CAJFF Canon Inc (PK)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

*Print the name and title of the signing officer under his signature.

The following materials are included.

[English summary with full translation of consolidated financial information]

Quarterly Report filed with the Japanese government

pursuant to

the Financial Instruments and Exchange Law of Japan

For the first quarter ended

March 31, 2020

CANON INC.

Tokyo, Japan

CONTENTS

Disclaimer Regarding Forward-Looking Statements

This quarterly report includes forward-looking statements (within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934) concerning Canon Inc. (the “Company”) and its subsidiaries (collectively “Canon”). To the extent that statements in this quarterly report do not relate to historical or current facts, they constitute forward-looking statements. These forward-looking statements are based on the current assumptions and beliefs of Canon in light of the information currently available to them, and involve known and unknown risks, uncertainties and other factors. Such risks, uncertainties and other factors may cause Canon’s actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements. Canon undertakes no obligation to publicly update any forward-looking statements after the date of this quarterly report. Investors are advised to consult any further disclosures by Canon in its subsequent filings with the U.S. Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and its other filings.

The risks, uncertainties and other factors referred to above include, but are not limited to, foreign currency exchange rate fluctuations; the uncertainty of Canon’s ability to implement its plans to localize production and other measures to reduce the impact of foreign currency exchange rate fluctuations; uncertainty as to economic conditions in Canon’s major markets; uncertainty of continued demand for Canon’s high-value-added products; Canon’s ability to continue to develop products and to market products that incorporate new technology on a timely basis, are competitively priced, and achieve market acceptance; the possibility of losses resulting from foreign currency transactions designed to reduce financial risks from changes in foreign currency exchange rates; disasters, outages or similar events; and inventory risk due to disruptions in supply chains and shifts in market demand.

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Notes:

Canon prepares quarterly consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Financial information presented in sections “II. The Business” is also in conformity with U.S. GAAP.

The Canon Group (consisting of the Company, 354 consolidated subsidiaries, and 8 affiliates accounted for using the equity method, as of March 31, 2020, collectively, the “Group”) is engaged in development, manufacturing, sales, and servicing activities in areas such as office, imaging systems, medical systems, and industrial equipment. No material change in Canon’s business has occurred during the three months ended March 31, 2020.

No additions or removals of significant group entities have occurred during the three months ended March 31, 2020.

2

No material changes are recognized pursuant to the risk factors of Canon’s business indicated in the Annual Securities Report (Yukashoken Houkokusho) of the previous fiscal year.

Operating Results

Looking at the global economy in the first quarter of 2020, the global economy rapidly declined due to limited economic activity caused by the coronavirus disease (“COVID-19”) global pandemic. The U.S. economy remained on a path of modest growth until February, thanks to the strong employment situation. It rapidly declined, however, from the beginning of March due to a drop in consumption caused by restrictions on people’s movement. The European economy, which showed signs of recovery in manufacturing sectors from the beginning of 2020 also fell significantly due to a rapid slowdown in consumption caused by, among others, the lockdown of major cities from March. The Chinese economy experienced a drop in domestic demand, mainly due to factory shutdowns and travel restrictions from January. Despite a gradual restart of economic activity from March, however, the Chinese economy saw a significant drop in its rate of growth. Even in other emerging markets, economic activity stagnated due to spread of the infection and drops in resource prices. As for Japan, in addition to sluggish consumption from the fourth quarter of last year due to a hike in the consumption tax rate, the impact of exercising self-restraint with regard to going out since March caused the economic slowdown to worsen.

Amid these conditions, in the markets in which Canon operates, demand for both color and monochrome office multifunction devices (MFDs) declined. As for laser printers, demand also declined, particularly for monochrome models. The camera market declined at an accelerated rate, reflecting the market’s ongoing contraction so far and the impact of COVID-19. As for inkjet printers, although the market continued to shrink, demand did increase in some regions due to remote working and learning. For medical equipment, although sales of equipment in the diagnosis of pneumonia and other infections increased, overall sales were impacted not only by the cancelation of academic conferences and trade show in and outside of Japan, but also by suppressed access to medical institutions. While manufacturers also continued to restrain capital investment in the industrial equipment market, demand for network cameras continued to expand.

The average value of the yen in the first quarter was ¥108.96 against the U.S. dollar, a year-on-year appreciation of approximately ¥1, and ¥120.11 against the euro, a year-on-year appreciation of approximately ¥5.

3

As for the first quarter, although sales of office MFDs were sluggish, the market for the production printing business remained solid. As for laser printers, despite expanding sales of new models, overall unit sales were below those of last year in the same period, due to the impact that COVID-19 had on production. Although top share of the interchangeable-lens digital camera market was maintained, unit sales were below those of last year in the same period, due to market contraction and the impact that COVID-19 had on production. As for inkjet printers, unit sales were above those of last year in the same period thanks to a rise in demand linked to remote working and learning in developed countries and China. As for medical equipment, although efforts were made to expand sales based on a series of new products introduced so far, because of delays in equipment installation at medical institutions that are our customers and also limited sales & marketing activities due to COVID-19, overall sales were below those of last year in the same period. In industrial equipment, lithography equipment sales were below those of last year in the same period, despite solid capital investment for image sensors supporting the development of the IoT (Internet of Things), due to the ongoing phase of capital investment adjustment towards memory devices and small- and medium-size panels. Conversely, sales of network cameras increased as they are deployed in a wider range of applications. Under these conditions, first-quarter net sales decreased by 9.5% year-on-year to ¥782.3 billion. Gross profit as a percentage of net sales rose by 0.6 points to 45.8%. Operating expenses decreased by 6.9% year-on-year to ¥325.8 billion, thanks to improved productivity and the further promotion of selection and focus for expenses as well as effects of foreign currency fluctuation. As a result, operating profit decreased by 18.7% to ¥32.9 billion. Other income (deductions) decreased by ¥4.1 billion, mainly due to valuation losses on securities compared with the previous year, while income before income taxes decreased by 25.2% year-on-year to ¥34.5 billion and net income attributable to Canon Inc. decreased by 30.0% to ¥21.9 billion.

Basic net income attributable to Canon Inc. shareholders per share was ¥20.69 for the quarter, a year-on-year decrease of ¥8.31.

4

Looking at Canon’s first-quarter performance by business unit, in the Office Business Unit, unit sales of office MFDs were below those of last year in the same period due to delays in business negotiations and equipment installations. It also reflected the impact of office closures due to the spread of COVID-19. Conversely, in the production printing market, unit sales grew thanks to the imagePRESS C165, a new model that has been well received by the market for its ability to provide high-speed and high-volume printing in a compact form factor. As for laser printers, unit sales were below those of last year in the same period, despite being led by new products that pursue not only low-energy consumption and compact form factors, but also high productivity. This also reflected a decline in sales of low-speed models in China due to the ongoing economic slowdown as well as the impact that COVID-19 had on production. Sales of consumables also declined, reflecting impact from the global economic slowdown. These factors resulted in total sales for the business unit of ¥397.6 billion, a year-on-year decrease of 9.4%, while income before income taxes increased by 2.4% year-on-year to ¥47.3 billion thanks to cost reduction.

As for the Imaging System Business Unit, unit sales of interchangeable-lens digital cameras were below those of last year in the same period. This reflected contraction of the Japanese market after the consumption tax hike and the impact of COVID-19 on Canon’s supply chain and marketing activities in each country. As for inkjet printers, unit sales in emerging market were below those of last year in the same period due to the impact of economic slowdown. In developed countries and China, however, sales grew due to expanding demand resulting from remote working and learning. As a result, overall unit sales were above those of last year in the same period. Consequently, sales for the business unit decreased by 13.9% year-on-year to ¥151.7 billion, while income before income taxes decreased by 81.6% year-on-year to ¥0.9 billion.

As for the Medical System Business Unit, although sales of Diagnostic X-ray systems and related components grew, there were fewer opportunities to hold business discussion with customers owing to the cancelation of academic conferences and trade shows due to COVID-19. Additionally, sales were hindered as, particularly in Europe and the U.S., entry restrictions were tightened from the beginning of March, delays in equipment installation at medical institutions were caused and sales & marketing activities were limited. Consequently, sales for the business unit decreased by 3.0% year-on-year to ¥106.1 billion, while income before income taxes decreased by 36.8% year-on-year to ¥4.1 billion.

As for the Industry & Others Business Unit, as for semiconductor equipment, although capital investment towards memory devices remained in a phase of adjustment, capital investment towards IoT related image sensors remained solid. As a result, unit sales were above those of last year in the same period. As for FPD (Flat Panel Display) lithography equipment, manufacturers continued to hold back capital investment towards small- and medium-size panels due to sluggish demand for smartphones. At the same time, the installation of some FPD lithography equipment for large-size panels was postponed due to the impact of COVID-19. As a result, unit sales were below those of last year in the same period. On the other hand, as for network cameras, 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 9.8% year-on-year to ¥147.1 billion, while income before income taxes decreased by 28.4% year-on-year to ¥4.1 billion.

Financial Conditions

Total assets decreased by ¥91.1 billion to ¥4,677.3 billion at March 31, 2020, compared to the end of previous year, mainly due to the decrease of trade receivables, net. Total liabilities increased by ¥79.9 billion to ¥1,956.3 billion at March 31, 2020, compared to the end of previous year, mainly due to the increase of short-term loans and current portion of long-term debt. Total equity decreased by ¥171.0 billion to ¥2,720.9 billion at March 31, 2020, compared to the end of previous year, mainly due to dividends to Canon Inc. shareholders, share repurchases and the increase of accumulated other comprehensive loss resulting from the appreciation of the yen.

5

Cash Flows

During the first quarter of 2020, cash flow from operating activities totaled ¥63.3 billion, an increase of ¥2.5 billion compared with the same period of the previous year, owing to improvements in working capital, despite a decrease in profit. Cash flow used in investing activities decreased by ¥8.0 billion year-on-year to ¥43.6 billion mainly due to a decrease of investment in production equipment. Accordingly, free cash flow totaled positive ¥19.7 billion, an increase of ¥10.5 billion compared with the corresponding year-ago period.

As for cash flow from financing activities, despite cash outlays for dividend payments and share repurchases, proceeds of ¥13.6 billion was recorded, mainly due to an increase in short-term loans.

Owing to these factors, as well as the impact from foreign currency translation adjustments, cash and cash equivalents increased by ¥27.1 billion to ¥439.9 billion from the end of the previous year.

Non-GAAP Financial Measures

We have reported our financial results in accordance with U.S. GAAP. In addition, we have discussed our results using “free cash flow,” which is a non-GAAP measure.

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

A reconciliation of this non-GAAP financial measure and the most directly comparable measures calculated and presented in accordance with U.S. GAAP are set forth on the following table.

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Management Issues to be Addressed

No material changes or issues with respect to business operations and finances have occurred during the three months ended March 31, 2020

Research and Development Expenses

Canon’s research and development expenses for the three months ended March 31, 2020 totaled ¥67.9 billion.

Property, Plant and Equipment

There were no significant changes to the status of existing major property, plant and equipment during the first three months of 2020.

There were no significant new constructions of property, plant and equipment, which were in progress as of December 31, 2019 and were completed during the three months ended March 31, 2020.

There were no significant changes in the plans relevant to the retirement of property, plant and equipment during the three months ended March 31, 2020. Moreover, there were no significant additional plans for new construction or retirement of property, plant and equipment during the three months ended March 31, 2020.

No material contracts were entered into during the three months ended March 31, 2020.

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Total number of authorized shares is 3,000,000,000 shares. The common stock of Canon is listed on the Tokyo, Nagoya, Fukuoka, Sapporo and New York Stock Exchanges. Total issued shares are as follows:

Stock Acquisition Rights

The descriptions of the stock option plans as of March 31, 2020 are below.

The Stock Option Plan Approved on February 13, 2020

1. Grantees of share options

The Company’s one executive officer.

2. Number of share options

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

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

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

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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. 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 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:

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.

(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.

(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 Reorganized Company and the Holder, based on the resolution of the Board of Directors’ meeting of the Reorganized Company.

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

If a proposal for the approval of a merger agreement under which the Reorganized 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 Reorganized Company will become a wholly owned subsidiary is approved by the shareholders of the Reorganized Company 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 Reorganized Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.

Not applicable.

10

Exercise status of bonds with share subscription rights containing an adjustable exercise price clause

Not applicable.

Change in Issued Shares, Common Stock and Additional Paid in Capital

Not applicable.

11

Note:

In “Fractional unit shares” under “Number of shares,” 93 shares of treasury stock are included.

There were no changes in members of the board of directors and Audit and Supervisory, and their functions between the filing date of the Annual Securities Report (Yukashoken Houkokusho) for the fiscal year ended December 31, 2019 and the end of this quarter.

There were no changes in members of executive officers and their functions between the filing date of the Annual Securities Report (Yukashoken Houkokusho) for the fiscal year ended December 31, 2019 and the end of this quarter.

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Index of Consolidated Financial Statements of Canon Inc. and Subsidiaries:

13

14

15

16

17

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Recently adopted accounting guidance

In June 2016, the Financial Accounting Standards Board 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 results in earlier recognition of losses than under the incurred loss approach, which requires waiting to recognize a loss until it is probable of being incurred. Canon adopted the guidance from the quarter beginning January 1, 2020 with the modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period. The adoption of this guidance did not have a material impact on its consolidated results of operation and financial condition.

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

The unrealized and realized gains and losses related to equity securities for the three months ended March 31, 2020 and 2019 are as follows:

The carrying amount of non-marketable equity securities without readily determinable fair value totaled ¥8,558 million and ¥8,448 million at March 31, 2020 and December 31, 2019, respectively. The impairment or other adjustments resulting from observable price changes recorded during the three months ended March 31, 2020 and 2019 were not significant.

There were no available-for-sale debt securities at March 31, 2020 and December 31, 2019.

Time deposits with original maturities of more than three months are ¥1,980 million and ¥1,767 million at March 31, 2020 and December 31, 2019, respectively, and are included in short-term investments in the accompanying consolidated balance sheets.

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Trade receivables are summarized as follows:

Inventories are summarized as follows:

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

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

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Notes to Consolidated Financial Statements (continued)

Lease income is included in Products and Equipment sales in the accompanying consolidated statement of income. Supplemental income statement information is as follows:

Allowance for credit Losses

Finance receivables represent financing leases, which consist of sales-type leases and direct financing leases resulting from the sales of Canon’s and complementary third-party products. These receivables typically have terms ranging from 1 year to 7 years. Finance receivables are ¥333,566 million and ¥340,533 million at March 31, 2020 and December 31, 2019, respectively.

The activities in the allowance for credit losses are as follows:

Canon has policies in place to ensure that its products are sold to customers with an appropriate credit history, and continuously monitors its customers’ credit quality based on information including length of period in arrears, macroeconomic conditions, initiation of legal proceedings against customers and bankruptcy filings. The allowance for credit losses of finance receivables are evaluated collectively based on historical experience of credit losses. An additional reserve for individual accounts is recorded when Canon becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings. Finance receivables which are past due or individually evaluated for impairment at March 31, 2020 and December 31, 2019 are not significant.

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Information about transferring finance receivables

Canon has syndication arrangements to sell its entire interests in finance receivables to the third-party financial institutions. The transactions under the arrangements are accounted for as sales in accordance with ASC 860 “Transfers and Servicing.” There were no significant transfers of finance receivables for the three months ended March 31, 2020 and 2019. The amount remained uncollected were ¥25,930 million and ¥28,616 million at March 31, 2020 and December 31, 2019, respectively. Cash proceeds from the transactions 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 institutions. The amount associated with the servicing liability measured at fair value was not material at March 31, 2020 and December 31, 2019, respectively. Canon also retains limited recourse obligations which cover credit defaults. The recourse obligation was not material at March 31, 2020 and December 31, 2019, respectively.

Trade payables are summarized as follows:

Short-term loans consisting of bank borrowings at March 31, 2020 and December 31, 2019 were ¥191,371 million and ¥40,800 million, respectively.

Canon has revolving credit facilities expiring in December 2021. The outstanding loans under the credit facilities are ¥354,000 million at a floating interest of 0.09% and Canon has no unused credit facilities as of March 31, 2020.

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

The change in the carrying amount of total equity, equity attributable to Canon Inc. shareholders and equity attributable to noncontrolling interests in the consolidated balance sheets for the three months ended March 31, 2020 and 2019 are as follows:

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019 are as follows:

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019 are as follows:

*1 Amounts in parentheses indicate gains in consolidated statements of income.

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Notes to Consolidated Financial Statements (continued)

Canon includes contract assets primarily for unbilled receivables mainly arising from services contracts for office products in prepaid expenses and other current assets in the consolidated balance sheet. The balances of the contract assets at March 31, 2020 and December 31, 2019 were ¥52,232 million and ¥43,783 million respectively.

Canon typically bills to the customer when performance obligation is satisfied and collects the payment in relatively short term except for certain maintenance service of office and medical products and certain industrial equipment for which Canon occasionally receives the payment in advance from customers. The amount received in excess of revenue recognized is recognized as deferred revenue until the performance obligation for distinct goods or services are satisfied. Deferred revenue at March 31, 2020 and December 31, 2019 were ¥123,926 million and ¥113,030 million, respectively, and are included in other current liabilities in the accompanying consolidated balance sheets. Revenue recognized for the three months ended March 31, 2020, which had been included in the deferred revenue balance at December 31, 2019, was ¥36,727 million.

Remaining performance obligations for products and equipment at March 31, 2020 primarily arise from the sales of certain industrial equipment, amounting to ¥214,655 million, 72% of which is expected to be recognized as revenue within one year and remaining 28% is within two years. Disclosure of remaining performance obligations is not required for the majority of service since the revenue is recognized as billed basis applying the right to invoice practical expedient or is generated from the contracts with original expected duration of less than one year. The portion of fixed maintenance service contract for office and medical products with original expected duration of more than one year is approximately 11% of total service revenue and the average remaining period for these fixed contracts as of March 31, 2020 is about two years.

Disaggregated revenues by business unit, product and geographic area are described in Note 19.

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Notes to Consolidated Financial Statements (continued)

Reconciliations of the numerators and denominators of basic and diluted net income attributable to Canon Inc. shareholders per share computations for the three months ended March 31, 2020 and 2019 are as follows:

During the three months ended March 31, 2020 and 2019, there were dilutive effects from the stock options granted by the Company.

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Notes to Consolidated Financial Statements (continued)

Risk management policy

Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Derivative financial instruments are comprised principally of foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized financial institutions and selected by Canon taking into account their financial condition, and contracts are diversified across a number of major financial institutions.

Foreign currency exchange rate risk management

Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange exposures principally from the exchange of U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and intercompany trade receivables that are denominated in foreign currencies. In accordance with Canon’s policy, a specific portion of foreign currency exposure resulting from forecasted intercompany sales is hedged using foreign exchange contracts which principally mature within three months.

Cash flow hedge

Changes in the fair value of derivative financial instruments designated as cash flow hedges, including foreign exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings in the same period as the hedged items affect earnings. Substantially all amounts recorded in accumulated other comprehensive income (loss) as of March 31, 2020 are expected to be recognized in net sales over the next twelve months. Changes in the fair value of a foreign exchange contract for the period between the date that the forecasted intercompany sales occur and its maturity date are recognized in earnings and not considered hedge ineffectiveness.

Derivatives not designated as hedges

Canon has entered into certain foreign exchange contracts to primarily offset the earnings impact related to fluctuations in foreign currency exchange rates associated with certain assets denominated in foreign currencies. Although these foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting, the contracts are effective from an economic perspective. The changes in the fair value of these contracts are recorded in earnings immediately.

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Contract amounts of foreign exchange contracts at March 31, 2020 and December 31, 2019 are set forth below:

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 March 31, 2020 and December 31, 2019.

Derivatives designated as hedging instruments