and failures

of its compliance regime. Although Canon works to minimize risks that may arise from product quality and liability issues, such as those triggered by the individual functionality and also from the combination of hardware and software that make up Canon’s products, there can be no assurance that Canon will be able to eliminate or limit these issues and the resulting damages. If such factors adversely affect Canon’s operating activities, generate additional expenses such as those related to product recalls, service and compensation, or otherwise hurt its brand image, Canon’s operating results or reputation for quality may be adversely affected. Canon has been implementing measures to halt the spread of counterfeit products. However, there can be no assurance that such measures will be successful, and the continued manufacture and sale of such products could adversely affect Canon’s brand image as well as its operating results.

If Canon fails to maintain its overall compliance regime, especially legal and regulatory compliance, this also could result in damage to Canon’s credibility and brand value.

Canon’s business is subject to environmental laws and regulations.

Canon is subject to certain Japanese and foreign environmental laws and regulations in areas such as energymitigation of climate change, resource conservation including product recycling, reduction of hazardous substances, product recycling, clean air, clean water and waste disposal. Due to the laws and regulations, Canon may face liability for additional costs and alleged damages. Such costs and damages could adversely affect Canon’s business and operating results.

Canon is subject to potential liability for the investigation and cleanup of environmental contamination at each of the properties that it owns or operates and at certain properties Canon formerly owned or operated. If Canon is held responsible for such costs in any future litigation or proceedings, such costs may not be covered by insurance and may be material.

Canon is subject to risks relating to legal proceedings.

Canon is involved in various claims and legal actions arising in the ordinary course of its business. Results of actual and potential litigation are inherently uncertain. An unfavorable result in a legal proceeding could adversely affect Canon’s reputation, financial condition and operating results.

Canon may be subject to intellectual property litigation and infringement claims, which could cause it to incur significant expenses or prevent it from selling its products.

Because of the emphasis on product innovation in the markets for Canon’s products, many of which are subject to frequent technological innovations, patents and other intellectual property are an important competitive factor. Canon relies primarily on internally developed technology, and seeks to protect such technology through a combination of patents, trademarks and other intellectual property rights.

In relation to protection of its technologies, Canon faces risks that:

In relation to third party intellectual property rights, if any governmental agency or third party is adjudicated to have a valid infringement claim against Canon, Canon could be required to:

Canon may need to litigate in order to enforce its intellectual property rights or in order to defend against claims of infringement, which can be expensive and time-consuming.

Canon also licenses its patents to third parties in exchange for payment or cross-licensing.licensing. The terms and conditions of such licensing or changes in the renewal conditions of such licenses could affect Canon’s business.

With respect to employee inventions, Canon maintains company rules and an evaluation system and has been making adequate payments to employees for the assignment of invention rights based on these rules. However, there can be no assurance that disputes will not arise with respect to the amount of these payments to employees.

Canon’s businesses, corporatebrand image and operating results could be adversely affected by any of these developments.

Canon must attract and retain highly qualified professionals.

Canon’s future operating results depend in significant part upon the continued contributions of its employees. In addition, Canon’s future operating results depend in part on its ability to attract, train and retain qualified personnel in development, production, sales and management. The competition for human resources in the high-tech industries in which Canon operates has intensified in recent years. Moreover, owing to the accelerating pace of technological change, the importance of training new personnel in a timely manner to meet product research and development requirements will increase. Failure by Canon to recruit and train qualified personnel or the loss of key employees could delay development or slow production and could increase the risks of outflow of technologies andknow-how. These factors may adversely affect Canon’s business and operating results.

Maintaining a high level of expertise in Canon’s manufacturing technology is critical to Canon’s business. However, it is difficult to secure the requisite expertise for specialized skill areas, such as lens processing, in a short time period. While Canon engages in advance planning to obtain the expertise needed for each skill area, Canon cannot guarantee that such expertise will be acquired in a timely manner and retained, and failure to do so may adversely affect Canon’s business and operating results.

Canon is subject to risks arising from dependency on electronic data.

Canon possesses confidential electronic data relating to manufacturing, research and development, procurement, and production, as well as sensitive information obtained from its customers relating to the customers and to other individuals and parties. This electronic data is used by Canon and third party managed systems and networks. Electronic data is also used for the information service functions in various products.

There are some risks inherent in the use of the electronic data, including vulnerability to hacking and computer viruses, service failures due to unexpected events, and infrastructure issues, such as insufficient power supply and issues arising from damage caused by natural disasters. Although Canon continues to make administrative and managerial improvements in order to alleviate these risks, such events may occur despite Canon’s best efforts.

The materialization of such risks could result in interruptions to essential work, leaks of confidential data and damage to the information service functions in products. The occurenceoccurrence of any of these events has the potential to cause Canon to be subject to claims from affected individuals and parties and to negatively influence Canon’s brand image, the social trust it has developed, and its operations and financial conditions.

Canon’s financial results may be adversely affected if its deferred tax assets are not recoverable or if it is subject to international double taxation.

Canon currently has deferred tax assets, which are subject to periodic recoverability assessments based on projected future taxable income. The changes of future profitability due to future market conditions and tax

reforms including changes in tax rates may require possible recognition of significant valuation allowances to reduce the net carrying value of deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the amounts which may not be realized are charged to income tax expense and will adversely affect net income.

Recently, international corporate tax avoidance has developed into a political issue with a focus on aggressive tax planning strategies of certain multinational corporations. The OECD established the BEPS (Base Erosion and Profit Shifting) project for the purpose of increasing cooperation among countries and implementing harmonization of taxation. The BEPS action plan was published in July 2013; the OECD then conducted further study based on that plan and published its final report in October 2015, recommending that each country revise or amend its domestic taxation system and tax treaties.

Canon believes that liability of taxation is a basic and significant responsibility as a corporate citizen and that international taxation reforms will not significantly affect Canon. It is, however, possible that there will be differences in opinion between Canon and tax authorities after Canon shares its business information with each tax authority based on new transfer pricing documentation requirements.

Canon’s retirement and severance benefit obligations are subject to certain accounting assumptions.

Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including discount rates, expected return on plan assets, assumed rate of increase in compensation level and mortality rate. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore any such differences would be expected to be linked to increases in actual costs, which may adversely affect net income.

Item  4. Information on the Company

A. History and development of the Company

Canon Inc. is a joint stock corporation (kabushiki kaisha) formed under the Corporation Law of Japan. Its principal place of business is at30-2, Shimomaruko3-chome,Ohta-ku, Tokyo146-8501, Japan. The telephone number is +81-3-3758-2111.+81-3-3758-2111.

The Company was incorporated under the laws of Japan on August 10, 1937 to produce and sell Japan’s first focal plane shutter 35mm still camera, which was developed by its predecessor company, Precision Optical Research Laboratories, which was organized in 1933.

In the late 1950s, Canon entered the business machines field utilizing technology obtained through the development of photographic and optical products. With the successful introduction of electronic calculators in 1964, Canon continued to expand its operations to include plain paper copying machines, faxes, laser printers, bubble jet printers, computers, video camcorders and digital cameras.

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 (“TMSC”), which is 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 TMSC 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. 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 a health care business within the realm of “safety and security,” as a next-generation pillar of growth.

In 2013, 2012,2016, 2015, and 2011,2014, Canon’s increases in property, plant and equipment were ¥188,826¥171,597 million, ¥270,457¥195,120 million and ¥226,869¥182,343 million, respectively. In 2013,2016, the increases in property, plant and equipment were mainly used to expand production capabilities in both domestic and overseas regions, and to bolster Canon’s production-technology-related infrastructure. In addition, Canon has been continually investing in tools and dies for business machines, in which the amount invested is generally the same each year.

For 2014,2017, Canon projects an increaseto invest in property, plant and equipment of approximately ¥210,000¥195,000 million. This amount is expected to be spent for investments in new production plants and new facilities of Canon. Canon anticipates that the funds needed for this increase will be generated internally through operations.

B. Business overview

Canon is one of the world’s leading manufacturers of office multifunction devices (“MFDs”), plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment.

Canon sells its products principally under the Canon brand name and through sales subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail dealers in an assigned territory. In 2013, 80.8%2016, 79.2% of consolidated net sales were generated outside Japan, with approximately 28.4%28.3%, 30.1%26.9% and 22.3%24.0% generated in the Americas, Europe and Asia and Oceania, respectively.

Canon’s strategy is to develop innovative, high value-added products incorporating advanced technologies.

Canon’s research and development activities range from basic research to product-oriented research directed at maintaining and increasing Canon’s technological leadership in the marketplace.

Canon manufactureswill work to realize the majorityoptimized global allocation of its productsproduction assets based on changes in Japan, butlocal conditions in an effort to reduce currency exchange risk and production costs, Canon has increased its overseas production and the use of local components.each country. Canon has manufacturing subsidiaries in a variety of countries, including the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and the Philippines.

As a concerned member of the world community, Canon emphasizes recycling and has increased its use of clean energy sources and cleaner manufacturing processes. Canon has also launched programs to collect and recycle used Canon cartridges and to refurbish used Canon copying machines. In addition, Canon has removed virtually all environmentally unfriendly chemicals from its manufacturing processes.

Products

Canon operates its business in three segments: the “Office Business Unit,” the “Imaging System Business Unit” and the “Industry and Others Business Unit”.

- Office Business Unit -

Canon manufactures, markets and services a full range of MFDs, printers, copying machines for personal and office use and production print products for print professionals. Canon also delivers added value to

customers through software, services and solutions. OurCanon’s offerings covercater to a wide variety of marketsbroad market from Small Office Home Office (“SOHO”), and Small and Midsize Business (“SMB”) to large enterprises and professional graphic arts.arts companies.

In the industry, customer preference has been shifting from monochrome to color products and from hardware to services and solutions. Especially in the professional print market, customers are increasingly turning toshort-run,print-on-demand and variable data printing. The importance of connectivity, mobility, security, integration, workflow and cloud-based web services is growing, and such added value is increasingly delivered together with hardware. Canon seeks to maintain itsposition as a market leader*leader in these corefast-changing markets.

In 2013,2016, Canon enhanced its portfolio starting withexpanded our hardware offerings by introducing the launchnew A3 color MFPs; the image RUNNER ADVANCE C5500 series is positioned to be the core of an organization’s digital business communications and the imageRUNNER ADVANCE 4200C7500 series provides powerful performance and productivity for the A4-sizehigh-volume office environments. Canon also launched the imageRUNNER ADVANCE 400iF8500/6500 series, A3 monochrome devices, designed for flexibility and 500iF. To deliver higher value addedscalability. The imagePRESS C65 is a color digital press ideal for the creative community addressing the high demands of the visual artists. For print professionals, Canon introduced light production color devices, the imagePRESS C850 and expand our presenceC750, building on the success of the proven technology, the imagePRESS C800. Among high-speed continuous-feed printers, the Océ-produced VarioPrint i300, a high-speedsheet-fed color inkjet press, gained favorable feedback in the existing market while acquiring new markets in the production print industry, Canon introduced the varioPRINT DP line with new Canon branding and the imagePRESS C1+II. Aiming to accelerate the transition from offset to high volume digital color, Canon previewed our future solution Niagara, an ultra high-volume color inkjet cutsheet printing platform. In the high speed continuous feed printer area, Océ announced new Océ ColorStream 3000 Z series.market.

As forIn software, services and solutions, Canon’sCanon was one of the first vendors to launch its application development platform, the Multifunctional Embedded Application Platform (“MEAP”), which allows the creation of customized applications for Canon MFDs enabling tight integration into the customer’s IT infrastructure. The integration boosts productivity and allows users to fully take advantage of the power of our MFDs. Canon has introducedis reinforcing its solutions capability through offerings such as imageWARE software suite, business process automation software Enterprise Imaging Platform (“EIP”), and Canon MDS, a middleware applicationdevice management solution that enables customers to integrate enterprise applications and automate the business processes.reduces total cost of ownership.

To maintain and enhance its competitive edge and to meet increasingly sophisticated customer demands, Canon is committed to the continued reinforcement of Canon’s hardware and software offerings and solutions capability.

In the monochromeAs for laser printer market, the transition to a low price segment is expected to expand sales in the micro office/home office market and in emerging markets. Canon expects an expansion in the color laser printer market to be driven by increasing demand for color printing. Moreover,printers, Canon plans to aggressively launch new products for both monochrome and color in the MFDs market and to drive Canon’s business growth.

However, Canon is experiencing fierce competition with aggressive competitors in the laser printer market and an eventual decline in sales prices is becoming a major threat. Growth of the tablet PCPCs, smartphones, and smartphone market,cloud computing, which affectsaffect users’ printing behavior and may also lead to a decrease in demand for printing, is becoming a newanother threat. Canon implements numerous effortsis executing on several initiatives to enhance mobile printing solutions to tackle with the newthis threat and create further business opportunities.

In response, Canon aims to promote technological developments in order to introduce competitive products in a timely manner across the office business unit, and to pursue business efficiency through continuous cost reduction and optimization of its supply chain.

- Imaging System Business Unit -

Canon manufactures and markets digital cameras and digital video camcorders, as well as lenses and various related accessories.

In 2013,2016, Canon launched three new productsexpanded the imaging domains of EOS and particularly strengthened its product line up.

EOS Rebel T5i, succeeding T4i performance, is equipped with the smooth and silent Auto Focus the movie function with Stepping Motor (lead-screw type) lenses. The Vari-angle Touch Screen LCD monitor enables

flexible shooting positions with clear views. EOS Rebel SL1 islineup by launching four new digital SLR cameras, including the new offeringflagship modelEOS-1D X Mark II for the first time in four years, and onebuilt-in EVF mirrorless cameras EOS M5. These new models as well as the Entry category and the world’s smallest and lightest digital SLR camera which uses APS-C size equivalent sensors. With excellent basic performance of the Digital SLR, it offers the smallest body through a redesigned inside structure. Despite its compact design, it offers outstanding grip and operability. EOS 70D is equipped with the new innovative AF system, Dual Pixel CMOS AF offers smooth and silent AF, and Built-in Wireless LAN, enabling to expand image capturing area and increase the communication performance. EOS 5D Mark III, EOS 7D and EOS 6D show steadycurrent models pushed sales and Canon keeps No.1 sharemaintained number one market share* in the advanced amateur category. In addition to the need for higher resolution and more compact and lightweight sizes, such function as video recording with a full high definition (“HD”) format, is becoming a new standard feature forfield of interchangeable lens digital cameras.cameras in volume terms in 2016 in the major regions, such as the United States, Europe, and Japan. Canon believes there remains considerable room for future growth in this category through development of new products based onstate-of-the-art technology. technology following the trend of higher quality picture, small and light weight body and versatile movie / network functions.

Canon launched foursix new lens products and cumulative production of the EF lens series surpassed 90 million in May 2013.for digital SLR. The interchangeable lens line uplineup currently exceeds 70 products.90 products, including Cinema Lenses(EF-Mount). By enhancing ourits core capability, Canon has been introducing high-quality and high-performance lenses built ondeveloped by superior optical technology and new elemental technology, which Canon believes allowed it to maintain its advantage over the competition.

Canon introduced eighteen new models to the

As for compact digital cameracameras, while the overall market in 2013 in order to add value to its products. While there has been shrinking, the segment with relatively large sensor size has been performing steadily. In such circumstance, in the first half of the year, Canon launched a compact and high performance premium model PowerShot G7 X Mark II, equipped with a new imaging processor DIGIC 7. Canon aims to strengthen its premium lineup further and strives to improve its profitability. Including those premium models, Canon launched total of eight models globally, and plans to maintain its full-line up strategy.

In compact photo printer market, along with the increasing demand for photo printing from smart devices, Canon has performed well. With its advantages, such as easy operation, portability, andlab-quality photo print, SELPHY has gained a strong tendency toward reliance on electronic manufacturing services (“EMS”)market share in the compact digital camera industry, there is a possibility that the EMS manufactures cannot maintain their businesseach region. Canon plans to tap new customer demand and some of them might exit from the market. Canon is pressing forward with entire internal manufacturing leveraging the economies of scale and building an optimum cost structure to strivewill seek to maintain profitability.its lead in this market.

The market for conventional camcorders has been shrinking, as many other popular devices start equippingadding a movie function. On the other hand, new categories like web cameras and action cameras are emerging and expanding.In this environment, Canon aims to expand sales in this market with a product lineup includingwith higher value added based on Canon’s distinctive high-definition, high-resolution technologies. Concurrently, Canon has introduced a new product with unique styled camcorder especially for self-shooting, aiming to exploit a new market category. In the field of professional camcorders, Canon introduced the new “XA” series; small sized camcorders equippedmodels XC15; compact and lightweight camcorder which is capable of capturing impressive 4K video with a wide-angleXLR-input microphones, and high magnification lens in addition to current “XF” series for use in broadcast news, documentary and independent filmmaking. “CINEMA EOS SYSTEM” has strengthened its line up by launching newC700; the flagship model of the CINEMA EOS SYSTEM lineup of digital cinema cameras, capable of recording 4K-resolutionshooting 4K/60P video and improved user convenience through a wider selection of related software.onto the internal media. Canon aims to solidify its top position in the motion picture production market by introducing new products that suit to a wide variety of market.market requirements.

In 2013, Canon experienced robust growth in the field of projectors for business applications, and in particular brighter, installation type projectors. In this installation market, Canon enjoyed sales volume expansion in 2013, owing to the increased line-upoffers a range of introducing three new install-type models in 2012.products focusing on high resolution projectors of WUXGA and 4K with its advanced optical technologies. In 2016, Canon launched two new install-typelaser projectors, two WUXGA models in 2013,with LCOS panels and the world smallest and lightest 4K projectors*, “4K500ST” and “4K501ST”, which differentiated from the competitor by advanced optical technology, imaging technology and compact design. Those will beare strategic and leading models for expanding the projector business and advancing Canon’s position in the market. Moving forward, Canon expects to extend its competitive product lineup based around the optical technology on which the company prides itself.

In the broadcast TVHDTV lens market, worldwide market demand isremains stable although demand arising from the switchover to high definition broadcast formatssports broadcasting in developed countries slowed down.and from switchover to HD in developing countries, and Canon retainscontinues to maintain a large share of the TV lens market with high value-added products.

Meanwhile, demand for 2/3” format 4K lenses is increasing especially in Europe and Asia, and Canon will expand the product lineup to meet this demand. On the other hand, Canon launched a new product*CN-E18-80mm T4.4 L IS KAS S as a new series of EF Cinema lens “COMPACT SERVO” zoom lens series, which has excellent operability and mobility that meet various shooting styles, and also has optical performance compatible with both 4K and HD cameras. This lens is getting great reviews in the “MREAL” mixed reality (“MR”) system based on graphic information processing technology that can combine the real world with computer graphics for the purpose of, for example, realizing more efficient product design in July 2012.

Inkjet printer technology has been evolving, driving expansion of application to not only forfrom home use but forto office and commercial use such as poster printing and photo printing that require high-quality.

Canon offers a wide variety of products to meet such needs based on its core technology “Full-photolithographyFull-photolithography Inkjet Nozzle Engineering”Engineering (“FINE”), which enables realization of high-speed printing and high image quality at the same time.

For the home and business use, printers, Canon offers such printer solutions as New PIXMA Cloud Link and PIXMA PrintingCanon PRINT Inkjet to tighten the connection with Cloud environment, smartphonecloud computing, smartphones and tablet PC which have been proliferating.PCs. Canon also offers My Image Garden,more compact body, premium design, convenient front & rear dual paper feeder, a larger and easy to read liquid crystal touchscreen panel. Canon hopes such enhancement of function and service will increase user-friendliness and satisfaction of users.

In 2014, Canon launched the easy-to-use Intelligent Touch System, XL ink tank & ink cartridge. new brand MAXIFY in the business inkjet printer segment, targeting the growing SOHO market. In 2016, Canon also launched new models with network management capability. The MAXIFY printer series features Canon’s leading inkjet technologies such as high-quality printing with fast printing, and a low total cost of ownership.

For meeting wide and high quality level requirements of the professional users in photo printing, Canon launched three new large format professional inkjet printers sequentially from the end of 2015 to 2016: imagePROGRAFPRO-1000 (17”), imagePROGRAFPRO-2000 (24”), imagePROGRAFPRO-4000 (44”) which feature improved color reproduction and dark expression by employing a new image processor engineL-COA PRO and new LUCIA PRO 12 inks with new pigment inks and Chroma Optimizer. In the main body of these products, “RED LINE” is designed as a printer for the first time. “RED LINE” is allowed for only the product which can realize the highest photograph quality of the Canon products, producing the same quality as the high class Canon Digital SLR. Canon aims to further expand this business, leveraging its strength in the photo printing market.

In 2012, Canon started to ship the DreamLabo 5000, the first inkjet production photo printer featuring new “FINE”FINE high-density print head technology. In

Canon’s lineup also includes CanoScan LiDE, the professional printing market,flatbed scanners which use Contact Image Sensor (“CIS”), and a scanner with Charge-Coupled Devices (“CCD”) for high resolution. Canon offers three professional photo inkjet printers: the PIXMA PRO-1 with a 12 LUCIA ink system of pigment-based inks, PIXMA PRO-10 with a 10 LUCIA ink system, and the PIXMA PRO-100 with eight dye inks to produce colorful and vivid prints. Canon aims to further expand its business leveraging its strengthhas maintained high share in the photo printing market.

Canon large-format inkjet printers are based on “FINE” head technology and employ its unique image processor, “L-COA,” developed for high-speed, high-resolution printing, and “LUCIA” pigment inks. Consequently, Canon receives a high evaluation and steadily boosts thescanner market share.by achieving stable sales results.

- Industry and Others Business Unit -

TheIn the market for semiconductor lithography equipment, has shown a recovery trend in the second half of 2013investments have been stable due to the correctionseveral factors such as restarted investments for mass production of supply-demand imbalances3D-NAND flash memory, although sluggish demand for mobile devices such as smartphones had a negative influence on investments in the memory device market, althoughproduction. In the investments by memory makers had remained low in recent years because supply continued to outweigh demand. However, image sensor, logic device and automotive device makers steadily increased their equipment investments, drawn by the growing market for smartphones, tablet PCs and hybrid cars. At the same time, some manufacturers started to invest in i-line steppers, investments for small diameter wafers used inthe production of automobile electronics, power devices and LEDs as well ashave been performing well. Especially in the market ofback-end lithography systems, chip makers require higher density integration and thinner chip production due to the trend of miniaturization and power saving in the mobile devices market, and the demand for new markets such as 3D integration formass-production of Through-Silicon Via (“TSV”). is expected to expand.

Responding to diversified semiconductor applications, Canon has been rationalizing production systems to more flexibly respond to these market changes, creating new systems with overall responsibility for each stepper model, and integrating manufacturing and sales functions so thatdeveloping a“design-in” business style, which enables customer needs canto be more quickly reflected in development. Through these activities, a “design-in” business stylethe early stage of our product development process, and Canon believes steady progress has been taking hold and steady progress is being made in developing and marketing products with high added value. For example, in the market for advanced packaging, Canon released a new i-line stepper FPA-3030i5+, optimizedFPA-5520iV, which realized higher productivity and higher performance for the productionFan-out Wafer Level Package (“FOWLP”). For Internet of greenThings (“IoT”) devices such as LEDs and power devices, Canon released KrF stepperFPA-3030EX6, which can be used for special wafer such as small wafers of less than 200 mm in diameter. For memory and FPA-5510iV which enableslogic devices,FPA-5550iZ offers high productivity in the advanced packaging process such as TSV and Bump. As a result of these activities,to customers. In addition, Canon has occupied abeen upgrading KrF scanners,FPA-6300ES6a which achieved high throughput and industry’s highest level of overlay accuracy, steadily increasing Canon’s share of the i-line stepper market. Canon also released a new DUV scanner FPA-6300ES6a with greatly improved productivity, overlay accuracy and uptime rate compared to conventional equipments.

The market for FPD lithography equipmentKrF scanners. Furthermore, Canon has been on a downward trendsmoothly developing Nano-Imprint Lithography (“NIL”) equipment and successfully provided the one for mass-production in investment due to deterioration in the earnings of panel makers. The lithography market for small-to-mid sized panel production maintained steady trend drawn by growing demand for smartphones and tablet PCs. The lithography market for large-sized panel production, which has remained low in recent years, showed moderate recovery due to the demand from emerging countries and commercialization of 4K TVs.2016.

Under the circumstances, the MPAsp-H760 supporting 8th generation large-sized panels continues to offer high productivity and has contributed to customer production plans by allowing for quick equipment installation at existing production sites. This has helped Canon capture and maintain a commanding share of the FPD lithography equipment market for large-sized panel production. Furthermore, Canon’s sales and service support systems have earned high accolades in China whereIn the market for FPD lithography equipment, ongoing capital investments by panel makers forsmall-to-mid-sized panels offering high-definition organic light-emitting diode (“OLED”) panels in mobile devices led to growth of lithography systems forsmall-to-mid-sized panel production. More and more electronic makers are expected to use OLED displays for large-screen TVs in the future.

Under these circumstances, MPAsp-E810 series forsmall-to-mid-sized panel, successfully achieved 2.0µm resolution. This product realized high productivity and high overlay accuracy, which is growing. On the other hand, Canon has released new FPD lithography equipment, MPAsp-H800suitable for large-sizedhigh-definition panel and the

MPAsp-E810 for small-to-mid sized panels, with improved on resolution.production. Canon aims to gain an increasingcapture a larger share of the market for small-to-mid sizedsmall-to-mid-sized panel

production in additionby taking advantage of the growth of the market. Moreover, Canon’s MPAsp-H800 series forlarge-sized panels, corresponding to large-sized panel production.large-screen TVs has gained a large market share, and Canon aims to respond to this increased use of OLED TV displays.

In the medical equipment business,market, both the digital radiography (“DR”) market kept expanding, mainly in emerging markets such as Asia. Moreover, the digital systems market in industrialized nations continueddemand to transitionupgrade from the digitalization format of computed radiographyComputed Radiography (“CR”) to the newest formatDigital Radiography (“DR”) and the expanding demand in emerging markets keep driving the steady market growth for the digitalX-ray equipment. Although the price competition has been increasing due to commoditization caused by new entries from those countries such as China and Korea, Canon maintains sound business performance by enhancing image quality based on the advanced image processing technology. In terms of DR. Whileproducts, flat panel detectors (“FPDs”) with wireless connection contribute in sales. In the dynamicX-ray equipment market where the high growth is expected, Canon continues strong efforts to promote sales of fluoroscopy andhigh-end angiography systems.

Regarding ophthalmic equipment, Canon responded to a stiffer market competition offeredin the growing Optical Coherence Tomography (“OCT”) market by releasing a rising numberseries of new players, the target market of Canon DR products showed steady growth.OCT Angiography software which can depict retinal blood vessels without using fluorescein which may cause strong allergic reaction.

In the Healthcare IT market in Japan which has been growing over 20% CAGR, Canon launched new productsa Cloud-based “Medical Imaging Place” which can manage a variety of types of images and documents includingX-Ray/CT/MRI medical images, digital photos as well as medical documents by tagging them with the “X-ray auto detection function”: CXDI-701C/G Wireless,CXDI-801C/G Wireless, CXDI-401C/G Wireless. Canon believes this function, which eliminates the need for communication with X-ray generators, is accelerating replacement of CR by DR.each respective patient ID.

ForIn the ophthalmic equipmentnetwork cameras market, recently the optical coherence tomography (“OCT”) segment showed continuous growth, and further increase in volume and competition is expected. In this OCT segment, Canon sold the first Canon-brand OCT, OCT HS-100 in collaboration with consolidated subsidiary Optopol Technology, Sp. z o.o. (Poland). By adding the OCT to our product portfolio, we strive to increase sales in the ophthalmic equipment market.

The marketutilization of network cameras for businessthe purpose of disaster surveillance or for the prevention of crime has become well established in the market. In addition, the needs for network cameras in marketing as well as in productivity enhancement have increased. In this environment, Canon is intensively developing both network cameras with high specification utilizing optical/image handling technology as well as image analysis software.

In the first half of 2016, Canon launched 6 new models of network cameras including theVB-M50B which enables the viewing of color images of distant objects using night surveillance, and management applications is expectedthe H652LVE which enables black & white images even in low light situations of 0 lux. In addition, in the second half of 2016, Canon launched 7 new models of network cameras including theVB-S30VE, a compact size camera allowing the installation under the eaves, as well as two types of image analysis software, like People Counter Version 1.0, which can count up to show double-digit growth, reflecting the progress of IT and digital technologies.1,500 people from recorded images. Canon establishedalso announced that it will develop a dedicated product grouphigh-resolution network surveillance camera AXIS Q1659 using interchangeable lenses along with Axis, which would utilize each company’s technological strengths, for launch in 20132017.

Canon will continue to expand itsoffer cutting-edge network camera business, with its proprietary technologiessystems developed through the integration of optics, sensor,Canon’s imaging technology, Axis’ network video processing technology, and Milestone systems’ video management software technology and will also continue to strive for further growth in the network devices. With the introduction of four new compact Full HD network cameras at the end of 2013, Canon has extended its market coverage to meet demand for surveillance products for such areas as retail stores and offices.camera market.

NET SALES BY SEGMENT

The following table presents our net sales by segment for each of the periods shown.

NET SALES BY GEOGRAPHIC AREA

The following table presents our net sales by geographic area for each of the periods shown.

		Years ended December 31
		2016				change				2015				change				2014
		(Millions of yen, except percentage data)
Japan			706,979				-1.0	%			714,280				-1.4	%			724,317
Americas			963,544				-15.8				1,144,422				10.4				1,036,500
Europe			913,523				-15.0				1,074,366				-1.5				1,090,484
Asia and Oceania			817,441				-5.7				867,203				-1.0				875,951
Total			3,401,487				-10.5	%			3,800,271				2.0	%			3,727,252

Seasonality

Canon’s sales for the fourth quarter are typically higher than for the other three quarters, mainly due to strong demand for consumer products, such as cameras and inkjet printers, during theyear-end holiday season.

In Japan, corporate demand for office products peaks in the first quarter, as many Japanese companies end their fiscal years in March. Sales also tend to increase at the start of the new school year in each region.

Sources of supply

Canon purchases materials such as glass, aluminum, plastic, steel and chemicals for use in various product components and in the manufacturing process. Canon procures raw materials from all over the world and selects suppliers based on a number of criteria, including environmental friendliness, quality, cost, supply stability and financial condition.

Prices of some raw materials fluctuate according to market trends. Although Canon is currently focusing on globalizing supplies and improving raw material resource management strategies, and believes that it will be able to continue procuring sufficient quantities of raw materials to meet its needs, there can be no assurance that supply shortages will not occur or that raw materials, such as crude oil, will be available at competitive prices, or at all, in the future.

Marketing and distribution

Canon sells its products primarily through subsidiaries organized under regional marketing subsidiaries: Canon Marketing Japan Inc. in Japan; Canon U.S.A., Inc. in North and South America; Canon Europe Ltd. and

Canon Europa N.V. in Europe, Russia, Africa and the Middle East; Canon (China) Co., Ltd. in Asia outside Japan; and Canon Australia Pty. Ltd. in Oceania. Each subsidiary is responsible for its own market research and for determining its sales channels, advertising and promotional activities. Each subsidiary provides tailor-made solutions to a diverse range of unique customers and aims to advance Canon’s reputation as a highly trusted brand.

In Japan, Canon sells its products primarily through Canon Marketing Japan Inc., mainly to dealers and retail outlets.

In the Americas, Canon sells its products primarily through Canon U.S.A., Inc., and Canon Canada Inc. and Canon Latin America, Inc., mainly to dealers and retail outlets.

In Europe, Canon sells its products primarily through Canon Europa N.V., which sells mainly through subsidiaries or independent distributors to dealers and retail outlets in each locality. In addition, copying machines are sold directly toend-users by several subsidiaries such as Canon (UK) Ltd. in the United Kingdom and Canon France S.A.S. in France.

In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those areas. In addition, copying machines are sold directly toend-users in Australia by Canon Australia Pty. Ltd.

Canon also sells laser printers on an OEM basis to Hewlett-Packard Company. Hewlett-PackardHP Inc.. HP Inc. resells these printers under the “HP LaserJet Printers” name. During 20132016 and 2012,2015, OEM sales to Hewlett-PackardHP Inc. constituted 17.6%14.8% and 17.0%17.8%, respectively, of Canon’s consolidated net sales.

Canon continues to enhance its distribution system by promoting the continuing education of its sales personnel and by optimizing inventory levels and business planning through weekly analysis of sales data.

Service

In Japan and overseas, product service is provided in part by independent retail outlets and designated service centers that receive technical training assistance from Canon. Canon also services its products directly.

Most of Canon’s business machines carry warranties of varying terms, depending upon the model and country of sale. Cameras and camera accessories carry warranties that vary depending upon the model and country of sale.

Canon services its copying machines, MFDs, printers, and supplies replacement drums, parts, toner and paper. Most customers enter into a contract under which Canon provides maintenance services, replacement drums and parts in return for a stated amount of the contract plus a per copy charge. Copying machines not covered by a service contract may be serviced from time to time by Canon or local dealers for a fee.

Patents and licenses

Canon holds a large number of patents, design rights and trademarks in Japan and abroad to protect proprietary technologies stemming from its research and development activities. Canon utilizes these intellectual property rights as important strategic management tools. For example, Canon leverages its intellectual property rights to expand its product lines and business operations and to form alliances and exchange technologies with other companies.

Canon has granted licenses with respect to its patents to various Japanese and foreign companies, most often with respect to electrophotography, laser printers, multifunction printers, facsimile machines and cameras.

Companies to which Canon has granted licenses include:

Canon has also entered into cross-licensing agreements with other major industry participants.

Companies with which Canon has entered into cross-licensing agreements include:

Canon has placed a high priority on the management of its intellectual property. Some products that are material to Canon’s operating results incorporate patented technology. Patented technology is critical to the continued success of Canon’s products, which typically incorporate technology from dozens of different patents. However, Canon does not believe that its business, as a whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon, any particular patent, copyright, license or intellectual property rights or group thereof.

Competition

Canon encounters intense global competition in all areas of its business. Canon’s competitors range from some of the world’s major multinational corporations to smaller, highly specialized companies. Canon competes in a number of different business areas, whereas many of its competitors focus on one or more individual areas. Consequently, Canon may face significant competition from entities that apply greater financial, technological, sales and marketing or other resources than Canon to their activities in a particular market segment.

The principal elements of competition that Canon faces in each of its markets are technology, quality, reliability, performance, price and customer service and support. Canon believes that its ability to compete effectively depends in large part on conducting successful research and development activities that enable it to create new or improved products and release them on a timely basis and at commercially attractive prices.

The competitive environments in which each product group operates are described below:

- Office Business Unit -

The markets for this segment are highly competitive. Canon’s primary competitors are Xerox Corporation/Fuji Xerox Co., Ltd.; Ricoh Company, Ltd.; Konica Minolta Inc.; Hewlett-Packard Company;HP Inc.; Samsung Electronics Co., Ltd.; and Lexmark International, Inc. Canon believes that it is one of the leading global manufacturers*manufacturers of office MFDs, copying machines and laser printers. In addition to the general elements of competition described above, Canon’s ability to compete successfully in these markets also depends significantly on whether it can provide effective, broad-based “business solutions” to its customers and respond to interrelated customer needs. In particular, the ability to provide equipment and software that connect effectively to networks (ranging in scope from local area networks to the Internet and the cloud) is often a key to Canon’s competitive strength. In the United States,

Europe and Japan, Canon is one of the market leaders*leaders in all areas of the business machine market. In emerging markets, for example in China, the current market leaders for business machines are Toshiba TEC Corporation, Sharp Corporation andFuji Xerox. Co., Ltd., Konica Minolta Inc. and Toshiba TEC Corporation. Canon hopes to join this group by introducing products tailored to the Chinese market and by strengthening sales and service channels.

- Imaging System Business Unit -–

In addition to the traditional camera manufacturers, other electrical manufacturers started aggressively launching interchangeable lens digital cameras and related products in 2011. Nevertheless, Canon has continued to invest aggressively in competitive new products and intends to maintain its position in this market.

Canon’s primary competitors in the interchangeable lens digital camera market are Nikon Corporation and Sony Corporation.

TheAverage prices for compact digital camera market is extremely competitive, and a large number of Canon’s competitors are relying on electronic manufacturing service (“EMS”) manufacturers to do their development and production work.

Average pricescameras in the industry declinedincreased in 20132016 from the previous year. Prices have been rapidly declining as measured by the standard of specification price value, and the commoditization of products has been progressing. Market contraction and exchange rate fluctuation risks caused by the financial crisis which started in 2008 areis having a major impact, resulting in severe conditions in the digital camera market. Despite these difficulties, Canon will seek to take advantage of its status as the major brand in the industry, along with its economies of scale, in order to maintain profitability.

Canon’s primary competitors in the compact digital camera market are Sony Corporation;Corporation and Nikon Corporation; Panasonic Corporation; Fujifilm Co., Ltd.; Samsung Electronics Co., Ltd.; and Casio Computer Co., Ltd.Corporation. Canon’s primary competitors in the digital video camcorder market are Sony Corporation; Panasonic Corporation; and JVC Kenwood Corporation. Canon’s primary competitors in the inkjet printer market are Hewlett-Packard Company andHP Inc., Seiko Epson Corporation.Corporation and Brother Industries, Ltd.

- Industry and Others Business Unit -

Very stiff competition continues in the markets for lithography equipment used in the production of semiconductor devices and FPDs.flat panel displays (“FPDs”). In order to produce lithography equipment that can provide ultra-fine processing, an integration of advanced optical, control and system technologies is required, along with continuous investment in technology development. The main competitors in these markets are Nikon Corporation, in the markets for semiconductor and FPD lithography equipment, and ASML Holding N.V., in the market for semiconductor lithography equipment only.

Canon believes that it has helped its customers improve their productivity by continuously improving the cost performance of semiconductor lithography equipment using the i-line and KrF laser light sources. In particular, equipment using i-line has captured a large share of the global market. Canon believes that it has also been meetingmarket, satisfying the needs of image sensor manufacturers by quickly adaptingproviding products which correspond to various unique specifications.the diversification of devices associated with the trend of IoT.

Canon belivesbelieves its FPD lithography equipment with a common platform offers excellent productivity and reliability that has helped it capture market share of the industry-leading South KoreaKorean market and the growing China. Panel makers are accelerating developmentChinese market. Canon’s sales and service support systems have also received high accolades from the customers in these markets. In the trend of higher definition panels in recent years.demand expansion for 4K displays and OLED displays, Canon believes it has also been meeting the needs of panel makers by continuously offering new products with high-resolution.high productivity and high resolution.

As for network cameras, the market is competitive in higher functional requirement and price pressure from customers. Canon’s primary competitors are Hikvision Digital Technology Co., Ltd. and Panasonic Corporation. Canon is developing the innovative technology to continue to be a global market leader in this industry.

Environmental regulations

Canon is subject to a wide variety of laws, regulations and industry standards relating to energy and resource conservation, recycling, global warming, pollution prevention, pollution remediation and environmental health and safety. Some of the environmental laws that affect Canon’s businesses are summarized below.

The United Nations adopted the 2030 Agenda for Sustainable Development Goals (“SDGs”) on September 25, 2015, under the UN Sustainable Development Summit. SDGs cover global issues to be addressed for transforming the world toward sustainable development over the next 15 years, which are composed of 17 goals and 169 targets. The goals and targets cover a wide-range global issues, including the environmental areas such as climate change, sustainable energy, efficient use of natural resources and reduction of waste. Based upon the SDGs, member states will introduce national policies and initiatives to tackle such global environmental issues, and Canon may need to implement further actions to respond to potential national initiatives.

With respect to climate change, a framework of Post-Kyoto Protocol (beyond 2012) has been discussed at the Conference of the Parties (“COP”) to the United Nations Framework Convention on Climate Change (“UNFCCC”). On November 30, 2015, COP21 was convened in Paris and on December 12, a “Future Framework beyond 2020” for all member states to have a common legal regime to address climate change was adopted as the Paris Agreement. The Paris Agreement entered into force on November 4, 2016. It is supposed that member states will accelerate countermeasures for their mitigation goals.

Canon has established 2016–2018Mid-Term Environmental Goals and monitors its progress on a yearly basis. Canon is implementing initiatives to achieve these goals, which focus on “Lifecycle CO2 emissions improvement index per product by 3 percent improvement (compared to the previous year)”, “Raw materials and usage CO2 emissions improvement index per product by 3 percent improvement (compared to the previous year)”, “Improve energy consumption basic unit at operational sites by 1.2 percent (compared to the previous year)”. Canon has successfully reduced its “Life Cycle CO2 emission” per product by approximately 30 percent between 2008 and 2015. Also, total lifecycle CO2 emissions in 2015 were 6,312,073 tons, which were verified by a third party in April 2016.

Canon continues to pursue CO2 emission reductions both locally and globally through energy-efficient product design and improvement of logistics and factory operations.

Under RoHS Directive, from July 1, 2006, companies have been required to ensure that electrical and electronic equipment (“EEE”) sold in the European Union does not contain lead, cadmium, hexavalent chromium, mercury, polybrominated biphenyls or polybrominated diphenyl ethers. The scope of products covered will bewas expanded to include medical and measurement equipment fromstarting in July 2014. AnNew subsidiary directive of RoHS Directive restricting an additional four or fivesubstances was published in June 2015, and these substances will be proposed as restricted substancesstarting in 2014.2019. In parallel with these developments, all the RoHS exempted applications for which the restricted substances can be used are now under review. If the exempted applications concerned would be decided tothese exemptions expire, additional design-changesdesign changes may be required for Canon products, and cost of changing designs may increase total compliance costs.

The WEEE Directive requires that companies selling EEE bearing their trade names in the European Union must arrange and pay for collection, treatment, recycling, recovery and disposal of their equipment. Canon has

become a member company of collective compliance schemes in each member state of the European Union and has achieved the required recycling levels for EEE waste.waste EEE. The WEEE recast Directive was published on July 24, 2012 and was applied from February 2014. Due to a change in official interpretation, the scope of products covered is to be expanded to include consumables.

If tighter restrictions are enforced in 2014 and beyond,the future, Canon’s compliance costs could increase, including with costs related to the actions for newly-covered products and the development and adoption of substitute materials or processes. Such increased costs may have an adverse effect on Canon’s operating results.

2.3.	European Framework for the Management of Chemical Substances (“REACH Regulation”)

The REACH Regulation was implemented in 2007. This regulation covers almost all chemicals (products in gaseous, liquid, paste or powder form) and articles (products in solid state) manufactured in or imported into the European Union. All chemicals manufactured in or imported into the European Union that exceed specific content thresholds must be registered. If certain substances of very high concern are contained in an article, the substances must be communicated to the recipient or consumer of the article. Furthermore, additional of restrictions on the use of certain substances can be proposed at any time by the ECHA (European Chemical Agency) or member states, propose so, and, as some additional restrictionsof them have been already adopted and others are now under discussion, manufacturers such as Canon needs tomust take measuressteps to address such new restrictions.

Canon has been implementingkeeps meeting these existing and newly-added requirements under the REACH Regulation, whichand their implementation could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

The ErP Directive applies in Europe to all energy-using products, and implementing measures with respect tooff-mode and standby mode and external power supplies were adopted in and have been applied since 2010. This measure was expanded in 2013 to include requirements for energy modes with “networked standby”. The requirements for “networked standby” will bewere applied from 2015. For imaging equipments,equipment, the industry has made a public commitment to attain certain targets on environmentally conscious designs from 2012 by an industrial voluntary agreement (VA)(“VA”) and began implementation in 2011. The revisionBy the regular revisions of the VA, is under final review and the commitments will become tighter than ever because the European authorities and NGOs are expected to require a stricter VA. In addition, many new or revised implementing measures (expanded both in scope and requirements) are now considered, and some of them will cover Canon’s products. Canon is continuing its preparations to comply with requirement under the ErP Directive. However, the requirements are expected to be challenging, and achieving compliance will likely increase Canon’s costs, especially by required design changes.

Electrical and electronic equipmentE-waste recycling laws have been enacted or proposed in more than twenty American states. Although most of such laws cover only displays or television sets, printers and other products are covered by some states, such as Illinois, Michigan and Hawaii, among others. These laws require manufacturers to bear the costs of collecting and recycling electrical and electronic equipment based on sales volume or market share by brand of covered products. Canon expects that compliance with such state requirements might increase its costs, such as recycling fees and product guarantees.

The Chinese Ministry of Information Industry publishedrevised Administrative Measures on the Control of Pollution Caused by Electrical and Electronic Information Products in February 2006,January 2016, and regulates the same six substances covered by the EU RoHS in electrical and electronic information products. The measures establish two stages of implementation. Stage 1 is in effect and covers nearly all Canon products. To comply with Stage 1 requirements, a China-specific label must be

placed on any covered product if any of the six regulated substances are contained therein, and use of the six regulated substances must be disclosed in each product manual. In addition, each product’s environmental protection use period (“EPUP”) must be stated within its recycling mark and include the production date. Stage 2 requires that the contents of six regulated substances in specific electronic information products (as specified by the Chinese Government in the “list for emphasized management”“Compliance catalog”) be restricted by limitations similar to the EU RoHS Directive. A China-specific compulsory product certification system will be introduced for such products. Standards to implement these measures and the “emphasized management list”“Compliance catalog” are under discussion, including with regard to printers.printers, copying machines and facsimile machines.

If these requirements are applied to Canon’s products, this could increase Canon’s costs and have an adverse effect on its operating results and financial condition.

6.7.	Chinese Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products

The Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products was issued by the Chinese government in 2009 and implemented on January 1, 2011. Producers and importers are required to pay a fee to a government fund. The first list of products falling under the waste electrical and electronic products catalogue has been issued on February 9, 2015 includes printers, copying machines and includes four types of household appliances as well as personal computers. The Regulation of thosefacsimile machines. Those payment fees described above was enforced on July 1, 2012.are under discussion by the Chinese government.

If theseThese requirements are applied to Canon’s products, this couldwill likely increase Canon’s costs and have an adverse effect oncould adversely affect its operating results and financial condition.

A 2010 amendment to the Soil Pollution Prevention Law of Japan tightens certain requirements to survey soil to measure certain pollution levels. If soil pollution exceeds specified limits, a prefecture governor may designate the land as a “Measure required area” if effects to human health due to soil pollution are foreseen, and the prefecture governor may order removal of pollutants. The substances designated as pollutants consist of twenty-five chemical groups, including lead, arsenic and trichloroethylene. If an investigation shows that soil contamination may affect human health, the prefecture governor may issue an order to the landowner to take designated remedial actions and may restrict the changes of the land character. Canon has commenced a detailed survey and measurement of soil and groundwater to check for pollution at all of Canon’s operational sites in Japan.Japan, and necessary procedures are being carrying out. Additional costs may arise if these investigations reveal that additional remedial measures are necessary. These factors could adversely affect Canon’s operating results and financial condition.

In addition to the laws described above, various environmental laws and regulations may have been promulgated or enacted by European Union member states, states of the United States, emerging markets such as China, India, Russia, Vietnam, and other countries. Compliance with any such additional regulations may increase Canon’s costs and may adversely affect Canon’s operating results and financial condition.

Other regulations

Disclosure under Section 13(r) of the Securities Exchange Act of 1934

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) added Section 13 (r)13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether, during the reporting period, it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. bynon-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

During the year ended December 31, 2013,2016, the following Canon affiliates hadengaged in the transactions with Iran-related organizations.described below that are required to be disclosed pursuant to Section 13(r) of the Exchange Act. These transactions were conducted in compliance with applicable law in the respective countries.

As of the date of this report, Canon is not aware of any other activity, transaction or dealing by us or any of our affiliates during the year ended December 31, 20132016 that requires disclosure in this report under Section 13(r) of the Exchange Act. After considering recent changes in the international situation and economic sanctions relating to Iran, Canon does not intendhas restarted business with certain Iranian counterparties. Canon maintains policies and procedures designed to conduct any further business activitiesensure that transactions, including transactions with Iranian counterparties, required to be disclosed under the ITRA, except for sales of consumables, repair,are conducted in accordance with applicable economic sanction laws and maintenance services for products Canon previously sold to such entities.regulations.

C. Organizational structure

Canon Inc. and its subsidiaries and affiliates form a group of which Canon Inc. is the parent company. As of December 31, 2013,2016, Canon Inc. had 257367 consolidated subsidiaries and 119 affiliated companies accounted for by the equity method.

The following table lists the significant subsidiaries owned by Canon, Inc., all of which are consolidated as of December 31, 2013.2016.

D. Property, plants and equipment

Canon’s manufacturing is conducted primarily at 2830 plants in Japan and 18 plants in other countries. Canon owns all of the buildings and the land on which its plants are located, with the exception of certain immaterial leases of land and floor space of certain of its subsidiaries. The names and locations of Canon’s plants and other facilities, their approximate floor space and the principal activities and products manufactured therein as of December 31, 20132016 are as follows:

Name and location		Floor space (including leased space)				Principal activities and products manufactured
Domestic		(Thousands of square feet)
Hiratsuka Plant, Kanagawa			1,118964			R&D of display products and manufacturing of semiconductor devices
Tamagawa Office, Kanagawa			149383			Quality engineering
Oita Plant, Oita			279284			Manufacturing of semiconductor devices
Yako Office, Kanagawa			903905			Development of inkjet printers, inkjet chemical products
Utsunomiya Plant,Office, Tochigi			2,761			Manufacturing of lenses for cameras and other applications, R&D in optical technologies, development and sales of broadcasting equipment, R&D, manufacturing, sales and servicing of semiconductor production equipment
Toride Plant, Ibaraki			3,2033,328			R&D in electrophotographic technologies, mass-production trials and supports; manufacturing of office imaging products, chemical products; training of manufacturing
Ami Plant, Ibaraki			1,131977			Manufacturing of FPD production equipment
Canon Electronics Inc., Tokyo, Saitama and Gunma			1,309			Components, magnetic heads, document scanners and laser printers
Canon Finetech Inc., Saitama, Ibaraki and Fukui			915			Business-use printers, business machines peripherals and chemical products
Canon Precision Inc., Aomori			1,506			Toner cartridges, sensors and micromotors
Canon Optron Inc., Ibaraki			143			Optical crystals (for lithography equipments, cameras, telescopes) and vapor deposition materials
Canon Chemicals Inc., Ibaraki			2,098			Toner cartridges and rubber functional components
Canon Components, Inc., Saitama			610			Contact image sensors, inkjet cartridges and medical equipment
Oita Canon Inc., Oita			1,225			Digital cameras, lenses and digital video camcorders
Nagahama Canon Inc., Shiga			1,093			Toner cartridges and A-Si drums
Oita Canon Materials Inc., Oita			2,995			Chemical products for copying machines and printers, and inkjet cartridges
Ueno Canon Materials Inc., Mie			654			Chemical products for copying machines and printers
Fukushima Canon Inc., Fukushima			971			Inkjet printers and inkjet cartridges

Name and location		Floor space (including leased space)				Principal activities and products manufactured
Domestic		(Thousands of square feet)
Canon Electronics Inc., Tokyo, Saitama and Gunma			1,309			Components, magnetic heads, document scanners and laser printers
Canon Finetech Inc., Saitama, Ibaraki and Fukui			915			Business-use printers, business machines peripherals and chemical products
Canon Precision Inc., Aomori			1,493			Toner cartridges, sensors and micromotors
Canon Optron Inc., Ibaraki			143			Optical crystals (for lithography equipments, cameras, telescopes) and vapor deposition materials
Canon Chemicals Inc., Ibaraki			1,824			Toner cartridges and rubber functional components
Canon Components, Inc., Saitama			622			Contact image sensors, inkjet cartridges and medical equipment
Oita Canon Inc., Oita			1,485			Digital cameras, lenses and digital video camcorders
Nagahama Canon Inc., Shiga			1,093			Laser printers, toner cartridges andA-Si drums
Oita Canon Materials Inc., Oita			2,843			Chemical products for copying machines and printers, and inkjet cartridges
Ueno Canon Materials Inc., Mie			654			Chemical products for copying machines and printers
Fukushima Canon Inc., Fukushima			957			Inkjet printers and inkjet cartridges
Canon Semiconductor Equipment Inc., Ibaraki			423227			Development and production of semiconductor production-related equipment
Canon Ecology Industry Inc., Ibaraki			6461,313			Recycling of toner cartridges, repair and recycling of business machines
Nisca Corporation, Yamanashi			391380			Copying machine peripherals, scanner units and optical equipment
Miyazaki Daishin Canon Inc., Miyazaki			168179			Digital cameras
Canon Mold Co., Ltd., Ibaraki			219			Molds
Canon ANELVA Corporation, Kanagawa and Yamanashi			746721			Production equipment for electron devices, flat panel display and semiconductors
Canon Machinery Inc., Shiga			623			Automated production equipment and semiconductor production-related equipment
Canon Tokki Corporation, Niigata, Kanagawa and Tokyo			232393			Vacuum technology-related equipment
Nagasaki Canon Inc., Nagasaki			477469			Digital cameras
Hita Canon Materials Inc., Oita			370			Rubber functional components
Toshiba Medical Systems Corporation, Tochigi			1,493			R&D, manufacturing and sales of medical equipment
Toshiba Electron Tubes & Devices Corporation, Tochigi			294			R&D, manufacturing and sales of electron tubes and its application products

Name and location		Floor space (including leased space)				Principal activities and products manufactured
Overseas		(Thousands of square feet)
Asia
Canon Inc., Taiwan, Taiwan			1,7741,660			Lenses and digital cameras
Canon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia			584611			Lenses and optical lens parts
Canon Dalian Business Machines, Inc., Dalian, China			1,7401,732			Production and recycling of toner cartridges, production of laser printers
Canon Zhuhai, Inc., Zhuhai, China			1,9091,157			Digital cameras, digital video camcorders and contact image sensors
Canon Prachinburi (Thailand) Ltd., Prachinburi, Thailand			8081,008			Copying machines
CanonHi-Tech Thailand (Thailand) Ltd., Ayutthaya and Nakohon Ratchasima, Thailand			3,2693,274			Inkjet printers, MFDs, scanners, molds and plastic injection molded parts
Canon Zhongshan Business Machines Co., Ltd., Zhogshan,Zhongshan, China			1,3311,387			Laser printers
Canon Vietnam Co., Ltd., Hanoi, Vietnam			3,2333,277			Inkjet printers, laser printers, MFDs, scanners and contact image sensors
Canon (Suzhou) Inc., Suzhou, China			1,517			Copying machines
Canon Finetech Nisca (Shenzhen) Inc., Shenzhen, China			706721			Copying machines and laser printer peripherals
Canon Electronics Vietnam Co., Ltd., Hung Yen Province, Vietnam			308			Components
Canon Business Machines (Philippines), Inc., Batangas, Philippines			910898			Laser printers

Canon considers its manufacturing and other facilities to be well maintained and believes that its plant capacity is adequate for its current requirements. None of the buildings or land are subject to any major encumbrances.

Main facilities under construction for establishment/expansion

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

A. Operating Results

The following discussion and analysis provides information that management believes to be relevant to understanding Canon’s consolidated financial condition and results of operations.

Overview

Canon is one of the world’s leading manufacturers of plain paper copying machines, office multifunction devices (“MFDs”), laser printers, cameras, inkjet printers, semiconductor lithography equipment and flatFPD (Flat panel display (“FPD”)display) lithography equipment. Canon earns revenues primarily from the manufacture and sale of these products domestically and internationally. Canon’s basic management policy is to contribute to the prosperity and well-being of the world while endeavoring to become a truly excellent global corporate group targeting continued growth and development.

Canon divides its businesses into three segments: the Office Business Unit, the Imaging System Business Unit, and the Industry and Others Business Unit.

Economic environment

Looking back at the global economy in 2013, although2016, the trend of recovery in the U.S. economy became stronger as employment conditions and Japanese economies began heading toward moderate recoveries duringconsumer spending progressively improved from the latter half of the year,year. In Europe, although the economic downturneconomy grew moderately, centered on Germany, the outlook for the region’s economy has grown increasingly uncertain due to concerns over the UK’s decision to exit the EU and the political unrest in EuropeSyria. The Chinese economy continued to drag onits deceleration trend while the economies of emerging countries such as China faced slowdowns. As such, contraryRussia and Brazil remained stagnant. In Japan, the economy remained weak due to expectationsweak consumer spending. Looking at the global economy as a whole, although higher growth than the previous year was expected at the beginning of the year, the global economy remained stagnant. As for exchange rates,overall experienced its lowest level of growth since the correction of the historic high value of the yen continued, with a trend toward a weaker yen growing increasingly clear.financial crisis precipitated by Lehman Brothers’ bankruptcy.

Market environment

As for the markets in which Canon operates amid these conditions, owingregarding the demand for office MFDs and laser printers, the demand for color models enjoyed strong growth due to the trend of shifting from

monochrome to color machines, while the demand for monochrome shrunk due to the continued economic slowdown flat demand led to a continuationin emerging countries. As for cameras, along with the ongoing contraction of the harsh business environmentmarket, especially for consumer products. Among MFDs, color models continued to drive growth while demand for laser printers realized a turnaround toward recovery. Although demand for interchangeable-lens digital cameras continued to show strong growth in Japan, demand overseas fell short of the previous year’s level as the economic rebound in such markets as Europe and China takes longer than expected. As for digital compact cameras, demand continued to shrinkthe market suffered from a shortage of components arising from the earthquake in both developed countries as well as emerging markets. Overall marketKumamoto earlier in the year. Additionally, demand for inkjet printers hit bycontinued to decline. Within the prolonged economic downturn, also declined in all major markets. In the industryIndustry and othersOther sector, a rebound in capital investment for memory devices led to a pickup in demand for semiconductor lithography equipment in the latter half of the year, while demand for lithography equipment used in the production of FPDs showed healthy marketflat panel displays (“FPDs”) and manufacturing equipment for organic LED (”OLED”) displays enjoyed strong growth for mid- and small-size panels used mainly in smartphones and tablet PCs, and a modest recovery for large-size panels.thanks to active capital investment by panel manufacturers.

The average value of the yen during the year was ¥97.84¥108.58 against the U.S. dollar, ayear-on-year depreciation appreciation of approximately ¥18,¥13, and ¥130.01¥120.25 against the euro, ayear-on-year depreciation appreciation of approximately ¥27.¥14.

Summary of operations

DespiteDuring 2016, color-model office MFDs achieved higher growth than the market average, making up for the continued decline of monochrome models, which led to the same level of unit sales as the previous year overall. Although the unit sales of laser printers were below level compared with the same period of the previous year until the third quarter, due to the sluggish economic conditions in demandthe emerging countries, signs of bottoming out started to appear in the fourth quarter. Looking at the interchangeable-lens digital cameras, sales volume for the year exceeded that of the previous year, supported by sales of new products, while sales volume for digital compact cameras declined compared with the previous year amid the ongoing contraction of the market. Sales volume for inkjet printers declined for consumer products, while sales volume of wide format inkjet printers for business use exceeded the previous year. In contrast, sales of FPD lithography equipment and industrialOLED panel manufacturing equipment increased, boosted by increased capital investment by panel manufacturers. Consequently, along with the negative impact of the appreciation of the yen, net sales for the year increased 7.2%decreased 10.5% year on year to ¥3,731.4 billion from the previous year. This was realized through the steady demands for

MFDs and laser printers, along with an increase in sales of inkjet printers, made possible through sales-promotion efforts despite the harsh conditions posed by the shrinking inkjet printer market, as well as the positive effects of favorable currency exchange rates.¥3,401,487 million. The gross profit ratio rose 0.8decreased by 1.7 points year on year to 48.2% thanks to the effects of ongoing cost-cutting efforts along with the depreciation of the yen. Despite an increase in foreign-currency-denominated operating expenses after conversion into yen49.2% mainly due to the depreciationnegative effect of the yen,yen’s appreciation. Despite a reduction in operating expenses of 8.5% year on year, partly due to Group-wide efforts to thoroughly reduce spending, contributed to limiting the increase in operating expenses to just ¥1,461.1 billion, an increase of 10.2% year on year. Consequently, operating profit decreased by 35.6% to ¥228,866 million. Other income (deductions) increased by 4.1% to ¥337.3 billion. Other income decreased by ¥8.4 billion¥23,557 million due to foreign currency exchange lossesgains while income before income taxes increaseddecreased by 1.5%29.6% year on year to ¥347.6 billion. Net¥244,651 million and net income attributable to Canon Inc. increaseddecreased by 2.6%31.6% to ¥230.5 billion. Accordingly, Canon achieved increases in both sales and profit.¥150,650 million.

Key performance indicators

The following are the key performance indicators (“KPIs”) that Canon uses in managing its business. The changes from year to year in these KPIs are set forth in the table shown below.

KEY PERFORMANCE INDICATORS

Revenues

As Canon pursues the goal to become a truly excellent global company, one indicator upon which Canon’s management places strong emphasis is revenue. The following are some of the KPIs related to revenue that management considers to be important.

Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a much lesser extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the number and size of transactions within the reporting period, market acceptance for new products, and changes in sales prices. Other factors involved are market share and market environment. In addition, management considers the evaluation of net sales by segment to be important for the purpose of assessing Canon’s sales performance in various segments, taking into account recent market trends.

Gross profit ratio (ratio of gross profit to net sales) is another KPI for Canon. Through its reforms of product development, Canon has been striving to shorten product development lead times in order to launch new, competitively priced products at a faster pace. Furthermore, Canon has further achieved cost reductions through enhancement of efficiency in its production. Canon believes that these achievements have contributed to improving Canon’s gross profit ratio, and will continue pursuing the curtailment of product development lead times and reductions of production costs.

Operating profit ratio (ratio of operating profit to net sales) and R&D expense to net sales ratio are considered to be KPIs by Canon. Canon is focusing on two areas for improvement. Canon is striving to control

and reduce its selling, general and administrative expenses as its first key point. Secondly, Canon’s R&D policy is designed to maintain adequate spending in core technology to sustain Canon’s leading position in its current business areas and to exploit opportunities in other markets. Canon believes such investments will create the basis for future success in its business and operations.

Cash flow management

Canon also places significant emphasis on cash flow management. The following are the KPIs relating to cash flow management that Canon’s management believes to be important.

Inventory turnover measured in days is a KPI because it measures the efficiency of supply chain management. Inventories have inherent risks of becoming obsolete, physically damaged or otherwise decreasing significantly in value, which may adversely affect Canon’s operating results. To mitigate these risks, management believes that it is crucial to continue reducingwork-in-process inventories by decreasing production lead times in order to promptly recover related product expenses, while balancing risks of supply chain disruptions by optimizing finished goods inventories in order to avoid losing potential sales opportunities.

Canon’s management seeksThe debt to meet its liquidity and capital requirements primarily with cash flow from operations. Managementtotal assets ratio is also seeks debt-free operations.one of the KPIs. For a manufacturing company like Canon, it generally takes considerable time to realize profit from a business due to lead times required for R&D, manufacturing and sales has to be followed for success. Therefore, management believes that it is important to have sufficient financial strength so that the Company does not have to rely on external funds.strength. Canon has continuedwill continue to reduce its dependency on external funds for capital investments in favor of generating the necessary funds from its own operations.

Canon Inc. stockholders’shareholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its stockholders’shareholders’ equity to total assets ratio measures its long-term sustainability. Canon also believes that achieving a high or rising stockholders’shareholders’ equity ratio indicates that Canon has maintained a strong financial position or further improved its ability to fund debt obligations and other unexpected expenses. In the long-term, Canon’s management believes a high stockholders’shareholders’ equity ratio will enable the company to maintain a high level of stable investments for its future operations and development. As Canon puts strong emphasis on its R&D activities, management believes that it is important to maintain a stable financial base and, accordingly, a high level of its stockholders’shareholders’ equity to total assets ratio.

Critical accounting policies and estimates

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and based on the selection and application of significant accounting policies which require management to make significant estimates and assumptions. These estimates and assumptions include future market conditions, net sales growth rate, gross margin and discount rate. Though Canon believes that the estimates and assumptions are reasonable, actual future results may differ from these estimates and assumptions. Canon believes that the following are the more critical judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations.

Revenue recognition

Canon generates revenue principally through the sale of office and imaging system products, equipment, supplies, and related services under separate contractual arrangements. Canon recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer or services have been rendered, the sales price is fixed or determinable, and collectibility is probable.

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 title and risk of loss transfer to the customer.

Revenue from sales of optical equipment, such as semiconductor lithography equipment and FPD lithography equipment that are sold with customer acceptance provisions related to their functionality, is recognized when the equipment is installed at the customer site and the specific criteria of the equipment functionality are successfully tested and demonstrated by Canon. Service revenue is derived primarily from separately priced product maintenance contracts on equipment sold to customers and is measured at the stated amount of the contract and recognized as services are provided.

Canon also offers separately priced product maintenance contracts for most office products, for which the customer typically pays a stated base service fee plus a variable amount based on usage. Revenue from these service maintenance contracts is measured at the stated amount of the contract and recognized as services are provided and variable amounts are earned.

Revenue from the sale of equipment under sales-type leases is recognized at the inception of the lease. 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 the related revenue is recognized ratably over the lease term. When equipment leases are bundled with product maintenance contracts, revenue is first allocated considering the relative fair value of the lease andnon-lease deliverables based upon the estimated relative fair values of each element. Lease deliverables generally include equipment, financing and executory costs, whilenon-lease deliverables generally consist of product maintenance contracts and supplies.

For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative selling price if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting.

Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates. Estimated reductions to sales are based upon historical trends and other known factors at the time of sale. In addition, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protection obligations when announced. In 2011, the sales incentive program accruals were quite difficult to estimate compared to prior years because of the significant fluctuation in consumer product supplies from our manufacturing facilities, due to the earthquake in Japan and the flooding in Thailand. Although Canon utilized available data to produce its best estimate of promotion payments to be claimed in 2012, actual claims in 2012 were not as high as Canon had estimated. Moreover, in recent years, as a result of the market conditions and customer preferences, usage of incentive programs has shifted from mail-in rebates to instant rebates. Accordingly, the historical data relating to mail-in-rebates could not be used to determine instant rebates. Given the limited experience with instant rebates, this led Canon to maintain its estimated accruals for a longer period of time. As 2012 progressed and new information became available, Canon reviewed the 2011 accrual balance in order to determine whether the accrual needed to be revised during 2012. By using new additional statistical information and gathering sales and inventory data from customers, Canon was able to revise its estimates.

Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure.

Allowance for doubtful receivables

Allowance for doubtful receivables is determined using a combination of factors to ensure that Canon’s trade and financing receivables are not overstated due to uncollectibility. These factors include the length of time receivables are past due, the credit quality of customers, macroeconomic conditions and historical experience. Also, Canon records specific reserves for individual accounts when Canon becomes aware of a customer’s inability to meet its financial obligations to Canon, due for example to bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables are further adjusted.

Valuation of inventories

Inventories are stated at the lower of cost or marketnet realizable value. Cost is determined by the average method for domestic inventories and principally thefirst-in,first-out method for overseas inventories. MarketNet realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make a sale. Canon routinely reviews its inventories for their salability and for indications of obsolescence to determine if inventories should be written-down to market value. Judgments and estimates must be made and used in connection with establishing such allowances in any accounting period. In estimating the marketnet realizable value of its inventories, Canon considers the age of the inventories and the likelihood of spoilage or changes in market demand for its inventories.

Impairment of long-lived assets

Long-lived assets, such as property, plant and equipment, and acquired intangibles 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. 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. Determining the fair value of the asset involves the use of estimates and assumptions.

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.

Business combinations

The acquisition is accounted for using the acquisition method of accounting. The acquisition method of accounting requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values, as of the acquisition date. The determination of the fair value of net assets acquired involves significant judgment and estimates, such as future cash flow projections, appropriate discount and capitalization rates and other estimates based on available market information. Estimates of future cash flows are based on a number of factors including operating results, known and anticipated trends, as well as market and economic conditions. With regard to acquisition of TMSC, the identification and measurement of acquired tangible and intangible assets are still preliminary and subject to change within the measurement period. For further information, please refer to Note 7 of the Notes to Consolidated Financial Statements.

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. Canon performs its impairment test of goodwill using thetwo-step approach at the reporting unit level, which is one level below the operating segment level. 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 performs the second step to measure an impairment charge in the amount by which the carrying amount of a reporting unit’s goodwill exceeds its implied fair value. Fair value of a reporting unit is determined primarily based on the discounted cash flow analysis which involves estimates of projected future cash flows and discount rates. Estimates of projected future cash flows are primarily based on Canon’s forecast of future growth rates. Estimates of discount rates are determined based on the weighted average cost of capital, which considers primarily market and industry data as well as specific risk factors. Canon has completed its impairment test in the fourth quarter of 2016 and determined that there were no reporting units that were at risk of failing the impairment test as the fair value of each reporting unit exceeded its respective carrying amount. Intangible assets with finite useful lives consist primarily of software, trademarks, patents and developed technology, license fees patented technologies and customer relationships. Software and license feesrelationships, which are amortized using the straight-line method over themethod. The estimated useful lives which rangeof software are from 3 years to 5 years, for softwaretrademarks are 15 years, patents and 5developed technology are from 7 years to 1017 years, for license fees. Patented technologiesfees are amortized using the straight-line method principally over the estimated useful life of 3 years. Customer7 years, and customer relationships are amortized principally using the declining-balance method over the estimated useful life of 5 years.from 11 years to 20 years, respectively.

Income tax uncertainties

Canon considers many factors when evaluating and estimating income tax uncertainties. These factors include an evaluation of the technical merits of the tax positions as well as the amounts and probabilities of the outcomes that could be realized upon settlement. The actual resolutions of those uncertainties will inevitably differ from those estimates, and such differences may be material to the financial statements.

Valuation of deferred tax assets

Canon currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of Canon’s deferred tax assets is principally dependent upon its achievement of projected future taxable income. Canon’s judgments regarding future profitability may change due to future market conditions, its ability to continue to successfully execute its operating restructuring activities and other factors. Any changes in these factors may require possible recognition of significant valuation allowances to reduce the net carrying value of these deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the amounts, which may not be realized, are charged to income tax expense and will adversely affect net income.

Employee retirement and severance benefit plans

Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets. Management must consider current market conditions, including changes in interest rates, in selecting these assumptions. Other assumptions include assumed rate of increase in compensation levels, mortality rate, and withdrawal rate. Changes in assumptions inherent in the valuation are reasonably likely to occur from period to period. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect future pension expenses. While management believes that the assumptions used are appropriate, the differences may affect employee retirement and severance benefit costs in the future.

In preparing its financial statements for 2013,2016, Canon estimated a weighted-average discount rate used to determine benefit obligations of 1.6%0.7% for Japanese plans and 3.8%2.2% for foreign plans and a weighted-average

expected long-term rate of return on plan assets of 3.1% for Japanese plans and 5.2%4.4% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income government and corporate bonds currently available and expected to be available during the period to the maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan assets based on management’s expectations of the long-term return of the various plan asset categories in which it invests. Management develops expectations with respect to each plan asset category based on actual historical returns and its current expectations for future returns.returns