UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

20-F

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

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

For the fiscal year ended

December 31, ~~2018~~

2019

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

~~For the transition period from~~to

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

Date of event requiring this shell company report

For the transition period from
to

Commission file number

001-15122

CANON KABUSHIKI KAISHA

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

CANON INC.

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

JAPAN

(Jurisdiction of incorporation or organization)

30-2, Shimomaruko3-chome,

Ohta-ku,

Tokyo

146-8501,

Japan

(Address of principal executive offices)

Sachiho Tanino

,
+~~81-3-3758-2111,~~81-3
-
3758-2111
,
+81-3-5482-9680,
30-2, Shimomaruko3-chome,
Ohta-ku,
Tokyo
146-8501,

Japan

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

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

~~Title of each class~~

Title of each class

Trading Symbol(s)

Name of each exchange on which
registered

(1) ~~Common Stock (the “shares”)~~

New York Stock Exchange*

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

CAJ

New York Stock Exchange

(2)

Common Stock (the “shares”)*

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

None

(Title of Class)

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

None

(Title of Class)

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

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

As of December 31, ~~2018, 1,079,749,823~~ 2019,

1,063,834,471

of common stock, including ~~16,460,829~~15,667,622 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

☑

☐

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

☐

☑

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

☑

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter)

during the preceding

months (or for such shorter period that the registrant was required to submit such files).

Yes

☑

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule

12b-2

of the Exchange Act. (Check one):


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

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

☐

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

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


~~U.S. GAAP ☑~~
U.S. GAAP ☑	International Financial Reporting Standards as issued by the International Accounting Standards Board ☐	Other ☐

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

☐

Item 18

☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule

12b-2

of the Exchange Act).

Yes

☐

☑

Table of Contents

TABLE OF CONTENTS


	~~Page number~~
		Page number
CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION			1




~~FORWARD-LOOKING INFORMATION~~
FORWARD-LOOKING INFORMATION			1


	PART I

~~Item 1.~~
Item 1.	Identity of Directors, Senior Management and Advisers		2

~~Item 2.~~
Item 2.	Offer Statistics and Expected Timetable		2

~~Item 3.~~	~~Key Information~~		2

A.	~~Selected financial data~~		2
B. Item 3.	~~Capitalization and indebtedness~~Key Information		3 2
C.
A.	Selected financial data		2
B.	Capitalization and indebtedness		3
C.	Reasons for the offer and use of proceeds		3
D.	Risk factors		3

~~Item 4.~~
Item 4.	Information on the Company		10 11

A.
A.	History and development of the Company		10 11
B.	Business overview		11
	Products		11 12
	Net sales by segment		16
	Net sales by geographic area		16
	Seasonality		16 17
	Sources of supply		17
	Marketing and distribution		17
	Service		17 18
	Patents and licenses		18
	Competition		19
	Environmental regulations		20
	Other regulations		23
C.	Organizational structure		24
D.	Property, plants and equipment		24

~~Item 4A.~~	~~Unresolved Staff Comments~~		27

Item 5. 4A.	Unresolved Staff Comments		27

Item 5.	Operating and Financial Review and Prospects		27

A.	~~Operating results~~
A.	Operating results		27
	Overview		27
	Key performance indicators		29
	Critical accounting policies and estimates		30
	Consolidated results of operations		34 35
	~~2018~~2019 compared with ~~2017~~2018		34 35
	~~2017~~2018 compared with ~~2016~~2017		38 39
	Foreign operations and foreign currency transactions		42 43
B.	Liquidity and capital resources		43
	Non-GAAP financial measures		44 45
C.	Research and development, patents and licenses		45 46
D.	Trend information		46 47
E.	Off-balance sheet arrangements		47 48
F.	Contractual obligations		48

Table of Contents


	~~Page number~~
~~Item 6.~~		Page number
Item 6.	Directors, Senior Management and Employees		49

A.
A.	Directors and senior management		49
B.	Compensation		56 57
C.	Board practices		62 70
D.	Employees		63 71
E.	Share ownership		63 71

~~Item 7.~~
Item 7.	Major Shareholders and Related Party Transactions		64 73

A.	~~Major shareholders~~		64
B.	~~Related party transactions~~		65
A.	Major shareholders		73
C. B.	Related party transactions		73
C.	Interests of experts and counsel		65 74

~~Item 8.~~	~~Financial Information~~		65

A. Item 8.	Financial Information		74

A.	Consolidated financial statements and other financial information		65 74
	Consolidated financial statements		65 74
	Legal proceedings		65 74
	Dividend policy		65 74
B.	Significant changes		66 75

~~Item 9.~~
Item 9.	The Offer and Listing		66 75

A.
A.	Offer and listing details		66 75
	Trading in domestic markets		66 75
	Trading in foreign markets		66 75
B.	Plan of distribution		66 75
C.	Markets		66 75
D.	Selling shareholders		66 75
E.	Dilution		67 75
F.	Expenses of the issue		67 75

~~Item 10.~~	~~Additional Information~~		67

A.	~~Share capital~~		67
Item 10.	Additional Information		75
B.
A.	Share capital		75
B.	Memorandum and articles of association		67 76
C.	Material contracts		74 83
D.	Exchange controls		75 83
E.	Taxation		76 85
F.	Dividends and paying agents		80 88
G.	Statement by experts		80 88
H.	Documents on display		80 89
I.	Subsidiary information		80 89

~~Item 11.~~
Item 11.	Quantitative and Qualitative Disclosures about Market Risk		80 89

	~~Market risk exposures~~		80
	~~Equity price~~Market risk exposures		80 89
	Equity price risk		89
	Foreign currency exchange rate and interest rate risk		81 89

~~Item 12.~~
Item 12.	Description of Securities Other than Equity Securities		82 90

A.	~~Debt securities~~		82
B.	~~Warrants and rights~~		82
C.	~~Other securities~~		82
D.	~~American Depositary Shares~~		82

Table of Contents


		Page number
	PART II

~~Item 13.~~
Item 13.	Defaults, Dividend Arrearages and Delinquencies		83 92

~~Item 14.~~
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		83 92

~~Item 15.~~	~~Controls and Procedures~~		83

Item ~~16A.~~ 15.	Controls and Procedures		92

Item 16A.	Audit Committee Financial Expert		84 93

~~Item 16B.~~	~~Code of Ethics~~		84

Item ~~16C.~~ 16B.	Code of Ethics		93

Item 16C.	Principal Accountant Fees and Services		84 93

~~Item 16D.~~
Item 16D.	Exemptions from the Listing Standards for Audit Committees		85 94

~~Item 16E.~~
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		86 95

~~Item 16F.~~
Item 16F.	Change in Registrant’s Certifying Accountant		87 96

Item 16G.	Corporate Governance		97


~~Item 16G.~~	~~Corporate Governance~~PART III		87

Item 17.	Financial Statements		100

Item 18.	Financial Statements		100


	~~PART III~~

~~Item 17.~~	~~Financial Statements~~		90

~~Item 18.~~	~~Financial Statements~~		90

	Reports of Independent Registered Public Accounting Firm		91 101
	Consolidated Balance Sheets		93 104
	Consolidated Statements of Income		94 105
	Consolidated Statements of Comprehensive Income		95 106
	Consolidated Statements of Equity		96 107
	Consolidated Statements of Cash Flows		98 109
	Notes to Consolidated Financial Statements		99 110
	Schedule II—Valuation and Qualifying Accounts		~~149~~ 155

~~Item 19.~~	~~Exhibits~~		~~150~~

~~SIGNATURES~~			~~151~~
Item 19.	Exhibits		156

SIGNATURES			157

iii

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CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION

All information contained in this Annual Report is as of December 31, ~~2018~~2019 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 ~~8, 2019,~~6, 2020, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ~~¥111.11=~~¥ 105.31= U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report ~~“2018”~~“2019” refers to the Company’s fiscal year ended December 31, ~~2018,~~2019, 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.~~Canon. When used in this Annual Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “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,” “Item 4. Information on the 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.

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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.

Selected financial data *1*3:
   2018    2017    2016    2015    2014
   (Millions of yen, except average number of shares and per share data)
Net sales
   ¥ 3,951,937    ¥ 4,080,015    ¥ 3,401,487    ¥ 3,800,271    ¥ 3,727,252
Operating profit
   342,952    321,605    216,425    343,858    345,750
Income before income taxes
   362,892    353,884    244,651    347,438    383,239
Net income attributable to Canon Inc.
   252,755    241,923    150,650    220,209    254,797
Advertising expenses
   58,729    61,207    58,707    80,907    79,765
Research and development expenses
   315,842    333,371    306,537    332,678    311,896
Depreciation of property, plant and equipment
   175,771    189,712    199,133    223,759    213,739
Increase in property, plant and equipment
   159,316    147,542    171,597    195,120    182,343
Long-term debt, excluding current installments
   361,962    493,238    611,289    881    1,148
Common stock
   174,762    174,762    174,762    174,762    174,762
Canon Inc. shareholders’ equity
   2,827,602    2,870,630    2,783,129    2,966,415    2,978,184
Total assets
   4,899,465    5,198,291    5,138,529    4,427,773    4,460,618
Average number of common shares in thousands
   1,079,753    1,085,439    1,092,071    1,092,018    1,112,510
Per share data:

Net income attributable to Canon Inc. shareholders per share:

Basic
   ¥ 234.09    ¥ 222.88    ¥ 137.95    ¥ 201.65    ¥ 229.03
Diluted
   234.08    222.88    137.95    201.65    229.03
Cash dividends declared
   160.00    160.00    150.00    150.00    150.00
Cash dividends declared (U.S.$)*2
   $ 1.440    $ 1.483    $ 1.393    $ 1.290    $ 1.326


Selected financial data 13 :	2019		2018		2017		2016		2015
	(Millions of yen, except average number of shares and per share data)
Net sales	¥	3,593,299	¥	3,951,937	¥	4,080,015	¥	3,401,487	¥	3,800,271
Operating profit		174,667		342,952		321,605		216,425		343,858
Income before income taxes		195,740		362,892		353,884		244,651		347,438
Net income attributable to Canon Inc.		125,105		252,755		241,923		150,650		220,209
Advertising expenses		46,665		58,729		61,207		58,707		80,907
Research and development expenses		298,503		315,842		333,371		306,537		332,678
Depreciation of property, plant and equipment		170,418		175,771		189,712		199,133		223,759
Increase in property, plant and equipment		178,088		159,316		147,542		171,597		195,120
Long-term debt, excluding current installments		357,340		361,962		493,238		611,289		881
Common stock		174,762		174,762		174,762		174,762		174,762
Canon Inc. shareholders’ equity		2,692,595		2,827,602		2,870,630		2,783,129		2,966,415
Total assets		4,768,351		4,899,465		5,198,291		5,138,529		4,427,773

Average number of common shares in thousands		1,069,957		1,079,753		1,085,439		1,092,071		1,092,018

Per share data:
Net income attributable to Canon Inc. shareholders per share:
Basic	¥	116.93	¥	234.09	¥	222.88	¥	137.95	¥	201.65
Diluted		116.91		234.08		222.88		137.95		201.65
Cash dividends declared		160.00		160.00		160.00		150.00		150.00
Cash dividends declared (U.S.$)*2	$	1.514	$	1.440	$	1.483	$	1.393	$	1.290

Notes:

The above financial data is prepared in accordance with U.S. generally accepted accounting principles.

Canon acquired Toshiba Medical Systems Corporation on December 19, 2016, which was subsequently renamed as Canon Medical Systems Corporation (“CMSC”) on January 4, 2018. CMSC’s consolidated balance sheet and operating result since the acquisition date are reflected in Canon’s consolidated financial statements. ~~For further information, please refer to Note 7 of the Notes to Consolidated Financial Statements.~~

Annual cash dividends declared (U.S.$) are translated from yen based on a weighted average of the noon buying rates for yen in New York City as reported by the Federal Reserve Bank of New York in effect on the date of each semiannual dividend payment or on the latest practicable date.

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Canon adopted ASUNo.

2017-07

from the quarter beginning January 1, 2018. The adoption of the new presentation requirement of the service cost component and the other components of net benefit cost resulted in reclassification from cost of sales, and selling, general and administrative expenses, and research and development expenses into other income (deductions) for the years ended December 31, 2017, 2016, and 2015 ~~and 2014~~ respectively.

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, cameras, inkjet printers, diagnostic equipment 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.

Canon’s business activities are deployed globally in Japan, the United States, Europe, Asia, and in 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, diagnostic equipment and industrial equipment are affected by the financial results of its corporate customers or medical institutions, 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. Rapid 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.

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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.

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 in international markets.

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:

unfavorable political, diplomatic or economic conditions;

sharp fluctuations in foreign currency exchange rates;

unexpected political, legal or regulatory changes;

inadequate systems of intellectual property protection;

difficulties in recruiting and retaining qualified personnel; and

less developed production infrastructure.

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 and

in-house

production of key devices. If Canon cannot effectively implement these techniques, it may fail to realize cost advantages or product differentiation, 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.

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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 business.

In the business machines market for such products as office 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 digitalization of workflow in office 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.

~~The smartphone~~

As the market for digital cameras has been ~~growing on a global scale. Smartphones allow users not only~~shrinking, competition in price and performance specifications is intensifying. Moreover, along with the significant improvements in the shooting capabilities of other digital devices, including smartphones, consumer preferences for shooting activities have changed and diversified. If Canon is unable to ~~take photos, but also share them instantly on SNSs~~introduce new products that appeal to the needs of consumers and ~~it has changed people’s behavior towards photography. If Canon’s~~maintain its superiority over other digital ~~cameras cannot clearly state their advantages over smartphone cameras, which is improving its performance,~~device competitors, or provide new services for enjoying images, Canon could suffer from an erosion of the digital camera market, with a resulting adverse effect on operating results.

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

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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.

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

Disruptions of relationships with large Canon distributors or acquisitions of those distributors by competitors could adversely affect Canon’s ability to meet its sales targets. 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 HP 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 HP Inc. Any decision by HP 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

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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 the anticipated improvements to its financial results.

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. These activities can help Canon to grow its business. However, weak business trends or disappointing performance by partners or acquired companies may adversely affect the success of such activities. The 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. In 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.

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’s

high-end

precision products unmarketable, costs will increase, and Canon may lose sales opportunities and customer confidence.

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Substantially higher crude oil prices and the

supply-and-demand

balance of transportation means could lead to increases in the cost of freight, which could adversely affect Canon’s operating results.

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,~~earthquakes or floods, as well as terrorist ~~and cyber~~ 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.

In addition, the global spread of the coronavirus disease (
“COVID-19”
) has had disruptive effects on the supply chain and operations of manufacturers, particularly in Asia. As a result, Canon temporarily suspended operations in certain of Canon’s factories and has experienced reduced production in some of Canon’s factories. Although Canon expects the negative impact of
COVID-19
on global economic and market conditions will adversely affect Canon’s business, the duration and extent of the further spread of
COVID-19
remain uncertain at this time, and therefore the impact on results of operations remains unknown.

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, 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 mitigation of climate change, resource conservation including product recycling, reduction of hazardous substances, 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.

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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: competitors will be able to develop similar technology independently; Canon’s pending patent applications may not be issued; the steps Canon takes to prevent misappropriation or infringement of its intellectual property may be unsuccessful; and intellectual property laws may not adequately protect Canon’s intellectual property, particularly in certain emerging markets.

In relation to third party intellectual property rights, if any third party is adjudicated to have a valid infringement claim against Canon, Canon could be required to: refrain from selling the relevant product in certain markets; pay monetary damages; pursue development of

non-infringing

technologies, or attempt to acquire licenses to the infringed technology and to make royalty payments, which may not be available on commercially reasonable terms, if at all.

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 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 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, brand 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 and

know-how.

These factors may adversely affect Canon’s business and operating results.

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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, and cyber attacks, service failures and leakage of personal information due to infrastructure issues 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 occurrence 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.

In addition, 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. Each country has been revising or amending its domestic taxation system and tax treaties based on the final report.

Canon believes that liability of taxation is a basic and significant responsibility as a corporate citizen and that the revision or amendment will not significantly affect Canon. It is, however, possible that there will be differences in opinion between Canon and tax authorities 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.

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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 at

30-2,

Shimomaruko

3-chome,

Ohta-ku,

Tokyo

146-8501,

Japan. The telephone number is

+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. In 2016, Canon acquired Toshiba Medical Systems Corporation (“CMSC” as of January 4, 2018) and has expanded its medical business.

In 2019, 2018, ~~2017,~~ and ~~2016,~~2017, Canon’s increases in property, plant and equipment were ¥178,088 million, ¥159,316 million ~~¥147,542 million~~ and ~~¥171,597~~¥147,542 million, respectively. In ~~2018,~~2019, 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 ~~2019,~~2020, Canon projects to invest in property, plant and equipment of approximately ~~¥175,000~~¥160,000 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.

The SEC maintains a website at https://www.sec.gov that contains reports and proxy information regarding issuers that file electronically with the SEC. Some of the information may also be found on our website at https://global.canon/en.

B. Business overview

Canon is one of the world’s leading manufacturers of office MFDs, plain paper copying machines, laser printers, cameras, inkjet printers, diagnostic equipment 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 ~~2018, 78.0%~~2019, 75.7% of consolidated net sales were generated outside Japan, with approximately ~~27.2%~~28.6%, ~~25.7%~~24.6% and ~~25.1%~~22.5% 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 will work to realize the optimized global allocation of its production assets based on changes in local conditions in each ~~country.~~country and region. Canon has manufacturing subsidiaries in a variety of countries and regions, including the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and the Philippines, other than Japan.

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.

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Products

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

- Office Business Unit -

Canon manufactures, markets and services a full range of office 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. Canon’s offerings cater to a broad market from Small Office Home Office (“SOHO”), and Small and Midsize Business (“SMB”) to large enterprises and professional graphic 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 to

short-run,

print-on-demand

and variable data printing. The importance of connectivity, security, mobility, integration, workflow and cloud-based web services is growing, and such added value is increasingly delivered together with hardware. Canon seeks to maintain its position as a market leader in these fast-changing markets.

In ~~2018,~~2019, Canon expanded ~~our~~its hardware offerings by ~~introducing~~providing image RUNNER ADVANCE Gen3 ~~2nd Edition. We~~3rd Edition with enhanced security function. Canon is also ~~introduced the~~providing a new software named uniFLOW Online which enabled the new image RUNNER ADVANCE Gen 3 ~~2nd~~3rd Edition to connect to cloud services. WeCanon expanded our Multi-Function Printer (“MFP”) capability by using the new software solution technology.

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.

As for laser printers, Canon has focused on expanding sales of high value-added products from mid to

high-end

class, especially for MFP, which has resulted in increasing sales ~~quantity~~volume and market share in the said products category successfully. Canon, however, is experiencing fierce competition ~~with~~from aggressive competitors in the laser printer market and an eventual decline in sales prices of printers and consumable cartridges is becoming a major threat, in addition to concerns over lagging growth of the entire market affected by decrease in demand for printing, which is caused by change in users’ printing behavior ~~under~~due to the prevalence of ~~smartphone,~~smartphones, cloud computing, etc.

In response, Canon ~~is going~~aims to accelerate current momentum to increase sales ~~quantity~~volume and market share by enhancing competitiveness inlike driving contractual business ~~market~~which engages with ~~making the most of~~customers for a certain period, accompanied with leveraging technical innovation and so forth. Furthermore, Canon aims to maximize business efficiency through continuous efforts ~~for cost reductions~~to reduce costs and ~~optimization of~~optimize its supply chain.

- Imaging System Business Unit -

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

In ~~2018,~~2019, Canon strengthened and expanded its product lineup, including mirrorless cameras, a growing market, by launching ~~four~~six new digital interchangeable-lens cameras, such as the compact and lightweight full-frame mirrorless camera, EOS R,RP, adopting a newly designed mount system, ~~for improving optical performance,~~ and the EOS ~~M50~~M200 which realizes ~~both high performance~~improved smartphone connectivity and user-friendly operation. ~~These new models as well as the current models pushed sales and~~As a result, Canon ~~maintained number one~~has steadily increased its market share in the field of mirrorless cameras, and maintained number one share in digital interchangeable-lens cameras in terms of volume ~~terms~~ in ~~2018~~2019 in the major ~~regions,~~regions/countries, such as the United States, Europe, China and Japan.

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Canon aims to expand the imaging domains of EOS, and believes there remains considerable room for future growth through development of new products based on

state-of-the-art

technology such as higher picture quality, small and lightweight body and versatile movie/network functions.

Canon has announced ~~4 new EF lenses, 1 newEF-M~~ ~~lens, and 4~~six new RF lenses ~~along with 4 mount adapters~~ for ~~the new R system.~~full frame mirrorless cameras. The large diameter mount and short back focus has allowed for a great increase in freedom of lens design, resulting in huge leaps in optical performance.

Canon aims to meet customer expectations through continuous introduction of high-quality and high-performance lenses developed with superior optical technology and new elemental technology.

As for compact digital cameras, while the overall market has been shrinking, the premium segment with relatively large sensors has been performing steadily. In ~~these circumstances,~~this segment, Canon launched two new models in 2019, and ~~plans to maintain its full-line up strategy to meet a wide range of customer needs. In addition, Canon~~ aims to further strengthen its premium lineup, and improve its profitability.

In the compact photo printer market, Canon has performed well along with the increasing demand for photo printing from smart devices. With its advantages, such as easy operation, portability, and

lab-quality

photo print, SELPHY has gained a strong market position in each region. ~~The SELPHY CP1300 with advanced usability launched in the second half of 2017, and~~ IVY Mini Photo Printer (Zoemini), which empowers users to share their story through print launched in 2018 has also shown high sales performance. Canon plans to tap new customer demand and to maintain its lead in this market.

In the market for digital camcorders, Canon aims to expand sales in this market with a product lineup with higher value added based on Canon’s distinctive high-definition, high-resolution technologies. In the field of professional camcorders, Canon introduced the new model EOS C700 FF; a digital cinema camera which has newly developed full-frame sensor, and XF705; a professional camcorder which is capable of shooting 4K/60P/4:2:2/10 bit/HDR video to~~on-board~~ ~~SD cards. Canon aims to solidify its top position in the motion picture production market by introducing new products that suit a wide variety of market requirements.~~

Canon experienced robust growth in the field of projectors for business applications, and in particular brighter, installation type projectors. In this market, Canon offers a range of products with its advanced optical technologies. In 2018, Canon launched totally 8 models, such as two 4K laser projectors,“4K6020Z” and “4K5020Z”. Moreover, in the 4K category, a high-brightness model with 35,000lm is lined up. Canon plans to expand the projector business based on customer’s demands.

In the broadcast HDTV lens market, demand remains stable from sports broadcasting in developed countries and from switchover to HD in developing countries, and Canon continues to maintain a large share of the TV lens market with high value-added products. Demand for 2/3” format 4K lenses is increasing especially in Europe and Asia, like we introduced in September, UJ122x8,2B, which has the world largest optical zoom ratio* as 4K broadcast lens in 2/3” format, Canon continues to expand the product lineup to meet this demand. In the Cinema lens market, Canon launched~~CN-E20mm,~~ ~~which reinforces the 6 prime lens set. Thanks to the 7th prime lens model, the value of the prime set itself once more has been raised and well appreciated in the market.~~

*	~~Among field zoom lenses for 4K broadcast cameras employing2/3-inch~~ ~~sensors. As of December, 2018, based on a Canon survey.~~

Inkjet printer technology has been evolving, driving expansion of application from home use to 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-photolithography Inkjet Nozzle Engineering (“FINE”), which enables realization of high-speed printing and high image quality at the same time.

For home use, Canon offers such printer solutions as Canon PRINT Inkjet to tighten the connection with cloud computing, smartphones and tablet PCs. Canon also offers more compact body, premium design, convenient front &and rear dual paper feeder, and a larger and easy to read liquid crystal touchscreen panel. Canon ~~hopes~~believes such enhancement of function and service will increase user-friendliness and satisfaction of users.

~~In the second half of 2018,~~

Since 2016, Canon launched the WG7000 series which is the first generation of Inkjet MFP with the line head technology targeting the growing Small-Medium Business segment. The WG7000 series makes user maintenance easy by adopting with a simple print process in the body. The newly developed line head and the pigment ink make both high productivity and high quality print. At the same time of launching of WG7000 series, Canon is introducing a fixed charge business model as a new contractual business starting in Japan. No initial investment for a printer and reducing management load by automatic consumable delivery respond to various office needs.

~~In 2016, Canon~~has launched Refillable Ink Tank Printers that achieved high productivity and cost saving by featuring

built-in

ink tanks, for business use in emerging market.

As large-format inkjet printers must meet the advanced photo and graphic printing needs of professionals, ~~in 2017~~ Canon ~~completed~~has a lineup of graphic products that cater to all customers, starting with the imagePROGRAF

PRO-1000,

which supports

A2-size

paper, to the

60-inch

flagship ~~model.~~model, imagePROGRAF

PRO-6100

with improved functionality and productivity. The color reproduction and expressiveness of dark areas of these products are improved by using

12-color

LUCIA Pro ink, which features new pigment ink and Chroma Optimizer, and the new

L-COA

PRO image processing engine.

To meet companies’ growing demand for~~low-costin-house~~

low-cost

in-house

production of large formats such as CAD and posters, Canon newly developed the five-color pigment ink LUCIA TD that realizes high-quality image printing on normal paper and does not require special paper. ~~The~~In addition to the imagePROGRAF TXTX/TM series that ~~delivers~~deliver high-speed printing, ~~and~~ the entry version imagePROGRAF TMTA series ~~with printing noise significantly reduced by up to 60%~~ were newly added to the ~~lineup.~~

Inlineup, with the best print quality and the quietness inherited from the advanced models.

Since 2012, Canon ~~started to ship~~has shipped the DreamLabo 5000, the first inkjet production photo printer featuring new FINE high-density print head technology.

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Canon’s lineup also includes CanoScan LiDE, the flatbed scanners which use Contact Image Sensor (“CIS”), and a scanner with Charge-Coupled Devices (“CCD”) for high resolution. Canon has maintained high share in the scanner market by achieving stable sales results.

- Medical System Business Unit -

Canon markets diagnostic imaging systems, including Computed tomography (“CT”), Magnetic resonance imaging (“MRI”), ultrasound, and

X-ray

systems, as well as clinical laboratory systems and healthcare ICT solutions, and provides them to customers in more than 150 countries and regions around the world, offering technology that enables early detection and fast diagnosis. Continuing its long tradition of contributing to improvements in healthcare, Canon is making positive contributions toward hospital management and provides a range of patient-friendly healthcare systems and services.

~~The medical equipment market continues to gradually expand supported by overseas growth in such markets as~~

In the United States and emerging markets. In Japan, we saw a temporary slowdown in demand as investment decisions were being postponed, particularly for high-priced diagnostic imaging equipment. Against this background, Canon’s CT systems business, ~~which is~~ the mainstay of medical ~~system~~ business units, ~~remathe~~Canon kept top share ofin the Japanese market. ~~And new~~New products ~~that we~~Canon launched so far continued to ~~raise our~~enhance its presence, such as aAquilion Start in 16 slice configurations with premium ~~1.5T MRI system, named Vantage Orian utilizing migrated high end 3T technology.~~

technology originally developed for our

high-end

CT systems, Aquilion ONE

™

/ GENESIS Edition with Advanced intelligent

Clear-IQ

Engine (“AiCE”) and ultrasound systems “Aplio

a-series”.

Canon pursues high-resolution imaging that ~~enables~~helps enable more accurate diagnosis. ~~Japan Medical Research~~Canon introduces spectral CT system and Development Awards program was established in 2017 which aims for research and development in the medical field and we are truly honored to have received the first award presented by the Minister of Health, Labor and Welfare for the pioneering development of Aquilion ONE. We were also recognized during the Seventh Monozukuri Nippon Grand Awards where our CT technology were recognized for its contribution to diagnostic imaging and global healthcare with development of Aquilion systems. Aplio~~i-series~~ diagnostic ultrasound systems technology, in recognition of CMSC’s proprietary technology of Different Tissue Harmonic Imaging, was acknowledged at the 2018 Ceremony of National Commendation for Invention, where it received the Invention Achievement Award. We also launched standard priced diagnostic imaging equipment such as premium 1.5T MRI system ~~Vantage Orian, high image quality~~designed for deep intelligence with ~~full portability ultrasound systems named Viamo series,~~Deep Learning Spectral Reconstruction imaging capabilities. Deep Learning can distinguish true signal from noise to deliver sharp, clear and ~~Aquilion Lightning 80 detector row Ultra Helical CT.~~

distinct images at fast speeds.

By incorporating various strengths (such as precision mechanical design, processing technology, sensor technology, and image processing technology) and advancing synergy with Canon’s group technology ~~during~~among the development, ~~manufacture,~~manufacturing, and servicing of Canon’s medical equipment products, Canon ~~will continue to work hard~~continues to provide products with high added value that further contribute to ~~improvements~~a field of healthcare.

Canon is strategically realigning its global medical business within Canon Group and started operations under the new organization in ~~healthcare.~~

USA and Japan from January 2020 in order to expand global business.

Canon and the Center for iPS Cell Research and Application, Kyoto University, began joint research from August, 2019, with the aim of contributing to the field of regenerative medicine through the realization of higher-quality induced pluripotent stem (“iPS”) cells1 for autograft purposes, or “my iPS cells2”.

In the component business, ~~market,~~ both the expanding demand in emerging markets and the demand to transition from Computed Radiography (“CR”) to Digital Radiography (“DR”) continue to drive steady market growth for

X-ray

equipment. On the other hand, technological competition with component manufacturers in Europe and the USA has been increasing for

high-end

products, and price competition with manufacturers in China and South Korea has been increasing for the

low-end

product segment where products are becoming commoditized. Under these market circumstances, Canon ~~released our~~launched a new ~~flat panel detectors (“CXDI-710C Wireless series”)~~standard model with enhanced price competitiveness for some regions in ~~2017, featuring weight-saving~~2019, and ~~waterproof performance, and this has contributed~~plans to ~~increased sales quantity~~make it available in ~~the DR product market.~~other regions soon. In the dynamic

X-ray

equipment market, where high growth is expected, Canon is continuing its strong efforts to promote sales of fluoroscopy and angiography systems. With regard to our

X-ray

tube units,

X-ray

imaging devices, etc., Canon has developed competitive products for this business based on ~~our~~its highly reliable core technologies (high-voltage vacuum technology, hydrodynamic liquid metal bearing technology, cesium iodide deposition technology, etc.), which have contributed to strong sales.

~~Regarding~~ With regard to professional cameras which are mainly for medical equipment, Canon retains high competitiveness, due to its agile product development and quick adaptation to the market needs for camera miniaturization and better image quality.

In the ophthalmic equipment business, Canon ~~responded~~continues to ~~stiffer market competition in the growing~~upgrade its Optical Coherence Tomography (“OCT”) ~~market by upgrading a OCT~~ Angiography software series which enables depiction of retinal blood vessels without using fluorescein, a substance that potentially causes strong allergic ~~reactions.~~

reactions, under stiffer competition in the growing OCT market.

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- Industry and Others Business Unit -

In the market for semiconductor lithography equipment, ~~investments for~~capital expenditures in memory ~~devices has remained positive~~lithography equipment were significantly restrained due to the ~~demand expansion~~impact of trade friction between the United States and China and the decline in memory prices. On the other hand, capital expenditures for~~3D-NAND~~ ~~flash memory semiconductors used~~ CMOS sensors, communication devices, and other products were solid due to advances in ~~data centers.~~IoT and 5G technologies. In the market for~~i-line~~ ~~steppers, investments for diversified IoT devices and automotive semiconductors has remained stable. In the market for~~

back-end

lithography systems, ~~chip makers have required higher density integration and thinner chip production which resulted~~capital expenditures in ~~the investment growth for~~ large-capacity memories such as Through-Silicon Via (“TSV”).

expanded due to increasing demands for higher density integration and thinner chips.

Responding to diversified semiconductor applications, Canon has been developing a

“design-in”

business style, which enables customer needs to be reflected in the early stage of our product development process, and Canon has made steady progress in developing products with high added value. Canon has a wide variety of ~~productline-ups~~products for ~~such as~~ IoT devices and automotive semiconductors, which are rapidly becoming more widespread. Canon is ready to expand ~~the~~its market share further by KrF scanner

“FPA-6300ES6a”

which realized high productivity and the highest level of overlay for memory production, and by continuous upgrades of

i-line

stepper

“FPA-5550iZ2.”

For

back-end

lithography systems, Canon is going to meet the variety of market needs with releasing high-resolution optional function of

“FPA-5520iV”

which can be adapted to FOWLP (Fan Out Wafer Level Package) process and responds to the latest packaging. Canon is also preparing for the mass production of Nanoimprint semiconductor lithography equipment.

In the market for FPD lithography equipment, investments ofin high-definition organic light-emitting diode (“OLED”) panels for mobile applications, ~~has settled down after~~which had been very strong in past couple of years, have entered an ~~uptrend,~~adjustment phase, but there is an ongoing momentum of application expansion such as ~~automotive panels.~~foldable displays. The TV market performed stable due to the continuous investments for

large-sized

TVs mostly in China’s market. The TV market ~~has seen flat-screen TVs spread, and~~ is expected to experience a transition to high-quality TVs represented by

large-sized,

4K/8K high-definition panels and OLED displays. ~~In order to meet this~~Canon meets market needs ~~Canon launched~~by reinforcing its lineup with “MPAsp-H1003T” which ~~enables~~realizes a high productivity by one shot exposure of high quality

65-inch

panel on a G8 glass substrate. Also, Canon is aiming to expand ~~the~~its market share further ~~with~~by strengthening competitiveness and improving throughput of “MPAsp-E813H” to meet the diversification of OLED products.

~~Regarding~~

Network cameras are recognized as the ~~network cameras, in addition~~key to the social infrastructure for crime prevention and disaster monitoring, ~~development~~and the need for high-resolution, high-quality cameras is ~~also progressing~~ever increasing. Moreover, video content analysis software contributes to the automation and

man-power

saving in response to the shortage of human resources due to the declining birthrate and aging population, and is widely used for ~~various applications to support~~production sites and marketing fields other than just for security purposes. The market for solutions that combine network cameras and video content analysis ~~based marketing and productivity improvement and others. As a result,~~software is largely expanding.

In 2019, Canon enhanced the ~~demand is increasing for high-grade cameras supporting high resolution and improving performance under low light, as well as for video analysis software. Thus, the market is on an expansion trend.~~

~~In the first half~~function of ~~2018, Canon launched~~ the ultra-high sensitivity network camera

“ME20F-SHN” ~~to demonstrate~~

that demonstrates its ~~power for monitoring,~~outstanding performance especially at night and in the dark. Furthermore, Canon also released new outdoor network cameras that adopted its originally developed “Hydrophilic Coating II” technology. By merging products equipped with Canon’s differentiated technology with the extensive lineup of network cameras from Axis, as part of the Group, Canon is able to respond to a wide range of customer requests from general monitoring applications to important ~~facilities, rivers, borders, disaster areas,~~facility monitoring.

In addition, as a video content analysis software, Canon released the “Crowd People Counter for Milestone XProtect Version 1.0” that can instantly count thousands of people with high speed and ~~dark places.~~high accuracy by using AI. It is expected to be utilized in various fields for such situations as accident prevention, traffic volume surveys, gauging the congestion status of sightseeing spots, event marketing and others.

Going forward, Canon aims to become a global leader in network visual solutions by providing optimal solutions through strengthening collaboration and accelerating technology fusion among the group companies such as Axis, Milestone, and BriefCam.

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Canon adopts differentiation strategy for high image quality in the digital video camera market. In the professional video camera field, Canon launched the “EOS C 500 Mark II” digital cinema camera equipped with a 5.9 K

full-size

sensor, and the “XA 55/45 Series” 4K professional video camera. Canon is aiming to build up a major position in the video production market by introducing a wider product lineup.

In the broadcasting lens market, demand for sports relay broadcasting in developed countries and 4K broadcasting in emerging countries are growing steadily, and Canon continues to maintain a high market share thanks to its strong product lineup. For satisfying higher demand for 2/3 inch 4K lenses mainly in Europe and Asia, Canon continues to expand the product lineup, for example, by launching the “UJ 122 x 8.2 B” outdoor relay lens and the “CJ 15 ex 4.3 B” portable lens. In the field of cinema lenses, Canon launched 7 types of single focus lens series “Sumire Prime” featuring soft depiction and bokeh in cinema photography. The series has been popular in the film and video production markets.

The market for projectors in business applications, in particular brighter, installation type projectors, enjoyed robust growth. In this market, Canon is expanding its product lineup with its advanced optical technologies. In 2019, Canon launched 4K laser projector “4K6021Z” as the flagship model. Moreover, Canon released PC application software that supports multiple projection installation, which has been growing in recent years. Canon aims to expand the “Moving Object Mask”, an embedded application for Milestone Systems’ video management software “XProtect” which can silhouette display a moving body in a video for consideration of privacy. In the second half of 2018, Canon welcomed BriefCam, a company advancing with video analytics software differentiated by unique Video Synopsis technology, into the Group. In addition toprojector business ~~growth, their arrival in the Group strengthened the foundation as a solution provider integrating network cameras, video management software, and video analysis software, etc.~~

Now and in the future, Canon will strive to become the global leader of network video solution with strengthening the collaboration within the Canon Group, accelerating the integration of technology, and offering the optimized solution.

based on customer’s demands.

NET SALES BY SEGMENT

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

   Years ended December 31
   2018    change 2017    change 2016
   (Millions of yen, except percentage data)
Office
   1,807,301    0.1 % 1,804,782    3.4 % 1,745,996
Imaging System
   1,008,165    -11.3 1,136,188    3.7 1,095,289
Medical System
   437,578    0.3 436,187    — —
Industry and Others
   805,211    1.6 792,850    22.6 646,483
Eliminations
   (106,318 )    — (89,992 )    — (86,281 )






Total
   3,951,937    -3.1 % 4,080,015    19.9 % 3,401,487

~~Note:~~

Canon newly established “Medical System” Business Unit effective at the beginning of the second quarter of 2017, and certain businesses included in Industry and Others Business Unit have been reclassified. Net sales for the year ended December 31, 2016 were not restated since they were not material.


	Years ended December 31
	2019			change			2018			change			2017
	(Millions of yen, except percentage data)
Office		1,702,595			-5.8	%		1,807,301			0.1	%		1,804,782
Imaging System		807,414			-16.8			970,435			-11.7			1,099,125
Medical System		438,525			0.2			437,578			0.3			436,187
Industry and Others		737,945			-12.5			842,941			1.6			829,913
Eliminations		(93,180	)		—			(106,318	)		—			(89,992	)

Total		3,593,299			-9.1	%		3,951,937			-3.1	%		4,080,015

From the beginning of the first quarter of 2019, Canon has reclassified certain businesses from the Imaging System Business Unit to the Industry and Others Business Unit, and from the beginning of the third quarter of 2018, Canon has reclassified certain businesses from the Office Business Unit to the Industry and Others Business Unit. Sales amounts for the years ended ~~2017~~2018 and ~~2016~~2017 also have been restated.

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
   2018    change 2017    change 2016
   (Millions of yen, except percentage data)
Japan
   869,577    -1.7 % 884,828    25.2 % 706,979
Americas
   1,076,402    -2.8 1,107,515    14.9 963,544
Europe
   1,015,428    -1.3 1,028,415    12.6 913,523
Asia and Oceania
   990,530    -6.5 1,059,257    29.6 817,441






Total
   3,951,937    -3.1 % 4,080,015    19.9 % 3,401,487

Years ended December 31

2019

change

2018

change

2017

(Millions of yen, except percentage data)

Japan

872,534

0.3
%
869,577

-1.7
%
884,828

Americas

1,029,078

-4.4

1,076,402

-2.8

1,107,515

Europe

882,480

-13.1

1,015,428

-1.3

1,028,415

Asia and Oceania

809,207

-18.3

990,530

-6.5

1,059,257

Total

3,593,299

-9.1
%
3,951,937

-3.1
%
4,080,015

16

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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 the

year-end

holiday season.

In Japan, corporate demand for office products peaks in the first quarter, as many Japanese companies end their fiscal ~~years~~year 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., 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 to

end-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 to

end-users

in Australia by Canon Australia Pty. Ltd.

For medical business, CMSC sells its products directly or through regional marketing subsidiaries and distributors.

Canon also sells laser printers on an OEM basis to HP ~~Inc..~~Inc. HP Inc. resells these printers under the “HP LaserJet Printers” name. During ~~2018~~2019 and ~~2017,~~2018, OEM sales to HP Inc. constituted ~~13.6%~~13.0% and ~~13.1%~~13.6%, 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.

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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, office MFDs, and printers, and supplies replacement drums, parts, toner and paper. Most customers enter into a contract under which Canon offers consumables and parts as well as break fix activities in return mainly for a ~~stated~~fixed amount ofin 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.

For diagnostic imaging systems, including CT, MRI, ultrasound, and

X-ray

systems, Canon provides comprehensive repairs, service, and maintenance to ensure that customers are able to use these products to their full potential at all times. Canon maintains support contracts with customers and has technical call centers. In addition, to help ensure customer satisfaction, Canon offers service training programs for engineers working in overseas medical institutions. For the service contract of medical system products, customers pay stated fixed fees for the stand ready maintenance service.

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:


~~Ricoh Company, Ltd.~~		~~Electrophotography~~
~~HP Inc.~~		~~Laser printers, multifunction printers and facsimile machines~~
Kyocera Document Solutions Inc.		Electrophotography
~~Oki Electric Industry Co., Ltd.~~ Sharp Corporation		~~LED printers, multifunction printers and facsimile machines~~ Electrophotography
~~Sharp Corporation~~ Brother Industries, Ltd.		~~Electrophotography~~
~~Brother Industries, Ltd.~~		Electrophotography and facsimile machines

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

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


~~HP Inc.~~
HP Inc.		Bubble jet printers
~~Ricoh Company, Ltd.~~ Xerox Corporation		~~Electrophotography products, facsimile~~ Business machines ~~and word processors~~
~~Xerox Corporation~~		~~Business machines~~
International Business Machines Corporation		Information handling systems
Eastman Kodak Company		Electrophotography and image processing technology
Seiko Epson Corporation		Information-related instruments

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.

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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.; HP Inc.; Samsung Electronics Co., Ltd.; and Lexmark International, Inc. Canon believes that it is one of the leading global 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 in all areas of the business machine market. In emerging markets, for example in China, the current market leaders for business machines are Fuji Xerox. Co., Ltd., Konica Minolta Inc. and Toshiba TEC Corporation. Canon ~~hopes~~plans to join this group by introducing products tailored to the Chinese market and by strengthening sales and service channels.

- Imaging System Business Unit -

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.

Average prices for compact digital cameras in the industry increased in ~~2018~~2019 from the previous year. Market contraction is 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 and Nikon 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 HP Inc., Seiko Epson Corporation and Brother Industries, Ltd.

- Medical System Business Unit -

Canon’s primary competitors in the diagnostic medical imaging market are General Electric Company, Siemens AG, Koninklijke Philips N.V., Hitachi, Ltd., and Fujifilm Corporation. Canon has also new competitors such as United Imaging Healthcare Co. Ltd., Chinese vendor.

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The markets for this segment are highly competitive. Canon has been consistently involved in the medical care business, from development to manufacturing, sales, and service. Canon believes that it provides high-resolution images that enable more accurate diagnosis. For example, we have developed several

world’s-first

technologies, such as an ultrahigh-resolution CT scanner with twice the spatial resolution in both the

in-plane

direction and the axial direction compared to a conventional CT scanner, and ultrasound technology that can perform imaging of very fine, slow-flowing bloodstreams that previously could not be visualized. WeCanon will continue to bring the latest diagnostic imaging systems to the market.

- Industry and Others Business Unit -

Very stiff competition continues in the markets for lithography equipment used in the production of semiconductor devices and FPD. 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, satisfying the needs by quickly providing products which correspond to the diversification of devices associated with the trend of IoT.

Canon believes 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 Korean market. Canon’s sales and service support systems have also received high accolades from the customers in these markets. In the trend of demand expansion for 4K displays and OLED panels, Canon believes it has also been meeting the needs of panel makers by continuously offering new products with 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 and global initiative relating to energy and resource conservation, recycling, global warming, pollution prevention, pollution remediation and environmental health and safety. Some of the environmental laws, regulations, industry standards and global initiative that affect Canon’s businesses are summarized below.

1.	UN Frameworks to Address Global Issues, which are related to the Environment including Climate Changes

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 1211 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.

The Paris Agreement on climate change was adopted in 2015 and entered into force in 2016. The Agreement relates to a common future framework beyond 2020 to address climate change. In the Agreement, all

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member states of UNFCCC agreed to take countermeasures to hold Global temperature rise to well below 2 degrees Celsius above

pre-industrial

levels and to pursue efforts to limit the temperature rise to 1.5 degrees Celsius.

Upon the Agreement, Canon is further striving to reduce CO2 emissions toward the

low-carbon

society. Canon has established ~~2018-2020~~2019-2021

Mid-Term

Environmental Goals and monitors its progress to be reported to its Management for review on a yearly basis. Canon is implementing initiatives to achieve these goals, which focus on “Lifecycle CO2 emissions improvement index per product by average 3% improvement”, “Raw materials and usage CO2 emissions improvement index per product by average 3% improvement”, and “Improve energy consumption basic unit at operational sites by 1.2% (compared to the previous year)”. Canon has successfully reduced its “Life Cycle CO2 emission” per product, that was an average improvement of ~~5.2% (2008-2017)~~5.0% (2008-2018) and cumulative ~~35.9%~~37.7% as compared with 2008. Also, total lifecycle CO2 emissions in ~~2017~~2018 were ~~7.559~~7,043 million tons. Further, Canon continues to reduce its “Life Cycle CO2 emission” per product, that was an average improvement of 4.7% (2008-2019) and cumulative 40.0% as compared with 2008. Total lifecycle CO2 emissions in 2019 were 6,088 million tons, which were verified by a third party in ~~April 2018.~~

March 2020.

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

As for the environmental information disclosure, Canon considers the disclosure items recommended by the Financial Stability Board (FSB), Task Force on Climate-related Financial Disclosures (TCFD) in the Canon Sustainability Report. Further, Canon discloses climate-related information through a platform of the CDP.

2.	European Union Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“the RoHS Directive”)

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 was expanded to include medical and measurement equipment starting in July 2014. New subsidiary directive of RoHS Directive restricting an additional four substances, Bis

(2-ethylhexyl)

phthalate (“DEHP”), Butyl benzyl phthalate (“BBP”), Dibutyl phthalate (“DBP”) and Diisobutyl phthalate (“DIBP”), was published in June 2015, and these substances ~~will be~~have been restricted starting in July, 2019. In 2018, study for more additional restricted substances was started, and the preparatory study for the next recast of RoHS ~~will start from~~was started in 2019. In parallel with these developments, all the RoHS exempted applications for which the restricted substances can be used are now under review. If these exemptions expire and/or additional substances are restricted in the future, additional design changes may be required for Canon products, and cost of changing designs may increase total compliance costs.

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. In addition, such information will have to be registered on the new EU database under Waste Framework Directive from January 2021. Canon is now preparing a scheme which make necessary information input to the database. Furthermore, additional restrictions on the use of certain substances can be proposed at any time by the ECHA (European Chemical Agency) or member states, and, some of them have been already adopted and others are now under discussion, manufacturers such as Canon must take steps to address such new restrictions.

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

4.	The European Framework for the Setting of Requirements for Energy-Related Products (“ErP Directive”)

The ErP Directive applies in Europe to all energy-using products, and implementing measures with respect to

off-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” were applied from 2015. The revised implementing regulation for external power supplies was published in Nov. 2019 and will be implemented from April 2020. For imaging equipment, the industry made a public commitment to attain certain targets on environmentally conscious designs from 2012 by an industrial voluntary agreement (“VA”) and began implementation in 2011. Currently the VA is under review, and

commitments may become tighter than ever from 2020, because the European authorities and NGOs are expected to require a stricter VA including resource efficiency-related criteria. 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 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..~~

changes.

5.	State Legislation in the United States Concerning Recycling of Waste Electric and Electronic Products

E-waste

recycling laws have been enacted or proposed in more than twenty American states. Although most 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.

6.	Chinese Administrative Measures on the Control of Pollution Caused by Electrical and Electronic Products

The Chinese Ministry of Information Industry revised Administrative Measures on the Control of Pollution Caused by Electrical and Electronic Products in January 2016, and regulates the same six substances covered by the EU RoHS in electrical and electronic products. The measures establish two stages of implementation. Stage 1 is in effect and covers 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. Stage 2 requires that the contents of six regulated substances in specific (as specified by the Chinese Government in the “Compliance catalog”) be restricted by limitations similar to the EU RoHS Directive. The “Compliance catalog” including printers, copying machines and facsimile machines was published on March 12, 2018. ~~Standards to implement these measures are under discussion~~The Conformity Assessment System for products covered by the ~~Chinese government.~~

“Compliance catalog” was published on May 16, 2019, which entered into force on November 1, 2019. Canon is continuing to comply with requirement.

The requirements may increase Canon’s costs and have an adverse effect on its operating results and financial ~~condition.~~

condition

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 list of products falling under the waste electrical and electronic products catalogue issued on February 9, 2015 includes printers, copying machines and facsimile machines. Those payment fees are under discussion by the Chinese government.

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These requirements will likely increase Canon’s costs and could adversely affect its operating results and financial condition.

8.	Soil Pollution Prevention Law of Japan

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-six

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, 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.

9.	Other Environmental Regulations

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) 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. by

non-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, ~~2018,~~2019, the following Canon affiliates engaged in the transactions 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.

CMSC, a wholly-owned Japanese subsidiary of Canon Inc., had indirect sales transactions through independent distributors in Istanbul, Turkey, Sharjah, United Arab Emirates and Tehran, Iran for computed tomography, diagnostic ultrasound systems and service parts for those products with hospitals in Iran. It is our understanding that Iranian hospitals are owned or controlled by the Government of Iran (central or local government) and that their purchases are controlled through an agency of the Iranian Ministry of Health and Medical Education. Total gross sales under these contracts during the year ~~2018~~2019 were approximately ~~¥86,738~~¥142,431 thousand. The net profit was substantially less than that.

Canon Europa N.V. (“CENV”), a wholly-owned Dutch subsidiary of Canon Finance Netherlands B.V., which is wholly-owned by Canon Inc., had indirect sales transactions through independent distributors in Dubai, United Arab Emirates and Algete, Spain for medical products such as digital radiography systems with hospitals in Iran. It is our understanding that Iranian hospitals are owned or controlled by the Government of Iran (central or local government) and that their purchases are controlled through an agency of the Iranian Ministry of Health and Medical Education. Total gross sales under these contracts during the year 2018 were in foreign currency of approximately ¥11,914 thousand. The net profit was substantially less than that.

Canon India Pvt. Ltd., a wholly-owned Indian subsidiary of Canon Singapore Pte. Ltd. (“CSPL”), a wholly-owned Singapore subsidiary of Canon Inc., has a service contract for a copier machine with the Iranian embassy in New Delhi. Total gross sales under this contract and activity above during the year 2018 was in foreign currency of approximately ¥5 thousand. The net profit was substantially less than that.

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, ~~2018~~2019 that requires disclosure in this report under Section 13(r)

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of the Exchange Act. Canon maintains policies and procedures designed to ensure that transactions, including transactions with Iranian counterparties, are conducted in accordance with applicable economic sanction laws and regulations.

In addition, CMSC has indirect sales of medical equipment to unaffiliated distributors in Japan, which distribute the equipment to hospitals in Syria and Sudan through unaffiliated third parties. Canon does not have any direct agreements, commercial arrangements, or other contacts with the governments of Syria or Sudan, or with entities controlled by those governments. Total net sales to Syria and Sudan in the year ended December 2019 was
one-tenth
of one percent (0.1%) or less of Canon’s total consolidated net sales for that period. Canon does not believe the transactions with Syria and Sudan are material, either individually or in the aggregate, in quantitative or in qualitative terms.

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, ~~2018,~~2019, Canon Inc. had ~~379~~361 consolidated subsidiaries and 8 affiliated companies accounted for by the equity method.

The following table lists the significant subsidiaries owned by Canon, all of which are consolidated as of December 31, ~~2018.~~

Name of company

Head office location
   Proportion of
ownership interest
owned    Proportion of
voting power
held
Canon Marketing Japan Inc.
   Tokyo, Japan    50.1%    58.5%
Canon U.S.A., Inc.
   New York, U.S.A.    100.0%    100.0%
Canon Europa N.V.
   Amstelveen, The Netherlands    100.0%    100.0%
Canon Medical Systems Corporation
   Tochigi, Japan    100.0%    100.0%

2019.

Name of company

Head office location

Proportion of
ownership interest
owned

Proportion of
voting power
held

Canon Marketing Japan Inc.

Tokyo, Japan

50.1
%
58.5
%
Canon U.S.A., Inc.

New York, U.S.A.

100.0
%
100.0
%
Canon Europa N.V.

Amstelveen, The Netherlands

100.0
%
100.0
%
Canon Medical Systems Corporation

Tochigi, Japan

100.0
%
100.0
%

D. Property, plants and equipment

Canon’s manufacturing is conducted primarily at 3029 plants in Japan and 1814 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, ~~2018~~2019 are as follows:


~~Name and location~~	~~Floor space~~ ~~(including~~ ~~leased space)~~		~~Principal activities and products manufactured~~
~~Domestic~~	~~(Thousands of~~ ~~square feet)~~
Name and location
~~Headquarters, Tokyo~~ Floor space (including leased space)		~~2,564~~ Principal activities and products manufactured
Domestic	(Thousands of square feet)

Headquarters, Tokyo		2,564	R&D, corporate administration and other functions

Canon Global Management Institute, Tokyo		166	Training and administration

~~Kawasaki Office, Kanagawa~~		~~1,904~~
Kawasaki Office, Kanagawa		1,882	R&D and manufacturing of production equipment and semiconductor devices; R&D of laser printers and toner cartridges

~~Kosugi Office, Kanagawa~~		~~370~~	~~Development of software for office imaging products~~

~~Fuji-Susono Research Park, Shizuoka~~ Kosugi Office, Kanagawa		~~932~~ 378	Development of medical equipment ,Human resources development training (except for technical training)

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Name and location	Floor space (including leased space)		Principal activities and products manufactured
Domestic	(Thousands of square feet)

Fuji-Susono Research Park, Shizuoka		932	R&D in electrophotographic technologies

~~Ayase Office, Kanagawa~~		~~394~~
Ayase Plant, Kanagawa		394	R&D and manufacturing of semiconductor devices

~~Hiratsuka Plant, Kanagawa~~		~~926~~
Hiratsuka Plant, Kanagawa		879	R&D of display products and manufacturing of semiconductor devices

~~Tamagawa Office, Kanagawa~~		~~384~~	~~Quality engineering~~

~~Oita Plant, Oita~~ Tamagawa Office, Kanagawa		~~389~~ 384	~~Manufacturing of semiconductor devices~~ Quality engineering

~~Yako Office, Kanagawa~~		~~906~~
Oita Plant, Oita		402	Manufacturing of semiconductor devices

Yako Office, Kanagawa		906	Development of inkjet printers, inkjet chemical products


~~Name and location~~	~~Floor space~~ ~~(including~~ ~~leased space)~~		~~Principal activities and products manufactured~~
~~Domestic~~	~~(Thousands of~~ ~~square feet)~~

Utsunomiya Office, Tochigi		2,764	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~~		~~3,127~~
Toride Plant, Ibaraki		3,018	R&D in electrophotographic technologies, mass-production trials and supports; manufacturing of office imaging products, chemical products; training of manufacturing

~~Ami Plant, Ibaraki~~		~~972~~
Ami Plant, Ibaraki		971	Manufacturing of FPD production equipment

Canon Electronics Inc., Tokyo, Saitama and Gunma		1,310	Components, magnetic heads, document scanners and laser printers

Canon Finetech Nisca Inc., Saitama, Ibaraki and Yamanashi		1,104	Label printer, Card printer, Optical equipment, Motor

Canon Precision Inc., Aomori		~~1,591~~ 1,587	Toner cartridges, sensors and micromotors

Canon Optron Inc., Ibaraki		144	Optical crystals (for lithography equipments, cameras, telescopes) and vapor deposition materials

Canon Chemicals Inc., Ibaraki		~~1,907~~ 1,920	Toner cartridges and rubber functional components

Canon Components, Inc., Saitama		~~725~~ 723	Contact image sensors, inkjet cartridges and medical equipment

Oita Canon Inc., Oita		~~1,577~~ 2,106	Digital cameras, lenses and digital video camcorders

Nagahama Canon Inc., Shiga		1,095	Laser printers, toner cartridges and A-Si drums

Oita Canon Materials Inc., Oita		~~3,143~~ 3,130	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		1,310	Inkjet printers and inkjet cartridges

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Name and location	Floor space (including leased space)		Principal activities and products manufactured
Domestic	(Thousands of square feet)

Canon Semiconductor Equipment Inc., Ibaraki		~~233~~ 232	Development and production of semiconductor production-related equipment

Canon Ecology Industry Inc., Ibaraki		~~992~~ 989	Recycling of toner cartridges, repair and recycling of business machines

Fukui Canon Materials Inc., Fukui		191	OPC raw stock, material for optics, High water-repellent material

~~Miyazaki Canon Inc., Miyazaki~~		~~179~~	~~Digital cameras~~

~~Canon Mold Co., Ltd., Ibaraki~~		~~219~~	~~Molds~~


~~Name and location~~	~~Floor space~~ ~~(including~~ ~~leased space)~~		~~Principal activities and products manufactured~~
~~Domestic~~	~~(Thousands of~~ ~~square feet)~~
Miyazaki Canon Inc., Miyazaki		831	Digital cameras

Canon Mold Co., Ltd., Ibaraki		220	Molds

Canon ANELVA Corporation, Kanagawa and Yamanashi		~~750~~ 760	Production equipment for electron devices, flat panel display and semiconductors

Canon Machinery Inc., Shiga		~~675~~ 697	Automated production equipment and semiconductor production-related equipment

Canon Tokki Corporation, Niigata, Kanagawa and Tokyo		~~373~~ 386	Vacuum technology-related equipment

Nagasaki Canon Inc., Nagasaki		~~518~~ 477	Digital cameras

~~Hita Canon Materials Inc., Oita~~		~~289~~	~~Rubber functional components~~

Canon Medical Systems Corporation, Tochigi		~~1,419~~ 1,423	R&D, manufacturing and sales of medical equipment

Canon Electron Tubes & Devices Corporation, Tochigi		357	R&D, manufacturing and sales of electron tubes and its application products

*~~Europe~~* Overseas

Europe

Canon Giessen GmbH, Giessen, Germany		348	Remanufacturing of copying machines, repair of cameras, service and ~~semiconductor production equipment~~ support for Canon sales companies

Canon Bretagne S.A.S., Liffre, France		505	Manufacturing and recycling of toner cartridges

Océ-Technologies B.V., Venlo, the ~~Netherlands~~ Netherlands*1		~~2,179~~ 2,189	Document management, digital sheet-fed presses and wide format printers

*Americas*

Canon Virginia, Inc., Virginia, U.S.		~~1,537~~ 1,546	Toner cartridges, molds and remanufacturing of copying machines

*Asia*

Canon Inc., Taiwan, Taiwan		~~1,595~~ 1,597	Lenses and digital cameras

Canon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia		611	Lenses and optical lens parts

Canon Dalian Business Machines, Inc., Dalian, China		1,721	Production and recycling of toner cartridges, production of laser printers

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Name and location	Floor space (including leased space)		Principal activities and products manufactured
Overseas	(Thousands of square feet)

Canon Zhuhai, Inc., Zhuhai, China		1,722	Digital cameras, digital video camcorders and contact image sensors

Canon Prachinburi (Thailand) Ltd., Prachinburi, Thailand		1,268	Copying machines

Canon Hi-Tech (Thailand) Ltd., Ayutthaya and Nakohon Ratchasima, Thailand		3,274	Inkjet printers, office MFDs, scanners, molds and plastic injection molded parts

Canon Zhongshan Business Machines Co., Ltd., Zhongshan, China		52	Laser printers

Canon Vietnam Co., Ltd., Hanoi, Vietnam		~~3,356~~ 3,368	Inkjet printers, laser printers, office MFDs, scanners and contact image sensors


~~Name and location~~	~~Floor space~~ ~~(including~~ ~~leased space)~~		~~Principal activities and products manufactured~~
~~Domestic~~	~~(Thousands of~~ ~~square feet)~~

Canon (Suzhou) Inc., Suzhou, China		~~1,524~~ 1,528	Copying machines

Canon Business Machines (Philippines),Inc., Batangas, Philippines		~~898~~ 893	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.

Note:

Océ-Technologies B.V. was renamed as Canon Production Printing Netherlands B.V. on January 1, 2020.

Main facilities under construction for establishment/expansion


~~Name and location~~		~~Principal activities and products manufactured~~
~~Domestic~~
Name and location		Principal activities and products manufactured
Domestic
~~Miyazaki~~
Canon Inc., ~~Miyazaki~~ Ibaraki		New ~~production base (Imaging System Business Unit)~~

~~Oita Canon Inc., Oita~~		~~New production base (Imaging System Business Unit)~~ Storage (Headquarters Operations)

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 office MFDs, plain paper copying machines, laser printers, cameras, inkjet printers, medical equipment, semiconductor lithography equipment and FPD 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.

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Canon divides its businesses into four segments: the Office Business Unit, the Imaging System Business Unit, the Medical System Business ~~Unit which was newly established in 2017,~~ and the Industry and Others Business Unit.

Economic environment

Looking back at the global economy in ~~2018,~~2019, the U.S. economy ~~steadily recovered as corporate earnings~~continued to grow thanks to solid consumer spending based on the strong employment environment and ~~employment conditions improved. In Europe, while domestic demand remained firm,~~changes in monetary policy, despite signs of a slowdown in manufacturing industries. The European economy was soft amid sluggish exports and concerns over the U.K. leaving the EU. As for the Chinese economy, despite holding discussions with the United States on trades and reaching an agreement in the first stage, the rate of economic growth ~~decelerated~~dropped due to decreases in exports and capital investment caused by prolonged trade friction with the United States. As for other emerging markets, economic growth slowed due to sluggish ~~export growth.~~external demand and weak pricing of natural resources. In ~~China,~~Japan, while the ~~economy slowed down~~employment situation remained strong, the economic recovery was modest due to a drop in manufacturing activity caused by sluggish ~~capital investments and~~external demand. On a ~~decline in consumer spending. The economies of other emerging markets also worsened, due to such factors as local currency depreciation. In Japan,~~global basis, the ~~economy recovered moderately supported by continuing improvements in employment conditions. As a result, the global economy overall continued to realize a moderate recovery. However, the pace of~~ economic ~~growth slowed down from the latter half of the year as a result of trade friction.~~

slowdown continued.

Market environment

~~As for~~

Amid these conditions, in the markets in which Canon operates, ~~amid these conditions,~~demand for office MFDs was in line with the previous year, despite solid demand for color models, and due to lower demand for monochrome models. As for laser printers, ~~enjoyed solid~~ demand decreased due to the ~~shift from monochrome~~impact of economic slowdowns in China and other countries. The market for cameras continued to ~~color models and robust demand in emerging markets. The decline of the camera market continued and the market~~shrink. Demand for inkjet printers ~~was slightly below the level of the previous year.~~continued to shrink in developed markets and remained sluggish in emerging markets due to economic slowdowns. On the other hand, although demand for medical equipment ~~grew moderately. Within~~continued to recover in Japan, overall demand was in line with the ~~Industry~~previous year, mainly owing to currency depreciation and ~~Others sector,~~economic slowdowns in some emerging markets. While customers continued efforts to restrain capital investment in ~~semiconductor lithography~~the industrial equipment ~~increased, while capital investment in OLED panel manufacturing equipment faced a temporary slowdown. Demand~~market, demand for network cameras ~~enjoyed solid growth.~~

continued to expand.

The average value of the yen ~~during~~for the year was ~~¥110.43~~¥109.03 against the U.S. dollar, a

year-on-year

appreciation of approximately ~~¥2,~~¥1, and ~~¥130.29~~¥122.03 against the euro, a

year-on-year ~~depreciation~~

appreciation of approximately ~~¥4.~~

¥8.

Summary of operations

~~During 2018,~~

In 2019, overall unit sales of office MFDs increased slightly compared with the previous year, despite a decline in monochrome models, and thanks to market exceeding growth in color models. As for laser printers, although sales for new models were strong, overall unit sales decreased compared with the previous year, due to ~~the expanded~~slowdowns in sales of ~~color models, mainly outside of Japan. Additionally,~~

low-speed

models. While Canon firmly maintained the top market share position, overall unit sales ~~of both monochrome and color laser printers increased compared with the previous year, supported by the steady sales of newly launched models. Total sales volume~~ of interchangeable-lens digital cameras decreased compared with the previous year, ~~due~~owing to ~~contraction of~~ the ~~market mainly for entry-class models. However, sales of mirrorless cameras increased.~~shrinking market. Looking at inkjet printers, ~~although~~despite expanding sales ~~unit~~ of refillable ink tank models, ~~increased in emerging markets,~~overall unit sales ~~overall~~decreased compared with the previous year. With regard to medical equipment, although domestic sales remained solid thanks to a strengthened product lineup, worldwide sales grew only slightly due to a first-quarter slowdown in overseas sales. As for industrial equipment, sales of lithography equipment and OLED panels manufacturing equipment decreased compared with the previous year due to decreasing demand in developed economies. For medical equipment, newly launched diagnostic ultrasound systems and MRI systems experienced solid demand, mainly outside of Japan, achieving increased sales compared with the previous year. For industrial equipment, sales of semiconductor lithography equipment increased significantly compared with the previous year, thanksefforts to ~~favorable market conditions. However, manufacturing equipment for OLED panels decreased compared with the previous year mainly due to a slowdown in~~restrain capital investment in ~~OLED~~semiconductor memory and small- and

medium-size

display panels. ~~Sales~~On the other hand, sales of network cameras increased steadily thanks to their broadening use in ~~response to the growing market.~~various areas. Under these conditions, net sales for the year decreased by ~~3.1%~~9.1% year on year to ~~¥3,951,937~~¥3,593,299 million. In addition, the gross profit ratio dropped by ~~2.4~~1.6 points to 46.4%. This was mainly due to the fact that certain costs that were recorded under operating expenses in the prior years have been reclassified to cost of sales in 2018, following the adoption of new accounting standards related to revenue recognitions as described in Note 15 of the Notes to Consolidated Financial Statements. The reclassified amount for the year ended December 31, 2018 was ¥115,700 million. Excluding the impact of this reclassification, the gross profit ratio increased by 0.6 points to 49.4%44.8%. Operating expenses decreased by ~~10.6%~~3.8% year on year to ~~¥1,492,602~~¥1,435,366 million, thanks to ~~Group-wide efforts to thoroughly manage expenses~~the pursuit of cost efficiencies in Canon as well as ~~impairment loss on goodwill~~positive effects of ~~commercial printing business during the previous year in addition to the impact of the aforementioned reclassification of figures related to the adoption of new accounting standards.~~currency exchange fluctuation. As a result, operating profit ~~increased~~decreased by ~~6.6%~~49.1% to ~~¥342,952~~¥174,667 million. Other income (deductions) ~~decreased~~increased by ~~¥12,339~~¥1,133 million, mainly due to ~~gain on securities contributed to the retirement benefit trust during~~currency exchange gains and losses compared with the previous year, while income before income taxes ~~increased~~decreased by ~~2.5%~~46.1% year on year to ~~¥362,892~~¥195,740 million and net income attributable to Canon Inc. ~~increased~~decreased by ~~4.5%~~50.5% to ~~¥252,755~~¥125,105 million.

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Total assets decreased by ~~¥298,826~~¥131,114 million to ~~¥4,899,465~~¥4,768,351 million at December 31, ~~2018,~~2019, compared with the end of previous year, mainly due to a decrease of cash and cash equivalents, and accounts receivables. Total liabilities decreased by ¥5,119 million to ¥1,876,433 million at December 31, 2019, compared with the end of previous year, mainly due to a decrease of accounts payables and accrued income tax. Total equity decreased by ¥125,995 million to ¥2,891,918 million at December 31, 2019, compared with the end of previous year, mainly due to the ~~decrease~~dividend payout, the repurchasing of ~~cash~~treasury stock and cash equivalents. Total liabilities decreased by ¥220,564 million to ¥1,881,552 million at December 31, 2018, compared to the end of previous year, mainly due to the repayment of the long-term debt. Total equity decreased by ¥78,262 million to ¥3,017,913 million at December 31, 2018, compared to the end of previous year, mainly due to thean increase of accumulated other comprehensive loss resulting from the appreciation of the yen.

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

2018 2017 2016 2015 2014
Net sales (Millions of yen)
3,951,937 4,080,015 3,401,487 3,800,271 3,727,252
Gross profit to net sales ratio
46.4 % 48.8 % 49.2 % 50.8 % 49.9 %
R&D expense to net sales ratio
8.0 % 8.2 % 9.0 % 8.8 % 8.4 %
Operating profit to net sales ratio
8.7 % 7.9 % 6.4 % 9.0 % 9.3 %
Income before income taxes to net sales ratio
9.2 % 8.7 % 7.2 % 9.1 % 10.3 %
Inventory turnover measured in days
56 days 49 days 59 days 47 days 50 days
Debt to total assets ratio
8.2 % 10.2 % 11.9 % 0.0 % 0.0 %
Canon Inc. shareholders’ equity to total assets ratio
57.7 % 55.2 % 54.2 % 67.0 % 66.8 %


	2019			2018			2017			2016			2015
Net sales (Millions of yen)		3,593,299			3,951,937			4,080,015			3,401,487			3,800,271
Gross profit to net sales ratio		44.8	%		46.4	%		48.8	%		49.2	%		50.8	%
R&D expense to net sales ratio		8.3	%		8.0	%		8.2	%		9.0	%		8.8	%
Operating profit to net sales ratio		4.9	%		8.7	%		7.9	%		6.4	%		9.0	%
Income before income taxes to net sales ratio		5.4	%		9.2	%		8.7	%		7.2	%		9.1	%
Inventory turnover measured in days		59 days			56 days			49 days			59 days			47 days
Debt to total assets ratio		10.8	%		8.2	%		10.2	%		11.9	%		0.0	%
Canon Inc. shareholders’ equity to total assets ratio		56.5	%		57.7	%		55.2	%		54.2	%		67.0	%

Notes:

Inventory turnover measured in days is determined by: Inventory divided by net sales for the previous six months, multiplied by 182.5. The increase of inventory turnover in 2016 was primarily due to the acquisition of CMSC on December 19, 2016. If this factor were excluded, the inventory turnover would show 50 days.

The increase of the debt to total assets ratio in 2019 was primarily due to adopting new accounting standard ASU No.

2016-02,

Leases (Topic 842) Section A. The company includes current operating lease liability and noncurrent operating lease liability as the debt since 2019. If this factor were excluded, the debt to total assets ratio in 2019 is 8.6%. Please refer to Note 1 (x) for more detailed information.

The decrease of the Canon Inc. shareholders’ equity to total assets ratio in 2019 was primarily due to adopting new accounting standard ASU No.

2016-02,

Leases (Topic 842) Section A. The company includes operating lease

right-of-use

assets in total assets since 2019. If this factor were excluded, Canon Inc. shareholders’ equity to total assets ratio is 57.9%. Please refer to Note 1 (x) for more detailed information.

See notes to Item 3A “Selected Financial Data”.

Net sales and profit ratio

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 lesser extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the

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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~~pursued cost reductions through enhancement of efficiency in its production. Canon believes that these ~~achievements have contributed to~~approaches will cause improving Canon’s gross profit ratio, and it 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), income before income taxes ratio (ratio of income before income taxes 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 reducing

work-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.

The debt to total assets ratio is also 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. Canon will continue to reduce its dependency on external funds for capital investments in favor of generating the necessary funds from its own operations.

Canon Inc. shareholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its shareholders’ equity to total assets ratio measures its long-term sustainability. Canon also believes that achieving a high or rising 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 shareholders’ equity ratio will enable ~~the company~~Canon 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 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

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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, imaging system and medical system products, industrial equipment, supplies and related services under separate contractual arrangements. Revenue is recognized when, or as, control of promised goods or services transfers to customers in an amount that reflects the consideration to which Canon expects to be entitled in exchange for transferring these goods or services.

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

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

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

The majority of service arrangements for office products are executed in combination with related products. Transaction prices for products and services need to be allocated to each performance obligation on a relative standalone selling price basis where ~~significant~~ judgements are required. Canon estimates the standalone selling price using a range of prices that would meet the allocation objective based on all the information that is reasonably available including market conditions and other observable inputs. If transaction prices of the product or service contracts are not within the acceptable range then the revenue is subject to allocation based on the estimated standalone selling prices. Canon recognizes the incremental costs of obtaining a contract as an expense when related office products are sold.

Canon also provides leasing arrangement to the customers primarily for the sales of office products. Approximately 4% of total revenue is generated from these leasing arrangements for the year ended December 31, 2018. Revenue from the sale of these products under sales-type leases is recognized at the inception of the lease. Interest income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-financing leases are accounted for as operating leases and related revenue is recognized ratably over the lease term. When product leases are bundled with maintenance contracts, revenue is allocated based upon the estimated standalone selling prices of the lease and~~non-lease~~ ~~components. Lease components generally include product, financing and executory costs, whilenon-lease~~ ~~components generally consist of maintenance contracts and supplies.~~

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

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

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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 net realizable value. Cost is determined by the average method for domestic inventories and principally the

first-in,

first-out

method for overseas inventories. Net 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 net 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.

Lease

Canon provides leasing arrangement to its customers primarily for the sales of office products. Revenue from the sale of these products under sales-type leases is recognized at the inception of the lease. Interest income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-financing leases are accounted for as operating leases and related revenue is recognized ratably over the lease term. When product leases are bundled with maintenance contracts, revenue is allocated based upon the estimated standalone selling prices of the lease and

non-lease

components. Lease components generally include product and financing while

non-lease

components generally consist of maintenance contracts and supplies. Some of the contracts include options to extend or to terminate the lease. Canon takes such options into account to determine the lease term when it is reasonably certain that it will exercise these options. The majority of Canon’s lease contracts do not contain bargain purchase options for their customers.

Business combinations

~~The acquisition is~~

Acquisitions are 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

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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.

Goodwill and other intangible assets

Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. All goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination. If the carrying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon recognizes an impairment charge in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. 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 ~~2018. The~~2019 and determined that there were no reporting units that were at risk of failing the impairment test as the fair ~~values~~value of ~~all~~each reporting ~~units~~unit exceeded its respective carrying ~~amount, and thus no impairment charge was recognized as a result of 2018 impairment test.~~amount. However, with regard to goodwill attributed to commercial printing business included in the Office Business Unit for which the impairment charge of ¥33,912 million was recognized for the year ended December 31, 2017 and goodwill attributed to the Medical System Business Unit, ~~and network camera business included in Industry and Others Business Unit were resulted~~

~~from recent acquisitions,~~ fair values in excess of reported carrying values as a percentage are lower than other reporting units. As a result, a future reduction in cash flows of the related business, could trigger an impairment. The goodwill related to these reporting units as of December 31, 2019 are ~~¥28,066 million, ¥500,896~~¥27,205 million and ~~¥211,598~~¥508,907 million, respectively. Intangible assets with finite useful lives consist primarily of software, trademarks, patents and developed technology, license fees and customer relationships, which are amortized using the straight-line method. The estimated useful lives of software are from 3 years to 78 years, trademarks are 15 years, patents and developed technology are from 7 years to 17 years, license fees are 7 years, and customer relationships are from 118 years to 15 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

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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 ~~2018,~~2019, Canon estimated a weighted-average discount rate used to determine benefit obligations of ~~0.6%~~0.5% for Japanese plans and ~~2.4%~~1.6% for foreign plans and a weighted-average expected long-term rate of return on plan assets of ~~2.9%~~3.0% for Japanese plans and ~~4.4%~~5.2% 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.

Decreases in discount rates lead to increases in actuarial pension benefit obligations which, in turn, could lead to an increase in service cost and amortization cost through amortization of actuarial gain or loss, a decrease in interest cost, and vice versa. For ~~2018,~~2019, a decrease of 50 basis points in the discount rate increases the projected

benefit obligation by approximately ~~¥94,366~~¥97,614 million. The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subsequent periods.

Decreases in expected returns on plan assets may increase net periodic benefit cost by decreasing the expected return amounts, while differences between expected value and actual fair value of those assets could affect pension expense in the following years, and vice versa. For ~~2018,~~2019, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ~~¥4,657~~¥4,995 million in net periodic benefit cost. Canon multiplies management’s expected long-term rate of return on plan assets by the value of its plan assets to arrive at the expected return on plan assets that is included in pension expense. Canon defers recognition of the difference between this expected return on plan assets and the actual return on plan assets. The net deferral affects future pension expense.

Canon recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plans in its consolidated balance sheets, with a corresponding adjustment to an accumulated other comprehensive income (loss), net of tax.

Recently Issued Accounting Guidance

Please refer to Note 1 of the Notes to Consolidated Financial Statements.

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Consolidated results of operations

2019 compared with 2018

Summarized results of operations for 2019 and 2018 are as follows:

2019

Change

2018

(Millions of yen, except per share

amounts and percentage data)

Net sales

Products and Equipment

2,835,428

-11.2
%
3,194,724

Services

757,871

+0.1

757,213

3,593,299

-9.1

3,951,937

Operating profit

174,667

-49.1

342,952

Income before income taxes

195,740

-46.1

362,892

Net income attributable to Canon Inc.

125,105

-50.5

252,755

Net income attributable to Canon Inc. shareholders per share:

Basic

116.93

-50.0

234.09

Diluted

116.91

-50.1

234.08

Note: See notes to Item 3A “Selected Financial Data”.
Sales
In the current business term, on a global basis, the economic slowdown continued. In such an environment, although each of Canon Group’s businesses endeavored to expand sales particularly with respect to new products, Canon’s consolidated net sales in 2019 totaled ¥3,593,299 million, a decrease of 9.1% from the previous year largely due to adverse effect of a shrinking market as well as unfavorable currency effects of foreign exchange rate fluctuation. Net sales of products and equipment totaled ¥2,835,428 million, a
year-on-year
decrease of 11.2%, while net sales of services totaled ¥757,871 million, a
year-on-year
increase of 0.1%.
Overseas operations are significant to Canon’s operating results and generated 75.7% of total net sales in 2019. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen relative to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.
The average value of the yen during the year was ¥109.03 against the U.S. dollar, a
year-on-year
appreciation of approximately ¥1, and ¥122.03 against the euro, a
year-on-year
appreciation of approximately ¥8. The effects of foreign exchange rate fluctuations negatively affected net sales by approximately ¥90,729 million in 2019. This unfavorable impact consisted of approximately ¥19,828 million of unfavorable impact for the U.S. dollar denominated sales and unfavorable impact of ¥52,368 million for the euro denominated sales, and unfavorable impact of ¥18,533 million for other foreign currency denominated sales.
Cost of sales
Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in foreign exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses, maintenance expenses, light and fuel expenses, and rent expenses. The ratios of cost of sales to net sales for 2019 and 2018 were 55.2% and 53.6%, respectively.
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Gross profit
Canon’s gross profit in 2019 decreased by 12.3% to ¥1,610,033 million from 2018. The gross profit ratio also dropped by 1.6 points to 44.8%.The decrease in the gross profit and gross profit ratio were mainly due to a decrease in sales and the negative effect of appreciation of the yen against other foreign currencies such as U.S. dollar and the euro.
Operating expenses
The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Operating expenses decreased by 3.8% year on year to ¥1,435,366 million, thanks to the pursuit of cost efficiencies in Canon as well as positive effects of currency exchange fluctuation.
Operating profit
Operating profit in 2019 decreased by 49.1% from 2018 to a total of ¥174,667 million. The ratio of operating profit to net sales decreased by 3.8 points to 4.9% from 2018.
Other income (deductions)
Other income (deductions) for 2019 was ¥21,073 million, an increase of ¥1,133 million from 2018 mainly due to a decrease in foreign currency exchange losses.
Income before income taxes
Income before income taxes in 2019 was ¥195,740 million, a decrease of 46.1% from 2018, and constituted 5.4% of net sales.
Income taxes
Income taxes in 2019 decreased by ¥39,927 million from 2018. The effective tax rate for 2019 was 28.7%, which was lower than the statutory tax rate in Japan. This was mainly due to the tax credit for R&D expense.
Net income attributable to Canon Inc.
As a result, net income attributable to Canon Inc. in 2019 decreased by 50.5% to ¥125,105 million, which represents 3.5% of net sales.
Segment information
Canon operates four segments: the Office Business Unit, the Imaging System Business Unit, the Medical System Business Unit and the Industry and Others Business Unit.
The Office Business Unit mainly includes office MFDs, laser MFPs, laser printers, digital continuous feed presses, digital
sheet-fed
presses, wide-format printers and document solutions.
The Imaging System Business Unit mainly includes interchangeable-lens digital cameras, digital compact cameras, interchangeable lenses, Compact photo printers, inkjet printers, large format inkjet printers, commercial photo printers, image scanners and calculators.
The Medical System Business Unit mainly includes digital radiography systems, diagnostic X-ray systems, CT systems, MRI systems, diagnostic ultrasound systems, clinical chemistry analyzers and ophthalmic equipment.
The Industry and Others Business Unit mainly includes semiconductor lithography equipment, FPD lithography equipment, vacuum thin-film deposition equipment, OLED panel manufacturing equipment, die bonders, network cameras, digital camcorders, digital cinema cameras, multimedia projectors, broadcast equipment, micromotors, handy terminals and document scanners.
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Sales by segment
Please refer to the table of sales by segment in Note 22 of the Notes to Consolidated Financial Statements.
Canon’s sales by segment are summarized as follows:

2019

Change

2018

(Millions of yen, except percentage data)

Office

1,702,595

-5.8
%
1,807,301

Imaging System

807,414

-16.8

970,435

Medical System

438,525

+0.2

437,578

Industry and Others

737,945

-12.5

842,941

Eliminations

(93,180
)
—

(106,318
)

Total

3,593,299

-9.1
%
3,951,937

Note: From the beginning of the first quarter of 2019, Canon has reclassified certain businesses from the Imaging System Business Unit to the Industry and Others Business Unit. Sales amount for the year ended 2018 also has been restated.
Within the Office Business Unit, demand for office MFDs was strong for new next-generation color models that feature enhanced security functions. Sales of monochrome models, however, declined due to the impact of economic slowdowns in emerging markets. In the production printing market, sales of a new compact model offering high-speed and high-volume printing steadily increased. As a result, overall unit sales of MFDs increased slightly compared with the previous year. As for laser printers, despite strong demand for new models that offer low energy consumption, compact body designs, and high productivity, overall unit sales decreased compared with the previous year due to decreasing sales of
low-speed
models, mainly in China where the economic slowdown continued. Sales of consumables decreased, mainly due to the economic slowdown in Europe. These factors resulted in total sales for the business unit of ¥1,702,595 million, a
year-on-year
decrease of 5.8%, while income before income taxes decreased by 23.9% year on year to ¥174,297 million.
Within the Imaging System Business Unit, sales of the new interchangeable-lens digital cameras for advanced amateur DSLRs enjoyed solid growth. Also, in the growing full-frame mirrorless camera market, Canon benefited from sales of new models launched in the second half of the previous year and the beginning of this year. However, the interchangeable-lens digital cameras market continued to shrink mainly for entry-level models and overall unit sales decreased compared with the previous year. As for inkjet printers, despite efforts to enhance the lineup in refillable ink tank models, overall unit sales decreased compared with the previous year, mainly affected by the sluggish economy in emerging markets. As a result, sales for the business unit decreased by 16.8% year on year to ¥807,414 million, while income before income taxes decreased by 62.1% year on year to ¥49,666 million.
Within the Medical System Business Unit, despite domestic sales increased steadily thanks to a recovery of demand and a series of newly launched products, sales in Europe remained sluggish in the first quarter. As a result, sales for the business unit increased by 0.2% year on year to ¥438,525 million, while income before income taxes decreased by 7.4% year on year to ¥27,283 million due to effects of currency exchange fluctuation.
In the Industry and Others Business Unit, although capital investment towards semiconductor devices relevant to IoT business remained solid, capital investment towards memory devices was restrained because of the deterioration in the market. Additionally, as for FPD lithography equipment and OLED panels manufacturing equipment, sales decreased compared with the previous year as capital investment for small- and
medium-size
panels entered into a phase of adjustment. On the other hand, sales of network cameras increased reflecting the growth of Axis and the contribution of relevant software, driven by the market’s continued expansion based on diversifying market needs and replacement demand. Consequently, sales for the business unit decreased by
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12.5% year on year to ¥737,945 million, while income before income taxes decreased by 73.1% year on year to ¥15,563 million.
Intersegment sales of ¥93,180 million are eliminated from total sales for the four segments, and are described as “Eliminations”.
Sales by geographic area
Please refer to the table of sales by geographic area in Note 22 of the Notes to Consolidated Financial Statements.
A summary of net sales by geographic area in 2019 and 2018 is provided below:

2019

Change

2018

(Millions of yen, except percentage data)

Japan

872,534

+0.3
%
869,577

Americas

1,029,078

-4.4

1,076,402

Europe

882,480

-13.1

1,015,428

Asia and Oceania

809,207

-18.3

990,530

Total

3,593,299

-9.1
%
3,951,937

Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.
A geographical analysis indicates that net sales in 2019 are summarized as follows.
In Japan, net sales increased by 0.3% from the previous year mainly owing to an increase in sales of medical equipment.
In the Americas, despite solid sales of network cameras, net sales decreased by 4.4% from the previous year mainly owing to a decline in sales of interchangeable-lens digital cameras and compact digital cameras.
In Europe, net sales decreased by 13.1% from the previous year mainly owing to a decline in sales of consumables, interchangeable-lens digital cameras and compact digital cameras.
In Asia and Oceania, net sales decreased by 18.3% from the previous year mainly owing to a decline in sales of interchangeable-lens digital cameras, compact digital cameras, OLED panels manufacturing equipment which was supplied by Canon Tokki, and semiconductor lithography equipment.
Income before income taxes by segment
Please refer to the table of segment information in Note 22 of the Notes to Consolidated Financial Statements.
Income before income taxes for the Office Business Unit in 2019 decreased by 23.9% from the previous year to ¥174,297 million, mainly due to a decline in sales of consumables.
Income before income taxes for the Imaging System Business Unit in 2019 decreased by 62.1% from the previous year to ¥49,666 million, owing to shrinking market for interchangeable-lens digital cameras on a global basis.
Income before income taxes for the Medical System Business Unit in 2019 decreased by 7.4% from the previous year to ¥27,283 million, mainly due to a decrease of sales in Europe in the first quarter.
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Income before income taxes for the Industry and Others Business Unit in 2019 decreased by 73.1% from the previous year to ¥15,563 million, due to a decrease in sales of semiconductor lithography equipment and OLED panels manufacturing equipment.

2018 compared with 2017

Summarized results of operations for 2018 and 2017 are as follows:

   2018    Change 2017
   (Millions of yen, except per share
   amounts and percentage data)
Net sales

Products and Equipment
   3,194,724    -9.3 % 3,521,156
Services
   757,213    +35.5 558,859




   3,951,937    -3.1 4,080,015
Operating profit
   342,952    +6.6 321,605
Income before income taxes
   362,892    +2.5 353,884
Net income attributable to Canon Inc.
   252,755    +4.5 241,923
Net income attributable to Canon Inc. shareholders per share:

Basic
   234.09    +5.0 222.88
Diluted
   234.08    +5.0 222.88


	2018		Change			2017
	(Millions of yen, except per share amounts and percentage data)
Net sales
Products and Equipment		3,194,724		-9.3	%		3,521,156
Services		757,213		+35.5			558,859

		3,951,937		-3.1			4,080,015
Operating profit		342,952		+6.6			321,605
Income before income taxes		362,892		+2.5			353,884
Net income attributable to Canon Inc.		252,755		+4.5			241,923

Net income attributable to Canon Inc. shareholders per share:
Basic		234.09		+5.0			222.88
Diluted		234.08		+5.0			222.88

Note: See notes to Item 3A “Selected Financial Data”.

Sales

In the current business term, the world economy seemingly mounted a gradual recovery on the whole, yet decelerated in the latter half largely due to adverse effects of trade friction. In such an environment, although each of Canon Group’s businesses endeavored to expand sales particularly with respect to new products, Canon’s consolidated net sales in 2018 totaled ¥3,951,937 million, a decrease of 3.1% from the previous year largely due to adverse effect of a shrinking market. The adoption of the new revenue standard required the reconsideration of the scope of performance obligations related to service contracts, which has resulted in a change in classification of revenues between the products and service revenues. As a result, net sales of products and equipment totaled ¥3,194,724 million, a

year-on-year

decrease of 9.3%, while net sales of services totaled ¥757,213 million, a

year-on-year

increase of 35.5%. For further information, please refer to Note 15 of the Notes to Consolidated Financial Statements.

Overseas operations are significant to Canon’s operating results and generated 78.0% of total net sales in 2018. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen relative to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.

The average value of the yen during the year was ¥110.43 against the U.S. dollar, a

year-on-year

appreciation of approximately ¥2, and ¥130.29 against the euro, a

year-on-year

depreciation of approximately ¥4. The effects of foreign exchange rate fluctuations positively affected net sales by approximately ¥1,024 million in 2018. This favorable impact consisted of approximately ¥17,800 million of unfavorable impact for the U.S. dollar denominated sales and favorable impact of ¥22,534 million for the euro denominated sales, and unfavorable impact of ¥3,710 million for other foreign currency denominated sales.

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Cost of sales

Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in foreign exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses, maintenance expenses, light and fuel expenses, and rent expenses. The ratios of cost of sales to net sales for 2018 and 2017 were 53.6% and 51.2%, respectively.

Gross profit

Canon’s gross profit in 2018 decreased by 7.8% to ¥1,835,554 million from 2017. The gross profit ratio also dropped by 2.4 points to 46.4%. This was mainly due to the fact that certain costs that were under operating expenses have been reclassified under cost of sales following the adoption of new accounting standards related to revenue recognitions as described in Note 15 of the Notes to Consolidated Financial Statements. The reclassified amount for the year ended December 31, 2018 was ¥115,700 million. Excluding the impact of this reclassification, the gross profit ratio increased by 0.6 points to 49.4%.

Operating expenses

The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Operating expenses decreased by 10.6% year on year to ¥1,492,602 million, thanks to Group-wide efforts to thoroughly manage expenses as well as impairment loss on goodwill of commercial printing business during the previous year in addition to the impact of the aforementioned reclassification of figures related to the adoption of new accounting standards.

Operating profit

Operating profit in 2018 increased by 6.6% from 2017 to a total of ¥342,952 million. The ratio of operating profit to net sales increased by 0.8 points to 8.7% from 2017.

Other income (deductions)

Other income (deductions) for 2018 was ¥19,940 million, a decrease of ¥12,339 million from 2017 mainly due to gain on securities contributed to the retirement benefit trust during the previous year.

Income before income taxes

Income before income taxes in 2018 was ¥362,892 million, an increase of 2.5% from 2017, and constituted 9.2% of net sales.

Income taxes

Income taxes in 2018 decreased by ¥1,874 million from 2017. The effective tax rate for 2018 was 26.5%, which was lower than the statutory tax rate in Japan. This was mainly due to the tax credit for R&D expenses.

Net income attributable to Canon Inc.

As a result, net income attributable to Canon Inc. in 2018 increased by 4.5% to ¥252,755 million, which represents 6.4% of net sales.

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Segment information

Canon divides its businesses into four segments: the Office Business Unit, the Imaging System Business Unit, the Medical System Business Unit ~~which was newly established in 2017,~~ and the Industry and Others Business Unit.

The Office Business Unit mainly includes office MFDs, laser MFPs, laser printers, digital continuous feed presses, digital

sheet-fed

presses, wide-format printers and document solutions.

The Imaging System Business Unit mainly includes interchangeable-lens digital cameras, digital compact ~~cameras, digital camcorders, digital cinema~~ cameras, interchangeable lenses, Compact photo printers, inkjet printers, large format inkjet printers, commercial photo printers, image scanners ~~multimedia projectors, broadcast equipment~~ and calculators.

The Medical System Business Unit mainly includes digital radiography systems, diagnostic X-ray systems, CT systems, MRI systems, diagnostic ultrasound systems, clinical chemistry analyzers and ophthalmic equipment.

The Industry and Others Business Unit mainly includes semiconductor lithography equipment, FPD lithography equipment, vacuum thin-film deposition equipment, OLED panel manufacturing equipment, die bonders, ~~micromotors,~~ network cameras, digital camcorders, digital cinema cameras, multimedia projectors, broadcast equipment, micromotors, handy terminals and document scanners.

Sales by segment

Please refer to the table of sales by segment in Note 22 of the Notes to Consolidated Financial Statements.

Canon’s sales by segment are summarized as follows:

   2018 Change 2017
   (Millions of yen, except percentage data)
Office
   1,807,301 +0.1 % 1,804,782
Imaging System
   1,008,165 -11.3 1,136,188
Medical System
   437,578 +0.3 436,187
Industry and Others
   805,211 +1.6 792,850
Eliminations
   (106,318 ) — (89,992 )


Total
   3,951,937 -3.1 % 4,080,015


	2018			Change			2017
	(Millions of yen, except percentage data)
Office		1,807,301			+0.1	%		1,804,782
Imaging System		970,435			-11.7			1,099,125
Medical System		437,578			+0.3			436,187
Industry and Others		842,941			+1.6			829,913
Eliminations		(106,318	)		—			(89,992	)

Total		3,951,937			-3.1	%		4,080,015

Note:

From the beginning of the first quarter of 2019, Canon has reclassified certain businesses from the Imaging System Business Unit to the Industry and Others Business Unit. Sales amounts for the years ended 2018 and 2017 also have been restated.

Within the Office Business Unit, unit sales of office MFDs increased from the previous year, thanks to expanded sales of such color models as the imageRUNNER ADVANCE Gen3 2nd Edition series, which enhances convenience through compatibility with external cloud services, and the imageRUNNER C3020 series of strategic models for emerging markets. As for laser printers, sales of hardware increased from the previous year, supported by steady sales mainly of new models that achieve low power consumption, compact body designs and high productivity. Sales of consumables remained at the same level as the previous year. These factors resulted in total sales for the business unit of ¥1,807,301 million, a

year-on-year

increase of 0.1%, while income before income taxes increased by 17.3% year on year to ¥229,187 million partly due to impairment loss on goodwill during the previous year.

Within the Imaging System Business Unit, although unit sales of interchangeable-lens digital cameras decreased overall compared with the previous year due to shrinking market, Canon maintained the top share of the overall interchangeable-lens digital cameras market, mainly in key countries in Europe and the Americas as well as in Japan and China. In mirrorless cameras, sales were strong for such new models as the EOS R, Canon’s first mirrorless camera equipped with a full-frame sensor, and the entry-class EOS Kiss M. As for digital compact cameras, although unit sales decreased compared with the previous year amid the shrinking market,

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sales of such high-value-added models as the PowerShot

G-series

enjoyed solid demand. For inkjet printers, unit sales of refillable ink tank models increased significantly in emerging markets. However, unit sales decreased overall compared with the previous year, mainly due to the shrinking market in developed economies. For large format inkjet printers, the imagePROGRAF TX series, which is suitable for outputting CAD drawings and poster designs, garnered high praise from the market and enjoyed solid sales. As a result, sales for the business unit decreased by ~~11.3%~~11.7% year on year to ~~¥1,008,165~~¥970,435 million, while income before income taxes decreased by ~~31.1%~~26.7% year on year to ~~¥121,254~~¥131,015 million.

Within the Medical System Business Unit, sales increased due to such newly launched products as the Alphenix-series of next-generation diagnostic

X-ray

systems and the Vantage Orian, a high-image-quality MRI system incorporating leading-edge technology. As a result, sales for the business unit increased by 0.3% year on year to ¥437,578 million, while income before income taxes increased by 31.0% year on year to ¥29,479 million.

In the Industry and Others Business Unit, unit sales of semiconductor lithography equipment increased from the previous year due to increasing demand for memory devices used in data centers. However, for FPD lithography equipment and OLED panel manufacturing equipment, sales decreased compared with the previous year mainly due to a temporary slowdown in investment in OLED panels. As for network cameras, Axis enjoyed solid sales amid increasing market demand. Consequently, sales for the business unit increased by 1.6% year on year to ~~¥805,211~~¥842,941 million, while income before income taxes increased by ~~60.7%~~47.9% year on year to ~~¥67,607~~¥57,846 million.

Intersegment sales of ¥106,318 million are eliminated from total sales for the four segments, and are described as “Eliminations”.

Sales by geographic area

Please refer to the table of sales by geographic area in Note 22 of the Notes to Consolidated Financial Statements.

A summary of net sales by geographic area in 2018 and 2017 is provided below:


	2018		Change			2017
	(Millions of yen, except percentage data)
Japan		869,577		-1.7	%		884,828
Americas		1,076,402		-2.8			1,107,515
Europe		1,015,428		-1.3			1,028,415
Asia and Oceania		990,530		-6.5			1,059,257

Total		3,951,937		-3.1	%		4,080,015

Note:

This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.

A geographical analysis indicates that net sales in 2018 are summarized as follows.

In Japan, net sales decreased by 1.7% from the previous year mainly owing to the decline in sales of interchangeable-lens digital cameras and compact digital cameras.

In the Americas, despite solid sales of network cameras, net sales decreased by 2.8% from the previous year mainly owing to the negative effect of the yen’s appreciation and the decline in sales of interchangeable-lens digital cameras and compact digital cameras.

In Europe, net sales decreased by 1.3% from the previous year mainly owing to the decline in sales of interchangeable-lens digital cameras and compact digital cameras.

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In Asia and Oceania, net sales decreased by 6.5% from the previous year mainly owing to the decline in sales of interchangeable-lens digital cameras, compact digital cameras, manufacturing equipment for OLED panels which is sold by Canon Tokki, and manufacturing equipment for FPD.

Income before income taxes by segment

Please refer to the table of segment information in Note 22 of the Notes to Consolidated Financial Statements.

Income before income taxes for the Office Business Unit in 2018 increased by 17.3% from the previous year to ¥229,187 million, as impairment loss on goodwill incurred during the previous year.

Income before income taxes for the Imaging System Business Unit in 2018 decreased by ~~31.1%~~26.7% from the previous year to ~~¥121,254~~¥131,015 million, owing to shrinking market for interchangeable-lens digital cameras.

Income before income taxes for the Medical System Business Unit in 2018 increased by 31.0% from the previous year to ¥29,479 million, mainly due to cost reduction and favorable sales of diagnostic

X-ray

systems and MRI systems.

Income before income taxes for the Industry and Others Business Unit in 2018 increased by ~~60.7%~~47.9% from the previous year to ~~¥67,607~~¥57,846 million, thanks to strong sales of semiconductor lithography equipment and network cameras.

~~2017 compared with 2016~~

~~Summarized results of operations for 2017 and 2016 are as follows:~~

   2017    Change 2016
   (Millions of yen, except per share
amounts and percentage data)
Net sales

Products and Equipment
   3,521,156    +17.9 % 2,986,188
Services
   558,859    +34.6 415,299




   4,080,015    +19.9 3,401,487
Operating profit
   321,605    +48.6 216,425
Income before income taxes
   353,884    +44.6 244,651
Net income attributable to Canon Inc.
   241,923    +60.6 150,650
Net income attributable to Canon Inc. shareholders per share:

Basic
   222.88    +61.6 137.95
Diluted
   222.88    +61.6 137.95

~~Note: See notes to Item 3A “Selected Financial Data”.~~

~~Sales~~

In the current business term, the world economy as a whole continued to recover more robustly than was expected at the beginning of the year. In such an environment, due to efforts to promote sales of newly launched

models and high-value-added models, along with the impact of acquiring CMSC, Canon’s consolidated net sales in 2017 totaled ¥4,080,015 million, an increase of 19.9% from the previous year. Net sales of products and equipment totaled ¥3,521,156 million, a~~year-on-year~~ ~~increase of 17.9%, while net sales of services totaled ¥558,859 million, ayear-on-year~~ ~~increase of 34.6% due to the impact of acquiring CMSC.~~

Overseas operations are significant to Canon’s operating results and generated 78.3% of total net sales in 2017. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen relative to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.

~~The average value of the yen during the year was ¥112.13 against the U.S. dollar, ayear-on-year~~ ~~depreciation of approximately ¥4, and ¥126.69 against the euro, ayear-on-year~~ depreciation of approximately ¥6. The effects of foreign exchange rate fluctuations positively affected net sales by approximately ¥96,224 million in 2017. This favorable impact consisted of approximately ¥42,467 million of favorable impact for the U.S. dollar denominated sales and favorable impact of ¥42,950 million for the euro denominated sales, and ¥10,807 million for other foreign currency denominated sales.

~~Cost of sales~~

~~Gross profit~~

Canon’s gross profit in 2017 increased by 19.1% to ¥1,990,554 million from 2016. The gross profit ratio decreased by 0.4 points year on year to 48.8%. The decrease in the gross profit ratio is primarily due to the effect of product mix.

~~Operating expenses~~

The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Operating expenses increased 14.7% year on year to ¥1,668,949 million owing to such factors as the increase in foreign-currency-denominated operating expenses after conversion into yen due to the depreciation of the yen, the impact of acquiring CMSC, and the impact of recognizing impairment losses on goodwill.

~~Operating profit~~

~~Operating profit in 2017 increased 48.6% from 2016 to a total of ¥321,605 million. The ratio of operating profit to net sales increased by 1.5 points to 7.9% from 2016.~~

~~Other income (deductions)~~

Other income (deductions) for 2017 was ¥32,279 million, an increase of ¥4,053 million from 2016 mainly due to gain on securities contributed to retirement benefit trust which was partially offset by foreign currency exchange losses.

~~Income before income taxes~~

~~Income before income taxes in 2017 was ¥353,884 million, an increase of 44.6% from 2016, and constituted 8.7% of net sales.~~

~~Income taxes~~

Income taxes in 2017 increased by ¥15,343 million from 2016. The effective tax rate for 2017 was 27.7%, which was lower than the statutory tax rate in Japan. This was mainly due to the effect of reversal of deferred tax liabilities derived from US tax reform in 2017 and the tax credit for R&D expenses which were partially offset by the impact of impairment losses on goodwill.

~~Net income attributable to Canon Inc.~~

~~As a result, net income attributable to Canon Inc. in 2017 increased by 60.6% to ¥241,923 million, which represents 5.9% of net sales.~~

~~Segment information~~

Canon divides its businesses into four segments: the Office Business Unit, the Imaging System Business Unit, the Medical System Business Unit which was newly established in 2017, and the Industry and Others Business Unit.

~~The Office Business Unit mainly includes office MFDs, laser MFPs, laser printers, digital continuous feed presses, digitalsheet-fed~~ ~~presses, wide-format printers and document solutions.~~

The Imaging System Business Unit mainly includes interchangeable-lens digital cameras, digital compact cameras, digital camcorders, digital cinema cameras, interchangeable lenses, Compact photo printers, inkjet printers, large format inkjet printers, commercial photo printers, image scanners, multimedia projectors, broadcast equipment and calculators.

The Industry and Others Business Unit mainly includes semiconductor lithography equipment, FPD lithography equipment, vacuum thin-film deposition equipment, OLED panel manufacturing equipment, die bonders, micromotors, network cameras, handy terminals and document scanners.

~~Sales by segment~~

~~Please refer to the table of sales by segment in Note 22 of the Notes to Consolidated Financial Statements.~~

~~Canon’s sales by segment are summarized as follows:~~

   2017 Change 2016
   (Millions of yen, except percentage data)
Office
   1,804,782 +3.4 % 1,745,996
Imaging System
   1,136,188 +3.7 1,095,289
Medical System
   436,187 — —
Industry and Others
   792,850 +22.6 646,483
Eliminations
   (89,992 ) — (86,281 )


Total
   4,080,015 +19.9 % 3,401,487

Within the Office Business Unit, unit sales of office MFDs increased from the previous year and achieved higher growth than the market average, supported by steady sales of next-generation color models designed to

~~strengthen the product lineup such as the newly launched color A3 (12”x18”) imageRUNNER ADVANCE C3500 series for small- andmedium-size~~ ~~offices. Among digitalsheet-fed~~ ~~presses, unit sales of the Océ-produced VarioPrint i300, a digitalsheet-fed~~ ~~presses color inkjet press that offers superiorlow-running-cost~~ performance, increased. As for laser printers, sales of both hardware and consumables increased from the previous year, supported by steady sales of new models that achieve low power consumption and compact body designs. These factors resulted in total sales for the business unit of ¥1,804,782 million, a~~year-on-year~~ ~~increase of 3.4%, while income before income taxes totaled ¥195,369 million, ayear-on-year~~ ~~increase of 15.0%.~~

Within the Imaging System Business Unit, while the pace of decline in demand for interchangeable-lens digital cameras is gradually decelerating, the sales of the advanced-amateur-models —including the EOS 6D Mark II—enjoyed solid demand, allowing Canon to maintain the top share, mainly in the United States, Europe, and Japan. As for compact-system cameras, the advanced-amateur-model EOS M6 and the entry-level EOS M100 enjoyed strong demand. As for digital compact cameras, amid the shrinking market, unit sales remained at the same level as the previous year, supported by the increased sales of such high-value-added models as the newly launched G9 X Mark II—part of the high-image-quality PowerShot~~G-series~~ ~~lineup. As for inkjet printers, the newly designedhome-useTS-series,~~ refillable ink tank models targeting emerging countries and the imagePROGRAF PRO series of large format inkjet printer targeting the professional photo and graphic art markets enjoyed strong demand, resulting in unit sales increasing from the previous year. As a result, sales for the business unit increased by 3.7% year on year to ¥1,136,188 million, while income before income taxes totaled ¥175,913 million, a~~year-on-year~~ ~~increase of 21.8%.~~

Within the Medical System Business Unit, CMSC’s CT system products increased the sales and maintained the top share in the Japanese market thanks to the solid sales of the newly launched Aquilion Precision CT scanner, which delivers the industry’s highest level of high-resolution imaging. As for diagnostic ultrasound systems, sale of the Aplio i-series, which delivers proprietary high-resolution imaging technology, remained firm. As a result, sales for the business unit totaled ¥436,187 million, while income before income taxes totaled ¥22,505 million.

In the Industry and Others Business Unit, unit sales of semiconductor lithography equipment increased from the previous year as a result of increasing demand for memory devices used in data centers. Additionally, sales of FPD lithography equipment and manufacturing equipment for OLED panels increased significantly in response to continued growing demand for high-definition OLED displays used in mobile devices. As for network cameras, amid increasing market demand, Axis enjoyed solid sales, resulting in a considerable sales increase compared with the previous year. Consequently, sales for the business unit increased by 22.6% year on year to ¥792,850 million, while income before income taxes grew by ¥35,008 million from the previous year to ¥42,067 million.

~~Intersegment sales of ¥89,992 million are eliminated from total sales for the four segments, and are described as “Eliminations”.~~

~~Sales by geographic area~~

~~Please refer to the table of sales by geographic area in Note 22 of the Notes to Consolidated Financial Statements.~~

~~A summary of net sales by geographic area in 2017 and 2016 is provided below:~~

   2017 Change 2016
   (Millions of yen, except percentage data)
Japan
   884,828 +25.2 % 706,979
Americas
   1,107,515 +14.9 963,544
Europe
   1,028,415 +12.6 913,523
Asia and Oceania
   1,059,257    +29.6 817,441


Total
   4,080,015 +19.9 % 3,401,487

~~Note:~~

~~This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.~~

~~A geographical analysis indicates that net sales in 2017 are summarized as follows.~~

~~In Japan, net sales increased by 25.2% from the previous year mainly due to the impact of acquiring CMSC.~~

~~In the Americas, net sales increased by 14.9% from the previous year due to the impact of acquiring CMSC, solid sales of network cameras and the positive effects of favorable currency exchange rates.~~

~~In Europe, net sales increased by 12.6% from the previous year due to the impact of acquiring CMSC, solid sales of network cameras and the positive effects of favorable currency exchange rates.~~

In Asia and Oceania, net sales increased by 29.6% from the previous year due to the impact of acquiring CMSC and strong sales of manufacturing equipment for OLED panels which is sold by Canon Tokki and manufacturing equipment for FPD.

~~Income before income taxes by segment~~

~~Please refer to the table of segment information in Note 22 of the Notes to Consolidated Financial Statements.~~

~~Income before income taxes for the Office Business Unit in 2017 increased by 15.0% from the previous year to ¥195,369 million, owing to the positive effects of favorable currency exchange rates.~~

Income before income taxes for the Imaging System Business Unit in 2017 increased by 21.8% from the previous year to ¥175,913 million, owing to the improvement in profitability from the sales shift to high-added-value models in cameras, along with the positive effects of favorable currency exchange rates.

~~Income before income taxes for the Medical System Business Unit, which was newly established in 2017, was ¥22,505 million in 2017.~~

Income before income taxes for the Industry and Others Business Unit in 2017 grew by ¥35,008 million to ¥42,067 million thanks to strong sales of manufacturing equipment for OLED panels and network cameras.

Foreign operations and foreign currency transactions

Canon’s marketing activities are performed by subsidiaries in various regions in local currencies, while the cost of sales is generally in yen. Given Canon’s current operating structure, appreciation of the yen has a negative impact on net sales and the gross profit ratio. To reduce the financial risks from changes in foreign exchange rates, Canon utilizes derivative financial instruments, which consist principally of forward currency exchange contracts.

The operating profit on foreign operation sales is usually lower than that from domestic operations because foreign operations consist mainly of marketing activities. Marketing activities are generally less profitable than production activities, which are mainly conducted by the Company and its domestic subsidiaries. Please refer to the table of geographic information in Note 22 of the Notes to Consolidated Financial Statements.

B. Liquidity and capital resources

Cash and cash equivalents decreased by ~~¥201,169~~¥107,831 million to ~~¥520,645~~¥412,814 million in fiscal ~~2018~~2019 compared to the previous year. Canon’s cash and cash equivalents are primarily denominated in Japanese yen and in U.S. dollars, with the remainder denominated in other currencies.

Net cash provided by operating activities decreased by ~~¥225,264~~¥6,832 million to ~~¥365,293~~¥358,461 million in fiscal ~~2018~~2019 compared to the previous year due to ~~increase of~~a decrease in profit, despite improving working capital ~~used for operations and income tax paid.~~mainly through inventory reduction. The major component of Canon’s cash inflow is cash received from customers, and the major components of Canon’s cash outflow are payments for parts and materials, selling, general and administrative expenses, R&D expenses and income taxes.

For fiscal ~~2018,~~2019, cash inflow from cash received from customers decreased due to sales deterioration. There were no significant changes in Canon’s collection rates. Cash outflow for payments for parts and materials ~~increased~~decreased due to ~~an increase~~a decrease of inventory ~~level resulting from sales decline.~~compared with the inventory in fiscal 2018. Cash outflow for payments for income taxes ~~increased~~decreased due to ~~an increase~~a decrease in taxable income in fiscal 2018 compared with taxable income in fiscal 2017.

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Net cash used in investing activities increased by ~~¥30,605~~¥32,953 million to ~~¥195,615~~¥228,568 million in fiscal ~~2018~~2019 mainly due to an increase in payment for ~~acquisitions~~purchases of ~~businesses.~~

fixed assets.

Canon defines “free cash flow” as cash flows from operating activities less cash flows from investing activities. For fiscal ~~2018,~~2019, free cash flow decreased by ~~¥255,869~~¥39,785 million to ~~¥169,678~~¥129,893 million as compared with ~~¥425,547~~¥169,678 million for fiscal ~~2017.~~

~~Note: “Free cash flow” isnon-GAAP~~ ~~measure. Refer to“Non-GAAP~~ ~~Financial Measures” section for the explanation and the reconciliation to the reported GAAP measure.~~

2018.

Note:

“Free cash flow” is

non-GAAP

measure. Refer to

“Non-GAAP

Financial Measures” section for the explanation and the reconciliation to the reported GAAP measure.

Canon’s management places importance on cash flow management and frequently monitors this indicator. Furthermore, Canon’s management believes that this indicator is significant in understanding Canon’s current liquidity and the alternatives of use in financing activities because it takes into consideration its operating and investing activities and believes that such indicator is beneficial to an investor’s understanding. Canon refers to this indicator together with relevant U.S. GAAP financial measures shown in its consolidated statements of cash flows and consolidated balance sheets for cash availability analysis.

Net cash used in financing activities totaled ~~¥354,830~~¥232,590 million in fiscal ~~2018,~~2019, mainly resulting from the dividend payout of ~~¥178,159~~¥171,487 million, the ~~repayment for long-term loans~~repurchases and reissuance of ~~¥136,094~~treasury stock of ¥50,012 million. The Company paid dividends in fiscal ~~2018~~2019 of ¥160.00 per share.

To the extent Canon relies on external funding for its liquidity and capital requirements, it generally has access to various funding sources, including the issuance of additional share capital, issuance of corporate bond or loans. While Canon has been able to obtain funding from its traditional financing sources and from the capital markets, and believes it will continue to be able to do so in the future, there can be no assurance that adverse economic or other conditions will not affect Canon’s liquidity or long-term funding in the future.

Short-term loans (including the current portion of long-term debt) ~~decreased~~increased by ~~¥801~~¥3,507 million to ¥42,034 million at December 31, 2019 compared with ¥38,527 million at December 31, ~~2018 compared with ¥39,328 million at December 31, 2017.~~2018. Long-term debt (excluding the current portion) decreased by ~~¥131,276~~¥4,622 million to ¥357,340 million at December 31, 2019 compared with ¥361,962 million at December 31, 2018 ~~compared with ¥493,238 million at December 31, 2017~~ thanks to the repayment for long-term loans.

Canon’s long-term debt mainly consists of bank borrowings and finance lease obligations.

In order to facilitate access to global capital markets, Canon obtains credit ratings from two rating agencies: Moody’s Investors Services, Inc. (“Moody’s”) and Standard and Poor’s Ratings Services (“S&P”). In addition, Canon maintains a rating from Rating and Investment Information, Inc. (“R&I”), a rating agency in Japan, for access to the Japanese capital market.

As of February ~~28, 2019,~~29, 2020, Canon’s debt ratings are: Moody’s: ~~Aa3~~A3 (long-term); S&P:~~AA-~~ A+ (long-term),~~A-1+~~

A-1

(short-term); and R&I: AA+ (long-term). Canon does not have any rating downgrade triggers that would accelerate the maturity of a material amount of its debt. A downgrade in Canon’s credit ratings or outlook could, however, increase the cost of its borrowings.

Canon’s management policy in recent periods to optimize inventory levels is intended to maintain an appropriate balance among relevant imperatives, including minimizing working capital, avoiding undue exposure to the risk of inventory obsolescence, and maintaining the ability to sustain sales despite the occurrence of unexpected disasters.

Canon’s total inventory turnover ratios were 59, 56, ~~49,~~ and 5949 days at the end of the fiscal years 2019, 2018, ~~2017,~~ and ~~2016,~~2017, respectively. The inventory turnover in ~~2018 was reflecting the foregoing circumstances. The inventory turnover in 2016 was primarily impacted by acquisition~~2019 increased due to sales decline.

Table of ~~CMSC on December 19, 2016. If this factor were excluded, the inventory turnover would show 50 days.~~

Contents

Increase in property, plant and equipment on an accrual basis in ~~2018~~2019 amounted to ~~¥159,316~~¥178,088 million compared with ¥159,316 million in 2018 and ¥147,542 million in ~~2017 and ¥171,597 million in 2016.~~2017. For ~~2019,~~2020, Canon projects its increase in property, plant and equipment will be approximately ~~¥175,000~~¥160,000 million.

Employer contributions to Canon’s worldwide defined benefit pension plans were ¥30,383 million in 2019, ¥35,044 million in 2018 and ¥50,628 million in ~~2017 and ¥14,575 million in 2016.~~2017. Employer contributions to Canon’s worldwide defined contribution pension plans were ¥17,414 million in 2019, ¥19,570 million in 2018, and ¥18,979 million in ~~2017, and ¥17,603 million in 2016.~~2017. In addition, employer contributions to the multiemployer pension plan of certain subsidiaries were ¥4,321 million in 2019, ¥4,452 million in 2018 and ¥4,165 million in ~~2017 and ¥3,482 million in 2016.~~

2017.

Working capital in ~~2018~~2019 decreased by ~~¥102,642~~¥135,060 million to ~~¥1,020,527~~¥885,467 million, compared with ¥1,020,527 million in 2018 and ¥1,123,169 million in ~~2017 and ¥1,116,379 million in 2016.~~2017. Canon believes its working capital will be sufficient for its requirements for the foreseeable future. Canon’s capital requirements are primarily dependent on management’s business plans regarding the levels and timing of purchases of fixed assets and investments. The working capital ratio (ratio of current assets to current liabilities) for 2019 was 1.92 compared to 1.99 for 2018 ~~was 1.99 compared~~and to 2.01 for ~~2017 and to 2.14 for 2016.~~

2017.

Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 2.6% in 2019, compared to 5.0% in 2018 ~~compared to~~and 4.7% in ~~2017 and 3.1% in 2016.~~

2017.

Return on Canon Inc. shareholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. shareholders’ equity) was 4.5% in 2019 compared with 8.9% in 2018 ~~compared with~~and 8.6% in ~~2017 and 5.2% in 2016.~~

2017.

The debt to total assets ratios were ~~8.2%~~10.8%, ~~10.2%~~8.2% and ~~11.9%~~10.2% as of December 31, 2019, 2018 ~~2017~~ and ~~2016,~~2017, respectively. Canon had short-term loans, ~~and~~current operating lease liabilities, long-term debt, and noncurrent operating lease liabilities of ¥514,946 million as of December 31, 2019, ¥400,489 million as of December 31, 2018 and ¥532,566 million as of December 31, ~~2017~~2017. The company includes current operating lease liability and ~~¥613,139 million~~noncurrent operating lease liability as ~~of December 31, 2016.~~

debt since 2019 due to adopting new accounting standard ASU No.

2016-02,

Leases (Topic 842) Section A. Please refer to Note 1 (x) for more detailed information.

Non-GAAP

Financial Measures

We have reported our financial results in accordance with U.S. ~~generally accepted accounting principles (“U.S. GAAP”).~~GAAP. In addition, we have discussed our results using the combination of two GAAP cash flow

measures, Net cash provided by operating activities and Net cash used for investing activities, which we refer to as “Free Cash Flow” which is

non-GAAP

measure. We believe this measure is beneficial to an investor’s understanding on Canon’s current liquidity and the alternatives of use in financing activities because it takes into consideration its operating and investing activities.

A reconciliation of ~~these~~this

non-GAAP

financial ~~measures~~measure and the most directly comparable ~~measures~~measure calculated and presented in accordance with GAAP ~~are~~is set forth on the following table.

Free Cash Flow

   December 31
   2018 2017
   (Millions of yen)
Net cash provided by operating activities
   365,293 590,557
Net cash used in investing activities
   (195,615 ) (165,010 )


Free cash flow
   169,678 425,547

Years ended December 31

2019

2018

(Millions of yen)

Net cash provided by operating activities

358,461

365,293

Net cash used in investing activities

(228,568
)
(195,615
)

Free cash flow

129,893

169,678

45
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C. Research and development, patents and licenses

Canon has started its

5-year

management plan, the Excellent Global Corporation Plan Phase V (“Phase V”) from the year 2016. In Phase V, our slogan is “Embrace the challenge of new growth through a grand strategic transformation” and there are three key strategies related to R&D:

Establish a new production system to achieve a

cost-of-sales

ratio of 45%;

Reinforce and expand new businesses while creating future businesses; and

Enhance R&D capabilities through open innovation.

Canon has been striving to implement the three R&D related strategies as follows:

•

~~Establish a new production system to achieve acost-of-sales~~ ~~ratio of 45%:~~

Establish a new production system to achieve a cost-of-sales ratio of 45%:

Strengthen domestic mother factories by integrating design, procurement, production engineering and manufacturing technology operations while pursuing total cost reduction by advancing production engineering capabilities with more sophisticated robots and next-generation technologies such as the IoT, big data and artificial intelligence.

•

~~Reinforce and expand new businesses while creating future businesses:~~

Reinforce and expand new businesses while creating future businesses:

Create and expand new businesses by accelerating the horizontal expansion of existing business with the exploration of new application possibility of Canon’s technologies into new fields. Also, invest intensively on the R&D of promising businesses areas such as commercial printing, network cameras and ~~life sciences~~healthcare while actively taking advantage of ~~M&A~~mergers and acquisitions (M&A) to accelerate the early expansion of these businesses.

•

~~Enhance R&D capabilities through open innovation:~~

Enhance R&D capabilities through open innovation:

Construct a more open R&D system that proactively leverages external technologies and knowledge to accelerate and improve efficiency of the R&D. Especially in our fundamental research and development, Canon is promoting joint and contract research with various partners including universities, research institutes, and startups around the world.

Canon is currently working on collaborative research with Massachusetts General Hospital and Brigham and Women’s Hospital to ~~develop medical robotics~~commercialize the products such as needle-guiding system which is consisted of ultra-miniature endoscope, image-guided navigation software and ~~ultra-miniature endoscope~~robot for needle insertion at the Healthcare Optics Research Laboratory in Boston. Also, CMSC ~~has started~~is currently working on collaborative research on Deep Learning Reconstruction in MRI systems, together with Kumamoto University and the University of Bordeaux.

Moreover, Canon started collaborative research with the Center for iPS Cell Research and Application, Kyoto University, to realize high-quality autologous iPS cells.

Canon has developed simulation systems covering comprehensive image processing including optical design, mechanical noise analysis, and thermal air flow analysis. With these simulation systems, Canon has succeeded in further reducing the need for prototypes, lowering costs and shortening product development lead times.

Canon believes that new products protected by the robust patent portfolio will not easily allow competitors to compete with them, and will give them an advantage in establishing standards in the market and industry.

Canon obtained the third greatest number of patents in the United States in ~~2018,~~2019, according to the annual ranking list, released by IFI CLAIMS^{®
Patent Services.}

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D. Trend information

Under the corporate philosophy of

kyosei

—living and working together for the common good—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 corporation targeting continued growth and development.

Based on this basic management policy, Canon launched the Excellent Global Corporation Plan in 1996 and, from Phase I through to Phase IV, has worked to strengthen its management base and improve corporate value. In 2016, under the slogan “Embracing the challenge of new growth through a grand strategic transformation,” Canon embarked on a new five-year initiative: Phase V of the Excellent Global Corporation Plan. Under this plan, Canon aims to facilitate growth through structural transformation by reinforcing existing businesses and taking steps to cultivate and strengthen new businesses.

The global economy in 2020, while a modest recovery is expected, uncertainty is increasing due to ~~continue to slow down from the latter half of 2018~~growing geopolitical risks and ~~overall, there are~~ concerns of ~~further economic slowdown occurring as~~ a ~~result of intensifying~~relapse in U.S.-China trade friction.

In addition,uncertainty about the effects of the global spread of

COVID-19

, which has already affected the global economy, has continued to increase.

In the businesses in which Canon is involved, ~~for~~overall demand of office MFDs ~~color models are~~is expected to ~~grow steadily. Overall~~increase slightly thanks to solid demand for color models. Demand for laser printers, however, is expected to ~~remain at the same level as~~be below that of ~~the previous~~last year ~~supported by the trend of shifting from monochrome to color models and increasing demand in emerging markets. For interchangeable-lens digital cameras, while demand~~as only a modest economic recovery is expected. As for interchangeable-lens digital cameras, ~~equipped with full-frame sensors is expected to grow steadily, overall~~although demand ~~is expected to decrease. Projections~~ for ~~digital compact cameras indicate continued market contraction, centered mainly onlow-priced~~ ~~models. With regard to inkjet printers, demand~~entry-level models is expected to continue to ~~decrease slightly from the previous year.~~

Asshrink, demand for ~~the medical equipment market, demand~~mirrorless cameras is expected to remain firm, particularly for advanced amateur models, including models with full-frame sensors. Demand for inkjet printers is expected to recover moderately, mainly ~~outside of Japan, with increasing~~in emerging markets. As for medical equipment, solid demand is expected thanks, in part, to expanding demand in emerging markets ~~and increased demand for advanced~~to improve medical ~~care in the United States and Europe. Looking at industrial equipment, as for the~~infrastructure. With regard to semiconductor lithography equipment, ~~while demand for automotive devices is expected to increase,~~ capital investment is ~~expected to slow down~~recovering because the price of memory devices has bottomed out. As for ~~memory devices. For~~ FPD lithography equipment and OLED ~~panel~~panels manufacturing equipment, a gradual rise in capital investment in small- and

medium-size

display panels is expected, ~~to continue to slow down.~~as is continued solid investment into high-resolution,

large-size

display panels. As for network cameras, ~~demand~~continued market expansion is expected ~~to continue expanding for high-spec models and image analysis software~~ due to growing demand for security and diversification in the ~~growing use of~~way network cameras ~~for~~are being used.

In 2020, while securing and maintaining a ~~widening range~~high market share by investing into new competitive products in our existing businesses in a timely manner, and securing high profit margin, even amid market shrinkage, we will endeavor to accelerate the great strategic transformation by implementing the following priority measures in our new businesses to realize their early expansion in terms of ~~applications.~~

The Canon Group recognizes the Business Term in 2019 as a year for achieving transformation into an enterprise wielding high productivity on par with other excellent global corporations in every field of business ranging from R&D to production,both sales and ~~service, underpinned by a new business portfolio containing four additional new business areas (commercial~~profit.

(1)

Commercial printing ~~network cameras, medical system,~~ and industrial ~~equipment). Accordingly,~~printing

Taking advantage of the trend that drives the transition from offset printing to digital printing, we will ~~work~~continue to ~~address~~expand and strengthen the ~~following key challenges under~~business through the ~~theme, “Accelerate Grand Strategic Transformation to achieve fundamental improvements in productivity.”~~

~~(1)~~~~Revitalizing existing businesses~~

~~We promote efforts to strengthen development~~enhancement of ~~DANTOTSU products that overwhelm competitors, making extensive use of cloud, AI~~our product portfolio and ~~IoT technologies.~~

service structure. We will ~~enhance assembly automation by turning out~~also push forward with product ~~designs suitable~~development targeting the areas of package printing and label printing, which are expected to ~~automation, and promotein-house~~ ~~production of equipment and key parts throughout the Group.~~

grow going forward, based on our original technologies

~~We will make quality and cost improvements by strengthening procurement functions and collaborating with suppliers, and promotein-house~~ ~~production and standardization of parts~~

(2)

Network cameras

~~(2)~~~~Bolstering and expanding new businesses~~

~~In commercial printing,~~

By bringing together all our aims involve drawing up comprehensive strategy for all printing-related businesses, building platforms for the commercial printing business centered on Océ, and establishing product structures geared to high-resolution and~~high-mix,small-lot~~ ~~printing.~~

~~With network cameras,~~group strengths, we will ~~enhance~~endeavor to expand and ~~upgrade related~~strengthen our solution business through the integrations of cameras, video management software, and ~~promote expansion into a wide range of fields beyond crime prevention and disaster monitoring applications.~~

video analysis software.

(3)

Medical systems

In the ~~medical~~diagnostic imaging systems segment, which is our core business field, we will ~~enhance our product strengths~~endeavor to strengthen the sales capability in overseas markets, particularly in the U.S. We will also aim to expand into business fields with high growth potential, such as healthcare IT and ~~sales capabilities with respect to diagnostic~~bioscience.

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(4)

Industrial equipment ~~and will explore possibilities for expanding our business into areas besides diagnostic equipment.~~

~~With industrial equipment, we will accelerate development~~We have an overwhelming share in the market of ~~next-generation~~ OLED panel manufacturing equipment for smartphones and ~~promote development of new industrial equipment~~

~~(3)~~~~Reforming R&D operation in anticipation of industrial~~will aim to increase its competitiveness further and ~~social changes~~

~~We will take an approach~~apply it to the ~~theme~~segment of development, grouped into the three areas of: 1. initiatives related to enhancing existing businesses, 2. initiatives aiming to commercialize opportunities in the near future, and 3. initiatives over the medium to long term. Accordingly, we will strive to improve development productivity by forming a development framework that is tailored to those three areas of focus.

large-size

displays for televisions.

~~We will expand and enhance our worldwide research intostart-up~~ ~~companies that have substantial potential for growth drawing on their cutting-edge technologies and new business models.~~

For a discussion of the trend by business segments, see “Item 4 B. Business overview” and “Item 5 A. Operating Results”.

E.
Off-balance
sheet arrangements

As part of its ongoing business, Canon does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities established for the purpose of facilitating

off-balance

sheet arrangements or other contractually narrow or limited purposes.

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

Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract terms. The contract terms are 1 year to 3015 years in case of employees with housing loans, and 1 year to 75 years in case of affiliates and other companies with lease obligations and bank loans. The maximum amount of undiscounted payments Canon would have had to make in the event of default is ~~¥4,458~~¥2,987 million at December 31, ~~2018.~~2019. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, ~~2018~~2019 were not significant.

F. Contractual obligations

The following summarizes Canon’s contractual obligations at December 31, ~~2018.~~

      Payments Due By Period
   Total    Less than
1 year    1-3 years    3-5 years    More than
5 years
   (Millions of yen)
Contractual obligations:

Long-Term Debt:

Loan from the banks
   360,000    —    360,000    —    —
Other debt
   4,602    2,640    1,443    509    10
Operating Lease Obligations
   115,084    29,817    41,239    23,730    20,298
Purchase commitments for:

Property, Plant and Equipment
   54,905    54,905    —    —    —
Parts and Raw Materials
   120,344    120,344    —    —    —
Other long-term liabilities

Contribution to Defined Benefit Pension Plans
   32,400    32,400    —    —    —










Total
   687,335    240,106    402,682    24,239    20,308

2019.


			Payments Due By Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(Millions of yen)
Contractual obligations:
Long-Term Debt:
Loan from the banks		354,000		—		354,000		—		—
Other debt		4,574		1,234		2,020		690		630
Operating Lease Obligations		122,673		34,317		45,018		24,230		19,108
Purchase commitments for :
Property, Plant and Equipment		36,241		36,241		—		—		—
Parts and Raw Materials		112,831		112,831		—		—		—
Other long-term liabilities
Contribution to Defined Benefit Pension Plans		32,242		32,242		—		—		—

Total		662,561		216,865		401,038		24,920		19,738

Note:

The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future payments related to these obligations cannot be projected with reasonable certainty. See Note ~~12,~~11, Income Taxes in the Notes to Consolidated Financial Statements for further details.

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Contribution to defined benefit pension plans reflects the expected amount only for the next fiscal year, since contributions beyond the next fiscal year are not currently determinable due to uncertainties related to changes in actuarial assumptions, returns on plan assets and changes to plan membership.

Canon provides warranties of generally less than one year against defects in materials and workmanship on most of its consumer products. Estimated product warranty related costs are ~~established~~recorded at the time revenue ~~are~~is recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are primarily 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. As of December 31, ~~2018~~2019 accrued product warranty costs are included in accrued expenses and amounted to ~~¥17,318~~¥15,846 million.

At December 31, ~~2018,~~2019, commitments outstanding for the purchase of property, plant and equipment were approximately ~~¥54,905~~¥36,241 million, and commitments outstanding for the purchase of parts and raw materials were approximately ~~¥120,344~~¥112,831 million, both for use in the ordinary course of its business. Canon anticipates that funds needed to fulfill these commitments will be generated internally through operations.

During 2019, Canon expects to contribute ~~¥13,089~~¥13,257 million to its Japanese defined benefit pension plans and ~~¥19,311~~¥18,985 million to its foreign defined benefit pension plans.

Canon’s management believes that current financial resources, cash generated from operations and Canon’s potential capacity for additional debt and/or equity financing will be sufficient to fund current and future capital requirements.

Item 6. Directors, Senior Management and Employees

A. Directors and senior management

Directors and Audit & Supervisory Board Members of the Company as of March ~~28, 2019~~27, 2020 and their respective business experience are listed below.


Name (Date of birth)	Position (Group executive/function)	Date of commencement				Business experience (*current position/function)
Fujio Mitarai	Chairman & CEO		4/1961			Entered the Company
(Sep. 23, 1935)			1/1979			President of Canon U.S.A., Inc.
			3/1981		~~Director~~
		~~3/1985~~		~~Managing~~ Director
		~~1/1989~~	3/1985		~~In charge of HQ administration~~	Managing Director
		3/	1/1989		~~Senior Managing Director~~	In charge of HQ administration
			3/~~1993~~1989		~~Executive Vice President~~	Senior Managing Director
		~~9/1995~~	3/1993			Executive Vice President ~~& CEO~~
		~~3/2006~~	9/1995			President & CEO
			3/2006			Chairman of the Board & President & CEO
			5/2006			Chairman & CEO*

~~Masaya Maeda~~
Masaya Maeda	President & COO		4/1975			Entered the Company
(Oct. 17, 1952)			1/2006			Group Executive of Digital Imaging Business Group
			3/2007			Director
			4/2007			Chief Executive of Image Communication Products Operations
			3/2010			Managing Director
			3/2014			Senior Managing Director
			3/2016			President & COO*

~~Toshizo Tanaka~~

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Name (Date of birth)	Position (Group executive/function)		Date of commencement				Business experience (*current position/function)
Toshizo Tanaka	Executive Vice President & CFO		~~4/1964~~		~~Entered the Company~~
~~(Oct. 8, 1940)~~		(Group Executive of Finance & Accounting HQ, Group Executive of Public Affairs HQ, Group Executive of Facilities Management HQ, Group Executive of Corporate Planning HQ)		~~1/1992~~	4/1964			Entered the Company
(Oct. 8, 1940)						1/1992			Deputy Group Executive of Finance & Accounting HQ
						3/1995			Director
						4/1995			Group Executive of Finance & Accounting HQ
						3/1997			Managing Director
						3/2001			Senior Managing Director
						1/2007			Group Executive of Policy and Economy Research HQ
				3/2007			Executive Vice President & Director
		3/2008				Executive Vice President & CFO*
			~~3/2008~~	1/2010			Group Executive Vice President & CFO* of General Affairs HQ
			1/	3/2010			Group Executive of ~~General Affairs~~External Relations HQ
			~~3/2010~~	4/2011			Group Executive of ~~External Relations~~Finance & Accounting HQ
				4/~~2011~~2012			Group Executive of ~~Finance & Accounting~~Facilities Management HQ
			~~4/2012~~	3/2014		~~Group Executive of Facilities Management HQ~~
			~~3/2014~~		Group Executive of Human Resources Management & Organization HQ


~~Name~~ ~~(Date of birth)~~	~~Position~~ ~~(Group executive/function)~~	~~Date of~~ ~~commencement~~		~~Business experience~~ ~~(*current position/function)~~
			4/2017		Group Executive of Facilities Management HQ*
			3/2018		Group Executive of Public Affairs HQ*
			4/2018		Group Executive of Finance & Accounting HQ*
			3/2020		Group Executive of Corporate Planning HQ*
~~Toshio Homma~~
Toshio Homma	Executive Vice President & CTO & In charge of Office Business (Chief Executive of Office Imaging Products Operations)		4/1972		Entered the Company
(Mar. 10, 1949)			4/2001		Deputy Chief Executive of i Printer Products Operations
			3/2003		Director
			4/2003		Group Executive of Business Promotion HQ
			7/2003		Group Executive of L Printer Business Promotion HQ
			1/2007		Chief Executive of L Printer Products Operations
			3/2008		Managing Director
			3/2012		Senior Managing Director Group Executive of Procurement HQ
			3/2016		Executive Vice President
			4/2016		Chief Executive of Office Imaging Products Operations*
			3/2017		Executive Vice President in charge of Office Business*
			3/2019		CTO*

~~Kunitaro Saida~~	~~Director~~

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	~~5/2006~~
Name (Date of birth)	Position (Group executive/function)	Date of commencement				Business experience (*current position/function)
Kunitaro Saida	Director		5/2006			Qualified for attorney*
(May 4, 1943)			6/2007			Audit & Supervisory Board Member of NICHIREI CORPORATION* CORPORATION
			6/2008			Director of Sumitomo Osaka Cement Co., Ltd.*
			6/2010			Director of HEIWA REAL ESTATE CO., LTD.*
			3/2014			Director*

Haruhiko Kato (Jul. 21, 1952)	Director		7/2009			Commissioner of National Tax Agency
Haruhiko Kato (Jul. 21, 1952)	Director		1/2011		~~1/2011~~		Senior Managing Director of Japan Securities Depository Center, Incorporated
			6/2011			President & CEO of Japan Securities Depository Center, Incorporated*
		~~6/2013~~		~~Director of Toyota Motor Corporation~~
		~~3/2014~~		Director*

~~Masaaki Nakamura~~	~~Audit & Supervisory Board Member~~	~~4/1980~~		~~Entered the Company~~
~~(Jul. 28, 1957)~~		~~1/2013~~		~~Deputy Group Executive of Facilities Management HQ~~

Incorporated


~~Name~~ ~~(Date of birth)~~	~~Position~~ ~~(Group executive/function)~~	~~Date of~~ ~~commencement~~		~~Business experience~~ ~~(*current position/function)~~
		~~3/2014~~	6/2013		~~Deputy Group Executive~~	Director of ~~Human Resources Management & Organization HQ~~
		~~4/2014~~		~~Executive Officer~~ Toyota Motor Corporation
			3/~~2015~~2014		~~Director~~	Director*
		~~3/2016~~	6/2019		~~Managing Executive Officer~~	Audit & Supervisory Board Member of Toyota Motor Corporation*

Ryuichi Ebinuma	Audit & Supervisory Board Member		4/1983			Entered the Company
(Nov. 1, 1958)			7/2002			Senior General Manager of Research Laboratory of Printing Technologies, Core Technology Development Headquarters
		~~4/2016~~	1/2009			Group Executive of ~~Facilities Management HQ~~ Core Technology Development Group, Corporate R&D Headquarters
		~~2/2017~~	4/2011		~~Group~~	Executive ~~of Public Affairs HQ~~ Officer
		~~3/2018~~	1/2013		Audit & Supervisory Board Member*

~~Hiroaki Sato~~	~~Audit & Supervisory Board Member~~	~~4/1982~~		~~Entered the Company~~
~~(Jan. 29, 1960)~~		~~2/2004~~		~~Senior General Manager~~ Deputy Group Executive of ~~MR Systems Laboratory~~ Corporate R&D Headquarters
		~~7/2014~~	4/2016			Managing Executive Officer
			4/2018			Group Executive of Corporate Planning HQ
			3/2020			Audit & Supervisory Board Member*

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Name (Date of birth)	Position (Group executive/function)	Date of commencement				Business experience (*current position/function)
Hiroaki Sato	Audit & Supervisory Board Member		4/1982			Entered the Company
(Jan. 29, 1960)			2/2004			Senior General Manager of MR Systems Laboratory
			7/2014			Deputy Group Executive of Advanced Information & Real-world Technology Development Group, Digital System Technology Development HQ
			7/2015			Deputy Group Executive of Digital System Technology Development HQ
			4/2018			Principal Staff Engineer of Digital Bussiness Platform Development HQ
			3/2019			Audit & Supervisory Board Member*

Yutaka Tanaka (Mar. 11, 1949)	Audit & Supervisory Board Member		4/1975			Assistant Judge of the Tokyo District Court
Yutaka Tanaka (Mar. 11, 1949)	Audit & Supervisory Board Member		4/1986		~~4/1986~~		Judge of the Tokyo District Court
			4/1987			Instructor of the Legal Training & Research Institute, the Supreme Court of Japan
			4/1992			Judicial Research Official, the Supreme Court of Japan
		~~4/1996~~		Registered as an attorney*
		~~10/2014~~		Guest Professor of Keio University Law School*
		~~3/2019~~		Audit & Supervisory Board Member*

~~Hiroshi Yoshida~~	~~Audit & Supervisory Board Member~~	~~10/1980~~		~~Joined Tohmatsu Awoki & Co.~~
~~(Sep. 5, 1954)~~		~~4/1984~~		Registered as Certified Public Accountant*
		~~7/1993~~		~~Partner of Tohmatsu & Co.~~
		~~6/2000~~		~~Representative Partner of Tohmatsu & Co.~~


~~Name~~ ~~(Date of birth)~~	~~Position~~ ~~(Group executive/function)~~	~~Date of~~ ~~commencement~~		~~Business experience~~ ~~(*current position/function)~~
		~~5/2007~~	4/1996			Registered as an attorney*
			10/2014			Guest Professor of Keio University Law School
			3/2019			Audit & Supervisory Board Member*

Hiroshi Yoshida	Audit & Supervisory Board Member		10/1980			Joined Tohmatsu Awoki & Co.
(Sep. 5, 1954)			4/1984			Registered as Certified Public Accountant*
			7/1993			Partner of Tohmatsu & Co.
			6/2000			Representative Partner of Tohmatsu & Co.
			5/2007			Managing Partner, Finance & Administration of Deloitte Touche Tohmatsu The Board Member of Deloitte Touche Tohmatsu
		~~11/2011~~		~~CFO of Deloitte Touche Tohmatsu LLC~~
		~~3/2017~~	11/2011		Audit & Supervisory Board Member*

~~Koichi Kashimoto~~ ~~(Jul. 2, 1961)~~	~~Audit & Supervisory Board Member~~	~~4/1984~~		~~Entered The Dai-ichi Life Insurance Company, Limited~~
~~Koichi Kashimoto~~ ~~(Jul. 2, 1961)~~				~~(formerly The Dai-ichi Mutual Life Insurance Co.)~~ CFO of Deloitte Touche Tohmatsu LLC
		~~4/1997~~	3/2017		~~Manager~~	Audit & Supervisory Board Member*

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Name (Date of ~~Government Relations Department~~birth)	Position (Group executive/function)	Date of commencement			Business experience (*current position/function)
Koichi Kashimoto (Jul. 2, 1961)	Audit & Supervisory Board Member		4/1984		Entered TheDai-ichi Life Insurance Company, Limited (formerly The Dai-ichi Mutual Life Insurance Co.)
			4/~~2005~~1997	~~General~~	Manager of ~~Corporate Administration Center~~Government Relations Department of The Dai-ichi Life Insurance Company, Limited
			4/~~2009~~2005	~~Managing Director~~	General Manager of Corporate Administration Center of The Dai-ichi Life ~~International (Europe),~~Insurance Company, Limited
			4/~~2012~~2009	~~General Manager~~	Managing Director of ~~Secretarial Department of~~ ~~The~~ Dai-ichi Life ~~Insurance Company,~~International (Europe), Limited
			4/~~2016~~2012		General Manager of Secretarial Department of The Dai-ichi Life Insurance Company, Limited
			4/2016		Senior General Manager of Secretarial Department (in charge of Secretarial Department and General Affairs Department), and Senior General Manager of Group General Affairs Unit of The Dai-ichi Life Insurance Company, Limited
			10/2016		Senior General Manager of Secretarial Department (in charge of Secretarial Department and General Affairs Department) of The Dai-ichi Life Insurance Company, Limited, and Senior General Manager and Chief of General Affairs Unit of Dai-ichi Life Holdings, Inc.
			3/2018		Audit & Supervisory Board Member*

Term

All directors and Audit & Supervisory Board Members are elected by the shareholders at their general meeting.

Yutaka Tanaka, Hiroshi Yoshida and Koichi Kashimoto, are outside Audit & Supervisory Board Members as stipulated in Item16, Article 2 of the Corporation Law of Japan. Kunitaro Saida and Haruhiko Kato are outside directors. The term of office of directors is one year. The current term of all directors expires in March ~~2020.~~2021. The term of office of Audit & Supervisory Board Members is four ~~years.~~years, however, the term of office of an Audit & Supervisory Board Member elected to fill a vacancy expires with the expiration of the remaining term of office of the retired Audit & Supervisory Board Member under the Company’s Articles of Incorporation. The current term for Hiroshi Yoshida who was elected in the general meeting of shareholders in March 2017, expires in March 2021, the current term for ~~Masaaki Nakamura and~~ Koichi Kashimoto who ~~were~~was elected in the general meeting of shareholders in March 2018, expires in March 2022, ~~and~~ the current term for Hiroaki Sato and Yutaka Tanaka who were elected in

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the general meeting of shareholders in March 2019, expires in March 2023.

Meanwhile, the current term for Ryuichi Ebinuma who was elected to fill a vacancy in the general meeting of shareholders in March 2020, expires in March 2022 when his predecessor’s term of office expires.

Board members and Audit & Supervisory Board Members may serve any number of consecutive terms.

There is no arrangement or understanding between any director or Audit & Supervisory Board Member and any major shareholder, customer, supplier or other material stakeholders in connection with the selection of such director or Audit & Supervisory Board Member.

Board of Directors and Audit & Supervisory Board Members

The Company’s articles of incorporation provide for a board of directors of not more than 30 members and for not more than five Audit & Supervisory Board Members. Currently the number of board members is six and the number of Audit & Supervisory Board Members is five. There is no maximum age limit for members of the board. Board members and Audit & Supervisory Board Members may be removed from office at any time by a resolution of a general meeting of shareholders.

The board of directors has ultimate responsibility for the administration of the Company’s affairs. By resolution, the board of directors designates, from among its members, representative directors who have authority individually to represent the Company generally in the conduct of its affairs.

Under the Corporation Law of Japan, board members must refrain from engaging in any business competing with the Company unless approved by a board resolution, and no board member may vote on a proposal, arrangement or contract in which that board member is deemed to be materially interested.

The Corporation Law of Japan requires a resolution of the board of directors for a company to acquire or dispose of material assets, to borrow substantial amounts of money, to employ or discharge important employees such as corporate officers, and to establish, change or abolish material corporate organizations such as a branch office.

The Audit & Supervisory Board Members are not required to be certified public accountants, although Hiroshi Yoshida is a certified public accountant. At least half of the Audit & Supervisory Board Members must be persons who have not been either board members or employees of the Company or any of its subsidiaries. An Audit & Supervisory Board Member may not at the same time be a board member or an employee of the Company or any of its subsidiaries. The Audit & Supervisory Board Members have the statutory duty of examining the Company’s financial statements and the Company’s business reports to be submitted annually by the board of directors at the general meetings of shareholders and of reporting their opinions to the shareholders. They also have the statutory duty of supervising the administration by the board members of the Company’s affairs. They shall participate in the meetings of the board of directors but are not entitled to vote.

The Audit & Supervisory Board Members constitute the Audit & Supervisory Board. Under the Corporation Law of Japan, the Audit & Supervisory Board has a statutory duty to prepare and submit its audit report to the board of directors each year. An Audit & Supervisory Board Member may note an opinion in the auditor report if

an Audit & Supervisory Board member’s opinion is different from the opinion expressed in the audit report. The Audit & Supervisory Board is empowered to establish audit principles, the method of examination by Audit & Supervisory Board Members of the Company’s affairs and financial position and other matters concerning the performance of the Audit & Supervisory Board Members’ duties. The Company does not have an audit committee.

The amount of remuneration payable to the Company’s board members as a group and that of the Company’s Audit & Supervisory Board Members as a group in respect of a fiscal year is subject to approval by a

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general meeting of shareholders. Within those authorized amounts, the compensation for each board member and Audit & Supervisory Board Member is determined by the board of directors and a consultation with the Audit & Supervisory Board Members, respectively. The Company does not have a remuneration committee.

Under the Corporation Law of Japan and the Company’s articles of incorporation, the board of directors may, by resolution, release current and former directors and Audit & Supervisory Board Members from liability for damages resulting from negligence in the fulfillment of their respective duties to the extent permitted by law. In addition, the Company may enter into contracts with outside directors limiting their liability for damages resulting from negligence in the fulfillment of their respective duties in an amount consistent with the limitation stipulated by law. Furthermore, the Company may enter into contracts with outside Audit & Supervisory Board Members limiting their liability for damages resulting from negligence in the fulfillment of their respective duties in an amount consistent with the limitation stipulated by law.

Canon established a standing committee, the Internal Control Committee in 2004, with the president appointed as chairman of the group. The Internal Control Committee has built a highly effective internal control system unique to Canon, which not only serves to ensure the reliability of the Company’s financial reporting, but also aims to ensure the effectiveness and efficiency of its business operations, as well as compliance with related laws, regulations and internal controls. In 2015, with the aim of managing financial, compliance, and business risks from a comprehensive perspective, the Internal Control Committee was reorganized and renamed the Risk Management Committee which is tasked with performing this duty. Established under the Risk Management Committee are the following three subcommittees: the Financial Risk Management Subcommittee, which is in charge of improving systems to ensure the reliability of financial reporting, the Compliance Subcommittee, which is in charge of improving systems to ensure compliance of corporate ethics and major laws and regulations, and the Business Risk Management Subcommittee, which is in charge of improving systems to manage quality risks, information leakage risks and other significant business risks. The Risk Management Committee shall develop various measures with regard to improving the risk management system. These measures include the system for grasping any significant risks (violation of laws and regulations, inappropriate financial reporting, quality issues, work-related injuries, disasters, etc.) that the Canon Group may face in the course of business. Additionally, in accordance with any action plan that is approved by the Board of Directors, the Risk Management Committee shall evaluate the status of improvement and implementation of the risk management system and report its findings to the CEO and the Board of Directors.

The Disclosure Committee was established with the president appointed as chairman in 2005. This committee was formed to ensure that Canon is not only in compliance with applicable laws, rules and regulations, but also to ensure that information disclosed to shareholders and capital markets is both correct and comprehensive.

Executive Officer System

Canon adopted an Executive Officer System effective April 1, 2008. Executive Officers are appointed and discharged by the Board of Directors and have a term of office of one year. Taking into consideration growth in the scope of its business activities, Canon recognizes the need to bolster its management execution structure. By promoting capable human resources with accumulated executive knowledge across specific business areas, the Company is endeavoring to realize more flexible and efficient management operations. To this end, Canon intends to gradually increase the number of Executive Officers and further solidify its management systems.

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Executive Officers of the Company ~~appointed by the Board of Directors meeting held on January 30, 2019,~~ whom are expected to take the assignment on April 1, ~~2019,~~2020, are listed below.


~~Name~~	~~Position~~
Name	Position	(Group executive/function)
~~Yoroku Adachi~~ Hideki Ozawa	Executive Vice President	~~Chairman of Canon U.S.A., Inc.~~
~~Hideki Ozawa~~	~~Executive Vice President~~	President of Canon (China) Co., Ltd.
Seymour Liebman	Senior Managing Executive Officer	Executive Vice President of Canon U.S.A., Inc.
~~Naoji Otsuka~~ Toshio Takiguchi	Senior Managing Executive Officer	~~Chief Executive of Inkjet Products Operations~~
~~Toshio Takiguchi~~	~~Senior Managing Executive Officer~~	Chief Executive of Medical Systems and Components Operations, President of Canon Medical Systems Corporation
Kenichi Nagasawa	Managing Executive Officer	Group Executive of Corporate Intellectual Property & Legal HQ
Masanori Yamada	Managing Executive Officer	Group Executive of Image Solutions Business Operations, Chief of ~~Rugby World Cup/~~Olympic and Paralympic Project, Chief of IR/MICE Business project
Aitake Wakiya	Managing Executive Officer	Executive Vice President of Canon Europe Ltd.
Eiji Osanai	Managing Executive Officer	Group Executive of Production Engineering HQ
~~Ryuichi Ebinuma~~ Yuichi Ishizuka	Managing Executive Officer	~~Group Executive of Corporate Planning HQ~~
~~Yuichi Ishizuka~~	~~Managing Executive Officer~~	President of Canon Europa N.V., President of Canon Europe Ltd.
Kazuto Ogawa	Managing Executive Officer	President of Canon U.S.A.,Inc.
Shunsuke Inoue	Managing Executive Officer	Group Executive of R&D HQ ~~Group Executive of Device Technology Development HQ~~
Takayuki Miyamoto	Managing Executive Officer	Chief Executive of Peripheral Products Operations, Chief of Canon EXPO Project
Katsumi Iijima	Managing Executive Officer	Group Executive of Digital Business Platform Development HQ
Hiroaki Takeishi	Managing Executive Officer	Chief Executive of Optical Products Operations
Soichi Hiramatsu	Managing Executive Officer	Group Executive of Procurement HQ
Takashi Takeya	Managing Executive Officer	Senior General Manager of Global Logistics Management Center
Go Tokura	Managing Executive Officer	Chief Executive of Image Communication Business Operations
Hisahiro Minokawa	Managing Executive Officer	Group Executive of Human Resources Management & Organization HQ
~~Nobutoshi Mizusawa~~ Ritsuo Mashiko	Managing Executive Officer	President of Oita Canon Inc., President of Miyazaki Canon Inc.
Minoru Asada	Managing Executive Officer	President of Canon Production Printing Holding B.V.
Kazuhiko Nagashima	Managing Executive Officer	Deputy Group Executive of Finance & Accounting HQ
Nobutoshi Mizusawa	Executive Officer	Deputy Chief Executive of Medical Systems and Components Operations
Yoichi Iwabuchi	Executive Officer	Group Executive of Information & Communication Systems HQ
Nobuyuki Tainaka	Executive Officer	Senior General Manager of Global Legal Administration Center
Takanobu Nakamasu	Executive Officer	Executive Vice President of Canon Europe Ltd.
Toshihiko Kusumoto	Executive Officer	Deputy Chief Executive of Office Imaging Products Operations
Akiko Tanaka	Executive Officer	Deputy Group Executive of Corporate Planning HQ
~~Ritsuo Mashiko~~ Noriko Gunji	Executive Officer	~~President of Oita Canon Inc.~~
~~Noriko Gunji~~	~~Executive Officer~~	President of Canon Singapore Pte. Ltd.
Hideki Sanatake	Executive Officer	Deputy Group Executive of Corporate Intellectual Property and Legal HQ
Tamaki Hashimoto	Executive Officer	Group Executive of Consumer Inkjet Products Group
Hideto Kohtani	Executive Officer	~~Group Executive of Office Imaging Products Digital Solution Group~~
~~Minoru Asada~~	~~Executive Officer~~	~~Chairman of Océ Holding B.V.~~
~~Kazuhiko Nagashima~~	~~Executive Officer~~	Deputy Group Executive of ~~Finance & Accounting HQ~~Image Solutions Business Group 1

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~~Katsuhiko Shinjo~~	~~Executive Officer~~
Name	Position	(Group executive/function)
Katsuhiko Shinjo	Executive Officer	Deputy Group Executive of R&D HQ
Katsuyoshi Soma	Executive Officer	President of Fukushima Canon Inc.
Masaki Omori	Executive Officer	Deputy Group Executive of Production Engineering HQ


~~Name~~ Saijiro Endo	~~Position~~ Executive Officer	~~(Group executive/function)~~
~~Saijiro Endo~~	~~Executive Officer~~	Senior General Manager of Office Imaging Products Development Planning & Management Center
Toshiyuki Matsuda	Executive Officer	Group Executive of Peripherals Marketing Group
Takeshi Ichikawa	Executive Officer	Group Executive of Device Technology Development HQ
Hiroto Okawara	Executive Officer	Deputy Group Executive of Image Solutions Business Group 2, Chief of Smart Mobility Business Promotion Project
Yoshiyuki Koshimizu	Executive Officer	Senior General Manager of ~~Semiconductor Device Research &~~Office Imaging Products Development Center
~~Hiroto Okawara~~	~~Executive Officer~~	~~Senior General Manager of Image Solutions Development Center 2~~

B. Compensation

In the fiscal year ended December 31, ~~2018,~~2019, Canon ~~pays~~paid an aggregate of approximately ~~¥1,145~~¥1,038 million to its directors and Audit & Supervisory Board Members. This amount includes bonuses.

Beginning from the fiscal year ended December 31, 2010, the Company is required to disclose the compensation of any director who receives total aggregate annual compensation exceeding ¥100 million in accordance with the Financial Instruments and Exchange Act of Japan and related ordinances. The following table sets forth the amount of compensation paid or planned to be paid directors whose aggregate compensation exceeded ¥100 million in ~~2018.~~

Name
(Position)
      Category of remuneration
   Company    Basic Compensation    Bonus    Stock-Type
Compensation
Stock Options    Total
      (Millions of yen)
Fujio Mitarai (Director)
   Canon Inc.    300    39    33    372
Masaya Maeda (Director)
   Canon Inc.    137    22    15    174
Toshizo Tanaka (Director)
   Canon Inc.    131    21    14    166
Toshio Homma(Director)
   Canon Inc.    110    16    13    139
Shigeyuki Matsumoto(Director)
   Canon Inc.    107    15    13    135

2019.


Name (Position)			Category of remuneration
Name (Position)	Company		Basic Remuneration		Bonus		Stock-Type Compensation Stock Options		Total
			(Millions of yen)
Fujio Mitarai (Director)		Canon Inc.		305		21		67		393
Masaya Maeda (Director)		Canon Inc.		140		12		14		166
Toshizo Tanaka (Director)		Canon Inc.		132		12		21		165
Toshio Homma (Director)		Canon Inc.		112		9		13		134

Notes:

(1)	~~Bonus amounts represent~~Items that relate to policies which determine the ~~increased portion~~amount of ~~accrued directors’ bonuses in fiscal year 2018.~~ director and audit & supervisory board member remuneration or its calculation method:

(i) Basic Policy of Remuneration

The ~~following two elements comprise~~Company, for the health and sustainable growth of the Canon Group, is working to design a director remuneration system that effectively encourages directors and audit & supervisory board members to ~~directors:~~

fully demonstrate their abilities and fulfill their roles and responsibilities. Moreover, the total value of director and audit & supervisory board member remuneration is based on an appropriate standard, taking into consideration the recruiting and holding on to

top-class

people that can effectively meet the Company’s expectations.

(ii) Details of Each Element of the Remuneration System

a. Representative Directors and Executive Directors

The remuneration of Representative Directors and Executive Directors consists of a basic remuneration, a bonus, and a stock-type compensation stock option.

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Basic ~~Compensation:~~Remuneration

As compensation for ~~executing~~the performance of ~~business operations~~

duties, directors receive a fixed monthly remuneration. The remuneration is a predetermined amount based on the director’s position and the degree to which they contribute in this role. The total amount of director remuneration is not more than ¥1.5 billion a year, which was approved at the Company’s Ordinary General Meeting of Shareholders for the 117th Business Term held on March 2018. (Note: the total amount includes remuneration for outside directors.)

~~Bonus:~~

Bonus

As a reward for directors’ service over their

one-year

term, directors receive a bonus ~~links~~for which consolidated income before income taxes is used as a financial indicator to ~~business~~measure the results of ~~current fiscal~~annual group-wide corporate activities. The total amount of the director’s bonus is determined by multiplying such consolidated income with a given predetermined coefficient that corresponds with the director’s position. It is also determined through individual assessment based on the degree to which the director has contributed in this role.

Bonuses along with dividend and internal reserves are essentially subjects of corporate profit distribution. As such, matters including whether a payment is allowed or the total amount of bonus as calculated above, are deliberated during the general meeting of shareholders every year.

Stock-type Compensation Stock Option

The granting of stock acquisition rights for the Company’s shares is to further raise the motivation of these directors to improve performance from a medium- to long-term perspective as well as raise corporate value by sharing the benefits and risks of share price fluctuations with the Company’s shareholders. The total amount of stock acquisition rights of not more than ¥300 million a year,

was approved at the Company’s Ordinary General Meeting of Shareholders for the 117 Business Term held on March 29, 2018. The number of stock acquisition rights allotted to a director is calculated based on the amount determined by the director’s position, the consolidated income before income taxes in the previous year as well as the degree to which the director has contributed in this role (The amount contributed as consideration for granted stock acquisition rights), and the stock price level at the time of grant. As remuneration is linked to the achievements throughout one’s term in office, the Company has a system in place that allows the exercising of acquisition rights at the time of retirement due to the expiration of one’s term. As for the grantee, if the Company recognizes any misconduct of duty, act conflicting with the duty of due care, etc., the Company may limit the exercise of all or a portion of the stock acquisition rights.

Managing from a medium- to long-term perspective is important. Based on this, the Company places emphasis on providing a certain level of basic remuneration in a stable manner. In addition to this, consideration is also given to improved performance in a single year and the ~~above,~~pursuit of shareholder interest when determining the ~~Company issues~~breakdown between basic remuneration, bonus, and stock-type compensation stock ~~options for the purpose of providing effective incentives to improve business results on a medium and long-term basis.~~options. The ~~remuneration to Audit & Supervisory Board Members consists of only basic compensation, which is not affected by the performance of the Company.~~

~~The determination methods of remuneration are as follows:~~

~~Basic Compensation~~

~~Each~~ maximum amount of ~~total~~director remuneration accounted for by the bonus and stock-type compensation stock options on average by position is set around 50% and 30% of the basic remuneration, respectively. As for consolidated income before income taxes which is the financial indicators linked to ~~directors~~the bonus, in 2019 (the 119th Business Term), although the Company’s outlook was for ¥347.5 billion at the beginning of the year, actual results were ¥195.7 billion.

b. Outside Directors and Audit & Supervisory Board Members

As for the remuneration of outside directors and audit & supervisory board members which perform duties that are independent from a business execution standpoint, their remuneration is ~~determined by~~made up of a fixed monthly amount, namely a basic remuneration, as compensation for their service. As for outside directors, their basic remuneration is decided within a predetermined range that takes into consideration levels that are considered standard and

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within the specified yearly range that was approved at the Company’s general meeting of shareholders as described in Basic Remuneration above. As for audit & supervisory board members, within the yearly limit of ¥200 million that was approved at the Ordinary General Meeting of ~~Shareholders. The remuneration to each director~~Shareholders for the 103rd Business Term held on March 30, 2004, distribution is determined ~~by the meeting of the Board of Directors based on criteria set by the Company, and the remuneration to each~~through consultation between Audit & Supervisory Board ~~Member is determined by the meeting of Audit & Supervisory Board~~ Members.

~~Bonus~~

Director bonuses are calculated based on internal criteria considering the performance of the Company. The total amount is proposed to and approved by the Ordinary General Meeting of Shareholders. The bonus amount

~~paid to individual directors is determined at a meeting of the Board of Directors, based on the total approved amount, taking into account the position and performance of each director.~~

Stock Options

The descriptions of the stock option plans are below.

The Stock Option Plan Approved on March 29, 2018

1. Grantees of share options

The Company’s 5 directors (excluding outside directors) and 28 executive officers.

2. Number of share options

The number of share options that the Board of Directors are authorized to issue is ~~740.~~

695.

3. Number of shares acquired upon exercise of a share option

The number of shares acquired upon exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is ~~74,000~~69,500 common shares. However, in the case that the Company conducts a share split (including an allotment without consideration (

musho-wariate

) of shares of common stock of the Company; the same shall apply to all references to the share split herein) or share consolidation on and after the date of shareholders’ resolution adopting the proposal at the above-mentioned General Meeting of Shareholders (the “Allotment Date”), the number of shares acquired shall be adjusted in accordance with the following formula, rounding down any fraction of less than one share resulting from such adjustment.


Number of shares acquired after adjustment		=		Number of shares acquired before adjustment		×		Ratio of share split or share consolidation

In addition to the above, in any event that makes it necessary to adjust the number of shares acquired, including a merger and company split, on and after the Allotment Date, the Company may make appropriate adjustment to the Number of Shares Acquired within a reasonable range.

4. Cash payment for share options (yen)

The cash payment required for each stock acquisition right shall be ¥1 per share to be acquired upon exercise of each stock acquisition right, multiplied by the number of shares acquired.

5. Period during which share options are exercisable

From May 2, 2018 to May 1, ~~2048~~

2048.

6. Issue price and amount of increased stated capital (yen)

The issue price and amount of increased stated capital per share is ¥2,949 and ¥1,475, respectively. The issue price is total amount of the exercise price of each stock acquisition (¥1 per share) and the fair value of the stock

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acquisition rights at the allotment date (¥2,948 per share). In addition, the amount of capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be a half of the maximum amount of

capital increase, etc, which is calculated in accordance with the Article 17, Paragraph 1 of the Company Accounting Regulations (

Kaisha Keisan Kisoku

), and any fraction less than ¥1 arising therefrom shall be rounded up to the nearest ¥1.

7. Other conditions for exercise of share options

(i) Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a director or an executive officer of the Company.

(ii) In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.

8. Restriction on acquisition of share options by transfer

An acquisition of share options by way of transfer requires the approval of the Board of Directors.

9. Treatment of the stock acquisition rights upon restructuring transaction

If the Company conducts a merger (limited to the case where the Company is dissolved due to the merger), or a share exchange or transfer (both, limited to the case where the Company becomes a wholly-owned subsidiary) (collectively, the “Structural Reorganization”), the Company shall, in each of the above cases, allot stock acquisition rights of any of the relevant companies listed in “a” through “e” of Article 236, Paragraph 1, Item 8 of the Company Law (the “Reorganized Company”) to the Holders holding the stock acquisition rights remaining at the time immediately preceding the effective date of the relevant Structural Reorganization (the “Remaining Stock Acquisition Rights”) (the effective date of the relevant Structural Reorganization shall mean, in the case of a merger, the date on which the merger becomes effective; in the case of a consolidation; the date of establishment of a newly-incorporated company through consolidation; in the case of a share exchange, the date on which the share exchange becomes effective; and in the case of a share transfer, the date of establishment of a wholly-owning parent company through the share transfer; hereinafter the same shall apply). Provided, however, that the foregoing shall be on the condition that transfer of such stock acquisition rights by the Reorganized Company in accordance with each of the following items is stipulated in a merger agreement, a consolidation agreement, a share exchange agreement or a share transfer plan.

(i) Number of stock acquisition rights of the Reorganized Company to be allotted:

A number equal to the number of the Remaining Stock Acquisition Rights held by the Holder shall be transferred to such Holder.

(ii) Class of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:

Common stock of the Reorganized Company.

(iii) Number of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:

To be determined in accordance with 3 above, taking into consideration, among others, the conditions of Structural Reorganization.

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(iv) Value of assets to be contributed upon exercise of each stock acquisition right:

shares of the Reorganized Company to be acquired upon exercise of the relevant stock acquisition rights as determined in accordance with (iii) above. The “exercise price after reorganization” shall be one 1 yen per share of the Reorganized Company to be acquired upon exercise of each of its stock acquisition rights.

(v) Exercise period of stock acquisition rights:

From and including whichever is the later of (x) the commencement date of the period during which the stock acquisition rights may be exercised or (y) the effective date of the Structural Reorganization, to and including the expiration date of the period during which the stock acquisition rights may be exercised as provided.

(vi) Matters regarding stated capital and capital reserves increased due to the issuance of shares upon exercise of stock acquisition rights:

(a) The increased amount of stated capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights will be one half (1/2) of the maximum amount of increase of stated capital, etc. to be calculated in accordance with Article 17, Paragraph 1 of the Company Accounting Regulations (

Kaisha Keisan Kisoku

). Any fractional amount of less than one 1 yen resulting from such calculation will be rounded up to one 1 yen.

(b) The increased amount of capital reserves to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be the maximum amount of increases of stated capital, etc., mentioned in (a) above, after the subtraction of increased amount of stated capital mentioned in (a) above.

(vii) Restrictions on acquisition of stock acquisition rights by transfer:

The stock acquisition rights cannot be acquired through transfer, unless such acquisition is expressly approved by a resolution of the Board of Directors of the Reorganized Company.

(viii) Conditions for exercise of stock acquisition rights:

(a)Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a Director or an Executive Officer of the Company.

(b)In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.

(c)Besides the above, other conditions shall be stipulated in an agreement to be executed between the Company and the Holder, based on the resolution of the Board of Directors’ meeting.

(ix) Events regarding the Company’s acquisition of stock acquisition rights:

If a proposal for the approval of a merger agreement under which the Company will become an extinguishing company or a proposal for the approval for a share exchange agreement or a share transfer plan under which the Company will become a wholly owned subsidiary is approved by the Company’s shareholders at a Meeting of Shareholders (or by the Board of Directors if no resolution of a Meeting of Shareholders is required for such approval), the Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.

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The Stock Option Plan Approved on March 28, 2019

1. Grantees of share options

The Company’s 4 directors (excluding outside directors) and 31 executive officers.

2. Number of share options

The number of share options that the Board of Directors are authorized to issue is 1,163.

3. Number of shares acquired upon exercise of a share option

The number of shares acquired upon exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is 116,300 common shares. However, in the case that the Company conducts a share split (including an allotment without consideration (

musho-wariate


Number of shares acquired after adjustment		=		Number of shares acquired before adjustment		×		Ratio of share split or share consolidation

4. Cash payment for share options (yen)

The cash payment required for each stock acquisition right shall be ¥1 per share to be acquired upon exercise of each stock acquisition right, multiplied by the number of shares acquired.

5. Period during which share options are exercisable

From April 27, 2019 to April 26, ~~2049~~

2049.

6. Issue price and amount of increased stated capital (yen)

The issue price and amount of increased stated capital per share is ¥2,282 and ¥1,141, respectively. The issue price is total amount of the exercise price of each stock acquisition (¥1 per share) and the fair value of the stock acquisition rights ~~shall be calculated by using the Black-Scholes model based on some conditions to be applied on~~at the allotment ~~date.~~date (¥2,281 per share). In addition, the amount of capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be a half of the maximum amount of capital increase, etc, which is calculated in accordance with Article 17, Paragraph 1 of the Company Accounting Regulations (

Kaisha Keisan Kisoku

), and any fraction less than ¥1 arising therefrom shall be rounded up to the nearest ¥1.

7. Other conditions for exercise of share options

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8. Restriction on acquisition of share options by transfer

An acquisition of share options by way of transfer requires the approval of the Board of Directors.

9. Treatment of the stock acquisition rights upon restructuring transaction

(i) Number of stock acquisition rights of the Reorganized Company to be allotted:

A number equal to the number of the Remaining Stock Acquisition Rights held by the Holder shall be transferred to such Holder.

(ii) Class of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:

Common stock of the Reorganized Company.

(iii) Number of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:

To be determined in accordance with 3 above, taking into consideration, among others, the conditions of Structural Reorganization.

(iv) Value of assets to be contributed upon exercise of each stock acquisition right:

The value of assets to be contributed upon exercise of each stock acquisition right to be allotted shall be the amount obtained by multiplying (x) the exercise price after reorganization set forth below by (y) the number of shares of the Reorganized Company to be acquired upon exercise of the relevant stock acquisition rights as determined in accordance with (iii) above. The “exercise price after reorganization” shall be one 1 yen per share of the Reorganized Company to be acquired upon exercise of each of its stock acquisition rights.

(v) Exercise period of stock acquisition rights:

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(vi) Matters regarding stated capital and capital reserves increased due to the issuance of shares upon exercise of stock acquisition rights:

Kaisha Keisan Kisoku

). Any fractional amount of less than one 1 yen resulting from such calculation will be rounded up to one 1 yen.

(vii) Restrictions on acquisition of stock acquisition rights by transfer:

The stock acquisition rights cannot be acquired through transfer, unless such acquisition is expressly approved by a resolution of the Board of Directors of the Reorganized Company.

(viii) Conditions for exercise of stock acquisition rights:

(a) Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a Director or an Executive Officer of the Company.

(b) In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.

(c) Besides the above, other conditions shall be stipulated in an agreement to be executed between the Company and the Holder, based on the resolution of the Board of Directors’ meeting.

(ix) Events regarding the Company’s acquisition of stock acquisition rights:

The Stock Option Plan Approved on February 13, 2020

1. Grantees of share options

One of the Company’s executive officers.

2. Number of share options

The number of share options that the Board of Directors are authorized to issue is 103.

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3. Number of shares acquired upon exercise of a share option
The number of shares acquired upon exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is 10,300 common shares. However, in the case that the Company conducts a share split (including an allotment without consideration (
musho-wariate
) of shares of common stock of the Company; the same shall apply to all references to the share split herein) or share consolidation on and after the date of shareholders’ resolution adopting the proposal at the above-mentioned General Meeting of Shareholders (the “Allotment Date”), the number of shares acquired shall be adjusted in accordance with the following formula, rounding down any fraction of less than one share resulting from such adjustment.
Number of shares
acquired after
adjustment
=
Number of shares
acquired before
adjustment
×
Ratio of share split
or
share consolidation
In addition to the above, in any event that makes it necessary to adjust the number of shares acquired, including a merger and company split, on and after the Allotment Date, the Company may make appropriate adjustment to the Number of Shares Acquired within a reasonable range.
4. Cash payment for share options (yen)
The cash payment required for each stock acquisition right shall be ¥1 per share to be acquired upon exercise of each stock acquisition right, multiplied by the number of shares acquired.
5. Period during which share options are exercisable
From March 26, 2020 to March 25, 2050.
6. Issue price and amount of increased stated capital (yen)
The issue price and amount of increased stated capital per share is ¥1,704 and ¥852, respectively. The issue price is total amount of the exercise price of each stock acquisition (¥1 per share) and the fair value of the stock acquisition rights at the allotment date (¥1,703 per share). In addition, the amount of capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be a half of the maximum amount of capital increase, etc, which is calculated in accordance with Article 17, Paragraph 1 of the Company Accounting Regulations (
Kaisha Keisan Kisoku
), and any fraction less than ¥1 arising therefrom shall be rounded up to the nearest ¥1.
7. Other conditions for exercise of share options
(i) Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a director or an executive officer of the Company.
(ii) In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.
8. Restriction on acquisition of share options by transfer
An acquisition of share options by way of transfer requires the approval of the Board of Directors.
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9. Treatment of the stock acquisition rights upon restructuring transaction
If the Company conducts a merger (limited to the case where the Company is dissolved due to the merger), or a share exchange or transfer (both, limited to the case where the Company becomes a wholly-owned subsidiary) (collectively, the “Structural Reorganization”), the Company shall, in each of the above cases, allot stock acquisition rights of any of the relevant companies listed in “a” through “e” of Article 236, Paragraph 1, Item 8 of the Company Law (the “Reorganized Company”) to the Holders holding the stock acquisition rights remaining at the time immediately preceding the effective date of the relevant Structural Reorganization (the “Remaining Stock Acquisition Rights”) (the effective date of the relevant Structural Reorganization shall mean, in the case of a merger, the date on which the merger becomes effective; in the case of a consolidation; the date of establishment of a newly-incorporated company through consolidation; in the case of a share exchange, the date on which the share exchange becomes effective; and in the case of a share transfer, the date of establishment of a wholly-owning parent company through the share transfer; hereinafter the same shall apply). Provided, however, that the foregoing shall be on the condition that transfer of such stock acquisition rights by the Reorganized Company in accordance with each of the following items is stipulated in a merger agreement, a consolidation agreement, a share exchange agreement or a share transfer plan.
(i) Number of stock acquisition rights of the Reorganized Company to be allotted:
A number equal to the number of the Remaining Stock Acquisition Rights held by the Holder shall be transferred to such Holder.
(ii) Class of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:
Common stock of the Reorganized Company.
(iii) Number of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:
To be determined in accordance with 3 above, taking into consideration, among others, the conditions of Structural Reorganization.
(iv) Value of assets to be contributed upon exercise of each stock acquisition right:
The value of assets to be contributed upon exercise of each stock acquisition right to be allotted shall be the amount obtained by multiplying (x) the exercise price after reorganization set forth below by (y) the number of shares of the Reorganized Company to be acquired upon exercise of the relevant stock acquisition rights as determined in accordance with (iii) above. The “exercise price after reorganization” shall be one 1 yen per share of the Reorganized Company to be acquired upon exercise of each of its stock acquisition rights.
(v) Exercise period of stock acquisition rights:
From and including whichever is the later of (x) the commencement date of the period during which the stock acquisition rights may be exercised or (y) the effective date of the Structural Reorganization, to and including the expiration date of the period during which the stock acquisition rights may be exercised as provided.
(vi) Matters regarding stated capital and capital reserves increased due to the issuance of shares upon exercise of stock acquisition rights:
(a) The increased amount of stated capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights will be one half (1/2) of the maximum amount of increase of stated capital, etc. to be calculated in accordance with Article 17, Paragraph 1 of the Company Accounting Regulations (
Kaisha Keisan Kisoku
). Any fractional amount of less than one 1 yen resulting from such calculation will be rounded up to one 1 yen.
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(b) The increased amount of capital reserves to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be the maximum amount of increases of stated capital, etc., mentioned in (a) above, after the subtraction of increased amount of stated capital mentioned in (a) above.
(vii) Restrictions on acquisition of stock acquisition rights by transfer:
The stock acquisition rights cannot be acquired through transfer, unless such acquisition is expressly approved by a resolution of the Board of Directors of the Reorganized Company.
(viii) Conditions for exercise of stock acquisition rights:
(a) Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a Director or an Executive Officer of the Company.
(b) In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.
(c) Besides the above, other conditions shall be stipulated in an agreement to be executed between the Company and the Holder, based on the resolution of the Board of Directors’ meeting.
(ix) Events regarding the Company’s acquisition of stock acquisition rights:
If a proposal for the approval of a merger agreement under which the Company will become an extinguishing company or a proposal for the approval for a share exchange agreement or a share transfer plan under which the Company will become a wholly owned subsidiary is approved by the Company’s shareholders at a Meeting of Shareholders (or by the Board of Directors if no resolution of a Meeting of Shareholders is required for such approval), the Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.
The Stock Option Plan Approved on March 27, 2020
1. Grantees of share options
The Company’s 4 directors (excluding outside directors) and 30 executive officers.
2. Number of share options
The number of share options that the Board of Directors are authorized to issue is 886.
3. Number of shares acquired upon exercise of a share option
The number of shares acquired upon exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is 88,600 common shares. However, in the case that the Company conducts a share split (including an allotment without consideration (
musho-wariate
) of shares of common stock of the Company; the same shall apply to all references to the share split herein) or share consolidation on and after the date of shareholders’ resolution adopting the proposal at the above-mentioned General Meeting of Shareholders (the “Allotment Date”), the number of shares acquired shall be adjusted in accordance with the following formula, rounding down any fraction of less than one share resulting from such adjustment.
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Number of shares
acquired after
adjustment
=
Number of shares
acquired before
adjustment
×
Ratio of share split
or
share consolidation
In addition to the above, in any event that makes it necessary to adjust the number of shares acquired, including a merger and company split, on and after the Allotment Date, the Company may make appropriate adjustment to the Number of Shares Acquired within a reasonable range.
4. Cash payment for share options (yen)
The cash payment required for each stock acquisition right shall be ¥1 per share to be acquired upon exercise of each stock acquisition right, multiplied by the number of shares acquired.
5. Period during which share options are exercisable
From May 2, 2020 to May 1, 2050.
6. Issue price and amount of increased stated capital (yen)
The issue price is total amount of the exercise price of each stock acquisition (¥1 per share) and the fair value of the stock acquisition rights shall be calculated by using the Black-Scholes model based on some conditions to be applied on the allotment date. In addition, the amount of capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be a half of the maximum amount of capital increase, etc, which is calculated in accordance with Article 17, Paragraph 1 of the Company Accounting Regulations (
Kaisha Keisan Kisoku
), and any fraction less than ¥1 arising therefrom shall be rounded up to the nearest ¥1.
7. Other conditions for exercise of share options
(i) Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a director or an executive officer of the Company.
(ii) In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.
8. Restriction on acquisition of share options by transfer
An acquisition of share options by way of transfer requires the approval of the Board of Directors.
9. Treatment of the stock acquisition rights upon restructuring transaction
If the Company conducts a merger (limited to the case where the Company is dissolved due to the merger), or a share exchange or transfer (both, limited to the case where the Company becomes a wholly-owned subsidiary) (collectively, the “Structural Reorganization”), the Company shall, in each of the above cases, allot stock acquisition rights of any of the relevant companies listed in “a” through “e” of Article 236, Paragraph 1, Item 8 of the Company Law (the “Reorganized Company”) to the Holders holding the stock acquisition rights remaining at the time immediately preceding the effective date of the relevant Structural Reorganization (the “Remaining Stock Acquisition Rights”) (the effective date of the relevant Structural Reorganization shall mean, in the case of a merger, the date on which the merger becomes effective; in the case of a consolidation; the date of
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establishment of a newly-incorporated company through consolidation; in the case of a share exchange, the date on which the share exchange becomes effective; and in the case of a share transfer, the date of establishment of a wholly-owning parent company through the share transfer; hereinafter the same shall apply). Provided, however, that the foregoing shall be on the condition that transfer of such stock acquisition rights by the Reorganized Company in accordance with each of the following items is stipulated in a merger agreement, a consolidation agreement, a share exchange agreement or a share transfer plan.
(i) Number of stock acquisition rights of the Reorganized Company to be allotted:
A number equal to the number of the Remaining Stock Acquisition Rights held by the Holder shall be transferred to such Holder.
(ii) Class of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:
Common stock of the Reorganized Company.
(iii) Number of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:
To be determined in accordance with 3 above, taking into consideration, among others, the conditions of Structural Reorganization.
(iv) Value of assets to be contributed upon exercise of each stock acquisition right:
The value of assets to be contributed upon exercise of each stock acquisition right to be allotted shall be the amount obtained by multiplying (x) the exercise price after reorganization set forth below by (y) the number of shares of the Reorganized Company to be acquired upon exercise of the relevant stock acquisition rights as determined in accordance with (iii) above. The “exercise price after reorganization” shall be one 1 yen per share of the Reorganized Company to be acquired upon exercise of each of its stock acquisition rights.
(v) Exercise period of stock acquisition rights:
From and including whichever is the later of (x) the commencement date of the period during which the stock acquisition rights may be exercised or (y) the effective date of the Structural Reorganization, to and including the expiration date of the period during which the stock acquisition rights may be exercised as provided.
(vi) Matters regarding stated capital and capital reserves increased due to the issuance of shares upon exercise of stock acquisition rights:
(a) The increased amount of stated capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights will be one half (1/2) of the maximum amount of increase of stated capital, etc. to be calculated in accordance with Article 17, Paragraph 1 of the Company Accounting Regulations (
Kaisha Keisan Kisoku
). Any fractional amount of less than one 1 yen resulting from such calculation will be rounded up to one 1 yen.
(b) The increased amount of capital reserves to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be the maximum amount of increases of stated capital, etc., mentioned in (a) above, after the subtraction of increased amount of stated capital mentioned in (a) above.
(vii) Restrictions on acquisition of stock acquisition rights by transfer:
The stock acquisition rights cannot be acquired through transfer, unless such acquisition is expressly approved by a resolution of the Board of Directors of the Reorganized Company.
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(viii) Conditions for exercise of stock acquisition rights:
(a) Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a Director or an Executive Officer of the Company.
(b) In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.
(c) Besides the above, other conditions shall be stipulated in an agreement to be executed between the Company and the Holder, based on the resolution of the Board of Directors’ meeting.
(ix) Events regarding the Company’s acquisition of stock acquisition rights:
If a proposal for the approval of a merger agreement under which the Company will become an extinguishing company or a proposal for the approval for a share exchange agreement or a share transfer plan under which the Company will become a wholly owned subsidiary is approved by the Company’s shareholders at a Meeting of Shareholders (or by the Board of Directors if no resolution of a Meeting of Shareholders is required for such approval), the Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.

C. Board practices

See Item 6A “Directors and senior management” and Item 6B “Compensation.”

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D. Employees

The following table shows the numbers of Canon’s employees as of December 31, 2019, 2018 ~~2017~~ and ~~2016.~~

   Total    Japan    Americas    Europe    Asia and Oceania
December 31, 2018

Office
   95,052    32,516    9,450    15,200    37,886
Imaging System
   53,049    16,699    2,291    1,801    32,258
Medical System
   11,759    6,200    1,975    1,744    1,840
Industry and Others
   26,763    9,750    4,645    6,484    5,884
Corporate
   8,433    8,295    —    52    86










Total
   195,056    73,460    18,361    25,281    77,954










December 31, 2017

Office
   103,380    32,407    13,263    18,972    38,738
Imaging System
   55,909    16,732    2,416    1,841    34,920
Medical System
   10,851    5,942    1,834    1,577    1,498
Industry and Others
   18,476    9,573    935    3,176    4,792
Corporate
   9,160    9,011    —    57    92










Total
   197,776    73,665    18,448    25,623    80,040










December 31, 2016

Office
   105,480    33,056    14,108    19,103    39,213
Imaging System
   55,263    15,845    2,353    1,914    35,151
Industry and Others
   27,790    15,042    2,699    4,434    5,615
Corporate
   9,140    8,970    —    60    110










Total
   197,673    72,913    19,160    25,511    80,089

2017.


	Total		Japan		Americas		Europe		Asia and Oceania
December 31, 2019
Office		91,664		31,588		9,182		14,057		36,837
Imaging System		48,341		16,254		1,797		1,506		28,784
Medical System		12,212		6,447		2,305		1,729		1,731
Industry and Others		26,607		10,522		4,923		5,785		5,377
Corporate		8,217		8,168		—		49		—

Total		187,041		72,979		18,207		23,126		72,729

December 31, 2018
Office		95,052		32,516		9,450		15,200		37,886
Imaging System		53,049		16,699		2,291		1,801		32,258
Medical System		11,759		6,200		1,975		1,744		1,840
Industry and Others		26,763		9,750		4,645		6,484		5,884
Corporate		8,433		8,295		—		52		86

Total		195,056		73,460		18,361		25,281		77,954

December 31, 2017
Office		103,380		32,407		13,263		18,972		38,738
Imaging System		55,909		16,732		2,416		1,841		34,920
Medical System		10,851		5,942		1,834		1,577		1,498
Industry and Others		18,476		9,573		935		3,176		4,792
Corporate		9,160		9,011		—		57		92

Total		197,776		73,665		18,448		25,623		80,040

Basically, the Company and its subsidiaries have their own independent labor union. The Company believes that the relationship between Canon and its labor union is good.

E. Share ownership

The following table shows the numbers of shares owned by the directors and Audit & Supervisory Board Members of the Company as of ~~December 31, 2018.~~March 27, 2020. The total is ~~232,764~~265,495 shares, constituting 0.02% of all outstanding shares.


~~Name~~	~~Position~~	~~Number of shares~~
~~Fujio Mitarai~~	~~Chairman & CEO~~		~~130,123~~
~~Masaya Maeda~~	~~President & COO~~		~~15,200~~
Name	Position	Number of shares
~~Toshizo Tanaka~~ Fujio Mitarai	Chairman & CEO		134,023
Masaya Maeda	President & COO		25,400
Toshizo Tanaka	Executive Vice President & CFO		~~23,110~~ 23,510
Toshio Homma	Executive Vice President & CTO		~~54,652~~ 58,552
Kunitaro Saida	Director		~~5,500~~ 7,100
Haruhiko Kato	Director		— 200
~~Masaaki Nakamura~~ Ryuichi Ebinuma	Audit & Supervisory Board Member		~~2,179~~ 10,800
Hiroaki Sato	Audit & Supervisory Board Member		— 1,810
Yutaka Tanaka	Audit & Supervisory Board Member		— 400
Hiroshi Yoshida	Audit & Supervisory Board Member		~~1,500~~ 2,700
Koichi Kashimoto	Audit & Supervisory Board Member		~~500~~ 1,000


	Total		~~232,764~~ 265,495

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March 29, 2018 was ~~74,000~~69,500 shares of common stock. The exercise price of the rights is ¥1 per share and those to whom stock acquisition rights are granted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from after the date when they cease to hold any position as a director or an executive officer of the Company. The exercisable period of acquisition rights is from May 2, 2018 to May 1, 2048.

The number of shares that may be subscribed for under rights granted to the Directors and Audit & Supervisory Board Members, listed above, pursuant to the stock option plan approved on March 28, 2019 was 116,300 shares of common stock. The exercise price of the rights is ¥1 per share and those to whom stock acquisition rights are granted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from after the date when they cease to hold any position as a director or an executive officer of the Company. The exercisable period of acquisition rights is from April 27, 2019 to April 26, 2049.

The number of shares that may be subscribed for an under right granted to one of the Company’s executive officers, pursuant to the stock option plan approved by on February 13, 2020 was 10,300 shares of common stock. The exercise price of the right is ¥1 per share and that to whom stock acquisition right is granted (the “Holder”) shall be entitled to exercise all the stock acquisition right together within 10 days (in case the last day is not a business day, the following business day) from after the date when he ceases to hold any position as an executive officer of the Company. The exercisable period of acquisition right is from March 26, 2020 to March 25, 2050.

The number of shares that may be subscribed for under rights granted to the Directors and Audit & Supervisory Board Members, listed above, pursuant to the stock option plan approved on March 27, 2020 was 88,600 shares of common stock. The exercise price of the rights is ¥1 per share and those to whom stock acquisition rights are granted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from after the date when they cease to hold any position as a director or an executive officer of the Company. The exercisable period of acquisition rights is from May 2, 2020 to May 1, 2050.

For additional information on the stock option plan, see “B. Compensation” of this Item.

The Company and certain of its subsidiaries encourage its employees to purchase shares of their Common Stock in the market through an employees’ stock purchase association.

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Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

The table below shows the numbers of the Company’s shares held by the top ten holders of the Company’s shares and their ownership percentage as of December 31, ~~2018:~~

Name of major shareholder
   Shares owned    Percentage

Number of shares owned /
Number of shares issued

The Master Trust Bank of Japan, Ltd. (Trust Account)
   92,066,100    8.5 %
Japan Trustee Services Bank, Ltd. (Trust Account)
   54,304,900    5.0 %
TheDai-ichi Life Insurance Company, Limited
   28,685,980    2.7 %
Barclays Securities Japan Limited
   26,000,000    2.4 %
Mizuho Bank, Ltd.
   22,558,173    2.1 %
Japan Trustee Services Bank, Ltd. (Trust Account 5)
   21,122,600    2.0 %
State Street Bank West Client—Treaty 505234
   20,700,178    1.9 %
OBAYASHI CORPORATION
   16,527,607    1.5 %
Moxley and Co. LLC
   16,460,829    1.5 %
JPMorgan Chase Bank, N.A. 385151
   15,603,560                        1.4 %

2019:


Name of major shareholder	Shares owned		Percentage
			Number of shares owned / Number of shares issued
The Master Trust Bank of Japan, Ltd. (Trust Account)		94,742,900		8.9	%
Japan Trustee Services Bank, Ltd. (Trust Account)		43,357,100		4.1	%
Barclays Securities Japan Limited		26,429,117		2.5	%
The Dai-ichi Life Insurance Company, Limited		24,320,780		2.3	%
Mizuho Bank, Ltd.		22,558,173		2.1	%
Japan Trustee Services Bank, Ltd. (Trust Account 5)		21,834,600		2.1	%
State Street Bank West Client—Treaty 505234		20,815,428		2.0	%
SMBC Nikko Securites Inc.		17,697,000		1.7	%
OBAYASHI CORPORATION		16,527,607		1.6	%
JPMorgan Chase Bank, N.A. 385151		16,295,790		1.5	%

Notes:

Apart from the above shares, The

Dai-ichi

Life Insurance Company, Limited held 6,180,000 shares contributed to a trust fund for its retirement and severance plans.

Apart from the above shares, Mizuho Bank, Ltd. held 9,057,000 shares contributed to a trust fund for its retirement and severance plans.

~~Moxley and Co. LLC is a nominee of JPMorgan Chase Bank, which is the depositary of Canon’s ADRs (American Depositary Receipts).~~

Apart from the above shares, the Company owns ~~254,013,641~~269,928,993 shares ~~(19.0%~~(20.2% of total issued shares) of treasury stock.

5:4:

Ownership percentage is calculated by deducting the number of treasury shares from the total shares issued.

Canon’s major shareholders do not have different voting rights from other shareholders.

As of December 31, ~~2018, 8.2%~~2019, 7.3% of the issued shares of common stock, including the Company’s treasury stock, were held of record by ~~279~~281 residents of the United States of America.

The Company is not directly or indirectly owned or controlled by any other corporation, by any government, or by any other natural or legal person or persons severally or jointly.

B. Related party transactions

During the latest three fiscal years, Canon has not transacted with, nor does Canon currently plan to transact with a related party (other than certain transactions with subsidiaries and affiliates of the Company). For purposes of this paragraph, a related party includes: (a) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, Canon; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of Canon that gives them significant influence over Canon, and close members of any such individual’s family; (d) key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of Canon, including directors and senior management of companies and close member of such individual’s families; (e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of Canon and enterprises that have a member of key management in common with Canon. Close members of an individual’s family are those that may be expected to

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influence, or be influenced by, that person in their dealings with Canon. An associate is an unconsolidated enterprise in which Canon has a significant influence or which has significant influence over Canon. Significant influence over an enterprise is the power to participate in the financial and operating policy decisions of the enterprise but is less than control over those policies. Shareholders beneficially owning a 10% interest in the voting power of the Company are presumed to have a significant influence on Canon.

To the Company’s knowledge, no person owned a 10% interest in the voting power of the Company as of March ~~28, 2019.~~

27, 2020.

In the ordinary course of business on an arm’s length basis, Canon purchases and sells materials, supplies and services from and to its affiliates accounted for by the equity method. There are 8 affiliates which are accounted for by the equity method. Canon does not consider the amounts of the transactions with the above affiliates to be material to its business.

C. Interests of experts and counsel

Not applicable.

Item 8. Financial Information

A. Consolidated financial statements and other financial information

Consolidated financial statements

This Annual Report contains consolidated financial statements as of December 31, ~~2018~~2019 and ~~2017~~2018 and for each of the three years in the period ended December 31, ~~2018~~2019 prepared in accordance with U.S. generally accepted accounting principles and audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) by an Independent Registered Public Accounting Firm. The financial statements as of and for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017 have been audited by Ernst & Young ShinNihon LLC, and their audit report covering each of the periods is included in Item 18 of this report.

Refer to Item 18 “Financial Statements.”

Legal proceedings

There are no outstanding legal or other proceedings which could reasonably be expected to have a material adverse effect on Canon’s consolidated financial position, results of operations or cash flows.

Dividend policy

Dividends are proposed by the Board of Directors of the Company based on the~~year-endnon-consolidated~~

year-end

non-consolidated

financial statements of the Company, and are approved at the ordinary general meeting of shareholders, which is

held in March of each year. Recordholders of the Company’s ADSs on the dividends’ record dates are entitled to receive payment in full of the declared dividends. In addition to annual dividends, by resolution of the Board of Directors, the Company may declare a cash distribution as an interim dividend. The record dates for the Company’s

year-end

dividends and for the interim dividends are December 31 and June 30, respectively.

Canon is being more proactive in returning profits to shareholders, mainly in the form of a dividend, taking into consideration

mid-term

profit forecasts, planned future investments, cash flow and other factors.

In ~~2018,~~2019, to provide a stable and active return to shareholders, Canon has decided to distribute a full-year dividend of ¥160 per share, (interim dividend of ¥80 per share that was already distributed and

year-end

dividend of ¥80) which is the same as the previous year’s ~~dividend that included payment~~dividend.

Table of ~~a commemorative dividend (¥10 per share).~~

Contents

B. Significant changes

No significant change has occurred since the date of the annual financial statements.

Item 9. The Offer and Listing

A. Offer and listing details

Trading in domestic markets

The common stock of the Company has been listed on the Tokyo Stock Exchange (“TSE”), the principal stock exchange market in Japan, since 1949, and is traded on the First Section of the TSE. The shares are also listed on three other regional markets in Japan (Nagoya, Fukuoka and Sapporo).

Trading in foreign markets

The Company’s ADRs are listed on the New York Stock Exchange (“NYSE”).

, the principal stock exchange market outside Japan.

Since the Company’s 1969 public offering in the United States of U.S.$9,000,000 principal amount of its 6 ¹⁄_1/2 % Convertible Debentures due 1984, there has been limited trading in the

over-the-counter

market in the Company’s ADRs. Since March 16, 1998, each ADR represents one share of the Company’s common stock. The Company’s ADSs had been quoted on the National Association of Securities Dealers Automated Quotation system (“NASDAQ”) from 1972 to September 13, 2000 under the symbol CANNY.

On September 14, 2000, Canon listed its ADSs on the NYSE under the symbol CAJ.

The depositary and agent of the ADRs is JPMorgan Chase Bank, N.A., located at 4383 Madison Avenue, Floor 11 New York, ~~Plaza Floor 12,~~ New York ~~N.Y. 10004,~~10179 U.S.A.

B. Plan of distribution

Not applicable.

C. Markets

See Item 9A “Offer and listing details”.

D. Selling shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the issue

Not applicable.

Item 10. Additional Information

A. Share capital

Not applicable.

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B. Memorandum and articles of association

Objects and Purposes in the Company’s Articles of Incorporation

The objects and purposes of the Company, as provided in Article 2 of the Company’s Articles of Incorporation, are to engage in the following businesses:

(1)	Manufacture and sale of optical machineries and instruments of various kinds.

(2)	Manufacture and sale of acoustic, electrical and electronic machineries and instruments of various kinds.

(3)	Manufacture and sale of precision machineries and instruments of various kinds.

(4)	Manufacture and sale of medical machineries and instruments of various kinds.

(5)	Manufacture and sale of general machineries, instruments and equipments of various kinds.

(6)	Manufacture and sale of parts, materials, etc. relative to the products mentioned in each of the preceding items.

(7)	Production and sale of software products.

(8)	Manufacture and sale of pharmaceutical products.

(9)	Telecommunications business, and information service business such as information processing service business, information providing service business, etc.

(10)	Contracting for telecommunications works, electrical works and machinery and equipment installation works.

(11)	Sale, purchase and leasing of real properties, contracting for construction works, design of buildings and supervision of construction works.

(12)	Manpower providing business, property leasing business and travel business.

(13)	Business relative to investigation, analysis of the environment and purification process of soil, water, etc.

(14)	Any and all business relative to each of the preceding items.

Provisions Regarding Directors

There is no provision in the Company’s Articles of Incorporation as to a Director’s power to vote on a proposal, arrangement or contract in which the Director is materially interested, but, under the Corporation Law of Japan, the law relating to joint stock corporations (known in Japanese as

kabushiki kaisha

) which came into effect on May 1, 2006, a director is required to refrain from voting on such matters at meetings of the board of directors.

The Corporation Law of Japan provides that compensation for directors is determined at a general meeting of shareholders of a company. Within the upper limit approved at the shareholders’ meeting, the board of directors determines the amount of compensation for each director. The board of directors may, by its resolution, leave such decision to the discretion of the company’s representative director.

The Corporation Law of Japan provides that the incurrence by a company of a significant loan from a third party should be approved by the company’s board of directors. The Company’s Regulations of the Board of Directors incorporate this requirement.

There is no mandatory retirement age for the Company’s Directors under the Corporation Law of Japan or its Articles of Incorporation.

There is no requirement concerning the number of shares an individual must hold in order to qualify him as a director of the Company under the Corporation Law of Japan or its Articles of Incorporation.

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Holding of Shares by Foreign Investors

Other than the Japanese unit share system that is described in “Rights of Shareholders—Japanese Unit Share System” below, there are no limitations on the rights of

non-residents

or foreign shareholders to hold or exercise voting rights on the Company’s shares imposed by the laws of Japan or the Company’s Articles of Incorporation or other constituent documents.

Rights of Shareholders

Set forth below is information relating to the Company’s common stock, including brief summaries of the relevant provisions of its Articles of Incorporation and Regulations for Handling of Shares, as currently in effect, and of the Corporation Law of Japan and related legislation.

General

The Company’s authorized share capital is 3,000,000,000 shares, of which 1,333,763,464 shares were issued, including the Company’s treasury stock, as of December 31, ~~2018.~~2019. In accordance with the Law Concerning Book-Entry Transfer of Corporate Bonds, Shares, etc. (including regulations promulgated thereunder; the “Book-Entry Law”), the Japan Securities Depository Center, Inc. (“JASDEC”) is the only institution that is designated by the relevant authorities as a clearing house which is permitted to engage in the clearing operations of shares of Japanese listed companies under the Book-Entry Law. Under the new clearing system, in order for any person to hold, sell or otherwise dispose of shares of Japanese listed companies, it must have an account at an account management institution unless such person has an account at JASDEC. “Account management institutions” are financial instruments traders (i.e., securities companies), banks, trust companies and certain other financial institutions which meet the requirements prescribed by the Book-Entry Law.

Under the Book-Entry Law, any transfer of shares is effected through book entry, and title to the shares passes to the transferee at the time when the transferred number of the shares is recorded at the transferee’s account at an account management institution. The holder of an account at an account management institution is presumed to be the legal owner of the shares held in such account.

Under the Corporation Law of Japan and the Book-Entry Law, in order to assert shareholders’ rights against the Company, a shareholder must have its name and address registered in the register of shareholders of the Company, except in limited circumstances.

The registered beneficial holder of deposited shares underlying the ADSs is the depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights.

Distributions of Surplus

Under the Corporation Law of Japan, distributions of cash or other assets by joint stock corporations to their shareholders, so called “dividends,” are referred to as “distributions of Surplus” (“Surplus” is defined in “Restriction on Distributions of Surplus” below). The Company may make distributions of Surplus to the shareholders any number of times per fiscal year, subject to certain limitations described in “Restriction on Distributions of Surplus”. Under the Corporation Law of Japan, distributions of Surplus are required to be authorized by a resolution of a general meeting of shareholders.

Under the Articles of Incorporation of the Company,

year-end

dividends and interim dividends, if any, may be distributed to shareholders (or pledgees) appearing in the register of shareholders as of December 31 and June 30 of each year, respectively.

Distributions of Surplus may be made in cash or in kind in proportion to the number of shares held by each shareholder. A resolution of a shareholders’ meeting must specify the kind and aggregate book value of the assets

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to be distributed, the manner of allocation of such assets to shareholders, and the effective date of the distribution. If a distribution of Surplus is to be made in kind, the Company may, pursuant to a resolution of shareholders’ meeting, grant a right to its shareholders to require the Company to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be approved by a special resolution of a general meeting of shareholders.

Restriction on Distributions of Surplus

When the Company makes a distribution of Surplus, the Company must, until the aggregate amount of its additional

paid-in

capital and legal reserve reaches

one-quarter

of its stated capital, set aside in its additional

paid-in

capital and/or legal reserve an amount equal to

one-tenth

of the amount of Surplus so distributed.

The amount of Surplus at any given time must be calculated in accordance with the following formula:

A + B + C + D – (E + F + G)

In the above formula, the letters from “A” to “G” are defined as follows:

“A”= the total amount of “other capital surplus” and “other retained earnings,” each such amount that is appearing on its

non-consolidated

balance sheet as of the end of the last fiscal year;

“B”= (if the Company has disposed of its treasury stock after the end of the last fiscal year) the amount of the consideration for such treasury stock received by the Company less the book value thereof;

“C”= (if the Company has reduced its stated capital after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to additional

paid-in

capital or legal reserve (if any);

“D”= (if the Company has reduced its additional

paid-in

capital or legal reserve after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to stated capital (if any);

“E”= (if the Company has cancelled its treasury stock after the end of the last fiscal year) the book value of such treasury stock;

“F”= (if the Company has distributed Surplus to its shareholders after the end of the last fiscal year) the total book value of the Surplus so distributed;

“G”= certain other amounts set forth in the ordinances of the Ministry of Justice, including (if the Company has reduced Surplus and increased its stated capital, additional

paid-in

capital or legal reserve after the end of the last fiscal year) the amount of such reduction and (if the Company has distributed Surplus to the shareholders after the end of the last fiscal year) the amount set aside in the additional

paid-in

capital or legal reserve (if any) as required by the ordinances of the Ministry of Justice.

The aggregate book value of Surplus distributed by the Company may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate of the following:

(a) the book value of the Company’s treasury stock;

(b) the amount of consideration for the treasury stock disposed of by the Company after the end of the last fiscal year; and

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one-half

of goodwill and the deferred assets exceeds the total of stated capital, additional

paid-in

capital and legal reserve, each such amount that is appearing on the

non-consolidated

balance sheet as of the end of the last fiscal year) all or certain part of such exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.

If the Company has become at its option a company with respect to which consolidated balance sheets should also be taken into consideration in the calculation of the Distributable Amount (

renketsu haito kisei tekiyo kaisha

), it will be required to further deduct from the amount of Surplus the excess amount (if the amount is zero or below zero) of (x) the total amount of shareholders’ equity appearing on its

non-consolidated

balance sheet as of the end of the last fiscal year and certain other amounts set forth in the ordinances of the Ministry of Justice over (y) the total amount of shareholders’ equity and certain amounts set forth in the ordinances of the Ministry of Justice appearing on its consolidated balance sheets as of the end of the last fiscal year.

If the Company has prepared interim financial statements as described below, and if such interim financial statements have been approved (unless exempted by the Corporation Law of Japan) by a general meeting of shareholders, the Distributable Amount must be adjusted to take into account the amount of profit or loss, and the amount of consideration for the treasury stock disposed of by the Company, during the period in respect of which such interim financial statements have been prepared. The Company may prepare

non-consolidated

interim financial statements consisting of a balance sheet as of any date subsequent to the end of the last fiscal year and an income statement for the period from the first day of the current fiscal year to the date of such balance sheet. Interim financial statements so prepared by the Company must be approved by the board of directors and audited by its independent auditors, as required by the ordinances of the Ministry of Justice.

Stock Splits

The Corporation Law of Japan permits the Company, by resolution of its Board of Directors, to make stock splits, regardless of the value of net assets (as appearing in its latest

non-consolidated

balance sheet) per share. In addition, by resolution of the Company’s Board of Directors, the Company may increase the authorized shares up to the number reflecting the rate of stock splits and amend its Articles of Incorporation to this effect without the approval of a shareholders’ meeting. For example, if each share became three shares by way of a stock split, the Company may increase the authorized shares from the current 3,000,000,000 shares to 9,000,000,000 shares.

Under the Book-Entry Law, the Company must give notice to JASDEC regarding a stock split at least two weeks prior to the relevant record date. On the effective date of the stock split, the numbers of shares recorded in all accounts held by the Company’s shareholders at account management institutions or JASDEC will be increased in accordance with the applicable ratio.

Japanese Unit Share System

The Company’s Articles of Incorporation provided that 100 shares of common stock constitute one “unit”. The Corporation Law of Japan permits the Company, by resolution of its Board of Directors, to reduce the number of shares which constitutes one unit or abolish the unit share system, and amend its Articles of Incorporation to this effect without the approval of a shareholders’ meeting.

Transferability of Shares Representing Less than One Unit

Under the new clearing system, shares constituting less than one unit are transferable. However, because shares constituting less than one unit do not comprise a trading unit, such shares may not be sold on the Japanese stock exchanges under the rules of the Japanese stock exchanges.

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Right of a Holder of Shares Representing Less than One Unit to Require the Company to Purchase Its Shares

A holder of shares representing less than one unit may at any time require the Company to purchase its shares through the account management institutions and JASDEC; provided, however, that the Company is not obliged to do so if the Company does not own its own shares in the number which it is requested to sell. These shares will be purchased at (a) the closing price of the shares reported by the TSE on the day when the request to purchase is made or (b) if no sale takes place on the TSE on that day, then the price at which sale of shares is effected on such stock exchange immediately thereafter.

Right of a Holder of Shares Representing Less than One Unit to Purchase from the Company its Shares up to a Whole Unit

The Articles of Incorporation of the Company provide that a holder of shares representing less than one unit may require the Company to sell its shares to such holder so that the holder can raise its fractional ownership to a whole unit; provided, however, that the Company is not obliged to do so if the Company does not own its own shares in the number which it is requested to sell. Such a request shall be made through the account management institutions and JASDEC. These shares will be sold at (a) the closing price of the shares reported by the TSE on the day when the request to sell becomes effective or (b) if no sale has taken place on the TSE on that day, then the price at which sale of shares is effected on such stock exchange immediately thereafter.

Voting Rights of a Holder of Shares Representing Less than One Unit

A holder of shares representing less than one unit cannot exercise any voting rights pertaining to those shares. In calculating the quorum for various voting purposes, the aggregate number of shares representing less than one unit will be excluded from the number of outstanding shares. A holder of shares representing one or more whole units will have one vote for each whole unit represented.

A holder of shares representing less than one unit does not have any rights relating to voting, such as the right to participate in a demand for the resignation of a director, the right to participate in a demand for the convocation of a general meeting of shareholders and the right to join with other shareholders to propose an agenda item to be addressed at a general meeting of shareholders.

However, a holder of shares constituting less than one unit has all other rights of a shareholder in respect of those shares, including the following rights:

to receive annual and interim dividends,

to receive cash or other assets in case of consolidation or split of shares, exchange or transfer of shares or corporate merger,

to be allotted rights to subscribe for free for new shares when such rights are granted to shareholders, and

to participate in any distribution of surplus assets upon liquidation.

Ordinary and Extraordinary General Meeting of Shareholders

The Company normally holds its ordinary general meeting of shareholders in March of each year in

Ohta-ku,

Tokyo or in a neighboring area. In addition, the Company may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks advance notice. Under the Corporation Law of Japan, notice of any shareholders’ meeting must be given to each shareholder having voting rights or, in the case of a

non-resident

shareholder, to his resident proxy or mailing address in Japan in accordance with the Company’s Regulations for Handling of Shares, at least two weeks prior to the date of the meeting.

Voting Rights

A shareholder is generally entitled to one vote per one unit of shares as described in this paragraph and under “Japanese Unit Share System” above. In general, under the Corporation Law of Japan, a resolution can be

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adopted at a general meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Corporation Law of Japan and the Company’s Articles of Incorporation require a quorum for the election of directors and Audit & Supervisory Board Members of not less than

one-third

of the total number of outstanding shares having voting rights. The Company’s shareholders are not entitled to cumulative voting in the election of Directors. A corporate shareholder whose outstanding shares are in turn more than

one-quarter

directly or indirectly owned by the Company does not have voting rights. Shareholders may exercise their voting rights through proxies, provided that those proxies are also shareholders who have voting rights.

Pursuant to the Corporation Law of Japan and the Company’s Articles of Incorporation, a quorum of not less than

one-third

of the outstanding shares with voting rights must be present at a shareholders’ meeting to approve any material corporate actions such as:

a reduction of stated capital,

amendment of the Articles of Incorporation (except amendments which the Board of Directors are authorized to make under the Corporation Law of Japan as described in “Stock ~~Splits”~~Splits“ and “Japanese Unit Share ~~System”~~System“ above),

the removal of an Audit & Supervisory Board Member,

establishment of a 100% parent-subsidiary relationship by way of share exchange or share transfer,

a dissolution, merger or consolidation,

a corporate separation,

the transfer of the whole or an important part of the Company’s business,

the transfer of the whole or a part of the Company’s equity interests in any of the Company’s significant subsidiaries which meets certain requirements,

the taking over of the whole of the business of any other corporation,

•

~~any issuance of new shares at a “specially favorable” price, stock acquisition rights (~~~~shinkabu yoyakuken~~~~) with “specially favorable” conditions or bonds with stock acquisition rights (~~~~shinkabu yoyakuken-tsuki shasai~~~~) with “specially favorable” conditions to persons other than shareholders,~~

any issuance of new shares at a “specially favorable” price, stock acquisition rights (

shinkabu yoyakuken

) with “specially favorable” conditions or bonds with stock acquisition rights (

shinkabu yoyakuken-tsuki shasai

) with “specially favorable” conditions to persons other than shareholders,

distribution of Surplus in kind with respect to which shareholders are not granted the right to require the Company to make such distribution in cash instead of in kind,

purchase of shares by the Company from a specific shareholder other than its subsidiaries,

consolidation of shares, and

discharge of a portion of liabilities of Directors, Audit & Supervisory Board Members or independent auditors that are owed to the Company.

At least

two-thirds

of the outstanding shares having voting rights present at the meeting is required to approve these actions.

The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders.

Subscription Rights

Holders of shares have no

pre-emptive

rights. Authorized but unissued shares may be issued at such times and upon such terms as the board of directors determines, subject to the limitations as to the issue of new shares at a “specially favorable” price mentioned in “Voting Rights” above. The board of directors may, however, determine that shareholders be given subscription rights to new shares, in which case they must be given on uniform terms to all shareholders as of a record date with not less than two weeks prior public notice. Each of the shareholders to whom such rights are given must also be given at least two weeks prior notice of the date on which such rights will expire.

Stock Acquisition Rights

The Company may issue stock acquisition rights or bonds with stock acquisition rights (in relation to which the stock acquisition rights are undetachable). Except where the issue would be on “specially favorable”

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conditions mentioned in “Voting Rights” above, the issue of stock acquisition rights or bonds with stock acquisition rights may be authorized by a resolution of the board of directors. Subject to the terms and conditions thereof, holders of stock acquisition rights may acquire a prescribed number of shares by exercising their stock acquisition rights and paying the exercise price at any time during the exercise period thereof. Upon exercise of stock acquisition rights, the Company will be obliged to either issue the relevant number of new shares or transfer the necessary number of existing shares held by it as treasury stock to the holder. The entitlements accorded to stock acquisition rights attached to bonds are substantially similar to those accorded to stock acquisition rights issued without being attached to bonds, provided that, if so determined by the board of directors at the time of its resolution authorizing the issue of the relevant bonds with stock acquisition rights, then, upon exercise of the stock acquisition rights, their exercise price will be deemed to have been paid by the holder thereof to the Company in lieu of the Company redeeming the relevant bonds.

Liquidation Rights

In the event of liquidation, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among the shareholders in proportion to the number of shares they own.

Liability to Further Calls or Assessments

All of the Company’s currently outstanding shares, including shares represented by the ADSs, are fully paid and nonassessable.

Share Registrar

Mizuho Trust & Banking Co., Ltd. (“Mizuho Trust”) is the share registrar for the Company’s shares. Mizuho Trust’s office is located at

2-1,

Yaesu

1-chome,

Chuo-ku, Tokyo, Japan. Under the clearing system, Mizuho Trust maintains the Company’s register of shareholders and records transfers of record ownership upon the Company’s receipt of necessary information from JASDEC and other information in the register of shareholders, as described under “Record Date” below.

Record Date

The close of business on December 31 is the record date for the Company’s

year-end

dividends, if paid. June 30 is the record date for interim dividends, if paid. A holder of shares constituting one or more whole units who is registered as a holder on the Company’s register of shareholders at the close of business as of December 31 is also entitled to exercise shareholders’ voting rights at the ordinary general meeting of shareholders with respect to the fiscal year ending on December 31. In addition, the Company may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks prior public notice.

Under the Book-Entry Law, the Company is required to give notice of each record date to JASDEC at least two weeks prior to such record date. JASDEC is required to promptly give the Company notice of the names and addresses of the Company’s shareholders, the numbers of shares held by them and other relevant information as of such record date.

The shares generally trade

ex-dividend

ex-rights

in the Japanese stock exchanges on the second business day before a record date (or if the record date is not a business day, the third business day prior thereto), for the purpose of dividends or rights offerings.

Repurchase by the Company of Shares

Under the Corporation Law of Japan, the Company may acquire its shares (i) by soliciting all shareholders to offer to sell its shares held by them (in this case, the certain terms of such acquisition, such as the total number

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of the shares to be purchased and the total amount of the consideration, shall be set by an ordinary resolution of a general meeting of shareholders in advance, and acquisition shall be effected pursuant to a resolution of the board of directors), (ii) from a specific shareholder other than any of the Company’s subsidiaries (pursuant to a special resolution of a general meeting of shareholders), (iii) from any of the Company’s subsidiaries (pursuant to a resolution of the board of directors), or (iv) by way of purchase on any Japanese stock exchange on which the Company’s shares are listed by way of tender offer (in either case pursuant to a resolution of the board directors). In the case of (ii) above, if the purchase price or any other consideration to be received by the relevant specific shareholder exceeds the then market price of the Company’s shares calculated in a manner set forth in the ordinances of the Ministry of Justice, any other shareholder may make a request to a representative director to be included as a seller in the proposed acquisition by the Company.

The total amount of the purchase price of the Company’s shares may not exceed the Distributable Amount, as described in “Restriction on Distributions of Surplus” above.

In addition, the Company may acquire its shares by means of repurchase of any number of shares constituting less than one unit upon the request of the holder of those shares, as described under “Japanese Unit Share System” above.

Right of Controlling Shareholder Representing 90 Per Cent or More of Shares to Request Other Shareholders to Sell All Shares

A shareholder holding, directly or indirectly, 90 per cent or more of the voting rights of the Company’s shares has the right to request, subject to approval by the Company’s Board of Directors, that the other shareholders and (if the controlling shareholder so determines) all holders of stock acquisition rights of the Company sell to the controlling shareholder all shares and all stock acquisition rights, as the case may be, held by them. In the above case, the Company will be required to give public notice thereof to all holders and registered pledgees of shares (and stock acquisition rights, as the case may be) not later than 20 days prior to the effective date of such sales.

C. Material contracts

On March 15, 2016, Canon entered into a provisional borrowing agreement with MUFG Bank, Ltd. for acquiring CMSC. This borrowing was refinanced on January 31, 2017. For further information, please refer to Note 98 of the Notes to Consolidated Financial Statements.

All contracts other than above entered into by Company during the two years preceding the date of this annual report were entered into in the ordinary course of business.

D. Exchange controls

(a) Information with respect to Japanese exchange regulations affecting the Company’s security holders is as follows:

The Foreign Exchange and Foreign Trade Law of Japan and the cabinet orders and ministerial ordinances thereunder (the “Foreign Exchange Regulations”) govern certain aspects relating to the issuance of securities by the Company and the acquisition and holding of such securities by

“non-residents

of Japan” and by “foreign investors”, as hereinafter defined.

The Foreign Exchange Regulations regarding the acquisition of listed shares and certain related matters are now being reformed, and the description below is current as of December 31, 2019.

“Non-residents

of Japan” are defined as individuals who are not resident in Japan and corporations whose principal offices are located outside Japan. Generally, branches and other offices of Japanese corporations

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located outside Japan are regarded as

non-residents

of Japan, while branches and other offices located within Japan of

non-resident

corporations are regarded as residents of Japan. “Foreign investors” are defined to be (i) individuals not resident in Japan, (ii) corporations which are organized under the laws of foreign countries or whose principal offices are located outside Japan, (iii) corporations of which 50% or more of the shares are held by (i) and / or (ii) above and (iv) corporations in respect of which (a) a majority of the officers are

non-resident

individuals or (b) a majority of the officers having the power to represent the corporation are

non-resident

individuals.

Issuance of Securities by the Company

Under the Foreign Exchange Regulations, the issue of securities outside Japan by the Company is, in principle, not subject to a prior notification requirement, but subject to a post reporting requirement of the Minister of Finance. Under the Foreign Exchange Regulations as currently in effect, payments of principal, premium and interest in respect of securities and any additional amounts payable pursuant to the terms thereof may in general be paid when made without any restrictions under the Foreign Exchange Regulations.

Acquisition of Shares

In general, the acquisition of shares of stock of a Japanese company listed on any Japanese stock exchange by a

non-resident

of Japan from a resident of Japan is not subject to a prior notification requirement, but subject to a post reporting requirement of the Minister of Finance by such resident.

In the case where a foreign investor intends to acquire listed shares (whether from a resident or a

non-resident

of Japan, from another foreign investor or from or through a designated securities company) and as a result of such acquisition the number of shares held, directly or indirectly, by such foreign investor (if there are other foreign investors with whom the foreign investor has a special relationship as prescribed in the Foreign Exchange Regulations, the shares held by such other foreign investors will be included in the number) would become 10% or more of the total outstanding shares of the company or the number of voting rights held, directly or indirectly, by such foreign investor (if there are other foreign investors with whom the foreign investor has a special relationship, the shares held by such other foreign investors will be included in the number) would become 10% or more of the total voting rights of the company, the foreign investor must generally report such acquisition to the Minister of Finance and other Ministers having jurisdiction over the business of the subject company by the 15th day of the immediately following month in the date of acquisition falls. In certain exceptional cases, a prior notification is required in respect of such acquisition.

Acquisition of Shares upon Exercise of Rights for Subscription of Shares

The acquisition by a

non-resident

of Japan of shares upon exercise of his rights for subscription of shares is exempted from the notification and reporting requirements described under “Acquisition of Shares” above.

Dividends and Proceeds of Sales

Under the Foreign Exchange Regulations currently in effect, dividends paid on, and the proceeds of sale in Japan of, the shares held by

non-residents

of Japan may be converted into any foreign currency and repatriated abroad. The acquisition of shares by

non-resident

shareholders by way of stock splits is not subject to any of the aforesaid notification requirements.

(b) Reporting of Substantial Shareholdings:

The Financial Instruments and Exchange Law of Japan requires any person who has become, beneficially and solely or jointly, a holder of more than 5% of the total outstanding voting shares of capital stock of a company listed on any Japanese stock exchange to file with the relevant Local Finance Bureau of the Minister of

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Finance within five business days a report concerning such share ownership. A similar report must also be made in respect of any subsequent change of 1% or more in any such holding or any change in material set out in a previously filed report. For this purpose, shares with exercisable rights for subscription of shares held by such holder are taken into account in determining both the size of a holding and a company’s total outstanding share capital.

E. Taxation

1. Taxation in Japan

Generally, a

non-resident

of Japan or

non-Japanese

corporation (a

“Non-Resident

Holder”) is subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits are not subject to Japanese income tax. A conversion of retained earnings or legal reserve (but not additional

paid-in

capital, in general) into stated capital (whether made in connection with a stock split or otherwise) is not treated as a deemed dividend payment to shareholders for Japanese tax purposes. Thus, such a conversion does not trigger Japanese withholding taxation. (Article 2 (16) of the Japanese Corporation Tax Law and Article 8 (1) (xiii) of the Japanese Corporation Tax Law Enforcement Order).

Pursuant to the Convention Between the Government of the United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Treaty”), dividend payments made by a Japanese corporation to a U.S. resident or corporation, unless the recipient of the dividend has a “permanent establishment” in Japan and the shares or ADSs with respect to which such dividends are paid are effectively connected with such “permanent establishment,” are generally subject to a withholding tax at rate of: (1) 10% for portfolio investors who are qualified U.S. residents eligible for benefits of the Treaty; and (2) 0% (

i.e.

, no withholding) for pension funds which are qualified U.S. residents eligible for benefits of the Treaty, provided that the dividends are not derived from the carrying on of a business, directly or indirectly, by such pension funds. Japan is a party to a number of income tax treaties, conventions and agreements, (collectively “Tax Treaties”), whereby the maximum withholding tax rate for dividend payments is set at, in most cases, 15% for portfolio investors who are

Non-Resident

Holders. Specific countries with which such Tax Treaties have been entered into include ~~Belgium,~~ Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, New Zealand, Norway, ~~Singapore~~ and ~~Spain.~~Singapore. Japan’s income tax treaties with Australia, Belgium, France, The Netherlands, Sweden, Switzerland and the United Kingdom have been amended to generally reduce the maximum withholding tax rate to 10%. Japan’s income tax treaty with Spain has been amended to generally reduce the maximum withholding tax rate to 5%. Japan signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”). The tax treaties with Australia, Canada, Finland, France, India, Ireland, Israel, Luxembourg, The Netherlands, New Zealand, Norway, Poland, Singapore, Slovakia, Ukraine, United Arab Emirates, and the United Kingdom are partly overridden by the MLI as of January 1, ~~2019.~~

2020.

On the other hand, unless one of the applicable Tax Treaties reducing the maximum rate of withholding tax applies, the standard tax rate applicable to dividends paid with respect to listed shares before 2037, such as those paid by the Company on shares or ADSs, to

Non-Resident

Holders is 15.315% under the Japanese Income Tax Law, except for dividends paid to any individual shareholder who holds 3% or more of the issued shares, in which case the applicable rate is 20.42% (Article 182(ii) of the Japanese Income Tax Law and Article

9-3(1)(i)

of the Japanese Special Tax Measures Law, including its relevant temporary provision for these withholding rates).

In order to enjoy a lower treaty rate, the taxpayer must file a treaty application in advance with the Company. Gains derived from the sale outside Japan of Japanese corporations’ shares or ADSs by

Non-Resident

Holders, or from the sale of Japanese corporations’ shares or ADSs within Japan by a

non-resident

of Japan as an

occasional transaction or by a

non-Japanese

corporation not having a permanent establishment in Japan, are generally not subject to Japanese income or corporation taxes, provided that the seller is a portfolio investor. Japanese inheritance and gift taxes at progressive rates may apply to an individual who has acquired Japanese corporations’ shares or ADSs as a distributee, legatee or donee.

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2. Taxation in the United States

The following is a discussion of the material U.S. federal income tax consequences of owning and disposing of the Company shares or ADSs to the U.S. holders described below, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire, hold or dispose of such securities. The discussion does not address the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) known as the “Medicare contribution tax.” The discussion applies only if a U.S. holder holds the Company shares or ADSs as capital assets for U.S. federal income tax purposes and it does not address special classes of holders, such as:

certain financial institutions;

insurance companies;

dealers and traders in securities or foreign currencies;

persons holding the Company shares or ADSs as part of a straddle, conversion, other integrated transaction or other similar transaction;

persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

persons liable for the alternative minimum tax;

~~tax-exempt~~ ~~entities;~~

tax-exempt

entities;

persons holding the Company shares or ADSs that own or are deemed to own 10% or more of the Company stock, by vote or by value;

persons who acquired the Company shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation; or

persons holding the Company shares or ADSs in connection with trade or business conducted outside of the United States.

This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations and the Treaty, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. An investor should consult its own tax adviser concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of the Company shares or ADSs in its particular circumstances.

As used herein, a “U.S. holder” is a beneficial owner of the Company shares or ADSs that is eligible for the benefits of the Treaty and is, for U.S. federal tax purposes:

a citizen or individual resident of the United States;

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or

an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

If an entity that is classified as a partnership for U.S. federal income tax purposes holds the Company shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding the Company shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the Company shares or ADSs.

In general, if a U.S. holder owns ADSs, it will be treated for U.S. federal income tax purposes as the owner of the underlying shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a U.S. holder exchanges ADSs for the underlying shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before shares are delivered to the depositary

(“pre-released”),

or intermediaries in the chain of ownership

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between the holder and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain

non-corporate

U.S. holders. Accordingly, the analysis of the creditability of Japanese taxes and the reduced rates of taxation applicable to dividends received by certain

non-corporate

U.S. holders, both as described below, could be affected by actions that may be taken by parties to whom ADSs are

pre-released

or by intermediaries.

This discussion assumes that the Company was not a passive foreign investment company for ~~2018,~~2019, as described below.

Taxation of Distributions

Distributions paid on the Company shares or ADSs, other than certain

pro rata

distributions of common shares, to the extent paid out of the Company’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles) will be treated as dividends for U.S. tax purposes. Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions will be reported to U.S. holders as dividends. The amount of a dividend will include any amounts withheld by the Company or its paying agent in respect of Japanese taxes. The amount of the dividend will be treated as foreign-source dividend income and will generally not be eligible for the dividends-received deductions allowed to U.S. corporations. Subject to applicable limitations that may vary depending upon a U.S. holder’s individual circumstances and the concerns of the U.S. Treasury described above, dividends paid to certain

non-corporate

U.S. holders will be taxable at the favorable rates applicable to long-term capital gains.

Non-corporate

U.S. holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favorable rates.

Dividends paid in Japanese yen will be included in a U.S. holder’s income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt of the dividend by the U.S. holder, in the case of the Company shares, or by the depositary, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

Japanese income taxes withheld from cash dividends on the Company shares or ADSs at a rate not exceeding the rate provided by the Treaty will be creditable against a U.S. holder’s U.S. federal income tax liability, subject to applicable limitations that may vary depending upon a U.S. holder’s circumstances and the concerns expressed by the U.S. Treasury described above. The rules governing foreign tax credits are complex, and a U.S. holder should consult its own tax adviser regarding the availability of foreign tax credits in its particular circumstances. Instead of claiming a credit, a U.S. holder may, at its election, deduct such Japanese taxes in computing its income, subject to generally applicable limitations under U.S. federal income tax law.

Sale or Other Disposition of the Company Shares or ADSs

For U.S. federal income tax purposes, gain or loss a U.S. holder realizes on the sale or other disposition of the Company shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if such holder

held the Company shares or ADSs for more than one year. The amount of a U.S. holder’s gain or loss will be equal to the difference between the U.S. dollar amount realized on the disposition and the U.S. holder’s U.S. dollar tax basis in the Company shares or ADSs that were disposed of. Such gain or loss will generally beU.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitation.

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Passive Foreign Investment Company Rules

The Company believes that it was not a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for its ~~2018~~2019 fiscal year. However, since PFIC status depends upon the composition of the Company’s income and assets and the market value of its assets (including, among others, goodwill and equity investments in less than 25% owned entities) from time to time, there can be no assurance that the Company will not be considered a PFIC for any taxable year. If the Company were treated as a PFIC for any taxable year during which a U.S. holder owned the Company shares or ADSs, certain adverse tax consequences could apply to such U.S. holder.

If the Company were treated as a PFIC for any taxable year during which a U.S. holder owned the Company shares or ADSs, gain recognized by a U.S. holder on the sale or other disposition, including certain pledges, of the Company shares or ADSs would be allocated ratably over its holding period for such securities. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect in such taxable year for individuals or corporations, as appropriate, and an interest charge would be imposed on the tax liability attributable to such allocated amounts. Further, any distribution in respect of the Company shares or ADSs in excess of 125% of the average of the annual distributions on such securities received by a U.S. holder during the preceding three years or its holding period, whichever is shorter, would be subject to taxation as described immediately above. Certain elections (including a

mark-to-market

election) may be available to a U.S. holder that would result in alternative tax treatments.

In addition, if the Company were a PFIC or, with respect to a particular U.S. holder, were treated as a PFIC in a taxable year in which it pays a dividend or the prior taxable year, the favorable tax rates discussed above with respect to dividends paid to certain

non-corporate

U.S. holders would not apply.

If the Company were a PFIC for any taxable year during which a U.S. holder owned the Company shares or ADSs, the U.S. holder would generally be required to file IRS Form 8621 with its annual U.S. federal income tax return, subject to certain exceptions.

Information Reporting and Backup Withholding

Payments of dividends and sales proceeds that are made within the United States or through certainU.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless the U.S. holder is a corporation or other exempt recipient or, in the case of backup withholding, the U.S. holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.

Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

Certain U.S. holders who are individuals may be required to report information relating to stock of a

non-U.S.

person, generally on IRS Form 8938, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). U.S. holders are urged to consult their tax advisers regarding the effect, if any, of this requirement on their tax reporting obligations.

F. Dividends and paying agents

Not applicable.

G. Statement by experts

Not applicable.

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H. Documents on display

Under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is subject to requirements information disclosure. The Company files various reports and other information, including Form

20-F

and Annual Reports, with the Securities Exchange Commission and the NYSE. ~~These reports may be inspected at the following sites.~~

~~Securities Exchange Commission (Public Reference Room):~~

~~100 F Street, N.E., Washington D.C. 20549~~

~~New York Stock Exchange, Inc.:~~

~~11 Wall Street, New York, New York 10005~~

Form

20-F

is ~~also~~ available at the Electronic Data Gathering, Analysis, Retrieval system (“EDGAR”) website which is maintained by the Securities Exchange Commission.

Securities Exchange Commission Home Page:

~~http:~~

https://www.sec.gov

I. Subsidiary information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

Market risk exposures

Canon is exposed to market risks, including changes in foreign currency exchange rates, interest rates and prices of marketable securities and investments. In order to hedge the ~~risks~~risk of changes in foreign currency exchange rates, Canon uses derivative financial instruments.

Equity price risk

Canon holds marketable securities included in current assets, which consist generally of highly-liquid and

low-risk

instruments. Investments included in noncurrent assets are held as long-term investments. Canon does not hold marketable securities and investments for trading purposes.

Maturities and fair values of such marketable securities and investments with original maturities of more than three months were as follows at December 31, ~~2018.~~

2019.


	~~2018~~
	2019
	Fair value
	(Millions of yen)
Fund trusts and others		730
Equity securities		16,740
	~~Fair value~~
	~~(Millions of yen)~~
~~Debt securities~~
~~Due within one year~~		~~630~~
~~Fund trusts and others~~		~~1,038~~
~~Equity securities~~		~~13,787~~

		~~15,455~~ 17,470

Foreign currency exchange rate and interest rate risk

Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Derivative financial instruments are comprised principally of foreign currency exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of

non-performance

by counterparties to derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized financial institutions and selected by Canon taking into account their financial condition, and contracts are diversified across a number of major financial institutions.

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

The following table provides information about Canon’s major derivative financial instruments related to foreign currency exchange transactions existing at December 31, ~~2018.~~2019. All of the foreign exchange contracts described in the following table have a contractual maturity date in ~~2019.~~

   U.S.$ Euro Others Total
   (Millions of yen)
Forwards to sell foreign currencies:

Contract amounts
   108,126 101,356 21,023 230,505
Estimated fair value
   857 1,235 513 2,605
Forwards to buy foreign currencies:

Contract amounts
   24,025 2,807 3,984 30,816
Estimated fair value
   (158 ) (11 ) (59 ) (228 )

2020.


	U.S.$			Euro			Others			Total
	(Millions of yen)
Forwards to sell foreign currencies:
Contract amounts		75,838			94,308			10,096			180,242
Estimated fair value		(600	)		(1,451	)		(172	)		(2,223	)
Forwards to buy foreign currencies:
Contract amounts		24,816			1,712			6,090			32,618
Estimated fair value		(173	)		(16	)		190			1

Canon expects that fair value changes and cash flows resulting from reasonable near-term changes in interest rates will be immaterial. Accordingly, Canon believes interest rate risk is insignificant. See also Note 98 of the Notes to Consolidated Financial Statements.

Changes in the fair value of derivative financial instruments designated as cash flow hedges, including foreign ~~currency~~ exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings ~~through other income (deductions)~~ in the same period as the hedged items affect earnings. Substantially all ~~such~~ amounts recorded in accumulated other comprehensive income (loss) at~~year-end~~as of December 31, 2019 are expected to be recognized in ~~earnings~~net sales over the next twelve months. After the adoption of ASU No.

2017-12

from the quarter beginning January 1, 2019, Canon ~~excludes~~includes the time value component ~~from~~in the assessment of hedge ~~effectiveness.~~effectiveness, which had been previously excluded. Changes in the fair value of a foreign ~~currency~~ exchange contract for the period between the date that the forecasted intercompany sales occur and its maturity date are recognized in ~~earnings and not considered hedge ineffectiveness. From the quarter beginning January 1, 2019, Canon will adopt ASUNo. 2017-12,~~ Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. After the adoption of this guidance, gains and losses resulting from derivative financial instruments designated as cash flow hedges associated with forecasted intercompany sales, which are currently included in other income (deductions) in the consolidated statements of income, will be included in net sales.

earnings.

The amount of the hedging ineffectiveness was not material for the years ended December 31, 2018 ~~2017~~ and ~~2016.~~2017. The amounts of net losses excluded from the assessment of hedge effectiveness (time value

component) which was recorded in other income (deductions) were ¥682 million ~~¥332 million~~ and ~~¥311~~¥332 million for the years ended December 31, 2018 and 2017, ~~and 2016,~~ respectively.

Canon has entered into certain foreign currency exchange contracts to manage its foreign currency exposures. These foreign currency exchange contracts have not been designated as hedges. Accordingly, the changes in fair values of these contracts are recorded in earnings immediately.

Item 12. Description of Securities Other than Equity Securities

A. Debt securities

Not applicable.

B. Warrants and rights

Not applicable.

C. Other securities

Not applicable.

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D. American Depositary Shares

(a)

Depositing or substituting the underlying shares

Not applicable.

(b)

Receiving or distributing dividends

Not applicable.

(c)

Selling or exercising rights

Upon the distribution or sale of Canon’s ADSs, a holder of American Depositary Receipts is required to pay a commission fee of $5.00 to the depositary for each 100 ADSs (or part of the 100 ADSs) for this transaction.

(d)

Withdrawing an underlying security

Not applicable.

(e)

Transferring, splitting or grouping receipts

Not applicable.

(f)

General depositary services, particularly those charged on an annual basis

Not applicable.

(g)

Expenses of the depositary

Not applicable.

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Canon’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and Canon’s chief executive officer and chief financial officer concluded that Canon’s disclosure controls and procedures, as defined in Rule

13a-15(e)

of the Exchange Act, are effective at the reasonable assurance level as of December 31, ~~2018.~~

2019.

Management’s Report on Internal Control over Financial Reporting

The management of Canon is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule

13a-15(f)

promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

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

Canon’s management assessed the effectiveness of internal control over financial reporting as of December 31, ~~2018.~~2019. In making this assessment, management used the criteria established in internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”).

Based on its assessment, management concluded that, as of December 31, ~~2018,~~2019, Canon’s internal control over financial reporting was effective based on the COSO criteria.

Canon’s independent registered public accounting firm, Ernst & Young ShinNihon LLC, has issued an audit report on the effectiveness of Canon’s internal control over financial reporting. This report appears in Item 18.

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Changes in Internal Control over Financial Reporting

There has been no change in Canon’s internal control over financial reporting that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

Canon’s Audit & Supervisory Board has determined that Hiroshi Yoshida is an “audit committee financial expert” as defined by the rules of the SEC. Hiroshi Yoshida has considerable experience and advanced expert knowledge in corporate accounting gained thorough his longstanding practice as a certified public accountant. Hiroshi Yoshida was elected as one of Canon’s Outside Audit & Supervisory Board Members at an ordinary general meeting of shareholders held in March 2017. Hiroshi Yoshida ~~met~~meets the independence requirements imposed on Audit & Supervisory Board Members as set forth by Japanese ~~legal provisions.~~

stock exchange regulations; however, he does not meet the independence standards for Audit & Supervisory Board Members of the Company.

Item 16B. Code of Ethics

Canon maintains a “Canon Group Code of Conduct” or Code of Conduct, applicable to all executives and employees. The Code of Conduct sets forth provisions relating to honest and ethical conduct (including the handling of conflicts of interest), compliance with applicable laws, rules and regulations and accountability for adherence to the provisions of the Code of Conduct. The Board of Directors maintains a “Code of Ethics” as a supplement to the Code of Conduct. This Code of Ethics applies to Canon’s President and Chief Executive Officer, each member of the Board of Directors (which includes the Chief Financial Officer) and general managers belonging to Canon’s accounting headquarters. The Code of Ethics requires full, fair, accurate, timely and understandable disclosure in reports and documents that Canon files with or submits to the SEC and in Canon’s other communications with the public, prompt internal reporting of violations of the Code of Conduct or Code of Ethics, and accountability for adherence to their provisions. Both the Code of Conduct and the Code of Ethics have been filed as exhibits.

Item 16C. Principal Accountant Fees and Services

Policy on
Pre-Approval
of Audit and
Non-Audit
Services of Independent Auditors

Canon’s Audit & Supervisory Board consisting of five members, including three outside auditors, is responsible for the oversight of the services of its independent registered public accounting firm. The Audit & Supervisory Board has established

Pre-Approval

Policies and Procedures for Audit and

Non-Audit

Services. These policies and procedures govern the Audit & Supervisory Board’s review and approval of the board of director’s engagement of Canon’s independent registered public accounting firm to render audit or

non-audit

services.

Non-audit

services include audit-related services, tax services and other services, as described in greater detail below under “Fees and Services.” Canon and any affiliate controlled by Canon directly, indirectly or through one or more intermediaries must follow these policies and procedures before any engagement of Canon’s independent registered public accounting firm for U.S. securities law reporting purposes.

The policies and procedures stipulate three means by which audit and

non-audit

services may be

pre-approved,

depending on the content of and the fee for the services.

All services provided to Canon necessary to perform an annual audit or review to comply with the standards of the Public Company Accounting Oversight Board (United States), in any jurisdiction, including tax services and accounting consultation necessary to comply with the standards of the Public Company Accounting Oversight Board (United States) in those jurisdictions, and any engagement of an Independent Registered Public Accounting Firm for any audit or

non-audit

service involving estimated fees exceeding ¥10,000,000 per single engagement must be

pre-approved

by the majority of Audit & Supervisory Board.

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Certain other services may be

pre-approved

under detailed categories of audit and

non-audit

services established annually by the Audit & Supervisory Board, as long as those services do not exceed specified maximum yen limits for aggregate fees relating to each of those categories. Any engagement of an Independent Registered Public Accounting Firm by this means must be reported to the Audit & Supervisory Board at its next regularly scheduled meeting.

For services that are not covered by the above two means of

pre-approval,

the Audit & Supervisory Board has delegated

pre-approval

authority to any of the standing Audit & Supervisory Board Members of the board. Any engagement of an Independent Registered Public Accounting Firm

pre-approved

by one of the standing Audit & Supervisory Board Members is required to be reported to the Audit & Supervisory Board at its next regularly scheduled meeting.

Additional services may be

pre-approved

by the Audit & Supervisory Board on an individual basis.

No services were provided for which

pre-approval

was waived pursuant to paragraph (c)(7)(i)(C) ofRule

2-01

ofRegulation

S-X.

Fees and services

The following table discloses the aggregate fees accrued or paid to Canon’s principal accountant and member firms of Ernst & Young for each of the last two fiscal years and briefly describes the services performed:

   Year ended
December 31, 2018    Year ended
December 31, 2017
   (Millions of yen)
Audit fees
                   3,073                    3,028
Audit-related fees
   19    27
Tax fees
   103    119
All other fees
   9    10




Total
   3,204    3,184

Year ended
December 31, 2019

Year ended
December 31, 2018

(Millions of yen)

Audit fees

2,908

3,073

Audit-related fees

28

19

Tax fees

121

103

All other fees

18

9

Total

3,075

3,204

Audit

fees

include fees billed for professional services rendered for audits of Canon’s annual consolidated financial statements, reviews of consolidated quarterly financial information and statutory audits of the Company and its subsidiaries.

Audit-related fees

include fees billed for assurance and related services such as due diligence, accounting consultations and audits in connection with mergers and acquisitions, employee benefit plan audits, internal control reviews, and consultations concerning financial accounting and reporting standards.

Tax fees

include fees billed for services related to tax compliance, including the preparation of tax returns and claims for refund, tax planning and tax advice, including assistance with tax audits and appeals, advice related to mergers and acquisitions, tax services for employee benefit plans and assistance with respect to requests for rulings from tax authorities.

All other fees

include fees billed primarily for services rendered with respect to advisory and training services.

Ernst & Young ShinNihon LLC served as Canon’s principal accountant for ~~2018~~2019 and ~~2017.~~

2018.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Canon is relying on the general exemption contained inRule

10A-3(c)(3)

under the Exchange Act. Because of such reliance, Canon does not have an audit committee which can act independently and satisfy the other requirements ofRule

10A-3

under the Exchange Act.

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According toRule

10A-3

under the Exchange Act and NYSE listing standards, Canon’s Audit & Supervisory Board has been identified to act in place of an audit committee. The Audit & Supervisory Board meets the following requirements of the general exemption contained in Rule

10A-3(c)(3):

the Audit & Supervisory Board is established pursuant to applicable Japanese law and Canon’s Articles of Incorporation;

under Japanese legal requirements, the Audit & Supervisory Board is separate from the board of directors;

the Audit & Supervisory Board is not elected by the management of Canon and no executive officer of Canon is a member of the Audit & Supervisory Board;

~~all of~~

Japanese regulations provide for standards for the ~~members~~independence of the Audit & Supervisory Board ~~meet specific independence requirements~~ from the Company and ~~Canon, the management and the auditing firm, as set forth by Japanese legal provisions;~~

its management;

the Audit & Supervisory Board, in accordance with and to the extent permitted by Japanese law, is responsible for the appointment, retention and oversight of the work of Canon’s external auditors engaged for the purpose of issuing audit reports on Canon’s annual financial statements;

the Audit & Supervisory Board maintains a complaints procedure in accordance withRule

10A-3(b)(3)

of the Exchange Act;

the Audit & Supervisory Board is authorized to engage independent counsel and other advisers, as it deems appropriate; and

the Audit & Supervisory Board is provided with appropriate funding for payment of (i) compensation to Canon’s independent registered public accounting firm engaged for the purpose of issuing audit reports on Canon’s annual financial statements, (ii) compensation to independent counsel and other advisers engaged by the Audit & Supervisory Board, and (iii) ordinary administrative expenses of the Audit & Supervisory Board in carrying out its duties.

Canon’s reliance onRule

10A-3(c)(3)

does not, in its opinion, materially adversely affect the ability of its Audit & Supervisory Board to act independently and to satisfy the other requirements ofRule

10A-3.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth, for each of the months indicated, the total number of shares purchased by Canon, or on Canon’s behalf or by any affiliated purchaser, the average price paid per share, the number of shares purchased pursuant to the applicable shareholder resolution or board resolution, which are publicly announced, and the maximum number of shares that may yet be purchased pursuant to these shareholder resolutions or board resolutions.

Period    (a) Total number of
shares purchased    (b) Average price
paid per share    (c) Total number of
shares purchased as
part of publicly
announced plans or
programs    (d) Maximum number of
shares that may yet be
purchased under the
plans or
programs
2018
   (Shares)    (Yen)
January 1 - January 31
   792    4,312    —    —
February 1 - February 28
   587    4,148    —    —
March 1 - March 31
   356    3,982    —    —
April 1 - April 30
   445    3,859    —    —
May 1 - May 31
   603    3,805    —    —
June 1 - June 30
   519    3,742    —    —
July 1 - July 31
   242    3,556    —    —
August 1 - August 31
   300    3,535    —    —
September1- September 30
   894    3,491    —    —
October 1 - October 31
   619    3,591    —    —
November 1 - November 30
   783    3,241    —    —
December 1 - December 31
   735    3,176    —    —


Period	(a) Total number of shares purchased		(b) Average price paid per share		(c) Total number of shares purchased as part of publicly announced plans or programs		(d) Maximum number of shares that may yet be purchased under the plans or programs
2019	(Shares)		(Yen)
January 1 - January 31		238		3,062		—		—
February 1 - February 28		302		3,159		—		—
March 1 - March 31		243		3,181		—		—
April 1 - April 30		553		3,217		—		—
May 1 - May 31		15,916,069		3,142		15,915,400		—
June 1 - June 30		251		3,135		—		—
July 1 - July 31		387		3,147		—		—
August 1 - August 31		651		2,899		—		—
September 1- September 30		619		2,800		—		—
October 1 - October 31		230		2,889		—		—
November 1 - November 30		569		2,992		—		—
December 1 - December 31		373		3,056		—		—

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Notes:

(1)	On May 9, 2019, a resolution approved at the meeting of our board directors authorized the Company to acquire to up to 17.5 million shares with an aggregate purchase price of ¥50 billion during the period from May 10, 2019 through July 31, 2019.

Column (a) represents the total number of shares purchased as fractional shares from fractional shareowners in accordance with the Corporation Law of Japan, and the purchase of shares from publicly announced plans which is shown in column (c). During ~~2018,~~2019, the Company purchased ~~6,875~~5,085 shares for a total purchase price of ~~25,358,703~~15,417,850 yen upon requests from holders of shares consisting less than one full unit.

Item 16F. Change in Registrant’s Certifying Accountant

~~Not applicable.~~

At a meeting held on January 28, 2020, the Company’s Audit and Supervisory Board approved, subject to shareholders’ approval, the dismissal of Ernst & Young ShinNihon LLC as the Company’s certified public accountant or auditing firm upon the conclusion of the annual shareholders’ meeting for the fiscal year ended December 31, 2019. At the same meeting the Company’s Audit and Supervisory Board approved the engagement of Deloitte Touche Tohmatsu LLC subject to shareholder approval. The change was approved by the Company’s shareholders at the Ordinary General Meeting of Shareholders held on March 27, 2020.

The Company’s Audit and Supervisory Board conducted a comparative assessment of several candidate firms from 2016 from the perspective of qualifications and independence, following the introduction of an auditor rotation system in other countries. In addition, the Company’s Audit and Supervisory Board has determined to receive a proposal from several candidate firms periodically.

After considering Ernst & Young ShinNihon LLC’s consecutive years of service to the Company and comprehensively reviewing Deloitte Touche Tohmatsu LLC’s independence, expertise, their quality management structure and global auditing structure, the Company’s Audit and Supervisory Board has resolved to appoint Deloitte Touche Tohmatsu LLC as the Company’s certified public accountant or auditing firm, having concluded that the firm upholds a system for robust auditing and can offer new perspectives on the Company’s audit.

The reports of Ernst & Young ShinNihon LLC on our consolidated financial statements for the years ended December 31, 2019 and 2018 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2019 and 2018, and the subsequent interim period through March 27, 2020, there was no disagreement with Ernst & Young ShinNihon LLC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to their satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report, or any “reportable event” as that term is described in Item 16F(a)(1)(v) of Form 20-F.

The Company has provided a copy of the above statements to Ernst & Young ShinNihon LLC and requested that Ernst & Young ShinNihon LLC furnish the Company with a letter addressed to the SEC stating whether or not they agree with the above disclosure. A copy of that letter, dated March 27, 2020, is filed as exhibit 15 to this annual report on Form 20-F.

Further, during the years ended December 31, 2019, and 2018, and the subsequent interim period through March 27, 2020, the Company has not consulted with Deloitte Touche Tohmatsu LLC regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered with respect to the consolidated financial statements of Canon; or (ii) any matter that was either the subject of a disagreement as that term is defined in Item 16F(a)(1)(iv) of Form
20-F
or a “reportable event” as described in Item 16F(a)(1)(v) of Form
20-F.

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Item 16G. Corporate Governance

Significant Differences in Corporate Governance Practices between Canon and U.S. Companies Listed on the NYSE

Section 303A of the ~~New York Stock Exchange (the “NYSE”)~~NYSE Listed Company Manual (the “Manual”) provides that companies listed on the NYSE must comply with certain corporate governance standards. However, foreign private issuers whose shares have been listed on the NYSE, such as ~~Canon Inc. (the “Company”),~~the Company, are permitted, with certain exceptions, to follow the laws and practices of their home country in place of the corporate governance practices stipulated under the Manual. In such circumstances, the foreign private issuer is required to disclose the significant differences between the corporate governance practices under Section 303A of the Manual and those required in Japan. A summary of these differences as they apply to the Company is provided below.

1. Directors

Currently, the Company’s board of directors does not have any director who could be regarded as an “independent director” under the NYSE Corporate Governance Rules for U.S. listed companies. Unlike the NYSE Corporate Governance Rules, the Corporation Law of Japan (the “Corporation Law”) does not require Japanese companies with the Audit & Supervisory Board such as the Company, to appoint independent directors as members of the board of directors. The NYSE Corporate Governance Rules require

non-management

directors of U.S. listed companies to meet at regularly scheduled executive sessions without the presence of management. Unlike the NYSE Corporate Governance Rules, however, the Corporation Law does not require companies to implement an internal corporate organ or committee comprised solely of independent directors. Thus, the Company does not have such internal corporate organ or committee.

The Company currently has two outside directors under the Corporation Law. Under the Corporation Law, an “outside” director is defined as a person who meets the prescribed conditions, such as, that the person is not currently, and has not been in the ten years prior to his or her assumption of office as outside director, an executive director (which means a director concurrently performing an executive role) (

gyomu shikko torishimariyaku

), a corporate executive officer, a manager (

shihainin

), or any other type of employee of the company or any of its subsidiaries. Such qualifications for an “outside” director are different from the director independence requirements under the NYSE Corporate Governance Rules.

In addition, pursuant to the regulations of the Japanese stock exchanges, the Company is required to have one or more “independent director(s)/audit & supervisory board member(s),” defined under the relevant regulations of the Japanese stock exchanges as “outside directors” or “outside audit & supervisory board members” (as defined under the Corporation Law), who are unlikely to have any conflicts of interests with the Company’s general shareholders. Each of the outside directors of the Company satisfies the “independent director/audit & supervisory board member” requirements under the regulations of the Japanese stock exchanges. The definition of “independent director/audit & supervisory board member” is different from that of the definition of independent director under the NYSE Corporate Governance Rules.

2. Committees

Under the Corporation Law, the Company may choose to:(i) have an audit committee, nomination committee and compensation committee and abolish the post of the Audit & Supervisory Board Members; (ii) have an audit and supervisory committee and abolish the post of the Audit & Supervisory Board Members; or (iii) have the Audit & Supervisory Board. The Company has elected to have the Audit & Supervisory Board, whose duties include monitoring and reviewing the management and reporting the results of these activities to the shareholders or board of directors of the Company. While the NYSE Corporate Governance Rules provide that U.S. listed companies must have an audit committee, nominating committee and compensation committee, each composed entirely of independent directors, the Corporation Law does not require companies to have specified committees, including those that are responsible for director nomination, corporate governance and executive compensation.

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The Company’s board of directors nominates candidates for directorships and submits a proposal at the general meeting of shareholders for shareholder approval. Pursuant to the Corporation Law, the shareholders then vote to elect directors at the meeting. The Corporation Law requires that the total amount or calculation method of compensation for directors and Audit & Supervisory Board Members be determined by a resolution of the general meeting of shareholders respectively, unless the amount or calculation method is provided under the Articles of Incorporation. As the Articles of Incorporation of the Company do not provide an amount or calculation method, the amount of compensation for the directors and the Audit & Supervisory Board Members of the Company is determined by a resolution of the general meeting of shareholders. The allotment of compensation for each director from the total amount of compensation is determined by the Company’s board of directors, and the allotment of compensation to each Audit & Supervisory Board Member is determined by consultation among the Company’s Audit & Supervisory Board Members.

3. Audit Committee

The Company avails itself of paragraph (c)(3) of Rule

10A-3

of the Security Exchange Act, which provides that a foreign private issuer which has established the Audit & Supervisory Board shall be exempt from the audit committee requirements, subject to certain requirements which continue to be applicable under Rule

10A-3.

Pursuant to the requirements of the Corporation Law, the shareholders elect the Audit & Supervisory Board Members by resolution of a general meeting of shareholders. The Company currently has five Audit & Supervisory Board Members, although the minimum number of Audit & Supervisory Board Members required pursuant to the Corporation Law is three. Unlike the NYSE Corporate Governance Rules, Japanese laws and regulations, including the Corporation Law, do not require the Audit & Supervisory Board Members to be experts in accounting or to have any other area of expertise. Under the Corporation Law, the Audit & Supervisory Board may determine the auditing policies and methods for investigating the business and assets of a Company, and may resolve other matters concerning the execution of the Audit & Supervisory Board Member’s duties. The Audit & Supervisory Board prepares auditors’ reports, determines a proposal for the nomination or removal of the accounting auditors to be submitted to the general meeting of shareholders, and may veto a proposal for the nomination of the Audit & Supervisory Board Members, accounting auditors and the determination of the amount of compensation for the accounting auditors put forward by the board of directors. Under the Corporation Law, the half or more of a company’s Audit & Supervisory Board Members must be “outside” Audit & Supervisory Board Members. An “outside” Audit & Supervisory Board Member is defined as a person who meets the prescribed conditions, such as, that the person has not been in the ten years prior to his or her assumption of office as outside Audit & Supervisory Board Member, a director, an accounting adviser (

kaikei sanyo

), a corporate executive officer, a manager (

shihainin

), or any other type of employee of the company or any of its subsidiaries. The Company’s current Audit & Supervisory Board Member system meets these requirements. In addition, pursuant to the regulations of the Japanese stock exchanges, the Company is required to have one or more “independent director(s) or independent Audit & Supervisory Board Member(s)” which terms are defined under the relevant regulations of the Japanese stock exchanges as “outside directors” or “outside Audit & Supervisory Board Members” (each of which terms is defined under the Corporation Law) who

are unlikely to have any conflict of interests with shareholders of the Company. Among the five members on the Company’s board of auditors, three are outside Audit & Supervisory Board Members. In addition, ~~all such~~the three outside Audit & Supervisory Board Members are also qualified as independent Audit & Supervisory Board Members under the regulations of the Japanese stock ~~exchanges.~~exchanges; however, one of such Audit & Supervisory Board Members does not satisfy the Company’s independence standards for Audit & Supervisory Board Members. The qualifications for an “outside” or “independent” Audit & Supervisory Board Member under the Corporation Law or the regulations of the Japanese stock exchanges are different from the audit committee independence requirement under the NYSE Corporate Governance Rules.

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4. Shareholder Approval of Equity Compensation Plans

The NYSE Corporate Governance Rules require that shareholders be given the opportunity to vote on all equity compensation plans and any material revisions of such plans, with certain limited exceptions. Under the Corporation Law, a Company is required to obtain shareholder approval regarding the stock options to be issued to directors and Audit & Supervisory Board Members as part of remuneration of directors and Audit & Supervisory Board Member.

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PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements


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

Reports of Ernst & Young ShinNihon LLC, Independent Registered Public Accounting Firm		91 101

Consolidated Balance Sheets as of December 31, ~~2018~~2019 and ~~2017~~2018		93 104

Consolidated Statements of Income for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017		94 105

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017		95 106

Consolidated Statements of Equity for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017		96 107

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017		98 109

Notes to Consolidated Financial Statements		99 110

Schedule:

Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017		~~149~~ 155

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

100

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Canon Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries (the Company) as of December 31, ~~2018~~2019 and ~~2017,~~2018, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, ~~2018,~~2019, and the related notes and financial statement schedule listed in the Index at Item 18 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, ~~2018~~2019 and ~~2017,~~2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2018,~~2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, ~~2018,~~2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March ~~28, 2019~~27, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.


		Valuation of goodwill
Description of the Matter		As discussed in Note 1 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. At December 31, 2019, goodwill related to the Commercial printing business and the Medical system business unit was ¥27,205 million and ¥508,907 million, respectively. The calculated fair value of these reporting units was in excess of the carrying value by narrower margins than impairment tests performed for the other reporting units.

101

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		Significant estimation is required in determining the fair value of the reporting units. In particular, the fair value estimates were sensitive to significant assumptions such as revenue growth rates, operating profit ratio and weighted average costs of capital which are affected by expectations about future markets or economic conditions. Auditing such annual goodwill impairment tests was complex and judgmental.

How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risk of material misstatement relating to management’s annual assessment of goodwill impairment, including internal controls over the significant assumptions. To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among other things, evaluating the valuation methodology used for fair value estimation and testing the weighted average cost of capital with assistance of our network firm specialist. We evaluated the significant assumptions used by management by comparing those assumptions to historical results, current economic trends, and other relevant factors. We compared the assumptions used in the previous year’s impairment test and the actual results and evaluated the effect on the fair value estimation for the current year. We performed sensitivity analyses of significant assumptions by evaluating the changes in the fair value of the reporting units that would result from changes in significant assumptions. In addition, we compared management’s reconciliation of the aggregate fair value of the reporting units to the market capitalization of the Company.

		Valuation of rebate accruals
Description of the Matter		As described in Note 14 to the consolidated financial statements, sales transaction prices are determined based on contracts with customers that contain certain forms of variable consideration, including volume-based rebates. Variable consideration is estimated based upon historical trends and other known factors at the time of sales. The Company recorded accruals for variable consideration (“rebate accruals”) within the accrued expenses on the consolidated balance sheets. Rebate accruals related to volume-based rebates which will be paid for products that will sell through from retailers or distributors to end users are sensitive to significant assumptions such as the estimated units to be sold during the promotion periods and level of the rebate provided on those units. Auditing such rebate accruals at period end was complex and judgmental.

How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risk of material misstatement relating to management’s assessment of the rebate accrual estimation including evaluating the controls related to the significant assumptions described above. To test the year end rebate accruals, we performed audit procedures that included, among other things, evaluating the data utilized in establishing the rebate accruals including sales volume and levels of rebate provided. We also compared rebate accruals recorded in the prior year to actual rebate claims to evaluate the effect on the estimation for current year rebate accruals. In addition, we tested actual rebate claims and additional rebate accruals established subsequent to the year end and considered whether they corroborate or contradict the year end rebate accruals.

/s/ Ernst & Young ShinNihon LLC

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

Tokyo, Japan

March ~~28, 2019~~

27, 2020

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Canon Inc.

Opinion on Internal Control over Financial Reporting

We have audited Canon Inc. and subsidiaries’ internal control over financial reporting as of December 31, ~~2018,~~2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Canon Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2018,~~2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, ~~2018~~2019 and ~~2017,~~2018, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, ~~2018,~~2019, and the related notes and financial statement schedule listed in the Index at Item 18 and our report dated March ~~28, 2019~~27, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

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

Definition and Limitations of Internal Control Over Financial Reporting

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

/s/ Ernst & Young ShinNihon LLC

Tokyo, Japan

March ~~28, 2019~~

27, 2020

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Canon Inc. and Subsidiaries

Consolidated Balance Sheets

   December 31
   2018 2017
   (Millions of yen)
Assets

Current assets:

Cash and cash equivalents(Note 1)
   520,645 721,814
Short-term investments(Note 2)
   956 1,965
Trade receivables, net(Notes 3 and 15)
   612,953 650,872
Inventories(Notes 4 and 15)
   611,281 570,033
Prepaid expenses and other current assets (Notes 6, 15 and 18)
   304,346 287,965


Total current assets
   2,050,181 2,232,649
Noncurrent receivables(Note 19)
   18,230 35,444
Investments(Note 2)
   42,556 48,320
Property, plant and equipment, net(Notes 5 and 6)
   1,090,992 1,126,620
Intangible assets, net(Notes 7 and 8)
   391,021 420,972
Goodwill(Notes 7 and 8)
   908,511 936,722
Other assets(Notes 6, 11 and 12)
   397,974 397,564


Total assets
   4,899,465 5,198,291


Liabilities and equity

Current liabilities:

Short-term loans and current portion of long-term debt(Note 9)
   38,527 39,328
Trade payables(Note 10)
   352,489 380,654
Accrued income taxes(Note 12)
   41,264 77,501
Accrued expenses(Notes 11, 15 and 19)
   321,137 330,188
Other current liabilities(Notes 5, 15 and 18)
   276,237 281,809


Total current liabilities
   1,029,654 1,109,480
Long-term debt, excluding current installments(Notes 9 and 20)
   361,962 493,238
Accrued pension and severance cost(Note 11)
   382,789 365,582
Other noncurrent liabilities(Note 12)
   107,147 133,816


Total liabilities
   1,881,552 2,102,116
Commitments and contingent liabilities(Note 19)

Equity:

Canon Inc. shareholders’ equity:

Common stock

Authorized 3,000,000,000 shares;
issued 1,333,763,464 shares in 2018 and 2017
   174,762 174,762
Additionalpaid-in capital
   404,389 401,386
Legal reserve(Note 13)
   67,116 66,879
Retained earnings(Note 13)
   3,508,908 3,429,312
Accumulated other comprehensive income (loss)(Note 14)
   (269,071 ) (143,228 )
Treasury stock, at cost; 254,013,641 shares in 2018 and
254,007,681 shares in 2017
   (1,058,502 ) (1,058,481 )


Total Canon Inc. shareholders’ equity
   2,827,602 2,870,630
Noncontrolling interests
   190,311 225,545


Total equity
   3,017,913 3,096,175


Total liabilities and equity
   4,899,465 5,198,291

December 31

2019

2018

(Millions of yen)

Assets

Current assets:

Cash and cash equivalents
(Note 1)

412,814

520,645

Short-term investments
(Note 2)

1,767

956

Trade receivables, net
(Note 3)

559,836

612,953

Inventories
(Note 4)

584,756

611,281

Prepaid expenses and other current assets
(Notes 6, 14 and 17)

286,792

304,346

Total current assets

1,845,965

2,050,181

Noncurrent receivables
(Note 19)

17,135

18,230

Investments
(Note 2)

48,361

42,556

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

1,089,671

1,090,992

Operating lease right-of-use assets
(Note 18)

114,418

—
Intangible assets, net
(Note 7)

347,921

391,021

Goodwill
(Note 7)

898,661

908,511

Other assets
(Notes 6, 10 and 11)

406,219

397,974

Total assets

4,768,351

4,899,465

Liabilities and equity

Current liabilities:

Short-term loans and current portion of long-term debt
(Note 8)

42,034

38,527

Trade payables
(Note 9)

305,312

352,489

Accrued income taxes
(Note 11)

18,801

41,264

Accrued expenses
(Notes 10 and 19)

324,891

321,137

Current operating lease liabilities
(Note 18)

31,884

—
Other current liabilities
(Notes 5, 14 and 17)

237,576

276,237

Total current liabilities

960,498

1,029,654

Long-term debt, excluding current installments
(Notes 8 and 20)

357,340

361,962

Accrued pension and severance cost
(Note 10)

368,507

382,789

Noncurrent operating lease liabilities
(Note 18)

83,688

—
Other noncurrent liabilities
(Note 11)

106,400

107,147

Total liabilities

1,876,433

1,881,552

Commitments and contingent liabilities
(Note 19)

Equity:

Canon Inc. shareholders’ equity:

Common stock

Authorized 3,000,000,000 shares;
issued 1,333,763,464 shares in 201
9
and 201
8

174,762

174,762

Additional
paid-in
capital

405,017

404,389

Legal reserve
(Note 12)

67,572

67,116

Retained earnings
(Note 12)

3,462,182

3,508,908

Accumulated other comprehensive income (loss)
(Note 1
3
)

(308,442
)
(269,071
)
Treasury stock, at cost; 269,928,993 shares in 201
9
and
254,013,641 shares in 201
8

(1,108,496
)
(1,058,502
)

Total Canon Inc. shareholders’ equity

2,692,595

2,827,602

Noncontrolling interests

199,323

190,311

Total equity

2,891,918

3,017,913

Total liabilities and equity

4,768,351

4,899,465

See accompanying Notes to Consolidated Financial Statements.

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Canon Inc. and Subsidiaries

Consolidated Statements of Income

   Years ended December 31
   2018 2017 2016
   (Millions of yen)
Net sales(Note 15)

Products and Equipment
   3,194,724 3,521,156 2,986,188
Services
   757,213 558,859 415,299


   3,951,937 4,080,015 3,401,487
Cost of sales(Notes 5, 8, 11, 15 and 19)

Products and Equipment
   1,762,171 1,875,581 1,574,679
Services
   354,212 213,880 154,810


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


Gross profit
   1,835,554 1,990,554 1,671,998


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

Selling, general and administrative expenses
   1,176,760 1,301,666 1,149,036
Research and development expenses
   315,842 333,371 306,537
Impairment losses on goodwill
   — 33,912 —


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


Operating profit
   342,952 321,605 216,425
Other income (deductions):

Interest and dividend income
   6,604 6,012 4,762
Interest expense
   (797 ) (818 ) (1,061 )
Other, net(Notes 1, 2, 11, 14 and 18)
   14,133 27,085 24,525


   19,940 32,279 28,226


Income before income taxes
   362,892 353,884 244,651
Income taxes(Note 12)
   96,150 98,024 82,681


Consolidated net income
   266,742 255,860 161,970
Less: Net income attributable to noncontrolling interests
   13,987 13,937 11,320


Net income attributable to Canon Inc.
   252,755 241,923 150,650


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

Basic
   234.09 222.88 137.95
Diluted
   234.08 222.88 137.95
Cash dividends per share
   160.00 160.00 150.00

Years ended December 31

2019

2018

2017

(Millions of yen)

Net sales
(Note
s 6,
1
4
a
nd 17
)

Products and Equipment

2,835,428

3,194,724

3,521,156

Services

757,871

757,213

558,859

3,593,299

3,951,937

4,080,015

Cost of sales
(Notes 5,
7
,
10
, and
18
)

Products and Equipment

1,627,858

1,762,171

1,875,581

Services

355,408

354,212

213,880

1,983,266

2,116,383

2,089,461

Gross profit

1,610,033

1,835,554

1,990,554

Operating expenses
(Notes 1, 5,
7
,
10
,
15
,
18
and
19
)
:

Selling, general and administrative expenses

1,136,863

1,176,760

1,301,666

Research and development expenses

298,503

315,842

333,371

Impairment losses on goodwill

—

—

33,912

1,435,366

1,492,602

1,668,949

Operating profit

174,667

342,952

321,605

Other income (deductions):

Interest and dividend income

5,526

6,604

6,012

Interest expense

(1,038
)
(797
)
(818
)
Other, net
(Notes 1, 2,
10
,
13
and
17
)

16,585

14,133

27,085

21,073

19,940

32,279

Income before income taxes

195,740

362,892

353,884

Income taxes
(Note
11
)

56,223

96,150

98,024

Consolidated net income

139,517

266,742

255,860

Less: Net income attributable to noncontrolling interests

14,412

13,987

13,937

Net income attributable to Canon Inc.

125,105

252,755

241,923

(Yen)

Net income attributable to Canon Inc. shareholders per share
(Note
16
)
:

Basic

116.93

234.09

222.88

Diluted

116.91

234.08

222.88

Cash dividends per share

160.00

160.00

160.00

See accompanying Notes to Consolidated Financial Statements.

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Canon Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

   Years ended December 31
   2018 2017 2016
   (Millions of yen)
Consolidated net income
   266,742 255,860 161,970
Other comprehensive income (loss), net of tax(Note 14):

Foreign currency translation adjustments
   (93,146 ) 47,090 (107,666 )
Net unrealized gains and losses on securities
   (141 ) (9,362 ) 997
Net gains and losses on derivative instruments
   488 2,588 (2,948 )
Pensionliability adjustments
   (30,570 ) 21,207 (70,355 )


   (123,369 ) 61,523 (179,972 )


Comprehensive income (loss)
   143,373 317,383 (18,002 )
Less: Comprehensive income attributable to noncontrolling interests
   6,918 18,807 1,745


Comprehensive income (loss) attributable to Canon Inc.
   136,455 298,576 (19,747 )

Years ended December 31

2019

2018

2017

(Millions of yen)

Consolidated net income

139,517

266,742

255,860

Other comprehensive income (loss), net of tax
(Note 1
3
)
:

Foreign currency translation adjustments

(32,157
)
(93,146
)
47,090

Net unrealized gains and losses on securities

—

(141
)
(9,362
)
Net gains and losses on derivative instruments

(1,068
)
488

2,588

Pension
liability adjustments

(3,630
)
(30,570
)
21,207

(36,855
)
(123,369
)
61,523

Comprehensive income (loss)

102,662

143,373

317,383

Less: Comprehensive income attributable to noncontrolling interests

16,382

6,918

18,807

Comprehensive income (loss) attributable to Canon Inc.

86,280

136,455

298,576

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Canon Inc. and Subsidiaries

Consolidated Statements of Equity

Common
stock Additional
paid-in
capital Legal
reserve Retained
earnings Accumulated
other
comprehensive
income (loss) Treasury
stock Total
Canon Inc.
shareholders’
equity Non-
controlling
interests Total
equity
(Millions of yen)
Balance at December 31, 2015
174,762 401,358 65,289 3,365,158 (29,742 ) (1,010,410 ) 2,966,415 218,048 3,184,463
Equity transactions with noncontrolling interests and other
27 258 285 (5,270 ) (4,985 )
Dividends to Canon Inc. shareholders
(163,810 ) (163,810 ) (163,810 )
Dividends to noncontrolling interests
(4,077 ) (4,077 )
Acquisition of subsidiaries
1,047 1,047
Transfer to legal reserve
1,269 (1,269 ) — —
Comprehensive income:

Net income
150,650 150,650 11,320 161,970
Other comprehensive income (loss), net of tax(Note 14):

Foreign currency translation adjustments
(101,257 ) (101,257 ) (6,409 ) (107,666 )
Net unrealized gains and losses on securities
1,196 1,196 (199 ) 997
Net gains and losses on derivative instruments
(2,924 ) (2,924 ) (24 ) (2,948 )
Pension liability adjustments
(67,412 ) (67,412 ) (2,943 ) (70,355 )

Total comprehensive income (loss)
(19,747 ) 1,745 (18,002 )

Repurchases and reissuance of treasury stock
(1 ) (13 ) (14 ) (14 )

Balance at December 31, 2016
174,762 401,385 66,558 3,350,728 (199,881 ) (1,010,423 ) 2,783,129 211,493 2,994,622
Equity transactions with noncontrolling interests and other
1 1 (1 ) —
Dividends to Canon Inc. shareholders
(162,887 ) (162,887 ) (162,887 )
Dividends to noncontrolling interests
(4,814 ) (4,814 )
Acquisition of subsidiaries
60 60
Transfer to legal reserve
321 (321 ) — —
Comprehensive income:

Net income
241,923 241,923 13,937 255,860
Other comprehensive income (loss), net of tax(Note 14):

Foreign currency translation adjustments
44,168 44,168 2,922 47,090
Net unrealized gains and losses on securities
(9,767 ) (9,767 ) 405 (9,362 )
Net gains and losses on derivative instruments
2,562 2,562 26 2,588
Pension liability adjustments
19,690 19,690 1,517 21,207

Total comprehensive income (loss)
298,576 18,807 317,383

Repurchases of treasury stock
(50,036 ) (50,036 ) (50,036 )
Reissuance of treasury stock
(131 ) 1,978 1,847 1,847

Balance at December 31, 2017
174,762 401,386 66,879 3,429,312 (143,228 ) (1,058,481 ) 2,870,630 225,545 3,096,175


	Common stock		Additional paid-in capital		Legal reserve		Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total Canon Inc. shareholders’ equity			Non- controlling interests			Total equity
	(Millions of yen)
Balance at December 31, 2016		174,762		401,385		66,558		3,350,728			(199,881	)		(1,010,423	)		2,783,129			211,493			2,994,622
Equity transactions with noncontrolling interests and other				1													1			(1	)		—
Dividends to Canon Inc. shareholders								(162,887	)								(162,887	)					(162,887	)
Dividends to noncontrolling interests																				(4,814	)		(4,814	)
Acquisition of subsidiaries																				60			60
Transfer to legal reserve						321		(321	)								—						—
Comprehensive income:
Net income								241,923									241,923			13,937			255,860
Other comprehensive income (loss), net of tax (Note 1 3 ) :
Foreign currency translation adjustments											44,168						44,168			2,922			47,090
Net unrealized gains and losses on securities											(9,767	)					(9,767	)		405			(9,362	)
Net gains and losses on derivative instruments											2,562						2,562			26			2,588
Pension liability adjustments											19,690						19,690			1,517			21,207

Total comprehensive income (loss)																	298,576			18,807			317,383

Repurchases of treasury stock														(50,036	)		(50,036	)					(50,036	)
Reissuance of treasury stock								(131	)					1,978			1,847						1,847

Balance at December 31, 2017		174,762		401,386		66,879		3,429,312			(143,228	)		(1,058,481	)		2,870,630			225,545			3,096,175
Cumulative effects of accounting standard update – adoption of ASU No. 2014-09								(106	)								(106	)		(76	)		(182	)
Cumulative effects of accounting standard update – adoption of ASU No. 2016-01								5,343			(5,343	)					—			—			—
Equity transactions with noncontrolling interests and other				3,003							(4,200	)					(1,197	)		(36,518	)		(37,715	)
Dividends to Canon Inc. shareholders								(178,159	)								(178,159	)					(178,159	)
Dividends to noncontrolling interests																				(5,558	)		(5,558	)
Transfers to legal reserve						237		(237	)								—						—
Comprehensive income:
Net income								252,755									252,755			13,987			266,742
Other comprehensive income (loss), net of tax (Note 1 3 ) :
Foreign currency translation adjustments											(89,823	)					(89,823	)		(3,323	)		(93,146	)
Net unrealized gains and losses on securities											(141	)					(141	)		—			(141	)
Net gains and losses on derivative instruments											488						488			—			488
Pension liability adjustments											(26,824	)					(26,824	)		(3,746	)		(30,570	)

Total comprehensive income (loss)																	136,455			6,918			143,373

Repurchases of treasury stock														(25	)		(25	)					(25	)
Reissuance of treasury stock								0						4			4						4

Balance at December 31, 2018		174,762		404,389		67,116		3,508,908			(269,071	)		(1,058,502	)		2,827,602			190,311			3,017,913

Table of Contents

Canon Inc. and Subsidiaries

Consolidated Statements of Equity (continued)

Common
stock Additional
paid-in
capital Legal
reserve Retained
earnings Accumulated
other
comprehensive
income (loss) Treasury
stock Total
Canon Inc.
shareholders’
equity Non-
controlling
interests Total
equity
(Millions of yen)
Cumulative effects of accounting standard update – adoption of ASUNo.2014-09
(106 ) (106 ) (76 ) (182 )
Cumulative effects of accounting standard update – adoption of ASUNo. 2016-01
5,343 (5,343 ) — — —
Equity transactions with noncontrolling interests and other
3,003 (4,200 ) (1,197 ) (36,518 ) (37,715 )
Dividends to Canon Inc. shareholders
(178,159 ) (178,159 ) (178,159 )
Dividends to noncontrolling interests
(5,558 ) (5,558 )
Transfers to legal reserve
237 (237 ) — —
Comprehensive income:

Net income
252,755 252,755 13,987 266,742
Other comprehensive income (loss), net of tax(Note 14):

Foreign currency translation adjustments
(89,823 ) (89,823 ) (3,323 ) (93,146 )
Net unrealized gains and losses on securities
(141 ) (141 ) — (141 )
Net gains and losses on derivative instruments
488 488 — 488
Pension liability adjustments
(26,824 ) (26,824 ) (3,746 ) (30,570 )

Total comprehensive income (loss)
136,455 6,918 143,373

Repurchases of treasury stock
(25 ) (25 ) (25 )
Reissuance of treasury stock
0 4 4 4

Balance at December 31, 2018
174,762 404,389 67,116 3,508,908 (269,071 ) (1,058,502 ) 2,827,602 190,311 3,017,913

Common
stock

Additional
paid-in

capital

Legal
reserve

Retained
earnings

Accumulated
other
comprehensive
income (loss)

Treasury
stock

Total
Canon Inc.
shareholders’
equity

Non-
controlling
interests

Total
equity

(Millions of yen)

Cumulative effects of accounting standard update – adoption of
ASU No.
2017-12

122

(122
)

—

—

—

Equity transactions with noncontrolling interests and other

641

(424
)

217

(1,813
)

(1,596
)
Dividends to Canon Inc. shareholders

(171,487
)

(171,487
)

(171,487
)
Dividends to noncontrolling interests

(5,557
)

(5,557
)
Transfers to legal reserve

456

(456
)

—

—

Comprehensive income:

Net income

125,105

125,105

14,412

139,517

Other comprehensive income (loss), net of tax
(Note 1
3
)
:

Foreign currency translation adjustments

(32,043
)

(32,043
)

(114
)

(32,157
)
Net unrealized gains and losses on securities

—

—

—

—

Net gains and losses on derivative instruments

(1,073
)

(1,073
)

5

(1,068
)
Pension liability adjustments

(5,709
)

(5,709
)

2,079

(3,630
)

Total comprehensive income (loss)

86,280

16,382

102,662

Repurchases of treasury stock

(50,015
)

(50,015
)

(50,015
)
Reissuance of treasury stock

(13
)

(10
)

21

(2
)

(2
)

Balance at December 31, 2019

174,762

405,017

67,572

3,462,182

(308,442
)

(1,108,496
)

2,692,595

199,323

2,891,918

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Canon Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years ended December 31
2018 2017 2016
(Millions of yen)
Cash flows from operating activities:

Consolidated net income
266,742 255,860 161,970
Adjustments to reconcile consolidated net income to net cash provided by operating activities:

Depreciation and amortization
251,554 261,881 250,096
Loss on disposal of fixed assets
5,726 6,935 5,203
Equity in earnings of affiliated companies
(1,414 ) (1,196 ) (890 )
Impairment losses on goodwill(Notes 8 and 21)
— 33,912 —
Gain on securities contributed to retirement benefit trust(Note 2)
— (17,836 ) —
Deferred income taxes
(11,849 ) (17,603 ) 7,188
(Increase) decrease in trade receivables
(17,724 ) 3,563 (4,155 )
(Increase) decrease in inventories
(61,755 ) 2,967 6,156
Increase (decrease) in trade payables
(31,212 ) 4,951 56,844
Increase (decrease) in accrued income taxes
(35,284 ) 46,296 (16,456 )
Increase (decrease) in accrued expenses
2,541 18,503 (5,256 )
Increase (decrease) in accrued (prepaid) pension and severance cost
(17,738 ) 522 5,489
Other, net(Note 6)
15,706 (8,198 ) 34,094

Net cash provided by operating activities
365,293 590,557 500,283
Cash flows from investing activities:

Purchases of fixed assets(Note 5)
(191,399 ) (189,484 ) (206,971 )
Proceeds from sale of fixed assets(Note 5)
9,634 26,444 6,177
Purchases of securities
(2,311 ) (2,220 ) (84 )
Proceeds from sale and maturity of securities
1,615 970 1,181
Decrease in time deposits, net
401 3,373 15,414
Acquisitions of businesses, net of cash acquired(Note 7)
(13,346 ) (6,557 ) (649,570 )
Other, net
(209 ) 2,464 (3,272 )

Net cash used in investing activities
(195,615 ) (165,010 ) (837,125 )
Cash flows from financing activities:

Proceeds from issuance of long-term debt(Note 9)
439 1,570 610,552
Repayments of long-term debt(Note 9)
(136,094 ) (126,578 ) (856 )
Increase (decrease) in short-term loans, net(Note 9)
2,501 5,628 (80,580 )
Transactions with noncontrolling interests
(37,942 ) — (4,993 )
Dividends paid
(178,159 ) (162,887 ) (163,810 )
Repurchases and reissuance of treasury stock
(21 ) (50,034 ) (14 )
Other, net
(5,554 ) (8,163 ) (4,607 )

Net cash provided by (used in) financing activities
(354,830 ) (340,464 ) 355,692
Effect of exchange rate changes on cash and cash equivalents
(16,017 ) 6,538 (22,270 )

Net change in cash and cash equivalents
(201,169 ) 91,621 (3,420 )
Cash and cash equivalents at beginning of year
721,814 630,193 633,613

Cash and cash equivalents at end of year
520,645 721,814 630,193

Supplemental disclosure for cash flow information:

Cash paid during the year for:

Interest
749 1,026 738
Income taxes
131,616 71,473 76,714

Years ended December 31

2019

2018

2017

(Millions of yen)

Cash flows from operating activities:

Consolidated net income

139,517

266,742

255,860

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

Depreciation and amortization

237,327

251,554

261,881

Loss on disposal of fixed assets

5,991

5,726

6,935

Equity in earnings of affiliated companies

311

(1,414
)
(1,196
)
Impairment losses on goodwill
—

—

33,912

Gain on securities contributed to retirement benefit trust
—

—

(17,836
)
Deferred income taxes

(6,446
)
(11,849
)
(17,603
)
(Increase) decrease in trade receivables

43,504

(17,724
)
3,563

(Increase) decrease in inventories

19,895

(61,755
)
2,967

Increase (decrease) in trade payables

(35,509
)
(31,212
)
4,951

Increase (decrease) in accrued income taxes

(22,279
)
(35,284
)
46,296

Increase in accrued expenses

9,491

2,541

18,503

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

(13,722
)
(17,738
)
522

Other, net

(Note 6)

(19,619
)
15,706

(8,198
)

Net cash provided by operating activities

358,461

365,293

590,557

Cash flows from investing activities:

Purchases of fixed assets

(Note 5)

(215,671
)
(191,399
)
(189,484
)
Proceeds from sale of fixed assets

(Note 5)

885

9,634

26,444

Purchases of securities

(4,907
)
(2,311
)
(2,220
)
Proceeds from sale and maturity of securities

828

1,615

970

(Increase) decrease in time deposits, net

(1,511
)
401

3,373

Acquisitions of businesses, net of cash acquired
(8,880
)
(13,346
)
(6,557
)
Other, net

688

(209
)
2,464

Net cash used in investing activities

(228,568
)
(195,615
)
(165,010
)
Cash flows from financing activities:

Proceeds from issuance of long-term debt
(Note
8
)

—

439

1,570

Repayments of long-term debt
(Note
8
)

(8,678
)
(136,094
)
(126,578
)
Increase in short-term loans, net
(Note
8
)

4,913

2,501

5,628

Transactions with noncontrolling interests

(1,769
)
(37,942
)
—

Dividends paid

(171,487
)
(178,159
)
(162,887
)
Repurchases and reissuance of treasury stock

(50,012
)
(21
)
(50,034
)
Other, net

(5,557
)
(5,554
)
(8,163
)

Net cash provided by (used in) financing activities

(232,590
)
(354,830
)
(340,464
)
Effect of exchange rate changes on cash and cash equivalents

(5,134
)
(16,017
)
6,538

Net change in cash and cash equivalents

(107,831
)
(201,169
)
91,621

Cash and cash equivalents at beginning of year

520,645

721,814

630,193

Cash and cash equivalents at end of year

412,814

520,645

721,814

Supplemental disclosure for cash flow information:

Cash paid during the year for:

Interest

888

749

1,026

Income taxes

77,654

131,616

71,473

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Basis of Presentation and Significant Accounting Policies

(a)	Description of Business

Canon Inc. (the “Company”) and subsidiaries (collectively “Canon”) is one of the world’s leading manufacturers in such fields as office products, imaging system products, medical system products and industry and other products. Office products consist mainly of office multifunction devices (“MFDs”), laser multifunction printers (“MFPs”), laser printers, digital continuous feed presses, digital

sheet-fed

presses,

wide-format

printers and document solutions. Imaging system products consist mainly of interchangeable-lens digital cameras, digital compact ~~cameras, digital camcorders, digital cinema~~ cameras, interchangeable lenses, compact photo printers, inkjet printers, large format inkjet printers, commercial photo printers, image scanners ~~multimedia projectors, broadcast equipment~~ and calculators. Medical system products consist mainly of digital radiography systems, diagnostic

X-ray

systems, computed tomography (“CT”) systems, magnetic resonance imaging (“MRI”) systems, diagnostic ultrasound systems, clinical chemistry analyzers and ophthalmic equipment. Industry and other products consist mainly of semiconductor lithography equipment, FPD (Flat panel display) lithography equipment, vacuum thin-film deposition equipment, organic LED (“OLED”) panel manufacturing equipment, die bonders, ~~micromotors,~~ network cameras, digital camcorders, digital cinema cameras, multimedia projectors, broadcast equipment, micromotors, handy terminals and document scanners. Sales are made principally under the Canon brand name, almost entirely through sales subsidiaries. These subsidiaries are responsible for marketing and distribution, and primarily sell to retail dealers in their geographic area. Further segment information is described in Note 22.

Canon sells laser printers on an OEM basis to HP Inc.; such sales constituted ~~13.6%~~13.0%, ~~13.1%~~13.6% and ~~14.8%~~13.1% of consolidated net sales for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016,~~2017, respectively, and are included in the Office Business Unit.

Canon’s manufacturing operations are conducted primarily at 3029 plants in Japan and 1814 overseas plants which are located in countries or regions such as the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and Philippines.

(b)	Basis of Presentation

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

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

(c)	Principles of Consolidation

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

(d)	Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the

disclosure

of contingent assets and liabilities at the date of the consolidated financial statements and the

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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

(d)	Use of Estimates (continued)

reported amounts of revenues and expenses during the period. Significant estimates and assumptions are

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

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

~~(d)~~

~~Use of Estimates (continued)~~

reflected in valuation and disclosure of accounts including: revenue recognition, allowance for doubtful receivables, inventories, long-lived assets, goodwill and other intangible assets with indefinite useful lives, environmental liabilities, deferred tax assets, uncertain tax positions and employee

retirement

and severance benefit obligations. Actual results could differ materially from those estimates.

(e)	Translation of Foreign Currencies

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

Gains and losses resulting from foreign currency transactions ~~including foreign exchange contracts,~~ and translation of assets and liabilities denominated in foreign currencies are included in other income (deductions) in the consolidated statements of income. Foreign currency exchange gains and losses were net losses

of ¥4,236 million, ¥6,044 million ~~¥9,775 million~~ and ¥2¥9,775 million for the years ended December 31, 2019, 2018 and 2017, ~~and 2016, respectively.~~

respec

ively.

(f)	Cash Equivalents

All highly liquid investments acquired with original maturities of three months or less are considered to be cash equivalents. Certain debt securities with original maturities of less than three months, classified as

available-for-sale

securities of ¥506 million and

¥70,500 million at December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, are included in cash and cash equivalents in the consolidated balance sheets.

(g)	Investments

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

Canon classifies investments in debt securities as

available-for-sale

securities. Canon does not hold any trading securities which are bought and held primarily for the purpose of sale in the near term, or any

held-to-maturity

securities. Canon reports investments with maturities of less than one year as short-term investments.

~~Available-for-sales~~

Available-for-sale

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

available-for-sale

debt securities.

Available-for-sale

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

available-for-sale

securities for which the declines are deemed to be other-than-temporary and there is

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

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

~~(g)~~

~~Investments (continued)~~

no intent to sell, the impairment are separated into the amount related to credit loss, which is recognized in

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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

(g)	Investments (continued)

earnings and the amount related to all other factors is recognized in other comprehensive income (loss). For

available-for-sale

securities for which the declines are deemed to be other-than-temporary and there is an intent to sell, the impairments in their entirety are recognized in earnings. Canon recognizes an impairment loss to the extent by which the cost basis of the investment exceeds the fair value of the investment.

Canon measures

non-marketable

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

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

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

(h)

Allowance for Doubtful Receivables

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

thereof

are deemed to be uncollectable and charged against the allowance.

(i)	Inventories

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

first-in,

first-out

method for overseas inventories.

(j)	Impairment of Long-Lived Assets

Long-lived assets, such as property, plant and equipment, and acquired intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset and the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

(k)	Property, Plant and Equipment

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

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

~~(k)~~

~~Property, Plant and Equipment (continued)~~

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

Table of Contents

Canon

Inc. and

Subsidiaries

Notes to Consolidated Financial

Statements

(

continued

)

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

(k)	Property, Plant and Equipment (continued)

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

years to ~~5 years.~~

years

(l)

Leases

As for lessor accounting, Canon provides leasing arrangement to its customers primarily for the sales of office products. Revenue from the sale of these products under sales-type leases is recognized at the inception of the lease. Interest income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-financing leases are accounted for as operating leases and related revenue is recognized ratably over the lease term. When product leases are bundled with maintenance contracts, revenue is allocated based upon the estimated standalone selling prices of the lease and

non-lease

components. Lease components generally include product and financing while

non-lease

As for lessee accounting, Canon has operating and finance leases for various assets including office buildings, warehouses, employees’ accommodations, and vehicles. Canon determines if an arrangement is a lease at the inception of each contract. Some of the contracts include options to extend or to terminate the lease. Canon takes such options into accounts to determine the lease term when it is reasonably certain that it will exercise these options. Canon’s lease arrangements do not contain material residual value guarantees or material restrictive covenants. As a rate implicit in the most of Canon’s leases cannot be determined, Canon uses incremental borrowing rate based on the information available at commencement to determine the present values of lease payments. Canon has lease contracts with lease and

non-lease

components, which are accounted for separately. Canon allocates the consideration in the lease contract to the lease and

non-lease

components based upon the estimated standalone prices. Costs

associated

with operating lease assets are recognized on a straight-line basis over the term of the lease.

(

)

Goodwill and ~~Other Intangible Assets~~

ther

ntangible

ssets

Intangible assets with finite useful lives consist primarily of software, trademarks, patents and developed technology, license fees and customer relationships, which are amortized using the straight-line method. The estimated useful lives of software are from 3 years to 78 years, trademarks are 15 years, patents and developed technology are from 7 years to 17 years, license fees are 7 years, and customer relationships are from 118 years to 15 years, respectively. Certain costs incurred in connection with developing or obtaining

internal-use

software are capitalized. These costs consist primarily of payments made to third parties and the salaries of employees working on such software development. Costs incurred in connection with developing

internal-use

software are capitalized at the application development stage. In addition, Canon develops or

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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

(m)	Goodwill and other intangible assets (continued)

obtains certain software to be sold where related costs are capitalized after establishment of technological feasibility.

~~(m)~~(n)

Environmental Liabilities

Liabilities for environmental remediation and other environmental costs are accrued when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values.

~~(n)~~(

)

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets

and

liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are

measured

using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Canon records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not realizable.

Canon recognizes the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the

more-likely-than-not

recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

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

~~(n)~~

~~Income Taxes (continued)~~

penalties accrued related to unrecognized tax benefits are included in income taxes in the consolidated statements of income.

~~(o)~~(

)

Stock-Based Compensation

Canon measures stock-based compensation cost at the grant date, based on the fair value of the award, and recognizes the cost on a straight-line basis over the requisite service period, which is the vesting period.

~~(p)~~(

)

Net Income Attributable to Canon Inc. Shareholders per Share

Basic net income attributable to Canon Inc. shareholders per share is computed by dividing net income attributable to Canon Inc. by the weighted-average number of common shares outstanding during each year. Diluted net income attributable to Canon Inc. shareholders per share includes the effect from potential issuances of common stock based on the assumptions that all stock options were exercised.

~~(q)~~(

)

Revenue Recognition

information

, please refer to Note ~~15.~~

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~(r)~~

Basis of Presentation and Significant Accounting Policies (continued)

(s)	Research and Development Costs

Research and development costs are expensed as incurred.

~~(s)~~(

)

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses were ¥46,665 million, ¥58,729

million ~~¥61,207 million~~

and ~~¥58,707~~¥61,207 million for the years ended December 31, 2019, 2018 and 2017, ~~and 2016,~~ respectively.

~~(t)~~(

)

Shipping and Handling Costs

Shipping and handling costs totaled ¥51,718 million, ¥54,844 million ~~¥52,953 million~~ and ~~¥44,296~~¥52,953 million for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016,~~2017, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.

~~(u)~~(

)

Derivative Financial Instruments

All derivatives are recognized at fair value and are included in prepaid

expenses

and other current assets, or other current liabilities in the consolidated balance sheets.

Canon uses and designates certain derivatives as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge). Canon formally documents all relationships between hedging instruments and hedged items, as well as its ~~risk-~~

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

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

~~(u)~~

~~Derivative Financial Instruments (continued)~~

~~management~~risk-management objective and strategy for undertaking various hedge transactions. Canon also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon discontinues hedge accounting prospectively. Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income (loss), until earnings are affected by the variability in cash flows of the hedged ~~item. Gains~~item, and ~~losses from hedging ineffectiveness are included~~reclassified in ~~other~~the same income ~~(deductions). Gains and losses related to~~statement line item in which the ~~components~~earnings effect of ~~hedging instruments excluded from~~ the ~~assessment of hedge effectiveness are included in other income (deductions).~~

hedged

item is reported.

Canon also uses certain derivative financial instruments which are not designated as hedges. The changes in fair values of these derivative financial instruments are immediately recorded in earnings.

Canon classifies cash flows from derivatives as cash flows from operating activities in the consolidated statements of cash flows.

~~(v)~~(

)

Guarantees

Canon recognizes, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing guarantees.

~~(w)~~

(

)

Recent Accounting Guidance

Recently adopted accounting guidance

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued ~~Accounting Standards Update (“ASU”)~~ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) Section C – Background Information and Basis for Conclusions, which is a new accounting standard related to revenue from contracts with customers, as amended. (Accounting Standards Codification (“ASC”) 606) This standard requires an entity to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Canon adopted this standard from the quarter beginning January 1, 2018 with modified retrospective method of adoption to contracts that were not completed as of the adoption. The cumulative-effects to the retained earnings and the impact on the consolidated result of operations for the year ended December 31, 2018 from the adoption of this standard were not material. For further information, please refer to Note 15.

~~In January 2016, the FASB issued ASUNo. 2016-01,~~ ~~Financial Instruments – Overall (Subtopic825-10):~~ Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes the requirement that equity investments that do not result in consolidation and are not accounted for under the equity method be measured at fair value with changes in the fair value recognized in net income. Canon adopted this standard from the quarter beginning January 1, 2018, and Canon recognized a cumulative-effect adjustment to retained earnings of ¥5,343 million as of January 1, 2018 for the unrealized gains, net of tax, on~~available-for-sale~~ ~~equity securities previously recognized in accumulated other comprehensive income.~~

2016-02,

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

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

~~(w)~~

~~Recent Accounting Guidance (continued)~~

~~In October 2016, the FASB issued ASUNo. 2016-16,~~ Income Taxes (Topic 740): Intra-entity Transfers of Assets other than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this guidance eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of this guidance are intellectual property and property, plant, and equipment. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. Canon adopted this standard from the quarter beginning January 1, 2018. The adoption of this guidance did not have a material impact on its consolidated results of operation and financial condition.

~~In March 2017, the FASB issued ASUNo. 2017-07,~~ Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an entity to disaggregate the service cost component from the other components of net benefit cost and present it in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component, such as in other income (deductions) in the income statement. The amendments also allow only the service cost component to be eligible for capitalization (for example, as a cost of internally manufactured inventory). The amendments were to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost, and prospectively for the capitalization of the service cost component of net benefit cost. Canon adopted this guidance from the quarter beginning January 1, 2018. The adoption of the new presentation requirement of the service cost component and the other components of net benefit cost resulted in reclassification of ¥2,137 million and ¥1,835 million from cost of sales, ¥4,419 million and ¥4,161 million from selling, general and administrative expenses and ¥3,318 million and ¥6,445 million from research and development expenses into other income (deductions) for the years ended December 31, 2017 and 2016, respectively. Please refer to Note 11 for additional information. The adoption of the capitalization of the service cost component of net benefit cost did not have a material impact on its consolidated results of operations and financial condition.

~~Recently issued accounting guidance not yet adopted~~

~~In February 2016, the FASB issued ASUNo. 2016-02,~~Leases (Topic 842) Section A – Leases: Amendments to the FASB Accounting Standards Codification, which

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

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

(

)

Recent Accounting Guidance (continued)

requires lessees to recognize most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the ~~current~~previous guidance. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. The FASB also modified the definition of a lease. Additionally, ~~the~~this guidance expands the qualitative and quantitative disclosures related to ~~lease. The~~leases. This guidance is effective for annual reporting periods beginning after December 15, 2018. Canon ~~applies~~ applied

the guidance from the quarter beginning ~~after~~ January 1, 2019. Canon ~~applies~~applied the package of practical expedients that allows usit not to reassess ~~whichever~~whether any existing contracts at or expired contracts prior to the adoption date are or contain leases, lease classification and ~~whichever~~whether initial direct costs qualify for capitalization, in addition to the short term lease exception. Canon also ~~adopts~~adopted the transition method for which no restatement of comparative periods and no reassessment of land easements not previously accounted for as a lease that ~~exist~~existed at or expired prior to the adoption date are required. The right of use assets for operating leases recognized at January 1, 2019 ~~is ¥125,649 million almost same as the~~

was

¥125,649

million. The corresponding lease ~~obligations and are included in noncurrent assets and~~ liabilities ~~in the accompanying consolidated balance sheets. Canon does not expect the~~were also recognized. The adoption of this guidance ~~such~~

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

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

~~(w)~~

~~Recent Accounting Guidance—(Continued)~~

~~as the modification the definition of lease and the changes in lessor accounting to~~did not have a material impact on its consolidated results of operation.

For further information, please refer to Notes 6 and 1

In August 2017, the FASB issued ASUNo.

2017-12,

Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends existing guidance to simplify the application of the hedge accounting in certain situations and ~~enable~~enables an entity to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. Canon adopted this guidance from the quarter beginning January 1, 2019 with the modified retrospective method through a cumulative effect adjustment directly to retained earnings as of the beginning of the period. Gains and losses resulting from derivative financial instruments designated as cash flow hedges associated with forecasted intercompany sales, which were

previously

included in other income (deductions) in the consolidated statements of income, are included in net sales after the adoption of this guidance. The ~~amendments~~adoption of this guidance did not have a material impact on its consolidated results of operation and financial condition.

Recently issued accounting guidance not yet adopted

In June 2016, the FASB issued ASU No.

2016-13,

Financial Instruments – Credit Losses – (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to use a current expected credit loss model to measure impairments of certain financial assets. Using this model will result in ~~this~~earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of being incurred. This guidance should be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. ~~This~~Canon

will

adopt the guidance ~~is effective for Canon~~ from the quarter beginning January 1, 2019. Gains and losses resulting from derivative financial instruments designated as cash flow hedges associated with forecasted intercompany sales, which are currently included in other income (deductions) in the consolidated statements of income, will be included in net sales after the adoption of this guidance.2020. Canon does not expect ~~other~~ material impacts from the adoption on its consolidated results of operation and financial condition.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Investments

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

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

Corporate bonds
   630    —    —    630








   630    —    —    630








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

Corporate bonds
   1,222    —    —    1,222








   1,222    —    —    1,222








Noncurrent:

Government bonds
   305    —    16    289
Corporate bonds
   640    182    —    822
Fund trusts*
   122    2    —    124
Equity securities*
   10,965    11,612    1,676    20,901








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

*	~~After the adoption of ASUNo. 2016-01,~~ ~~equity investments are measured at fair value with changes in the fair value recognized in net income from the quarter beginning January 1, 2018.~~

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

   Cost    Fair value
   (Millions of yen)
Due within one year
           630            630




   630    630

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

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~Investments (continued)~~

The unrealized and realized gains and losses related to equity securities for the year ended December 31, 2019 and 2018 are as follows:


	~~Millions of yen~~
	~~Year ended~~ ~~December 31, 2018~~
~~Net gains and (losses) recognized during the period on equity securities~~		~~(6,092~~	)
~~Less: Net gains and (losses) recognized during the period on equity securities sold during the period~~		~~675~~

~~Unrealized gains and (losses) recognized during the period on equity securities still held at December 31.~~		~~(6,767~~	)



	Years ended December 31
	2019			2018
	(Millions of yen)
Net gains and (losses) recognized during the period on equity securities		2,148			(6,092	)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		(76	)		675
Unrealized gains and (losses) recognized during the period on equity securities still held at December 31.		2,224			(6,767	)

Gross realized gains related to equity securities were ¥18,514 ~~million and ¥750~~

million for the ~~years~~year ended December 31, ~~2017 and 2016, respectively.~~2017. Gross realized losses, including write-downs for impairments that were other-than-temporary,

were ¥42 ~~million and ¥1,032~~

million for the years ended December 31, ~~2017, 2016, respectively.~~

2017.

During the year ended December 31, ~~2017,~~201

, Canon contributed certain marketable equity securities, not including those of its subsidiaries and affiliated companies, to an established employee retirement benefit trust, with no cash proceeds there on. The fair value of those securities at the time of contribution was ¥30,473 million. Upon contribution of those

available-for-sale

securities, the unrealized gains amounting to ¥17,836 million were realized and were included in “Other, net” in the consolidated statements of income.

The carrying amount of

non-marketable

equity securities without readily determinable fair value

totaled ¥8,448 million and ¥4,629

million at December 31, ~~2018. Aggregate cost ofnon-marketable~~ ~~equity securities accounted for under the cost method totaled ¥3,760 million at December 31, 2017.~~2019 and 2018, respectively. The impairment or other adjustments resulting from observable price changes recorded during the year ended December 31, 2019 and 2018 were not significant.

The unrealized and realized gains and losses related to debt securities were not significant for the years ended December 31, 2019, 2018 and 2017, ~~were not significant.~~

respectively.

Time deposits with original maturities of more than three months are ~~¥326~~¥1,767 million and ~~¥743~~¥326 million at December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, and are included in short-term investments in the accompanying consolidated balance sheets.

Investments in affiliated companies accounted for by the equity method amounted to ~~¥21,312~~¥19,988 million and ~~¥20,496~~ ¥21,312

million at December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. Canon’s share of the net earnings in affiliated companies accounted for by the equity method, included in other income (deductions), were losses

of ¥311

million for the year ended December 31, 2019, and earnings of

¥1,414 million and ¥1,196 ~~million and ¥890~~

million for the years ended December 31, 2018 and 2017 ~~and 2016~~ respectively.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Trade Receivables

Trade receivables are summarized as follows:

   December 31
   2018 2017
   (Millions of yen)
Notes
   29,878 37,077
Accounts
   594,552 627,173


   624,430 664,250
Less allowance for doubtful receivables
   (11,477 ) (13,378 )


   612,953 650,872


	December 31
	2019			2018
	(Millions of yen)
Notes		32,952			29,878
Accounts		537,243			594,552

		570,195			624,430
Less allowance for doubtful receivables		(10,359	)		(11,477	)

		559,836			612,953

Inventories

Inventories are summarized as follows:

   December 31
   2018    2017
   (Millions of yen)
Finished goods
   393,820    377,632
Work in process
   165,003    144,251
Raw materials
   52,458    48,150




   611,281    570,033


	December 31
	2019		2018
	(Millions of yen)
Finished goods		367,332		393,820
Work in process		165,399		165,003
Raw materials		52,025		52,458

		584,756		611,281

Property, Plant and Equipment

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

   December 31
   2018 2017
   (Millions of yen)
Land
   272,443 274,551
Buildings
   1,629,927 1,638,202
Machinery and equipment
   1,793,499 1,804,982
Construction in progress
   67,045 46,940


   3,762,914 3,764,675
Less accumulated depreciation
   (2,671,922 ) (2,638,055 )


   1,090,992 1,126,620


	December 31
	2019			2018
	(Millions of yen)
Land		273,014			272,443
Buildings		1,658,270			1,629,683
Machinery and equipment		1,802,624			1,789,226
Construction in progress		77,953			67,045
Finance lease right-of-use assets		4,999			4,517

		3,816,860			3,762,914
Less accumulated depreciation		(2,727,189	)		(2,671,922	)

		1,089,671			1,090,992

After the adoption of ASU No.

2016-02

from the beginning of the first quarter of 2019, Canon has reclassified finance lease assets from buildings and machinery and equipment to finance lease

right-of-use

assets. Finance lease assets at December 31, 2018 also have been reclassified.

Depreciation expenses for the years ended December 31, 2019, 2018 and 2017 ~~and 2016~~ were ¥170,418 million, ¥175,771 million ~~¥189,712 million~~ and ~~¥199,133~~ ¥189,712

million, respectively.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

5.	Property, Plant and Equipment (continued)

Amounts due for purchases of property, plant and equipment were ~~¥32,433~~¥30,601 million and ~~¥23,432~~¥32,433 million at December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, and are included in other current liabilities in the accompanying consolidated balance sheets. Fixed assets presented in the consolidated statements of cash flows include property, plant and equipment and intangible assets.

~~Canon Inc.~~

6.	Lessor Accounting

Lease income is included in Products and ~~Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

Equipment sales in the accompanying consolidated statement of income. Supplemental income statement information is as follows:

6.	~~Finance Receivables~~
	Year ended December 31, 2019
	(Millions o f yen)
Lease income – sales-type and ~~Operating Leases~~direct financing leases
Revenue at lease commencement		114,312
Interest income on lease receivables		20,382

		134,694

Lease income – operating leases		25,403

Variable lease income		6,216

		166,313

Finance Receivables and Operating Leases

Finance receivables represent financing leases which consist of sales-type leases and ~~direct-financing~~direct

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

   December 31
   2018 2017
   (Millions of yen)
Total minimum lease payments receivable
   351,198 361,686
Unguaranteed residual values
   12,661 15,055
Executory costs
   (2,112 ) (2,216 )
Unearned income
   (31,007 ) (32,286 )


   330,740 342,239
Less allowance for credit losses
   (2,675 ) (2,681 )


   328,065 339,558
Less current portion
   (111,629 ) (120,186 )


   216,436 219,372


	December 31
	2019			2018
	(Million s of yen)
Total minimum lease payments receivable		360,146			351,198
Unguaranteed residual values		13,070			12,661
Executory costs		—			(2,112	)
Unearned income		(33,338	)		(31,007	)

		339,878			330,740
Less allowance for credit losses		(2,627	)		(2,675	)

		337,251			328,065
Less current portion		(113,892	)		(111,629	)

		223,359			216,436

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6.	Lessor Accounting (continued)

Allowance for Credit Losses

The ~~activity~~activities in the allowance for credit losses isare as follows:

   Years ended December 31
   2018 2017
   (Millions of yen)
Balance at beginning of year
   2,681 2,325
Charge-offs
   (1,284 ) (1,523 )
Provision
   938 1,436
Translation adjustments and other
   340 443


Balance at end of year
   2,675 2,681


	Years ended December 31
	2019			2018
	(Millions of yen)
Balance at beginning of year		2,675			2,681
Charge-offs		(1,653	)		(1,284	)
Provision		1,495			938
Translation adjustments and other		110			340

Balance at end of year		2,627			2,675

Canon has policies in place to ensure that its products are sold to customers with an appropriate credit history and continuously monitors its customers’ credit quality based on information including length of period in arrears, macroeconomic conditions, initiation of legal proceedings against customers and bankruptcy filings. The allowance for credit losses of finance receivables ~~are~~is evaluated collectively based on historical experience of credit losses. An additional reserve for individual accounts is recorded when Canon becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings. Finance receivables which are past due or are individually evaluated for impairment at December 31, ~~2018~~2019 and ~~2017~~December 31, 2018 are not significant.

Equipment leased to customers

The cost of equipment leased to customers under operating leases included in property, plant and equipment, net at December 31, ~~2018~~2019 and ~~2017~~ 2018

was ~~¥120,457~~

¥116,681 million and ~~¥103,078~~¥120,457 million, respectively. Accumulated depreciation on equipment under operating leases at December 31, 2019 and 2018 was ¥82,633 million and ~~2017 was~~ ¥82,698 million, ~~and ¥78,307 million,~~ respectively.

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~Finance Receivables and Operating Leases (continued)~~

Maturity

Analysis

The following is a schedule by year of the future minimum lease payments to be received under ~~financing~~finance leases and ~~noncancelable~~

non-cancellable

operating leases at December 31, ~~2018.~~

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

2019
   127,068    9,207
2020
   98,772    6,409
2021
   66,719    2,917
2022
   37,181    1,202
2023
   14,792    317
Thereafter
   6,666    60




   351,198    20,112

2019


	Financ ing leases		Operating lease s
	(Millions of yen)
Year ending December 31:
2020		128,674		9,893
2021		100,569		6,115
2022		68,921		3,593
2023		39,314		1,116
2024		16,363		401
Thereafter		6,305		56

		360,146		21,174

Information about transferring finance receivables

Canon has a syndication ~~arrangement~~arrangements to sell its entire interests in finance receivables to athe third-party financial ~~institution.~~institutions. The transactions under the ~~arrangement~~arrangements are accounted for as sales in accordance with ASC 860 ~~“Transfers~~

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (

continued

)

6.	Lessor Accounting (continued)

Information about transferring finance receivables (continued)

“Transfers and Servicing.” The

sales

of finance receivables ~~sold~~were

¥11,710

million and ~~derecognized from its consolidated balance sheet was~~ ¥21,909 million ~~during~~for the year ended December 31, ~~2018~~2019 and ~~the~~2018. The amount remained uncollected ~~was~~were

¥28,616

million and ¥22,956 million ~~as of~~at December 31, ~~2018. This amount includes uncollected finance receivables which were sold before 2018.~~2019 and 2018, respectively. Cash proceeds from the transaction

are included in other, net under the cash flow from operating activities in the consolidated statement of cash flows. Canon continues to provide collection and administrative services for the financial ~~institution.~~institutions. The amount associated with the servicing liability measured at fair value was not material ~~as of~~at December 31, ~~2018.~~2019 and 2018, respectively. Canon also retains limited recourse obligations which cover credit defaults. The recourse obligation was not material ~~as of December 31, 2018.~~

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

~~Acquisitions~~

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

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

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

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

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~Acquisitions (continued)~~

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

The purchase price allocation was based on estimated fair values of the assets acquired and liabilities assumed at acquisition date. Since the acquisition date of CMSC was near the balance sheet date in 2016, and CMSC is composed of various entities located around the world, the purchase price allocation was preliminary at December 31, ~~2016. The purchase price allocation was finalized in the fourth quarter of 2017. The certain underlying inputs for inventories~~2019 and ~~intangible assets have been updated during the measurement period. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at acquisition date.~~

   Preliminary    Measurement
Period
Adjustment Final
   (Millions of yen)
Cash and cash equivalents
   25,301    — 25,301
Other current assets
   169,545    (1,962 ) 167,583
Intangible assets
   227,500    627 228,127
Other noncurrent assets
   42,975    — 42,975




Total assets acquired
   465,321    (1,335 ) 463,986




Current liabilities
   199,223    (877 ) 198,346
Noncurrent liabilities
   92,231    (1,049 ) 91,182




Total liabilities assumed
   291,454    (1,926 ) 289,528




Noncontrolling interest
   1,047    — 1,047




Net identifiable assets acquired
   172,820    591 173,411




Goodwill
   492,678    (591 ) 492,087




Net assets acquired
   665,498    — 665,498

Intangible assets acquired, which are subject to amortization, mainly consist of customer relationships of ¥143,600 million, and patents and developed technology of ¥73,000 million. Canon has estimated the amortization period for the customer relationships, and patents and developed technology to be 15 years and 10 years,2018, respectively. ~~The weighted average amortization period for all intangible assets is approximately 13 years.~~

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

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

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

Goodwill and Other Intangible Assets

Intangible assets subject to amortization acquired during the year ended December 31, 2019, including those recorded from businesses acquired, totaled ¥34,259 million, which primarily consist of software of ¥32,334 million. The weighted average amortization

periods

for intangible assets in total acquired during the year ended December 31, 2019 are approximately 5 years. The weighted average amortization period for software acquired during the year ended December 31, 2019

approximately 5 years.

Intangible assets subject to amortization acquired during the year ended December 31, 2018, including those recorded from businesses acquired, totaled ¥48,004 million, which primarily consist of software of ¥36,859

million, and patent and developed technology

of ¥6,109 million. The weighted average amortization periods for intangible assets in total acquired during the year ended December 31, 2018 are approximately 6 years.

The weighted average amortization periods for software, and patent and developed technology acquired during the

year ended December 31, 2018 are approximately 5 years and 11 years, respectively.

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

The components of intangible assets subject to amortization at December 31, ~~2018~~2019 and ~~2017~~2018 were as follows:

   December 31, 2018    December 31, 2017
   Gross
carrying
amount    Accumulated
amortization    Gross
carrying
amount    Accumulated
amortization
   (Millions of yen)
Software
   362,130    244,188    342,322    217,654
Customer relationships
   156,679    27,263    162,832    22,463
Patents and developed technology
   123,831    36,029    121,886    27,085
Trademarks
   44,449    12,062    48,823    9,890
License fees
   16,071    6,461    13,565    6,375
Other
   19,319    9,859    18,592    8,136








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


	December 31, 2019				December 31, 2018
	Gross carrying amount		Accumulated amortization		Gross carrying amount		Accumulated amortization
	(Millions of yen)
Software		370,178		262,405		362,130		244,188
Customer relationships		153,708		35,276		156,679		27,263
Patents and developed technology		123,609		46,263		123,831		36,029
Trademarks		41,688		13,582		44,449		12,062
License fees		15,944		8,482		16,071		6,461
Other		18,972		11,846		19,319		9,859

		724,099		377,854		722,479		335,862

Aggregate amortization expense for the years ended December 31, 2019, 2018 and 2017 ~~and 2016~~ was ¥66,909 million, ¥75,783 million ~~¥72,169 million~~ and ~~¥50,963~~¥72,169 million, respectively. Estimated amortization expense for intangible assets currently held for the next five years ending December 31 is ~~¥68,730 million in 2019, ¥54,115~~¥58,646 million in 2020, ~~¥46,067~~¥51,386 million in 2021, ~~¥37,158~~¥42,866 million in 2022, ~~and ¥31,202~~¥32,678 million in ~~2023.~~

2023, and ¥27,818 million in 2024.

Intangible assets not subject to amortization other than goodwill at December 31, ~~2018~~2019 and ~~2017~~2018 were not significant.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

7.	Goodwill and Other Intangible Assets (continued)

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

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~Goodwill and Other Intangible Assets (continued)~~

The changes in the carrying amount of goodwill by segment for the years ended December 31, ~~2018~~2019 and ~~2017~~2018 were as follows:

   Year ended December 31, 2018
   Office Imaging
System Medical
System Industry
and Others Unallocated Total
   (Millions of yen)
Goodwill – gross
   135,125 52,561 499,915 283,577         — 971,178
Accumulated impairment losses
   (22,069 ) — — (12,387 ) — (34,456 )


Balance at beginning of year
   113,056 52,561 499,915 271,190 — 936,722
Goodwill acquired during the year
   — — 1,521 6,106 — 7,627
Translation adjustments and other
   (5,966 ) (3,891 ) (540 ) (25,441 ) — (35,838 )


Goodwill – gross
   127,860 48,670 500,896 263,513 — 940,939
Accumulated impairment losses
   (20,770 ) — — (11,658 ) — (32,428 )


Balance at end of year
   107,090 48,670 500,896 251,855 — 908,511




Year ended December 31, 2017

   Office Imaging
System Medical
System Industry
and Others Unallocated
*1 Total
   (Millions of yen)
Balance at beginning of year*3
   124,993 49,034 — 269,719 492,678 936,424
Goodwill acquired during the year
   857 236 — 2,394 — 3,487
Transfer *1
   — — 499,855 (7,177 ) (492,678 ) —
Impairment loss*2, 3
   (21,721 ) — — (12,191 ) — (33,912 )
Translation adjustments and other*3
   8,927 3,291 60 18,445 — 30,723


Balance at end of year
   113,056 52,561 499,915 271,190 — 936,722

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

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

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

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~


	Year ended December 31, 2019
	Office			Imaging System			Medical System			Industry and Others			Total
	(Millions of yen)
Goodwill – gross		127,860			48,670			500,896			263,513			940,939
Accumulated impairment losses		(20,770	)		—			—			(11,658	)		(32,428	)

Balance at beginning of year		107,090			48,670			500,896			251,855			908,511
Goodwill acquired during the year		—			—			8,330			—			8,330
Translation adjustments and other		(2,518	)		(1,717	)		(319	)		(13,626	)		(18,180	)

Goodwill – gross		124,613			46,953			508,907			249,478			929,951
Accumulated impairment losses		(20,041	)		—			—			(11,249	)		(31,290	)

Balance at end of year		104,572			46,953			508,907			238,229			898,661


	Year ended December 31, 2018
	Office			Imaging System			Medical System			Industry and Others			Total
	(Millions of yen)
Goodwill – gross		135,125			52,561			499,915			283,577			971,178
Accumulated impairment losses		(22,069	)		—			—			(12,387	)		(34,456	)

Balance at beginning of year		113,056			52,561			499,915			271,190			936,722
Goodwill acquired during the year		—			—			1,521			6,106			7,627
Translation adjustments and other		(5,966	)		(3,891	)		(540	)		(25,441	)		(35,838	)

Goodwill – gross		127,860			48,670			500,896			263,513			940,939
Accumulated impairment losses		(20,770	)		—			—			(11,658	)		(32,428	)
Balance at end of year		107,090			48,670			500,896			251,855			908,511

~~Goodwill and Other Intangible Assets (continued)~~

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

Short-Term Loans and Long-Term Debt

Short-term loans consisting of bank borrowings at December 31, 2019 and 2018 ~~and 2017~~ were ~~¥35,887~~¥40,800 million and ~~¥33,398~~ ¥35,887

million, respectively. The weighted average interest rate on short-term borrowings outstanding at December 31, ~~2018~~2019 and ~~2017~~ 2018

were ~~0.43%~~0.21% and ~~0.52%~~0.43%,

respectively.

Unused overdraft facilities at December 31, 2019 were ¥150,000 million. The overdraft facilities bear interest at a rate equal to a base rate plus a

spread

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated

Financial

Statements (continued)

8.	Short-Term Loans and Long-Term Debt (continued)

Long-term debt consisted of the following:

   December 31
   2018 2017
   (Millions of yen)
Loan from the banks; bearing interest of 0.07% at December 31, 2018 and 0.06% at December 31, 2017 *1
   360,000 490,000
Other debt *2
   4,602 9,168


   364,602 499,168
Less current portion
   (2,640 ) (5,930 )


   361,962 493,238


	December 31
	2019			2018
	(Millions of yen)
Loan from banks; bearing interest of 0.08% at December 31, 2019 and 0.07% at December 31, 2018 *1		354,000			360,000
Other debt *2		4,574			4,602

		358,574			364,602
Less current portion		(1,234	)		(2,640	)

		357,340			361,962

Canon ~~entered into~~has the unsecured revolving credit facility contracts expiring

in December ~~2021.~~2021. Canon prepaid ~~¥130,000~~ ¥6,000

million of the loan with cash flows generated during the year ended December 31, ~~2018.~~2019. The outstanding loans under the credit facilities are ~~¥360,000~~

¥354,000 million at a floating interest of ~~0.07%~~0.08% and Canon has no0 unused credit facilities as of December 31, ~~2018.~~

2019.

*2	The other debt consisted of term-loans and ~~capital~~ finance lease obligations as of December 31, ~~2018~~2019 and ~~2017.~~ 2018.

The aggregate annual maturities of long-term debt outstanding at December 31, ~~2018~~2019 were as follows:

   (Millions of yen)
Year ending December 31:

2019
   2,640
2020
   638
2021
   360,805
2022
   427
2023
   82
Thereafter
   10


   364,602


	(Millions of yen)
Year ending December 31:
2020		1,234
2021		355,199
2022		821
2023		487
2024		203
Thereafter		630

		358,574

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

9 .	Trade Payables

Trade payables are summarized as follows:


	December 31
	2019		2018
	(Millions of yen)
Notes		56,865		68,140
Accounts		248,447		284,349

		305,312		352,489

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

10.

~~Trade Payables~~

~~Trade payables are summarized as follows:~~

   December 31
   2018    2017
   (Millions of yen)
Notes
   68,140    81,002
Accounts
   284,349    299,652




   352,489    380,654

~~11.~~

Employee Retirement and Severance Benefits

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

~~Canon Inc. and Subsidiaries~~

~~Notes~~tables for the remaining participants as of December 31, 2018. In March 2019, CMSC settled the pension obligations attributed to ~~Consolidated Financial Statements (continued)~~

~~11.~~

~~Employee Retirement and Severance Benefits (continued)~~

the remaining participants within the Toshiba Funds. The loss recognized due to the settlement in the consolidated statement of income for the year ended December 31, 2019 was not significant.

Obligations and funded status

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

   Japanese plans Foreign plans
   December 31 December 31
   2018 2017 2018 2017
   (Millions of yen) (Millions of yen)
Change in benefit obligations:

Projected benefit obligations at beginning of year
   929,630 906,007 423,579 392,086
Service cost
   31,241 30,889 7,982 6,962
Interest cost
   5,419 5,689 8,691 8,691
Plan participants’ contributions
   — — 1,535 1,644
Actuarial (gain) loss
   (1,844 ) 11,112 (24,297 ) (1,760 )
Benefits paid
   (33,477 ) (29,020 ) (10,135 ) (7,884 )
Acquisition
   — 4,239 — —
Plan amendments
   (3,963 ) 1,149 3,257 (1,069 )
Curtailments and settlements
   — (435 ) (1,149 ) —
Foreign currency exchange rate changes
   — — (23,514 ) 24,909


Projected benefit obligations at end of year
   927,006 929,630 385,949 423,579
Change in plan assets:

Fair value of plan assets at beginning of year
   735,513 667,436 254,020 224,939
Actual return on plan assets
   (38,010 ) 47,376 (6,042 ) 14,262
Employer contributions
   12,651 43,468 22,393 7,160
Plan participants’ contributions
   — — 1,535 1,644
Benefits paid
   (27,459 ) (23,967 ) (10,135 ) (7,884 )
Acquisition
   — 1,223 — —
Settlements
   — (23 ) (1,150 ) —
Foreign currency exchange rate changes
   — — (11,979 ) 13,899


Fair value of plan assets at end of year
   682,695 735,513 248,642 254,020


Funded status at end of year
   (244,311 ) (194,117 ) (137,307 ) (169,559 )

~~Employer contributions for the year ended December 31, 2017 include contribution~~


	Japanese plans						Foreign plans
	December 31						December 31
	2019			2018			2019			2018
	(Millions of yen)						(Millions of yen)
Change in benefit obligations:
Projected benefit obligations at beginning of year		927,006			929,630			385,949			423,579
Service cost		30,903			31,241			6,264			7,982
Interest cost		5,074			5,419			8,643			8,691
Plan participants’ contributions		—			—			1,432			1,535
Actuarial (gain) loss		15,289			(1,844	)		52,261			(24,297	)
Benefits paid		(35,372	)		(33,477	)		(10,863	)		(10,135	)
Plan amendments		—			(3,963	)		362			3,257
Curtailments and settlements		(17,510	)		—			(3,608	)		(1,149	)
Foreign currency exchange rate changes		—			—			(816	)		(23,514	)
Projected benefit obligations at end of year		925,390			927,006			439,624			385,949
Change in plan assets:
Fair value of plan assets at beginning of year		682,695			735,513			248,642			254,020
Actual return on plan assets		54,170			(38,010	)		35,298			(6,042	)
Employer contributions		12,367			12,651			18,016			22,393
Plan participants’ contributions		—			—			1,432			1,535
Benefits paid		(28,549	)		(27,459	)		(10,863	)		(10,135	)
Settlements		(16,514	)		—			—			(1,150	)
Foreign currency exchange rate changes		—			—			2,304			(11,979	)
Fair value of plan assets at end of year		704,169			682,695			294,829			248,642
Funded status at end of year		(221,221	)		(244,311	)		(144,795	)		(137,307	)

Table of ~~equity securities~~Contents

Canon Inc. and Subsidiaries

Notes to ~~a retirement benefit trust. The fair value of those securities at the time of contribution was ¥30,473 million.~~

Consolidated Financial Statements (continued)

10 .	Employee Retirement and Severance Benefits (continued)

Obligations and funded status (continued)

Amounts recognized in the consolidated balance sheets at December 31, ~~2018~~2019 and ~~2017~~2018 are as follows:

   Japanese plans Foreign plans
   December 31 December 31
   2018 2017 2018 2017
   (Millions of yen) (Millions of yen)
Other assets
   1,536 1,695 1,306 1,215
Accrued expenses
   (679 ) — (992 ) (1,004 )
Accrued pension and severance cost
   (245,168 ) (195,812 ) (137,621 ) (169,770 )


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


	Japanese plans						Foreign plans
	December 31						December 31
	2019			2018			2019			2018
	(Millions of yen)						(Millions of yen)
Other assets		1,904			1,536			2,342			1,306
Accrued expenses		(818	)		(679	)		(937	)		(992	)
Accrued pension and severance cost		(222,307	)		(245,168	)		(146,200	)		(137,621	)

		(221,221	)		(244,311	)		(144,795	)		(137,307	)

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~11.~~

~~Employee Retirement and Severance Benefits (continued)~~

~~Obligations and funded status (continued)~~

Amounts recognized in accumulated other comprehensive income (loss) at December 31, ~~2018~~2019 and ~~2017~~2018 before the effect of income taxes are as follows:

   Japanese plans Foreign plans
   December 31 December 31
   2018 2017 2018 2017
   (Millions of yen) (Millions of yen)
Actuarial loss
   267,355 221,106 95,121 105,883
Prior service credit
   (48,392 ) (57,430 ) (227 ) (3,638 )


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


	Japanese plans						Foreign plans
	December 31						December 31
	2019			2018			2019		2018
	(Millions of yen)						(Millions of yen)
Actuarial loss		231,811			267,355			118,247		95,121
Prior service credit		(36,506	)		(48,392	)		268		(227	)

		195,305			218,963			118,515		94,894

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

   Japanese plans    Foreign plans
   December 31    December 31
   2018    2017    2018    2017
   (Millions of yen)    (Millions of yen)
Accumulated benefit obligation
   893,154    894,329    371,653    402,390


	Japanese plans				Foreign plans
	December 31				December 31
	2019		2018		2019		2018
	(Millions of yen)				(Millions of yen)
Accumulated benefit obligation		892,154		893,154		421,460		371,653

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

   Japanese plans Foreign plans
   December 31 December 31
   2018 2017 2018 2017
   (Millions of yen) (Millions of yen)
Plans with projected benefit obligations in excess of plan assets:

Projected benefit obligations
   918,736 924,536 384,167 420,383
Fair value of plan assets
   672,889 728,724 245,554 249,609
Plans with accumulated benefit obligations in excess of plan assets:

Accumulated benefit obligations
   891,204 889,652 369,215 394,840
Fair value of plan assets
   670,826    728,724    244,826    245,247


	Japanese plans				Foreign plans
	December 31				December 31
	2019		2018		2019		2018
	(Millions of yen)				(Millions of yen)
Plans with projected benefit obligations in excess of plan assets:
Projected benefit obligations		916,562		918,736		437,780		384,167
Fair value of plan assets		693,437		672,889		290,643		245,554
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligations		887,138		891,204		414,729		369,215
Fair value of plan assets		688,754		670,826		285,341		244,826

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~11.~~

10.

Employee Retirement and Severance Benefits (continued)

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

Net periodic benefit cost for Canon’s employee retirement and severance defined benefit plans for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 consisted of the following components:

   Japanese plans Foreign plans
   Years ended December 31 Years ended December 31
   2018 2017 2016 2018 2017 2016
   (Millions of yen) (Millions of yen)
Service cost
   31,241 30,889 29,367 7,982 6,962 6,816
Interest cost
   5,419 5,689 8,238 8,691 8,691 8,792
Expected return on plan assets
   (21,983 ) (20,493 ) (19,443 ) (12,601 ) (10,722 ) (10,012 )
Amortization of prior service credit
   (13,001 ) (12,860 ) (13,230 ) (217 ) (83 ) 85
Amortization of actuarial loss
   11,900 14,220 10,944 5,108 5,747 2,185
(Gain) loss on curtailments and settlements
   — (63 ) — — — —


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


	Japanese plans									Foreign plans
	Years ended December 31									Years ended December 31
	2019			2018			2017			2019			2018			2017
	(Millions of yen)									(Millions of yen)
Service cost		30,903			31,241			30,889			6,264			7,982			6,962
Interest cost		5,074			5,419			5,689			8,643			8,691			8,691
Expected return on plan assets		(19,553	)		(21,983	)		(20,493	)		(11,919	)		(12,601	)		(10,722	)
Amortization of prior service credit		(11,877	)		(13,001	)		(12,860	)		(133	)		(217	)		(83	)
Amortization of actuarial loss		15,247			11,900			14,220			4,345			5,108			5,747
(Gain) loss on curtailments and settlements		(36	)		—			(63	)		(2,197	)		—			—

		19,758			13,576			17,382			5,003			8,963			10,595

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

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 are summarized as follows:

   Japanese plans Foreign plans
   Years ended December 31 Years ended December 31
   2018 2017 2016 2018 2017 2016
   (Millions of yen) (Millions of yen)
Current year actuarial (gain) loss
   58,149 (15,771 ) 53,076 (5,654 ) (5,300 ) 47,365
Current year prior service credit
   (3,963 ) 1,149 (4,734 )    3,257 (1,069 ) —
Amortization of actuarial loss
   (11,900 ) (14,220 ) (10,944 ) (5,108 ) (5,747 ) (2,185 )
Amortization of prior service credit
   13,001 12,860 13,230 217         83 (85 )
Curtailments and settlements
   — 19 — (63 ) — —


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


	Japanese plans									Foreign plans
	Years ended December 31									Years ended December 31
	2019			2018			2017			2019			2018			2017
	(Millions of yen)									(Millions of yen)
Current year actuarial (gain) loss		(19,328	)		58,149			(15,771	)		28,882			(5,654	)		(5,300	)
Current year prior service credit		—			(3,963	)		1,149			362			3,257			(1,069	)
Amortization of actuarial loss		(15,247	)		(11,900	)		(14,220	)		(4,345	)		(5,108	)		(5,747	)
Amortization of prior service credit		11,877			13,001			12,860			133			217			83
Curtailments and settlements		(960	)		—			19			(1,411	)		(63	)		—

		(23,658	)		55,287			(15,963	)		23,621			(7,351	)		(12,033	)

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

   Japanese plans Foreign plans
   (Millions of yen) (Millions of yen)
Prior service credit
   (11,887 ) (57 )
Actuarial loss
   15,230 4,852


	Japanese plans			Foreign plans
	(Millions of yen)			(Millions of yen)
Prior service credit		(8,736	)		(123	)
Actuarial loss		12,506			6,073

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~11.~~

10.

Employee Retirement and Severance Benefits (continued)

Assumptions

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

   Japanese plans Foreign plans
   December 31 December 31
   2018 2017 2018 2017
Discount rate
   0.6 % 0.6 % 2.4 % 2.2 %
Assumed rate of increase in future compensation levels
   2.6 % 2.6 % 1.9 % 1.8 %


	Japanese plans						Foreign plans
	December 31						December 31
	2019			2018			2019			2018
Discount rate		0.5	%		0.6	%		1.6	%		2.4	%
Assumed rate of increase in future compensation levels		2.6	%		2.6	%		1.0	%		1.9	%

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

   Japanese plans Foreign plans
   Years ended December 31 Years ended December 31
   2018 2017 2016 2018 2017 2016
Discount rate
   0.6 % 0.7 % 1.1 % 2.2 % 2.2 % 3.0 %
Assumed rate of increase in future compensation levels
   2.6 % 2.6 % 3.0 % 1.8 % 2.1 % 2.0 %
Expected long-term rate of return on plan assets
   2.9 % 3.1 % 3.1 % 4.4 % 4.2 % 4.4 %


	Japanese plans									Foreign plans
	Years ended December 31									Years ended December 31
	2019			2018			2017			2019			2018			2017
Discount rate		0.6	%		0.6	%		0.7	%		2.4	%		2.2	%		2.2	%
Assumed rate of increase in future compensation levels		2.6	%		2.6	%		2.6	%		1.9	%		1.8	%		2.1	%
Expected long-term rate of return on plan assets		3.0	%		2.9	%		3.1	%		5.2	%		4.4	%		4.2	%

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

Plan assets

Canon’s investment policies are designed to ensure adequate plan assets are available to provide future payments of pension benefits to eligible participants. Taking into account the expected long-term rate of return on plan assets, Canon formulates a “model” portfolio comprised of the optimal combination of equity securities and debt securities. Plan assets are invested in individual equity and debt securities using the guidelines of the “model” portfolio in order to produce a total return that will match the expected return on a

mid-term

to long-term basis. Canon evaluates the gap between expected return and actual return of invested plan assets on an annual basis to determine if such differences necessitate a revision in the formulation of the “model” portfolio. Canon revises the “model” portfolio when and to the extent considered necessary to achieve the expected long-term rate of return on plan assets.

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

Outside Japan, investment policies vary by country, but the long-term investment objectives and strategies remain consistent. Canon’s model portfolio for foreign plans has been developed as follows: approximately 35% is invested in equity securities, approximately ~~25%~~20% is invested in debt securities, and approximately ~~40%~~45% is invested in other investment vehicles, primarily consisting of investments in real estate assets.

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

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~11.~~

Employee Retirement and Severance Benefits (continued)

Plan assets (continued)

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

The three levels

input used to measure fair value are more fully described in Note 21. The fair values of Canon’s pension plan assets at December 31, ~~2018~~2019 and ~~2017,~~2018, by asset category, are as follows:

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

Japanese companies (a)
67,283 — — 67,283 — — — —
Foreign companies
5,451 — — 5,451 8,567 — — 8,567
Pooled funds (b)
— 137,712 — 137,712 — 49,312 — 49,312
Debt securities:

Government bonds (c)
137,858 — — 137,858 — — — —
Municipal bonds
— 1,483 — 1,483 — 2,642 — 2,642
Corporate bonds
— 12,595 — 12,595 — 6,318 — 6,318
Pooled funds (d)
— 140,712 — 140,712 — 59,419 — 59,419
Mortgage backed securities (and other asset backed securities)
— 8,489 — 8,489 — — — —
Life insurance company general accounts
— 123,747 — 123,747 — 9,019 — 9,019
Other assets
— 30,009 1,451 31,460 — 95,844 — 95,844
Investment measured at net asset value
— — — 15,905 — — — 17,521

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


	December 31, 2019
	Japanese plans								Foreign plans
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(Millions of yen)
Equity securities:
Japanese companies (a)		77,484		—		—		77,484		—		—		—		—
Foreign companies		5,164		—		—		5,164		10,298		—		—		10,298
Pooled funds (b)		—		164,662		—		164,662				63,557				63,557
Debt securities:
Government bonds (c)		130,180		—		—		130,180		—		—		—		—
Municipal bonds		—		1,202		—		1,202		—		2,302		—		2,302
Corporate bonds		—		11,711		—		11,711		—		6,472		—		6,472
Pooled funds (d)		—		136,655		—		136,655		—		64,259		—		64,259
Mortgage backed securities (and other asset backed securities)		—		12,090		—		12,090		—		2,511		—		2,511
Life insurance company general accounts		—		121,573		—		121,573		—		9,676		—		9,676
Other assets		—		26,979		218		27,197		—		115,102		—		115,102
Investment measured at net asset value		—		—		—		16,251		—		—		—		20,652

		212,828		474,872		218		704,169		10,298		263,879		—		294,829

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~11.~~

10.

Employee Retirement and Severance Benefits (continued)

Plan assets (continued)

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

Japanese companies (e)
83,765 — — 83,765 — — — —
Foreign companies
8,261 — — 8,261 32,240 — — 32,240
Pooled funds (f)
— 164,946 — 164,946 — 73,968 — 73,968
Debt securities:

Government bonds (g)
138,092 — — 138,092 9,343 — — 9,343
Municipal bonds
— 1,166 — 1,166 — 2,901 — 2,901
Corporate bonds
— 15,246 — 15,246 — 22,045 — 22,045
Pooled funds (h)
— 130,507 — 130,507 — 25,821 — 25,821
Mortgage backed securities (and other asset backed securities)
— 8,076 — 8,076 — 3 — 3
Life insurance company general accounts
— 126,985 — 126,985 — 8,683 — 8,683
Other assets
— 43,070 — 43,070 — 73,320 — 73,320
Investment measured at net asset value
— — — 15,399 — — — 5,696

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


	December 31, 2018
	Japanese plans								Foreign plans
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(Millions of yen)
Equity securities:
Japanese companies ( e )		67,283		—		—		67,283		—		—		—		—
Foreign companies		5,451		—		—		5,451		8,567		—		—		8,567
Pooled funds ( f )		—		137,712		—		137,712		—		49,312		—		49,312
Debt securities:
Government bonds ( g )		137,858		—		—		137,858		—		—		—		—
Municipal bonds		—		1,483		—		1,483		—		2,642		—		2,642
Corporate bonds		—		12,595		—		12,595		—		6,318		—		6,318
Pooled funds ( h )		—		140,712		—		140,712		—		59,419		—		59,419
Mortgage backed securities (and other asset backed securities)		—		8,489		—		8,489		—		—		—		—
Life insurance company general accounts		—		123,747		—		123,747		—		9,019		—		9,019
Other assets		—		30,009		1,451		31,460		—		95,844		—		95,844
Investment measured at net asset value		—		—		—		15,905		—		—		—		17,521

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

(a)	The plan’s equity securities include common stock of the Company and certain of its subsidiaries in the amounts of ~~¥147 million.~~ ¥118 million .

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

(c)	This class includes approximately 85% Japanese government bonds and 15% foreign government bonds for Japanese plans, and mainly foreign government bonds for foreign plans.

(d)	These funds invest in approximately 25% Japanese government bonds, 55% foreign government bonds, 5% Japanese municipal bonds, and 15% corporate bonds for Japanese plans. These funds invest in approximately 75% foreign government bonds and 25% corporate bonds for foreign plans.

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

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

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

~~(d)~~(h)

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

~~(e)~~

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

~~(f)~~

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

~~(g)~~

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

~~(h)~~

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

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

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

10.	Employee Retirement and Severance Benefits (continued)

Plan assets (continued)

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

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~11.~~

~~Employee Retirement and Severance Benefits (continued)~~

~~Plan assets (continued)~~

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

The fair value

of Level 3 asset, consisting of hedge funds, ~~was ¥1,451~~ w

ere

¥218 million

and

1,451

million at December 31, ~~2018.~~2019 and 2018, respectively. Amounts of actual returns on, purchases and sales of these assets during the ~~year~~years ended December 31, 2019 and 2018 were not significant.

The fair values of plan assets for the participants with Toshiba Funds by each asset category ~~are~~

in 2018 were

calculated based on a

pro-rata

basis of total plan assets of Toshiba Funds.

Contributions

Canon expects to contribute ~~¥13,089~~¥13,257 million to its Japanese defined benefit pension plans and ~~¥19,311~~¥18,985 million to its foreign defined benefit pension plans for the year ending December 31, ~~2019.~~

2020.

Estimated future benefit payments

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

   Japanese plans    Foreign plans
   (Millions of yen)    (Millions of yen)
Year ending December 31:

2019
   35,604    12,077
2020
   36,896    12,214
2021
   38,524    13,221
2022
   41,775    13,927
2023
   43,119    14,562
2024 – 2028
   226,704    87,006

Japanese plans

Foreign plans

(Millions of yen)

(Millions of yen)

Year ending December 31:

2020

37,164

12,564

2021

38,203

13,181

2022

41,146

14,083

2023

42,625

14,947

2024

42,803

15,742

2025 – 2029

222,813

94,532

Multiemployer pension plans

The amounts of cost recognized for the multiemployer pension plans primarily in the Netherlands for the years ended December 31, 2019, 2018 and 2017 ~~and 2016~~ were ¥4,321 million, ¥4,452 million ~~¥4,165 million~~ and ~~¥3,482~~¥4,165 million, respectively. The multiemployer pension plan in which the subsidiaries in the Netherlands participated was ~~102%~~98% funded as of December 31, ~~2017.~~201

. The collective bargaining agreements have no expiration date. Canon is not liable for other participating employers’ obligations under the terms and conditions of the agreements.

Defined contribution plans

The amounts of cost recognized for the defined contribution pension plans of the Company and certain of its subsidiaries for the years ended December 31, 2019, 2018 and 2017 ~~and 2016~~ were ¥17,414 million, ¥19,570 million and ¥18,979 million, ~~and ¥17,603 million,~~ respectively.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~12.~~

Income Taxes

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


	Year ended December 31, 2019
	Japanese			Foreign			Total
	(Millions of yen)
Income before income taxes		107,329			88,411			195,740

Income taxes:
Current		39,483			23,186			62,669
Deferred		(4,199	)		(2,247	)		(6,446	)

		35,284			20,939			56,223


	Year ended December 31, 2018
	Japanese			Foreign			Total
	(Millions of yen)
Income before income taxes		241,474			121,418			362,892

Income taxes:
Current		75,556			32,443			107,999
Deferred		(6,552	)		(5,297	)		(11,849	)

		69,004			27,146			96,150


	Year ended December 31, 2017
	Japanese			Foreign			Total
	(Millions of yen)
Income before income taxes		276,149			77,735			353,884

Income taxes:
Current		80,225			35,402			115,627
Deferred		(7,453	)		(10,150	)		(17,603	)

		72,772			25,252			98,024

   Year ended December 31, 2016
   Japanese    Foreign    Total
   (Millions of yen)
Income before income taxes
   135,131    109,520    244,651






Income taxes:

Current
   47,687    27,806    75,493
Deferred
   4,126    3,062    7,188






   51,813    30,868    82,681

The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the aggregate, represent a statutory income tax rate of approximately 31%~~, 31% and 33%~~

for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016, respectively.~~

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

2017.

The United States enacted tax reform legislation (the “Tax Reform Legislation”) on December 22, 2017. Due to the Tax Reform Legislation, the federal corporate income tax rate in the U.S. is

s reduced from 35% to 21% from the fiscal year commencing on January 1, 2018. The adjustment to deferred tax assets and liabilities for the tax rate change was

tax benefit of ¥14,563 million for the year ended December 31, 2017. The impacts related to other changes from the Tax Reform

Legislation

are not material.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~12.~~

Income Taxes (continued)

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

   Years ended December 31
   2018 2017 2016
Japanese statutory income tax rate
   31.0 % 31.0 % 33.0 %
Increase (reduction) in income taxes resulting from:

Expenses not deductible for tax purposes *
   0.7 3.7 0.8
Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate
   (3.0 ) (2.1 ) (3.0 )
Tax credit for research and development expenses
   (3.4 ) (4.8 ) (3.0 )
Change in valuation allowance
   0.4 1.7 (0.8 )
Effect of enacted changes in tax laws and rates on Japanese tax
   — — 1.4
Effect of enacted changes in U.S. tax laws
   — (3.6 ) —
Other
   0.8 1.8 5.4


Effective income tax rate
         26.5 %       27.7 %       33.8 %


	Years ended December 31
	2019			2018			2017
Japanese statutory income tax rate		31.0	%		31.0	%		31.0	%

Increase (reduction) in income taxes resulting from:
Expenses not deductible for tax purposes *		1.7			0.7			3.7
Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate		(4.5	)		(3.0	)		(2.1	)
Tax credit for research and development expenses		(2.3	)		(3.4	)		(4.8	)
Change in valuation allowance		0.0			0.4			1.7
Effect of enacted changes in U.S. tax laws		—			—			(3.6	)
Deferred tax liabilities on undistributed earnings of foreign subsidiaries		2.3			0.9			1.1
Other		0.5			(0.1	)		0.7

Effective income tax rate		28.7	%		26.5	%		27.7	%

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

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

   December 31
   2018 2017
   (Millions of yen)
Other assets
   160,541 150,854
Other noncurrent liabilities
   (70,336 ) (90,010 )


   90,205 60,844


	December 31
	2019			2018
	(Millions of yen)
Other assets		153,948			160,541
Other noncurrent liabilities		(59,888	)		(70,336	)

		94,060			90,205

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~12.~~

Income Taxes (continued)

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, ~~2018~~2019 and ~~2017~~2018 are presented below:

   December 31
   2018 2017
   (Millions of yen)
Deferred tax assets:

Inventories
   10,739 11,921
Accrued business tax
   2,361 4,705
Accrued pension and severance cost
   105,933 98,114
Research and development – costs capitalized for tax purposes
   4,690 5,383
Property, plant and equipment
   33,738 33,488
Accrued expenses
   28,015 30,126
Net operating losses carried forward
   28,549 29,006
Other
   38,683 38,526


   252,708 251,269
Less valuation allowance
   (30,734 ) (30,783 )


Total deferred tax assets
   221,974 220,486
Deferred tax liabilities:

Undistributed earnings of foreign subsidiaries
   (7,615 ) (9,859 )
Tax deductible reserve
   (4,050 ) (4,396 )
Financing lease revenue
   (26,441 ) (38,287 )
Intangible assets
   (66,189 ) (74,377 )
Other
   (27,474 ) (32,723 )


Total deferred tax liabilities
   (131,769 ) (159,642 )


Net deferred tax assets
   90,205 60,844


	December 31
	2019			2018
	(Millions of yen)
Deferred tax assets:
Inventories		10,225			10,739
Accrued business tax		1,282			2,361
Accrued pension and severance cost		107,463			105,933
Research and development – costs capitalized for tax purposes		4,751			4,690
Property, plant and equipment		32,040			33,738
Operating lease liabilities		25,646			—
Accrued expenses		25,845			28,015
Net operating losses carried forward		21,294			28,549
Other		41,759			38,683
		270,305			252,708
Less valuation allowance		(27,678	)		(30,734	)
Total deferred tax assets		242,627			221,974
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries		(8,769	)		(7,615	)
Tax deductible reserve		(4,050	)		(4,050	)
Financing lease revenue		(19,029	)		(26,441	)
Operating lease right-of-use assets		(25,249	)		—
Intangible assets		(59,350	)		(66,189	)
Other		(32,120	)		(27,474	)
Total deferred tax liabilities		(148,567	)		(131,769	)
Net deferred tax assets		94,060			90,205

The net changes in the total valuation allowance were a decrease of ¥3,056 million, a decrease of ¥49 million and an increase of ¥4,096 ~~million and a decrease of ¥6,244~~ million for the years ended December 31, 2019, 2018 and 2017, ~~and 2016,~~ respectively.

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

2019.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

11.	Income Taxes (continued)

At December 31, ~~2018,~~2019, Canon had net operating losses which can be carried forward for income tax purposes of ~~¥186,114~~¥130,907 million to reduce future taxable income. Periods available to reduce future taxable income vary in each tax jurisdiction and generally range from one year to an indefinite period as follows:


	~~(Millions of yen)~~
~~Within one year~~		~~5,854~~
~~After one year through five years~~		~~26,802~~
~~After five years through ten years~~		~~38,687~~
~~After ten years through twenty years~~		~~48,642~~
~~Indefinite period~~		~~66,129~~
			(Millions of yen)
~~Total~~ Within one year		~~186,114~~ 1,980
After one year through five years		28,550
After five years through ten years		31,871
After ten years through twenty years		17,137
Indefinite period		51,369

		130,907

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~12.~~

~~Income Taxes (continued)~~

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

Canon has not recognized deferred tax liabilities of ~~¥27,278~~¥24,886 million for a portion of undistributed earnings of foreign subsidiaries of ~~¥1,001,310~~¥994,886 million as of

December 31, ~~2018~~2019 because Canon ~~currently does not expect~~intends to ~~have~~permanently reinvest such ~~amounts distributed or paid as dividends to the Company in the foreseeable future.~~undistributed earnings of foreign subsidiaries. Deferred tax liabilities will be recognized when ~~Canon expects that it will realize those~~such undistributed earnings ~~in a taxable manner, such as through receipt of dividends or sale of the investments.~~

are no longer permanently reinvested.

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

   Years ended December 31
   2018 2017 2016
   (Millions of yen)
Balance at beginning of year
   10,282 7,318 6,056
Additions for tax positions of the current year
   45 2,956 2,741
Additions for tax positions of prior years
   178 250 —
Reductions for tax positions of prior years
   (17 ) (915 ) (665 )
Settlements with tax authorities
   (1,286 ) — (370 )
Other
   (553 ) 673 (444 )


Balance at end of year*
   8,649 10,282 7,318


	Years ended December 31
	2019			2018			2017
	(Millions of yen)
Balance at beginning of year		8,649			10,282			7,318
Additions for tax positions of the current year		—			45			2,956
Additions for tax positions of prior years		204			178			250
Reductions for tax positions of prior years		(44	)		(17	)		(915	)
Settlements with tax authorities		(402	)		(1,286	)		—
Other		(287	)		(553	)		673

Balance at end of year *		8,120			8,649			10,282

The ~~total amounts of~~ unrecognized tax benefits ~~presented in other noncurrent liabilities in the consolidated balance sheets~~ were offset by deferred tax assets in the amount of

¥933 million, ¥2,043 million ~~¥124 million~~ and ~~¥32~~¥124 million as of December 31, 2019, 2018 ~~2017~~ and ~~2016.~~

2017

respectively, and reported under “other noncurrent liabilities” on the consolidated balance sheets.

The total amounts of unrecognized tax benefits that would reduce the effective tax rate, if recognized, were ~~¥8,649~~¥8,120 million and ~~¥10,282~~¥8,649 million at December 31, 2019 and 2018, ~~and 2017,~~ respectively.

Although Canon believes its estimates and assumptions of unrecognized tax benefits are reasonable, uncertainty regarding the final determination of tax examination settlements and any related litigation could affect the effective tax rate in a future period. Based on each of the items of which Canon is aware at December 31, ~~2018,~~2019, no significant changes to the unrecognized tax benefits are expected within the next twelve months.

Canon recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes. Both interest and penalties accrued at December 31, ~~2018~~2019 and ~~2017,~~2018, and interest and penalties included in income taxes for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 were not significant.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

11.	Income Taxes (continued)

Canon files income tax returns in Japan and various foreign tax jurisdictions. In Japan, Canon is no longer subject to regular income tax examinations by the tax authority for years before 2017 with few exceptions. Canon is also no longer subject to a transfer pricing examination by the tax authority for years before 2017 with few exceptions. In other major foreign tax jurisdictions, including the United States and the Netherlands, Canon is no longer subject to income tax examinations by tax

authorities

for years before 2009 with few exceptions. ~~The tax authorities are currently conducting income tax examinations of Canon’s income tax returns for years after 2008 in some foreign tax jurisdictions.~~

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~13.~~

12.

Legal Reserve and Retained Earnings

The Corporation Law of Japan provides that an amount equal to 10% of distributions from retained earnings paid by the Company and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriations are required when the total amount of the additional

paid-in

capital and the legal reserve equals 25% of their respective stated capital. The Corporation Law of Japan also provides that additional

paid-in

capital and legal reserve are available for appropriations by resolution of the shareholders. Certain foreign subsidiaries are also required to appropriate their earnings to legal reserves under the laws of their respective countries.

Cash dividends and appropriations to the legal reserve charged to retained earnings for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 represent dividends paid out during those years and the related appropriations to the legal reserve. Retained earnings at December 31, ~~2018~~2019 did not reflect current

year-end

dividends in the amount of ~~¥86,380~~¥85,107 million which were approved by the shareholders in March ~~2019.~~

2020.

The amount available for dividends under the Corporation Law of Japan is based on the amount recorded in the Company’s nonconsolidated books of account in accordance with financial accounting standards of Japan. Such amount was ~~¥984,692~~¥853,374 million at December 31, ~~2018.~~

2019.

Retained earnings at December 31, ~~2018~~2019 included Canon’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of ~~¥18,265~~¥17,657 million.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~14.~~

13.

Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 are as follows:

   Foreign
currency
translation
adjustments Unrealized
gains and
losses on
securities Gains and
losses on
derivative
instruments Pension
liability
adjustments Total
   (Millions of yen)
Balance at December 31, 2015
   87,038 14,055 182 (131,017 ) (29,742 )
Equity transactions with noncontrolling interests and other
   259 — — (1 ) 258
Other comprehensive income (loss) before reclassifications
   (101,350 ) 814 938 (67,511 ) (167,109 )
Amounts reclassified from accumulated other comprehensive income (loss)
   93 382 (3,862 ) 99 (3,288 )


Net change during the year
   (100,998 ) 1,196 (2,924 ) (67,413 ) (170,139 )


Balance at December 31, 2016
   (13,960 ) 15,251 (2,742 ) (198,430 ) (199,881 )


Equity transactions with noncontrolling interests and other
   — — — — —
Other comprehensive income (loss) before reclassifications
   44,184 2,813 (1,452 ) 14,785 60,330
Amounts reclassified from accumulated other comprehensive income (loss)
   (16 ) (12,580 ) 4,014 4,905 (3,677 )


Net change during the year
   44,168 (9,767 ) 2,562 19,690 56,653


Balance at December 31, 2017
   30,208 5,484 (180 ) (178,740 ) (143,228 )


Cumulative effects of accounting standard update – adoption of ASU No. 2016-01 *
   — (5,343 ) — — (5,343 )
Equity transactions with noncontrolling interests and other
   (4,200 ) — — — (4,200 )
Other comprehensive income (loss) before reclassifications
   (89,823 ) — (457 ) (29,909 ) (120,189 )
Amounts reclassified from accumulated other comprehensive income (loss)
   — (141 ) 945 3,085 3,889


Net change during the year
   (94,023 ) (5,484 ) 488 (26,824 ) (125,843 )


Balance at December 31, 2018
   (63,815 ) — 308 (205,564 ) (269,071 )

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


	Foreign currency translation adjustments			Unrealized gains and losses on securities			Gains and losses on derivative instruments			Pension liability adjustments			Total
	(Millions of yen)
Balance at December 31, 2016		(13,960	)		15,251			(2,742	)		(198,430	)		(199,881	)

Equity transactions with noncontrolling interests and other		—			—			—			—			—
Other comprehensive income (loss) before reclassifications		44,184			2,813			(1,452	)		14,785			60,330
Amounts reclassified from accumulated other comprehensive income (loss)		(16	)		(12,580	)		4,014			4,905			(3,677	)

Net change during the year		44,168			(9,767	)		2,562			19,690			56,653

Balance at December 31, 2017		30,208			5,484			(180	)		(178,740	)		(143,228	)

Cumulative effects of accounting standard update – adoption of ASU No. 2016-01		—			(5,343	)		—			—			(5,343	)
Equity transactions with noncontrolling interests and other		(4,200	)		—			—			—			(4,200	)
Other comprehensive income (loss) before reclassifications		(89,823	)		—			(457	)		(29,909	)		(120,189	)
Amounts reclassified from accumulated other comprehensive income (loss)		—			(141	)		945			3,085			3,889

Net change during the year		(94,023	)		(141	)		488			(26,824	)		(120,500	)

Balance at December 31, 2018		(63,815	)		—			308			(205,564	)		(269,071	)

Cumulative effects of accounting standard update – adoption of ASU No. 2017-12 *		—			—			(122	)		—			(122	)
Equity transactions with noncontrolling interests and other		(424	)		—			—			—			(424	)
Other comprehensive income (loss) before reclassifications		(31,889	)		—			(1,723	)		(12,763	)		(46,375	)
Amounts reclassified from accumulated other comprehensive income (loss)		(154	)		—			650			7,054			7,550

Net change during the year		(32,467	)		—			(1,073	)		(5,709	)		(39,249	)

Balance at December 31, 2019		(96,282	)		—			(887	)		(211,273	)		(308,442	)

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~14.~~

13.

Other Comprehensive Income (Loss) (continued)

Reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 are as follows:

Amount reclassified from
accumulated other comprehensive income (loss) *1
Year ended
December 31,
2018 Year ended
December 31,
2017 Year ended
December 31,
2016
Affected line items in
consolidated statements of income
(Millions of yen)
Foreign currency translation adjustments
— (39 ) 139 Other, net
— 12 (46 ) Income taxes

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

— (16 ) 93 Net income attributable to Canon Inc.

Unrealized gains and losses on securities
(178 ) (18,472 ) 282 Other, net
37 5,727 (94 ) Income taxes

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

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

Gains and losses on derivative instruments
1,341 5,772 (5,890 ) Other, net
(392 ) (1,732 ) 2,049 Income taxes

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

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

Pension liability adjustments
3,853 7,005 (16 ) Other, net
(699 ) (1,832 ) 164 Income taxes

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

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

Total amount reclassified, net of tax and noncontrolling interests
3,889 (3,677 ) (3,288 )


	Amount reclassified from accumulated other comprehensive income (loss) *1
	Year ended December 31, 2019			Year ended December 31, 2018			Year ended December 31, 2017			Affected line items in consolidated statements of income
	(Millions of yen)
Foreign currency translation adjustments		(154	)		—			(39	)	Other, net
		—			—			12		Income taxes
		(154	)		—			(27	)	Consolidated net income
		—			—			11		Net income attributable to noncontrolling interests
		(154	)		—			(16	)	Net income attributable to Canon Inc.
Unrealized gains and losses on securities		—			(178	)		(18,472	)	Other, net
		—			37			5,727		Income taxes
		—			(141	)		(12,745	)	Consolidated net income
		—			—			165		Net income attributable to noncontrolling interests
		—			(141	)		(12,580	)	Net income attributable to Canon Inc.
Gains and losses on derivative instruments		661			1,341			5,772		*2
		(2	)		(392	)		(1,732	)	Income taxes
		659			949			4,040		Consolidated net income
		(9	)		(4	)		(26	)	Net income attributable to noncontrolling interests
		650			945			4,014		Net income attributable to Canon Inc.
Pension liability adjustments		9,953			3,853			7,005		Other, net
		(2,523	)		(699	)		(1,832	)	Income taxes
		7,430			3,154			5,173		Consolidated net income
		(376	)		(69	)		(268	)	Net income attributable to noncontrolling interests
		7,054			3,085			4,905		Net income attributable to Canon Inc.
Total amount reclassified, net of tax and noncontrolling i nterests		7,550			3,889			(3,677	)

*1	Amounts in parentheses indicate gains in consolidated statements of income.

*2	After the adoption of ASU No 2017-12, gains and losses on derivative are reclassified into net sales, which had been classified into other, net. Please refer to Notes 1(x) and 17 for more detailed information.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~14.~~

13.

Other Comprehensive Income (Loss) (continued)

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

Years ended December 31
Before-tax
amount Tax (expense)
or benefit Net-of-tax
amount
(Millions of yen)
2018:

Foreign currency translation adjustments

Amount arising during the year
(93,955 ) 809 (93,146 )
Reclassification adjustments for gains and losses realized in net income
— — —

Net change during the year
(93,955 ) 809 (93,146 )
Net unrealized gains and losses on securities:

Amount arising during the year
— — —
Reclassification adjustments for gains and losses realized in net income
(178 ) 37 (141 )

Net change during the year
(178 ) 37 (141 )
Net gains and losses on derivative instruments:

Amount arising during the year
(586 ) 125 (461 )
Reclassification adjustments for gains and losses realized in net income
1,341 (392 ) 949

Net change during the year
755 (267 ) 488
Pension liability adjustments:

Amount arising during the year
(51,789 ) 18,065 (33,724 )
Reclassification adjustments for gains and losses realized in net income
3,853 (699 ) 3,154

Net change during the year
(47,936 ) 17,366 (30,570 )

Other comprehensive income (loss)
(141,314 ) 17,945 (123,369 )

2017:

Foreign currency translation adjustments

Amount arising during the year
47,825 (708 ) 47,117
Reclassification adjustments for gains and losses realized in net income
(39 ) 12 (27 )

Net change during the year
47,786 (696 ) 47,090
Net unrealized gains and losses on securities:

Amount arising during the year
5,100 (1,717 ) 3,383
Reclassification adjustments for gains and losses realized in net income
(18,472 ) 5,727 (12,745 )

Net change during the year
(13,372 ) 4,010 (9,362 )
Net gains and losses on derivative instruments:

Amount arising during the year
(2,080 ) 628 (1,452 )
Reclassification adjustments for gains and losses realized in net income
5,772 (1,732 ) 4,040

Net change during the year
3,692 (1,104 ) 2,588
Pension liability adjustments:

Amount arising during the year
20,991 (4,957 ) 16,034
Reclassification adjustments for gains and losses realized in net income
7,005 (1,832 ) 5,173

Net change during the year
27,996 (6,789 ) 21,207

Other comprehensive income (loss)
66,102 (4,579 ) 61,523


	Years ended December 31
	Before-tax amount			Tax (expense) or benefit			Net-of-tax amount
	(Millions of yen)
2019:
Foreign currency translation adjustments
Amount arising during the year		(32,396	)		393			(32,003	)
Reclassification adjustments for gains and losses realized in net income		(154	)		—			(154	)

Net change during the year		(32,550	)		393			(32,157	)
Net unrealized gains and losses on securities:
Amount arising during the year		—			—			—
Reclassification adjustments for gains and losses realized in net income		—			—			—

Net change during the year		—			—			—
Net gains and losses on derivative instruments:
Amount arising during the year		(2,180	)		453			(1,727	)
Reclassification adjustments for gains and losses realized in net income		661			(2	)		659

Net change during the year		(1,519	)		451			(1,068	)
Pension liability adjustments:
Amount arising during the year		(9,916	)		(1,144	)		(11,060	)
Reclassification adjustments for gains and losses realized in net income		9,953			(2,523	)		7,430

Net change during the year		37			(3,667	)		(3,630	)

Other comprehensive income (loss)		(34,032	)		(2,823	)		(36,855	)

2018:
Foreign currency translation adjustments
Amount arising during the year		(93,955	)		809			(93,146	)
Reclassification adjustments for gains and losses realized in net income		—			—			—

Net change during the year		(93,955	)		809			(93,146	)
Net unrealized gains and losses on securities:
Amount arising during the year		—			—			—
Reclassification adjustments for gains and losses realized in net income		(178	)		37			(141	)

Net change during the year		(178	)		37			(141	)
Net gains and losses on derivative instruments:
Amount arising during the year		(586	)		125			(461	)
Reclassification adjustments for gains and losses realized in net income		1,341			(392	)		949

Net change during the year		755			(267	)		488
Pension liability adjustments:
Amount arising during the year		(51,789	)		18,065			(33,724	)
Reclassification adjustments for gains and losses realized in net income		3,853			(699	)		3,154

Net change during the year		(47,936	)		17,366			(30,570	)

Other comprehensive income (loss)		(141,314	)		17,945			(123,369	)

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~14.~~

Other Comprehensive Income (Loss) (continued)

Years ended December 31
Before-tax
amount Tax (expense)
or benefit Net-of-tax
amount
(Millions of yen)
2016:

Foreign currency translation adjustments

Amount arising during the year
(108,280 ) 521 (107,759 )
Reclassification adjustments for gains and losses realized in net income
139 (46 ) 93

Net change during the year
(108,141 ) 475 (107,666 )
Net unrealized gains and losses on securities:

Amount arising during the year
1,184 (375 ) 809
Reclassification adjustments for gains and losses realized in net income
282 (94 ) 188

Net change during the year
1,466 (469 ) 997
Net gains and losses on derivative instruments:

Amount arising during the year
1,619 (726 ) 893
Reclassification adjustments for gains and losses realized in net income
(5,890 ) 2,049 (3,841 )

Net change during the year
(4,271 ) 1,323 (2,948 )
Pension liability adjustments:

Amount arising during the year
(95,707 ) 25,204 (70,503 )
Reclassification adjustments for gains and losses realized in net income
(16 ) 164 148

Net change during the year
(95,723 ) 25,368 (70,355 )

Other comprehensive income (loss)
(206,669 ) 26,697 (179,972 )


	Years ended December 31
	Before-tax amount			Tax (expense) or benefit			Net-of-tax amount
	(Millions of yen)
2017:
Foreign currency translation adjustments
Amount arising during the year		47,825			(708	)		47,117
Reclassification adjustments for gains and losses realized in net income		(39	)		12			(27	)

Net change during the year		47,786			(696	)		47,090
Net unrealized gains and losses on securities:
Amount arising during the year		5,100			(1,717	)		3,383
Reclassification adjustments for gains and losses realized in net income		(18,472	)		5,727			(12,745	)

Net change during the year		(13,372	)		4,010			(9,362	)
Net gains and losses on derivative instruments:
Amount arising during the year		(2,080	)		628			(1,452	)
Reclassification adjustments for gains and losses realized in net income		5,772			(1,732	)		4,040

Net change during the year		3,692			(1,104	)		2,588
Pension liability adjustments:
Amount arising during the year		20,991			(4,957	)		16,034
Reclassification adjustments for gains and losses realized in net income		7,005			(1,832	)		5,173

Net change during the year		27,996			(6,789	)		21,207

Other comprehensive income (loss)		66,102			(4,579	)		61,523

~~15.~~

Revenue

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Revenue (continued)

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~15.~~

~~Revenue (continued)~~

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

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

   Office    Imaging
System    Medical
System    Industry and
Others    Corporate and
eliminations Consolidated
   (Millions of yen)
2018:

Revenue recognized at a point in time
   1,286,100    993,658    305,457    599,766    (106,318 ) 3,078,663
Revenue recognized over time
   521,201    14,507    132,121    205,445    — 873,274
Total
   1,807,301    1,008,165    437,578    805,211    (106,318 ) 3,951,937


	Office		Imaging System		Medical System		Industry and Others		Corporate and eliminations			Consolidated
	(Millions of yen)
2019:
Revenue recognized at a point in time		1,187,306		793,832		290,702		582,156		(93,180	)		2,760,816
Revenue recognized over time		515,289		13,582		147,823		155,789		—			832,483
Total		1,702,595		807,414		438,525		737,945		(93,180	)		3,593,299


	Office		Imaging System		Medical System		Industry and Others		Corporate and eliminations			Consolidated
	(Millions of yen)
2018:
Revenue recognized at a point in time		1,286,100		957,518		305,457		635,906		(106,318	)		3,078,663
Revenue recognized over time		521,201		12,917		132,121		207,035		—			873,274
Total		1,807,301		970,435		437,578		842,941		(106,318	)		3,951,937

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

~~The adoption~~

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

Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~15.~~

Revenue (continued)

of income starting from the quarter beginning January 1, 2018, including prior period’s presentation. However, prior period’s presentation is not retrospectively adjusted and is presented in accordance with the historical accounting policy. In addition, in conjunction with the application of the new standard,

Canon has reclassified certain expenses related to service revenues from operating expenses to cost of sales in the accompanying consolidated statement of income. The amount reclassified for the year ended December 31, 2018 was ¥115,700 million. The reconsideration of the scope of performance obligations did not materially affect the timing of revenue recognition. The impacts of adoption of new revenue standard on Canon’s consolidated balance sheet as of December 31, 2018 and the consolidated statement of income for the year ended December 31, 2018 were as follows.

~~Consolidated Balance Sheet~~

   December 31, 2018
   As Reported    Balance under
historical
accounting
policy    Effect of
Change
   (Millions of yen)
Assets
Trade receivables, net
   612,953    657,419    (44,466 )
Inventories
   611,281    614,243    (2,962 )
Prepaid expenses and other current assets
   304,346    253,547    50,799






Other assets
   397,974    397,949    25






Total assets
   4,899,465    4,896,069    3,396
Liabilities and equity
Accrued expenses
   321,137    319,416    1,721
Other current liabilities
   276,237    274,741    1,496






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






Retained earnings
   3,508,908    3,508,704    204
Noncontrolling interests
   190,311    190,336    (25 )






Total equity
   3,017,913    3,017,734    179

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~15.~~

~~Revenue (continued)~~

~~Consolidated Statement of Income~~

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

Products and Equipment
   3,194,724    3,383,566    (188,842 )
Services
   757,213    567,582    189,631






   3,951,937    3,951,148    789
Cost of sales

Products and Equipment
   1,762,171    1,783,798    (21,627 )
Services
   354,212    216,513    137,699






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






Gross profit
   1,835,554    1,950,837    (115,283 )
Selling, general and administrative expenses
   1,176,760    1,292,460    (115,700 )






Operating profit
   342,952    342,535    417
Income before income taxes
   362,892    362,475    417
Income taxes
   96,150    96,094    56






Consolidated net income
   266,742    266,381    361
Less: Net income attributable to noncontrolling interests
   13,987    13,936    51






Net income attributable to Canon Inc.
   252,755    252,445    310

~~Canon recognized~~recognizes contract assets primarily for unbilled receivables mainly arising from services contracts for office ~~products totaled to ¥42,915~~products. Contract assets at December 31, 2019 and 2018 were ¥43,783 million ~~at the adoption date~~ and ¥50,799 million, respectively, and are included in prepaid expenses and other current assets in the consolidated balance ~~sheet with an offsetting impact to trade receivables. Contract assets at December 31, 2018 were ¥50,799 million.~~

sheets.

Canon typically bills to the customer when

the

performance obligation is satisfied and collects the payment in relatively short term except for certain maintenance service of office and medical products and certain industrial equipment for which Canon occasionally receives the payment in advance from customers. The amount received in excess of revenue recognized is recognized as deferred revenue until the performance obligation for distinct goods or services are satisfied. Deferred revenue at December 31, 2019 and 2018 ~~and 2017~~ were ~~¥123,686~~¥

113,030

million and ~~¥125,965~~¥

123,686

million, respectively, and are included in other current liabilities in the accompanying consolidated balance sheets. Revenue recognized for the year ended December 31, ~~2018,~~2019, which had been included in the deferred revenue balance at December 31, ~~2017,~~2018, was ~~¥104,678~~¥

88,306

million.

Remaining performance obligations for products and equipment at December 31, ~~2018~~2019 primarily arise from the sales of certain industrial equipment, amounting to ~~¥72,708~~ ¥

114,617

million, ~~75%~~

73% of which is expected to be recognized as revenue within one year and remaining ~~25%~~27% is within

two

years. Disclosure of remaining performance obligations is not required for the majority of service

since the

revenue is recognized

on an

as billed basis applying the right to invoice practical expedient or is generated from the contracts with original expected duration of less than

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~15.~~

~~Revenue (continued)~~

one year. The portion of fixed maintenance service contract for office and medical products with original expected duration of more than one year is approximately ~~11%~~12% of total service revenue and the average remaining period for these fixed contracts as of December 31, ~~2018~~2019 is about 2 years.

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

~~16.~~

Stock-Based Compensation

On ~~May 2, 2018,~~April 26, 2019, based on the approval of the shareholders, the Company granted stock options to its directors and executive officers to acquire ~~74,000~~116,300 shares of common stock. Those to whom stock acquisition rights are granted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from after the date when they cease to hold any position as a director or an executive officer of the Company. These option awards have a 30 year exercisable period. The grant-date fair value per share of the stock options granted during the year ended December 31, 2019 was ¥2,281.

On May 2, 2018, based on the approval of the shareholders, the Company granted stock options to its directors and executive officers to acquire 74,000 shares of common stock.

he Holder

shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from after the date when they cease to hold any position as a director or an executive officer of the Company. These option awards have a 30 year exercisable period. The grant-date fair value per share of the stock options granted during the year ended December 31, 2018 was ¥2,948.

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

~~On May~~ ¥

772

1 ~~2010, based on the approval~~

Table of ~~the shareholders, the Company granted stock options~~Contents

Canon Inc. and Subsidiaries

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

Consolidated Financial Statements (continued)

15.	Stock-Based Compensation (continued)

The compensation cost recognized for these stock options for the years ended December 31, 2019 was ¥265 million and 2018 was ¥218 million and 2017 ~~and 2016~~ was ~~nil,~~NaN, and it is included in selling, general and administrative expenses in the consolidated statements of income.

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


	~~Year ended~~ ~~December 31, 2018~~
~~Expected term of option (in years)~~		~~6.0~~
~~Expected volatility~~		~~23.02~~	%
~~Dividend yield~~		~~4.14~~	%
~~Risk-free interest rate~~		~~(0.07~~	%)


	Year ended December 31, 2019		Year ended December 31, 201 8
Expected term of option (in years)	6.0			6.0
Expected volatility	19.97	%		23.02	%
Dividend yield	5.05	%		4.14	%
Risk-free interest rate	(0.16	%)		(0.07	%)

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~16.~~

~~Stock-Based Compensation (continued)~~

A summary of option activity under the stock option plans as of and for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 is presented below:

   Shares Weighted-average
exercise price    Weighted-average
remaining
contractual term    Aggregate
intrinsic value
   (Yen)    (Year)    (Millions of yen)
Outstanding at January 1, 2016
   1,296,000 4,263    0.4    —
Exercised
   — —
Forfeited/Expired
   (693,000 ) 4,500



Outstanding at December 31, 2016
   603,000 3,990    0.2    —
Exercised
   — —
Forfeited/Expired
   (603,000 ) 3,990



Outstanding at December 31, 2017
   — —       —
Granted
   74,000 1
Exercised
   — —
Forfeited/Expired
   — —



Outstanding at December 31, 2018
   74,000 1    29.3    222






Exercisable at December 31, 2018
   74,000 1    29.3    222


	Shares			Weighted-average exercise price		Weighted-average remaining contractual term		Aggregate intrinsic value
				(Yen)		(Year)		(Millions of yen)
Outstanding at January 1, 2017		603,000			3,990		0.2		—
Forfeited/Expired		(603,000	)		3,990

Outstanding at December 31, 2017		—			—				—
Granted		74,000			1

Outstanding at December 31, 2018		74,000			1		29.3		222
Granted		116,300			1
Exercised		(4,500	)		1

Outstanding at December 31, 2019		185,800			1		29.0		555

Exercisable at December 31, 2019		185,800			1		29.0		555

The total fair value

of shares vested during the years ended December 31, 2019

and 2018 ~~was ¥218~~were

¥265 million

and

¥218 million

, respectivel

and 2017 ~~and 2016~~ was ~~nil .Cash~~

NaN

. Cash received from the exercise of stock options for the

year ended December 31, 2019 was 0t significant, and

for the

years ended December 31,

2018 and 2017 was

NaN

Table of Contents

Canon Inc. and ~~2016 was nil.~~

Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~17.~~

Net Income Attributable to Canon Inc. Shareholders per Share

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

   Years ended December 31
   2018    2017    2016
   (Millions of yen)
Net income attributable to Canon Inc.
   252,755    241,923    150,650
   (Number of shares)
Average common shares outstanding
   1,079,753,008    1,085,439,370    1,092,070,680
Effect of dilutive securities:

Stock options
   49,319    —    —






Diluted common shares outstanding
   1,079,802,327    1,085,439,370    1,092,070,680






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

Basic
   234.09    222.88    137.95
Diluted
   234.08    222.88    137.95


	Years ended December 31
	2019		2018		2017
	(Millions of yen)
Basic n et income attributable to Canon Inc.		125,105		252,755		241,923
Diluted net income attributable to C anon Inc.		125,103		252,755		241,923

	(Number of shares)
Average common shares outstanding		1,069,956,767		1,079,753,008		1,085,439,370
Effect of dilutive securities:
Stock options		158,173		49,319		–

Diluted common shares outstanding		1,070,114,940		1,079,802,327		1,085,439,370


	(Yen)
Net income attributable to Canon Inc. shareholders per share:
Basic		116.93		234.09		222.88
Diluted		116.91		234.08		222.88

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

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~18.~~

Derivatives and Hedging Activities

Risk management policy

Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Derivative financial instruments are comprised principally of foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of

non-performance

Foreign currency exchange rate risk management

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

4
3

Table of Contents

Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1
7
.
Derivatives and Hedging Activities (continued)

Cash flow hedge

Changes in the fair value of derivative financial instruments designated as cash flow hedges, including foreign exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings ~~through other income (deductions)~~ in the same period as the hedged items affect earnings. Substantially all amounts recorded in accumulated other comprehensive income (loss) at~~year-end~~as of December 31, 2019 are expected to be recognized in ~~earnings~~net sales over the next twelve months. After the adoption of ASU No.

2017-12

earnings.

Derivatives not designated as hedges

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

Contract amounts of foreign exchange contracts at December 31, ~~2018~~2019 and ~~2017~~2018 are set forth below:

   December 31
   2018    2017
   (Millions of yen)
To sell foreign currencies
   230,505    272,563
To buy foreign currencies
   30,816    46,168


	December 31
	2019		2018
	(Millions of yen)
To sell foreign currencies		180,242		230,505
To buy foreign currencies		32,618		30,816

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~18.~~

~~Derivatives and Hedging Activities (continued)~~

Fair value of derivative instruments in the consolidated balance sheets

The following tables present Canon’s derivative instruments measured at gross fair value as reflected in the consolidated balance sheets at December 31, ~~2018~~2019 and ~~2017.~~

2018.

Derivatives designated as hedging instruments

   Fair value
   December 31

Balance sheet location
   2018    2017
   (Millions of yen)
Assets:

Foreign exchange contracts
Prepaid expenses and other current assets    521    255
Liabilities:

Foreign exchange contracts
Other current liabilities    323    367


		Fair value
		December 31
	Balance sheet location	2019		2018
		(Millions of yen)
Assets:
Foreign exchange contracts	Prepaid expenses and other current assets		34		521
Liabilities:
Foreign exchange contracts	Other current liabilities		828		323

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

17.	Derivatives and Hedging Activities (continued)

Fair value of derivative instruments in the consolidated balance sheets (continued)

Derivatives not designated as hedging instruments

   Fair value
   December 31

Balance sheet location
   2018    2017
   (Millions of yen)
Assets:

Foreign exchange contracts
Prepaid expenses and other current assets    2,622    289
Liabilities:

Foreign exchange contracts
Other current liabilities    443    2,892

Fair value

December 31

Balance sheet location

2019

2018

(Millions of yen)

Assets:

Foreign exchange contracts

Prepaid expenses and other current assets

317

2,622

Liabilities:

Foreign exchange contracts

Other current liabilities

1,745

443

Effect of derivative instruments in the consolidated statements of income

The following tables present the effect of Canon’s derivative instruments in the consolidated statements of income for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016.~~

2017.

Derivatives in cash flow hedging relationships

   Years ended December 31
   Gain (loss)
recognized in
OCI (effective
portion) Gain (loss) reclassified from
accumulated OCI into
income (effective portion) Gain (loss) recognized in income
(ineffective portion and amount
excluded from effectiveness testing)
       Amount         Location            Amount         Location            Amount
   (Millions of yen)
2018:

Foreign exchange contracts
   (586 ) Other, net    (1,341 ) Other, net    (682 )
2017:

Foreign exchange contracts
   (2,080 ) Other, net    (5,772 ) Other, net    (332 )
2016:

Foreign exchange contracts
   1,619 Other, net    5,890 Other, net    (311 )

Year ended December 31

Gain (loss)
recognized in
OCI

Gain (loss) reclassified from
accumulated OCI into

income

Amount

Location

Amount

(Millions of yen)

2019:

Foreign exchange contracts

(2,180

)

Net sales

(661

)


	Years ended December 31
	Gain (loss) recognized in OCI (effective portion)			Gain (loss) reclassified from accumulated OCI into income (effective portion)					Gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)
	Amount			Location		Amount			Location		Amount
	(Millions of yen)
2018:
Foreign exchange contracts		(586	)		Other, net		(1,341	)		Other, net		(682	)
2017:
Foreign exchange contracts		(2,080	)		Other, net		(5,772	)		Other, net		(332	)

Derivatives not designated as hedging instruments


	Gain (loss) recognized in income on derivative
	Years ended December 31
	Location		2019		2018		2017
			(Millions of yen)
Foreign exchange contracts		Other, net		805		5,284		(7,932	)

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

18.	Lessee Accounting

Lease costs are included in cost of goods sold or selling general and administrative expense in accompanying consolidated statement of income. Supplemental income statement information is as follows:

	~~Derivatives and Hedging Activities (continued)~~
	Year ended December 31, 2019
	(Millions of yen)
Operating lease cost		43,236
Short-term lease cost		14,374
Other lease cost		168

		57,778

~~Effect~~

Operating lease cashflow

Supplemental cash flow information is as follows.


	Year ended December 31, 2019
	(Millions of yen)
Cash paid for amount included in the measurement of lease liabilities
Operating cash flows from operating leases		41,368

Noncash activity – Rights of use assets obtained in exchange for lease liabilities
Operating leases		33,939

Maturity Analysis

The following is a schedule by year of ~~derivative instruments in~~ the ~~consolidated statements~~future minimum lease payments under operating leases at December 31, 2019.

(
Millions of yen
)

Year ending December 31:

2020

34,317

2021

26,094

2022

18,924

2023

13,950

2024

10,280

Thereafter

19,108

Total future minimum lease payments

122,673

Less Imputed Interest

(7,101
)

115,572

Remaining lease term and discount rate
The following is remaining lease term and discount rate under operating leases at December 31, 2019.
December 31, 2019
Weighted-average remaining lease term
62 months
Weighted-average discount rate
2.2
%
14
6

Table of ~~income~~Contents
Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

~~Derivatives not designated as hedging instruments~~

   Gain (loss) recognized in income on derivative
   Years ended December 31
   Location    2018    2017 2016
      (Millions of yen)
Foreign exchange contracts
   Other, net    5,284    (7,932 ) 7,018

19.

Commitments and Contingent Liabilities

Commitments

At December 31, ~~2018,~~2019, commitments outstanding for the purchase of property, plant and equipment approximated ~~¥54,905~~¥

36,241

million, and commitments outstanding for the purchase of parts and raw materials approximated ~~¥120,344~~¥

112,831

million.

Guarantees

Canon occupies sales offices and other facilities under lease arrangements accounted for as operating leases. Deposits

mainly for restoration

made under such arrangements aggregated ~~¥12,728~~¥

11,778

million and ~~¥13,740~~¥

12,728

million at December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, and are included in noncurrent receivables in the accompanying consolidated balance sheets. Rental expenses of cancelable and noncancelable operating leases amounted to ¥49,394 million, ¥47,619 million and ¥42,714 million for the years ended December 31, 2018, 2017 and 2016, respectively.

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

   (Millions of yen)
Year ending December 31:

2019
   29,817
2020
   23,402
2021
   17,837
2022
   13,565
2023
   10,165
Thereafter
   20,298


Total future minimum lease payments
   115,084

~~Guarantees~~

Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract terms. The contract terms are

year to 30

years in case of employees with housing loans, and

year to 7

years in case of affiliates and other companies with lease obligations and bank loans. The maximum amount of undiscounted payments Canon would have had to make in the event of default is ~~¥4,458~~¥

2,987

million at December 31, ~~2018.~~2019. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, ~~2018~~2019 were not significant.

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~19.~~

~~Commitments and Contingent Liabilities (continued)~~

~~Guarantees (continued)~~

Canon also ~~issues contractual product~~offers assurance-type warranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term. ~~Changes~~Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative

expenses in the accompanying consolidated statements of income. Estimates for accrued product warranty costs are based on historical experience. Accrued product warranty costs are included in accrued expenses in the accompanying consolidated balance sheets and the changes for the years ended December 31, ~~2018~~2019 and ~~2017~~2018 are summarized as follows:

   Years ended December 31
   2018 2017
   (Millions of yen)
Balance at beginning of year
   17,452 13,168
Additions
   18,870 18,893
Utilization
   (14,707 ) (12,957 )
Other
   (4,297 ) (1,652 )


Balance at end of year
   17,318 17,452

Years ended December 31

2019

2018

(Millions of yen)

Balance at beginning of year

17,318

17,452

Additions

15,945

18,870

Utilization

(14,488
)
(14,707
)
Other

(2,929
)
(4,297
)

Balance at end of year

15,846

17,318

Legal proceedings

Canon is involved in various claims and legal actions arising in the ordinary course of business. Canon has recorded provisions for liabilities when it is probable that liabilities have been incurred and the amount of loss can be reasonably estimated. Canon reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of the negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Based on its experience, although litigation is inherently unpredictable,

147

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

19.	Commitments and Contingent Liabilities (continued)

Legal proceedings (continued)

Canon believes that any damage amounts claimed in outstanding matters are not a meaningful indicator of Canon’s potential liability. In the opinion of management, any reasonably possible range of losses from outstanding matters would not have a material adverse effect on Canon’s consolidated financial position, results of operations, orand cash flows.

20.

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

Fair value of financial instruments

The estimated fair values of Canon’s financial instruments at December 31, ~~2018~~2019 and ~~2017~~2018 are set forth below. The following summary excludes cash and cash equivalents, trade receivables, finance receivables, noncurrent receivables, short-term loans, trade payables and accrued expenses, ~~for which~~and the fair values of these instruments approximate their carrying amounts. The summary also excludes investments and derivative instruments which are disclosed in Note 2 and Note 21, and Note ~~18,~~17, respectively.

   December 31
   2018 2017
   Carrying
amount Estimated
fair value Carrying
amount Estimated
fair value
   (Millions of yen)
Long-term debt, including current installments
   (364,602 ) (364,570 ) (499,168 ) (499,126 )


	December 31
	2019						2018
	Carrying amount			Estimated fair value			Carrying amount			Estimated fair value
	(Millions of yen)
Long-term debt, including current installments		(354,444	)		(354,444	)		(364,602	)		(364,570	)

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~20.~~

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

~~Fair value of financial instruments (continued)~~

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

Long-term debt

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

Limitations of fair value estimates

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

Concentrations of credit risk

At December 31, ~~2018~~2019 and ~~2017,~~2018, one customer accounted for approximately ~~12%~~

% and 8%

% of consolidated trade receivables, respectively. Although Canon does not expect that the customer will fail to meet its obligations, Canon is potentially exposed to concentrations of credit risk if the customer failed to perform according to the terms of the contracts.

21.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market

148

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

21.	Fair Value Measurements (continued)

participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is as follows:


~~Level 1~~	–
Level 1		–	Inputs are quoted prices in active markets for identical assets or liabilities.

~~Level 2~~	–
Level 2		–	Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

~~Level 3~~	–
Level 3		–	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable, which reflect the reporting entity’s own assumptions about the assumptions that market participants would use in establishing a price.

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

21.

Fair Value Measurements (continued)

Assets and liabilities measured at fair value on a recurring basis

The following tables present Canon’s assets and liabilities that are measured at fair value on a recurring basis consistent with the fair value hierarchy at December 31, ~~2018~~2019 and ~~2017.~~

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

Cash and cash equivalents
   —    70,500    —    70,500
Short-term investments:

Available-for-sale:

Corporate bonds
   630    —    —    630
Investments:

Available-for-sale:

Government bonds
   —    —    —    —
Corporate bonds
   —    —    —    —
Fund trusts and others
   630    408    —    1,038
Equity securities
   13,787    —    —    13,787
Prepaid expenses and other current assets:

Derivatives
   —    3,143    —    3,143








Total assets
   15,047    74,051    —    89,098








Liabilities:

Other current liabilities:

Derivatives
   —    766    —    766








Total liabilities
   —    766    —    766








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

Cash and cash equivalents
   —    70,500    —    70,500
Short-term investments:

Available-for-sale:

Corporate bonds
   1,222    —    —    1,222
Investments:

Available-for-sale:

Government bonds
   289    —    —    289
Corporate bonds
   605    217    —    822
Fund trusts
   13    111    —    124
Equity securities
   20,901    —    —    20,901
Prepaid expenses and other current assets:

Derivatives
   —    544    —    544








Total assets
   23,030    71,372    —    94,402








Liabilities:

Other current liabilities:

Derivatives
   —    3,259    —    3,259








Total liabilities
   —    3,259    —    3,259








2018.


	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(Millions of yen)
Assets:
Cash and cash equivalents		—		506		—		506
Investments:
Fund trusts and others		489		241		—		730
Equity securities		16,740		—		—		16,740
Prepaid expenses and other current assets:
Derivatives		—		351		—		351

Total assets		17,229		1,098		—		18,327

Liabilities:
Other current liabilities:
Derivatives		—		2,573		—		2,573

Total liabilities		—		2,573		—		2,573

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~21.~~

~~Fair Value Measurements (continued)~~

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


	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(Millions of yen)
Assets:
Cash and cash equivalents		—		70,500		—		70,500
Short-term investments:
Available-for-sale:
Corporate bonds		630		—		—		630
Investments:
Fund trusts and others		630		408		—		1,038
Equity securities		13,787		—		—		13,787
Prepaid expenses and other current assets:
Derivatives		—		3,143		—		3,143
Total assets		15,047		74,051		—		89,098
Liabilities:
Other current liabilities:
Derivatives		—		766		—		766
Total liabilities		—		766		—		766

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

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

21.	Fair Value Measurements (continued)

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

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

Assets and liabilities measured at fair value on a nonrecurring basis

There were no significant

assets or liabilities to be measured at fair value on a nonrecurring basis during the year ended December 31, ~~2018. The following table presents the Canon’s asset that was measured at fair value on a nonrecurring basis consistent with the fair value hierarchy~~2019 and ~~related impairment charge recognized during the year ended December 31, 2017.~~

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

Goodwill
   (33,912 ) —    —    29,370    29,370

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

2018.

22.

Segment Information

Canon operates its business in ~~four~~

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

Based on the realignment of Canon’s internal reporting and management structure, from the beginning of the ~~third~~first quarter of ~~2018,~~2019, Canon has reclassified certain businesses from ~~Office~~

the

Imaging System Business Unit to

the

Industry and Others Business

Unit. Segment information for the year ended December 31, ~~2018 have~~2019 has reflected ~~this change.~~these changes. Prior period amounts also have been restated. Canon newly established Medical System Business Unit effective at the beginning of the second quarter of 2017, and certain businesses included in Industry and Others Business Unit have been reclassified. Operating results for the year ended December 31, 2017 have been reclassified and for the year ended December 31, 2016 have not been restated since they have not been material. Total assets as of December 31, 2016 have been restated.

~~Canon Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~22.~~

~~Segment Information (continued)~~

The primary products included in each segment are as follows:


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

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

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

Industry and Others Business Unit:		Semiconductor lithography equipment / FPD (Flat panel display) lithography equipment/ Vacuum thin-film deposition equipment / Organic LED (OLED) panel manufacturing equipment / Die bonders / ~~Micromotors~~Network cameras / ~~Network~~Digital camcorders / Digital cinema cameras / Multimedia projectors / Broadcast equipment / Micromotors / Handy terminals / Document scanners

The accounting policies of the segments are substantially the same as those described in the significant accounting policies in Note 1. ~~While Canon previously disclosed operating profit as segment profit, Canon has newly adopted income before income taxes as segment profit for the year ended December 31, 2018. Due to the increase~~

Table of ~~other income (deductions) from the adoption of ASUNo. 2017-07,~~ Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Canon has changed its business performance measure. Please refer to Note 1 (w) for more detailed information about the change in the accounting standard.

Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

22.

Segment Information (continued)

Information about operating results and assets for each segment as of and for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 is as follows:

   Office    Imaging
System    Medical
System    Industry and
Others    Corporate and
eliminations Consolidated
   (Millions of yen)
2018:

Net sales:

External customers
   1,804,002    1,007,365    437,305    703,265    — 3,951,937
Intersegment
   3,299    800    273    101,946    (106,318 ) —










Total
   1,807,301    1,008,165    437,578    805,211    (106,318 ) 3,951,937
Operating cost and expenses
   1,586,497    891,210    408,739    739,665    (17,126 ) 3,608,985










Operating profit
   220,804    116,955    28,839    65,546    (89,192 ) 342,952
Other income (deductions)
   8,383    4,299    640    2,061    4,557 19,940










Income before income taxes
   229,187    121,254    29,479    67,607    (84,635 ) 362,892










Total assets
   923,261    393,004    247,282    383,568    2,952,350 4,899,465
Depreciation and amortization
   64,964    40,541    9,365    38,582    98,102 251,554
Capital expenditures
   48,127    25,796    7,454    24,091    95,036 200,504
2017:

Net sales:

External customers
   1,802,542    1,135,584    434,985    706,904    — 4,080,015
Intersegment
   2,240    604    1,202    85,946    (89,992 ) —










Total
   1,804,782    1,136,188    436,187    792,850    (89,992 ) 4,080,015
Operating cost and expenses
   1,615,521    962,663    414,246    752,122    13,858 3,758,410










Operating profit
   189,261    173,525    21,941    40,728    (103,850 ) 321,605
Other income (deductions)
   6,108    2,388    564    1,339    21,880 32,279










Income before income taxes
   195,369    175,913    22,505    42,067    (81,970 ) 353,884










Total assets
   946,213    387,088    238,824    376,064    3,250,102 5,198,291
Depreciation and amortization
   72,346    41,695    5,212    39,736    102,892 261,881
Impairment losses on goodwill
   21,721    —    —    12,191    — 33,912
Capital expenditures
   46,769    28,508    8,963    16,620    80,529 181,389
2016:

Net sales:

External customers
   1,743,039    1,094,291    —    564,157    — 3,401,487
Intersegment
   2,957    998    —    82,326    (86,281 ) —










Total
   1,745,996    1,095,289    —    646,483    (86,281 ) 3,401,487
Operating cost and expenses
   1,583,588    953,567    —    641,082    6,825 3,185,062










Operating profit
   162,408    141,722    —    5,401    (93,106 ) 216,425
Other income (deductions)
   7,467    2,691    —    1,658    16,410 28,226










Income before income taxes
   169,875    144,413    —    7,059    (76,696 ) 244,651










Total assets
   947,602    391,661    204,755    354,602    3,239,909 5,138,529
Depreciation and amortization
   76,500    47,386    —    42,872    83,338 250,096
Capital expenditures
   71,841    25,564    —    29,694    81,280 208,379


	Office		Imaging System		Medical System		Industry and Others		Corporate and eliminations			Consolidated
	(Millions of yen)
2019:
Net sales:
External customers		1,699,653		806,425		437,456		648,165		1,600			3,593,299
Intersegment		2,942		989		1,069		89,780		(94,780	)		—

Total		1,702,595		807,414		438,525		737,945		(93,180	)		3,593,299
Operating cost and expenses *		1,533,688		759,247		411,781		722,464		(8,548	)		3,418,632

Operating profit		168,907		48,167		26,744		15,481		(84,632	)		174,667
Other income (deductions)		5,390		1,499		539		82		13,563			21,073

Income before income taxes		174,297		49,666		27,283		15,563		(71,069	)		195,740

Total assets		863,381		313,141		273,525		424,911		2,893,393			4,768,351
Depreciation and amortization		58,373		35,805		11,760		41,420		89,969			237,327
Capital expenditures		51,623		24,016		7,074		33,515		95,000			211,228


2018:
Net sales:
External customers		1,804,002		969,660		437,305		740,970		—			3,951,937
Intersegment		3,299		775		273		101,971		(106,318	)		—

Total		1,807,301		970,435		437,578		842,941		(106,318	)		3,951,937
Operating cost and expenses		1,586,497		843,599		408,739		787,276		(17,126	)		3,608,985

Operating profit		220,804		126,836		28,839		55,665		(89,192	)		342,952
Other income (deductions)		8,383		4,179		640		2,181		4,557			19,940

Income before income taxes		229,187		131,015		29,479		57,846		(84,635	)		362,892

Total assets		923,261		371,944		247,282		404,628		2,952,350			4,899,465
Depreciation and amortization		64,964		38,054		9,365		41,069		98,102			251,554
Capital expenditures		48,127		25,712		7,454		24,175		95,036			200,504

2017:
Net sales:
External customers		1,802,542		1,098,525		434,985		743,963		—			4,080,015
Intersegment		2,240		600		1,202		85,950		(89,992	)		—

Total		1,804,782		1,099,125		436,187		829,913		(89,992	)		4,080,015
Operating cost and expenses		1,615,521		922,838		414,246		791,947		13,858			3,758,410

Operating profit		189,261		176,287		21,941		37,966		(103,850	)		321,605
Other income (deductions)		6,108		2,572		564		1,155		21,880			32,279

Income before income taxes		195,369		178,859		22,505		39,121		(81,970	)		353,884

Total assets		946,213		368,410		238,824		394,742		3,250,102			5,198,291
Depreciation and amortization		72,346		39,694		5,212		41,737		102,892			261,881
Impairment losses on goodwill		21,721		—		—		12,191		—			33,912
Capital expenditures		46,769		27,220		8,963		17,908		80,529			181,389

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

22.

Segment Information (continued)

*
During 2019, the Company implemented a restructuring plan centered in Europe with the goal of reorganizing sales structure and improving profitability mainly in
the
Office Business Unit. The employee severance charges in
the
Office Business Unit under the plan for the year ended December 31, 2019 were ¥15,621 million and most of the charges are included in selling, general and administrative expenses in the consolidated statement of income. The balance of the related employee severance liability as of December 31, 2019
is
¥10,225 million. The restructuring charges for the years ended December 31, 2018 and 2017 were not significant.

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

Information about sales by product to external customers for each segment for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 is as follows:

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

Monochrome copiers
   280,035    287,823    289,532
Color copiers
   403,522    405,576    386,193
Printers
   702,378    702,491    664,846
Others
   418,067    406,652    402,468






Total
   1,804,002    1,802,542    1,743,039
Imaging System

Cameras
   599,578    702,598    666,868
Inkjet printers
   318,382    333,721    329,066
Others
   89,405    99,265    98,357






Total
   1,007,365    1,135,584    1,094,291
Medical System

Diagnostic equipment
   437,305    434,985    —






Industry and Others

Lithography equipment
   199,722    193,113    121,090
Others
   503,543    513,791    443,067






Total
   703,265    706,904    564,157






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


	Years ended December 31
	2019		2018		2017
	(Millions of yen)
Office
Monochrome copiers		261,964		280,035		287,823
Color copiers		382,845		403,522		405,576
Printers		624,601		702,378		702,491
Others		430,243		418,067		406,652

Total		1,699,653		1,804,002		1,802,542
Imaging System
Cameras		466,306		594,567		702,598
Inkjet printers		285,821		318,382		333,721
Others		54,298		56,711		62,206

Total		806,425		969,660		1,098,525
Medical System
Diagnostic equipment		437,456		437,305		434,985

Industry and Others
Lithography equipment		157,160		199,722		193,113
Others		491,005		541,248		550,850
Total		648,165		740,970		743,963
Corporate		1,600		—		—
Consolidated		3,593,299		3,951,937		4,080,015

Table of Contents

Canon Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

22.

Segment Information (continued)

Information by major geographic area as of and for the years ended December

31, 2019, 2018 ~~2017~~ and ~~2016~~2017 is as follows:

   2018    2017    2016
   (Millions of yen)
Net sales:

Japan
   869,577    884,828    706,979
Americas
   1,076,402    1,107,515    963,544
Europe
   1,015,428    1,028,415    913,523
Asia and Oceania
   990,530    1,059,257    817,441






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






Long-lived assets:

Japan
   1,046,065    1,081,522    1,163,374
Americas
   129,989    141,937    147,129
Europe
   169,357    174,889    166,734
Asia and Oceania
   136,602    149,244    164,007






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


	2019		2018		2017
	(Millions of yen)
Net sales:
Japan		872,534		869,577		884,828
Americas		1,029,078		1,076,402		1,107,515
Europe		882,480		1,015,428		1,028,415
Asia and Oceania		809,207		990,530		1,059,257

Total		3,593,299		3,951,937		4,080,015

Long-lived assets:
Japan		1,053,074		1,046,065		1,081,522
Americas		148,669		129,989		141,937
Europe		191,050		169,357		174,889
Asia and Oceania		159,217		136,602		149,244

Total		1,552,010		1,482,013		1,547,592

Net sales are attributed to areas based on the location where the product is shipped and the service is performed to the customers. Other than in Japan and the United States, Canon does not conduct business in any individual country in which its sales in that country exceed 10% of consolidated net sales. Net sales in the United States were ~~¥995,245~~¥

958,442

million, ~~¥1,022,305~~¥

995,245

million and ~~¥884,083~~¥

1,022,305

million for the years ended December 31, 2019, 2018 and 2017, ~~and 2016,~~ respectively.

Long-lived

assets represent property, plant and

equipment, intangible assets, and ~~intangible~~operating lease

right-of-use

assets for each geographic area.

23.	Subsequent Event s

On January 17, 2020, Canon borrowed ¥100,000

million under its existing overdraft facilities with Mizuho Bank, Ltd. and MUFG Bank, Ltd. for required operating funds. Additionally, on March 19, 2020, Canon borrowed ¥50,000 million under its existing overdraft facilities with Mizuho Bank, Ltd. and MUFG Bank, Ltd. for required operating funds. The overdraft facilities bear interest at a rate equal to a base rate plus a spread.

On February 25, 2020, the Board of Directors of the Company approved and implemented a plan to repurchase up to 19.2 million shares of the Company’s common stock at a cost of up to ¥50,000 million for the period from February 26, 2020 to May 27, 2020. Such repurchases are intended to improve capital efficiency and ensure flexible capital strategy. Common stock repurchased in the Tokyo Stock Exchange between February 26, 2020 and March 6, 2020 under the aforementioned plan was 18,093,400 shares at a cost of ¥50,000 million.

Table of Contents

Canon Inc. and Subsidiaries

Schedule II Valuation and Qualifying Accounts

   Balance at
beginning
of period    Addition-
charged to
income    Deduction
bad debts
written off Translation
adjustments
and other Balance
at end of
period
   (Millions of yen)
Year ended December 31, 2018:

Allowance for doubtful receivables

Trade receivables
   13,378    1,347    (2,789 ) (459 ) 11,477
Finance receivables
   2,681    938    (1,284 ) 340 2,675
Year ended December 31, 2017:

Allowance for doubtful receivables

Trade receivables
   11,075    3,574    (1,787 ) 516 13,378
Finance receivables
   2,325    1,436    (1,523 ) 443 2,681
Year ended December 31, 2016:

Allowance for doubtful receivables

Trade receivables
   12,077    1,460    (1,824 ) (638 ) 11,075
Finance receivables
   2,878    398    (978 ) 27 2,325


	Balance at beginning of period		Addition- charged to income		Deduction bad debts written off			Translation adjustments and other			Balance at end of period
	(Millions of yen)
Year ended December 31, 2019:
Allowance for doubtful receivables
Trade receivables		11,477		1,840		(2,189	)		(769	)		10,359
Finance receivables		2,675		1,495		(1,653	)		110			2,627
Year ended December 31, 2018:
Allowance for doubtful receivables
Trade receivables		13,378		1,347		(2,789	)		(459	)		11,477
Finance receivables		2,681		938		(1,284	)		340			2,675
Year ended December 31, 2017:
Allowance for doubtful receivables
Trade receivables		11,075		3,574		(1,787	)		516			13,378
Finance receivables		2,325		1,436		(1,523	)		443			2,681

15
5

Table of Contents

Item 19. Exhibits

List of exhibits


~~1.1~~
	1.1			Articles of Incorporation of Canon Inc. (Translation), incorporated by reference from the annual report on Form20-F (Commission file number001-15122) filed on March 30, 2016

~~1.2~~
	1.2			Regulations of the Board of Directors of Canon Inc. (Translation), incorporated by reference from the annual report on Form20-F (Commission file number001-15122) filed on March 30, 2016

2
	2.1			Regulations for Handling of Shares of Canon Inc. (Translation), incorporated by reference from the annual report on Form20-F (Commission file number001-15122) filed on March 27, 2009

8
	2.2			Description of our Common Stock incorporated by reference from “Item 10.B. Memorandum and Articles of Incorporation” of this annual report

	2.3			Description of our American Depositary Shares represented by American Depositary Receipts (“ADRs”)

	8			List of Significant Subsidiaries (See “Organizational Structure” in Item 4.C. of thisForm 20-F)

~~11.1~~
	11.1			Canon Group Code of Conduct (Translation), incorporated by reference from the annual report on Form20-F (Commission file number001-15122) filed on March 28, 2013

~~11.2~~
	11.2			Code of Ethics (Supplement to The Canon Group Code of Conduct) (Translation), incorporated by reference from the annual report on Form20-F (Commission file number 001-15122) filed on June 10, 2004

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

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

~~101~~		~~INSTANCE DOCUMENT~~

~~101~~		~~SCHEMA DOCUMENT~~

~~101~~ 15		~~CALCULATION LINKBASE DOCUMENT~~	Letter of Ernst & Young ShinNihon LLC to the SEC pursuant to Item 16F of Form 20-F

~~101~~		~~LABELS LINKBASE DOCUMENT~~

~~101~~		~~PRESENTATION LINKBASE DOCUMENT~~

~~101~~ 101.INS		~~DEFINITION LINKBASE DOCUMENT~~	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

	101.SCH			Inline XBRL Taxonomy Extension Schema Document

	101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document

	101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document

	104			The cover page for the Company’s Annual Report on From 20-F for the year ended December 31, 2019, has been formatted in Inline XBRL

156

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the registrant certifies that it meets all of the requirements for filing on Form

20-F

and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

CANON INC.

(Registrant)

/s/ Toshizo Tanaka

Toshizo Tanaka

Executive Vice President & CFO

Canon Inc.

30-2,

Shimomaruko

3-chome,

Ohta-ku,

Tokyo

146-8501,

Japan

Date March ~~28, 2019~~

~~151~~

27, 2020

157


Selected financial data 13:	2018		2017		2016		2015		2014
	(Millions of yen, except average number of shares and per share data)
Net sales	¥	3,951,937	¥	4,080,015	¥	3,401,487	¥	3,800,271	¥	3,727,252
Operating profit		342,952		321,605		216,425		343,858		345,750
Income before income taxes		362,892		353,884		244,651		347,438		383,239
Net income attributable to Canon Inc.		252,755		241,923		150,650		220,209		254,797
Advertising expenses		58,729		61,207		58,707		80,907		79,765
Research and development expenses		315,842		333,371		306,537		332,678		311,896
Depreciation of property, plant and equipment		175,771		189,712		199,133		223,759		213,739
Increase in property, plant and equipment		159,316		147,542		171,597		195,120		182,343
Long-term debt, excluding current installments		361,962		493,238		611,289		881		1,148
Common stock		174,762		174,762		174,762		174,762		174,762
Canon Inc. shareholders’ equity		2,827,602		2,870,630		2,783,129		2,966,415		2,978,184
Total assets		4,899,465		5,198,291		5,138,529		4,427,773		4,460,618

Average number of common shares in thousands		1,079,753		1,085,439		1,092,071		1,092,018		1,112,510

Per share data:
Net income attributable to Canon Inc. shareholders per share:
Basic	¥	234.09	¥	222.88	¥	137.95	¥	201.65	¥	229.03
Diluted		234.08		222.88		137.95		201.65		229.03
Cash dividends declared		160.00		160.00		150.00		150.00		150.00
Cash dividends declared (U.S.$)*2	$	1.440	$	1.483	$	1.393	$	1.290	$	1.326


Name of company	Head office location	Proportion of ownership interest owned		Proportion of voting power held
Canon Marketing Japan Inc.	Tokyo, Japan		50.1%		58.5%
Canon U.S.A., Inc.	New York, U.S.A.		100.0%		100.0%
Canon Europa N.V.	Amstelveen, The Netherlands		100.0%		100.0%
Canon Medical Systems Corporation	Tochigi, Japan		100.0%		100.0%


Name of major shareholder	Shares owned		Percentage
			Number of shares owned / Number of shares issued
The Master Trust Bank of Japan, Ltd. (Trust Account)		92,066,100		8.5	%
Japan Trustee Services Bank, Ltd. (Trust Account)		54,304,900		5.0	%
TheDai-ichi Life Insurance Company, Limited		28,685,980		2.7	%
Barclays Securities Japan Limited		26,000,000		2.4	%
Mizuho Bank, Ltd.		22,558,173		2.1	%
Japan Trustee Services Bank, Ltd. (Trust Account 5)		21,122,600		2.0	%
State Street Bank West Client—Treaty 505234		20,700,178		1.9	%
OBAYASHI CORPORATION		16,527,607		1.5	%
Moxley and Co. LLC		16,460,829		1.5	%
JPMorgan Chase Bank, N.A. 385151		15,603,560		1.4	%


	Year ended December 31, 2018		Year ended December 31, 2017
	(Millions of yen)
Audit fees		3,073		3,028
Audit-related fees		19		27
Tax fees		103		119
All other fees		9		10

Total		3,204		3,184


	Common stock		Additional paid-in capital		Legal reserve		Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total Canon Inc. shareholders’ equity			Non- controlling interests			Total equity
	(Millions of yen)
Balance at December 31, 2015		174,762		401,358		65,289		3,365,158			(29,742	)		(1,010,410	)		2,966,415			218,048			3,184,463
Equity transactions with noncontrolling interests and other				27							258						285			(5,270	)		(4,985	)
Dividends to Canon Inc. shareholders								(163,810	)								(163,810	)					(163,810	)
Dividends to noncontrolling interests																				(4,077	)		(4,077	)
Acquisition of subsidiaries																				1,047			1,047
Transfer to legal reserve						1,269		(1,269	)								—						—
Comprehensive income:
Net income								150,650									150,650			11,320			161,970
Other comprehensive income (loss), net of tax(Note 14):
Foreign currency translation adjustments											(101,257	)					(101,257	)		(6,409	)		(107,666	)
Net unrealized gains and losses on securities											1,196						1,196			(199	)		997
Net gains and losses on derivative instruments											(2,924	)					(2,924	)		(24	)		(2,948	)
Pension liability adjustments											(67,412	)					(67,412	)		(2,943	)		(70,355	)

Total comprehensive income (loss)																	(19,747	)		1,745			(18,002	)

Repurchases and reissuance of treasury stock								(1	)					(13	)		(14	)					(14	)

Balance at December 31, 2016		174,762		401,385		66,558		3,350,728			(199,881	)		(1,010,423	)		2,783,129			211,493			2,994,622
Equity transactions with noncontrolling interests and other				1													1			(1	)		—
Dividends to Canon Inc. shareholders								(162,887	)								(162,887	)					(162,887	)
Dividends to noncontrolling interests																				(4,814	)		(4,814	)
Acquisition of subsidiaries																				60			60
Transfer to legal reserve						321		(321	)								—						—
Comprehensive income:
Net income								241,923									241,923			13,937			255,860
Other comprehensive income (loss), net of tax(Note 14):
Foreign currency translation adjustments											44,168						44,168			2,922			47,090
Net unrealized gains and losses on securities											(9,767	)					(9,767	)		405			(9,362	)
Net gains and losses on derivative instruments											2,562						2,562			26			2,588
Pension liability adjustments											19,690						19,690			1,517			21,207

Total comprehensive income (loss)																	298,576			18,807			317,383

Repurchases of treasury stock														(50,036	)		(50,036	)					(50,036	)
Reissuance of treasury stock								(131	)					1,978			1,847						1,847

Balance at December 31, 2017		174,762		401,386		66,879		3,429,312			(143,228	)		(1,058,481	)		2,870,630			225,545			3,096,175


	December 31, 2018
	Cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
	(Millions of yen)
Current:
Corporate bonds		630		—		—		630

		630		—		—		630


	December 31, 2017
	Cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
	(Millions of yen)
Current:
Corporate bonds		1,222		—		—		1,222

		1,222		—		—		1,222

Noncurrent:
Government bonds		305		—		16		289
Corporate bonds		640		182		—		822
Fund trusts*		122		2		—		124
Equity securities*		10,965		11,612		1,676		20,901

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


	Financing leases		Operating leases
	(Millions of yen)
Year ending December 31:
2019		127,068		9,207
2020		98,772		6,409
2021		66,719		2,917
2022		37,181		1,202
2023		14,792		317
Thereafter		6,666		60

		351,198		20,112


	Preliminary		Measurement Period Adjustment			Final
	(Millions of yen)
Cash and cash equivalents		25,301		—			25,301
Other current assets		169,545		(1,962	)		167,583
Intangible assets		227,500		627			228,127
Other noncurrent assets		42,975		—			42,975

Total assets acquired		465,321		(1,335	)		463,986

Current liabilities		199,223		(877	)		198,346
Noncurrent liabilities		92,231		(1,049	)		91,182

Total liabilities assumed		291,454		(1,926	)		289,528

Noncontrolling interest		1,047		—			1,047

Net identifiable assets acquired		172,820		591			173,411

Goodwill		492,678		(591	)		492,087

Net assets acquired		665,498		—			665,498


	Year ended December 31, 2016
	Japanese		Foreign		Total
	(Millions of yen)
Income before income taxes		135,131		109,520		244,651

Income taxes:
Current		47,687		27,806		75,493
Deferred		4,126		3,062		7,188

		51,813		30,868		82,681


	Years ended December 31
	Before-tax amount			Tax (expense) or benefit			Net-of-tax amount
	(Millions of yen)
2018:
Foreign currency translation adjustments
Amount arising during the year		(93,955	)		809			(93,146	)
Reclassification adjustments for gains and losses realized in net income		—			—			—

Net change during the year		(93,955	)		809			(93,146	)
Net unrealized gains and losses on securities:
Amount arising during the year		—			—			—
Reclassification adjustments for gains and losses realized in net income		(178	)		37			(141	)

Net change during the year		(178	)		37			(141	)
Net gains and losses on derivative instruments:
Amount arising during the year		(586	)		125			(461	)
Reclassification adjustments for gains and losses realized in net income		1,341			(392	)		949

Net change during the year		755			(267	)		488
Pension liability adjustments:
Amount arising during the year		(51,789	)		18,065			(33,724	)
Reclassification adjustments for gains and losses realized in net income		3,853			(699	)		3,154

Net change during the year		(47,936	)		17,366			(30,570	)

Other comprehensive income (loss)		(141,314	)		17,945			(123,369	)

2017:
Foreign currency translation adjustments
Amount arising during the year		47,825			(708	)		47,117
Reclassification adjustments for gains and losses realized in net income		(39	)		12			(27	)

Net change during the year		47,786			(696	)		47,090
Net unrealized gains and losses on securities:
Amount arising during the year		5,100			(1,717	)		3,383
Reclassification adjustments for gains and losses realized in net income		(18,472	)		5,727			(12,745	)

Net change during the year		(13,372	)		4,010			(9,362	)
Net gains and losses on derivative instruments:
Amount arising during the year		(2,080	)		628			(1,452	)
Reclassification adjustments for gains and losses realized in net income		5,772			(1,732	)		4,040

Net change during the year		3,692			(1,104	)		2,588
Pension liability adjustments:
Amount arising during the year		20,991			(4,957	)		16,034
Reclassification adjustments for gains and losses realized in net income		7,005			(1,832	)		5,173

Net change during the year		27,996			(6,789	)		21,207

Other comprehensive income (loss)		66,102			(4,579	)		61,523


	December 31, 2018
	As Reported		Balance under historical accounting policy		Effect of Change
	(Millions of yen)
Assets
Trade receivables, net		612,953		657,419		(44,466	)
Inventories		611,281		614,243		(2,962	)
Prepaid expenses and other current assets		304,346		253,547		50,799

Other assets		397,974		397,949		25

Total assets		4,899,465		4,896,069		3,396

Liabilities and equity
Accrued expenses		321,137		319,416		1,721
Other current liabilities		276,237		274,741		1,496

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

Retained earnings		3,508,908		3,508,704		204
Noncontrolling interests		190,311		190,336		(25	)

Total equity		3,017,913		3,017,734		179


	For the year ended December 31, 2018
	As Reported		Amount under historical accounting policy		Effect of Change
	(Millions of yen)
Net sales
Products and Equipment		3,194,724		3,383,566		(188,842	)
Services		757,213		567,582		189,631

		3,951,937		3,951,148		789
Cost of sales
Products and Equipment		1,762,171		1,783,798		(21,627	)
Services		354,212		216,513		137,699

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

Gross profit		1,835,554		1,950,837		(115,283	)
Selling, general and administrative expenses		1,176,760		1,292,460		(115,700	)

Operating profit		342,952		342,535		417
Income before income taxes		362,892		362,475		417

Income taxes		96,150		96,094		56

Consolidated net income		266,742		266,381		361

Less: Net income attributable to noncontrolling interests		13,987		13,936		51

Net income attributable to Canon Inc.		252,755		252,445		310


	Shares			Weighted-average exercise price		Weighted-average remaining contractual term		Aggregate intrinsic value
				(Yen)		(Year)		(Millions of yen)
Outstanding at January 1, 2016		1,296,000			4,263		0.4		—
Exercised		—			—
Forfeited/Expired		(693,000	)		4,500

Outstanding at December 31, 2016		603,000			3,990		0.2		—
Exercised		—			—
Forfeited/Expired		(603,000	)		3,990

Outstanding at December 31, 2017		—			—				—
Granted		74,000			1
Exercised		—			—
Forfeited/Expired		—			—

Outstanding at December 31, 2018		74,000			1		29.3		222

Exercisable at December 31, 2018		74,000			1		29.3		222


	( Millions of yen )
Year ending December 31:
2020		34,317
2021		26,094
2022		18,924
2023		13,950
2024		10,280
Thereafter		19,108
Total future minimum lease payments		122,673
Less Imputed Interest		(7,101	)
		115,572


	December 31, 2019
Weighted-average remaining lease term		62 months

Weighted-average discount rate		2.2	%


	Office		Imaging System		Medical System		Industry and Others		Corporate and eliminations			Consolidated
	(Millions of yen)
2018:
Net sales:
External customers		1,804,002		1,007,365		437,305		703,265		—			3,951,937
Intersegment		3,299		800		273		101,946		(106,318	)		—

Total		1,807,301		1,008,165		437,578		805,211		(106,318	)		3,951,937
Operating cost and expenses		1,586,497		891,210		408,739		739,665		(17,126	)		3,608,985

Operating profit		220,804		116,955		28,839		65,546		(89,192	)		342,952
Other income (deductions)		8,383		4,299		640		2,061		4,557			19,940

Income before income taxes		229,187		121,254		29,479		67,607		(84,635	)		362,892

Total assets		923,261		393,004		247,282		383,568		2,952,350			4,899,465
Depreciation and amortization		64,964		40,541		9,365		38,582		98,102			251,554
Capital expenditures		48,127		25,796		7,454		24,091		95,036			200,504

2017:
Net sales:
External customers		1,802,542		1,135,584		434,985		706,904		—			4,080,015
Intersegment		2,240		604		1,202		85,946		(89,992	)		—

Total		1,804,782		1,136,188		436,187		792,850		(89,992	)		4,080,015
Operating cost and expenses		1,615,521		962,663		414,246		752,122		13,858			3,758,410

Operating profit		189,261		173,525		21,941		40,728		(103,850	)		321,605
Other income (deductions)		6,108		2,388		564		1,339		21,880			32,279

Income before income taxes		195,369		175,913		22,505		42,067		(81,970	)		353,884

Total assets		946,213		387,088		238,824		376,064		3,250,102			5,198,291
Depreciation and amortization		72,346		41,695		5,212		39,736		102,892			261,881
Impairment losses on goodwill		21,721		—		—		12,191		—			33,912
Capital expenditures		46,769		28,508		8,963		16,620		80,529			181,389

2016:
Net sales:
External customers		1,743,039		1,094,291		—		564,157		—			3,401,487
Intersegment		2,957		998		—		82,326		(86,281	)		—

Total		1,745,996		1,095,289		—		646,483		(86,281	)		3,401,487
Operating cost and expenses		1,583,588		953,567		—		641,082		6,825			3,185,062

Operating profit		162,408		141,722		—		5,401		(93,106	)		216,425
Other income (deductions)		7,467		2,691		—		1,658		16,410			28,226

Income before income taxes		169,875		144,413		—		7,059		(76,696	)		244,651

Total assets		947,602		391,661		204,755		354,602		3,239,909			5,138,529
Depreciation and amortization		76,500		47,386		—		42,872		83,338			250,096
Capital expenditures		71,841		25,564		—		29,694		81,280			208,379

~~Page number~~

Debt securities

Warrants and rights

Other securities

American Depositary Shares