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61
Annual Report 2007
average foreign exchange rates for the respective periods. Foreign currency translation adjustments are recorded in
the consolidated balance sheets as translation adjustments and minority interest in subsidiaries.
(3) Cash and cash equivalents
Cash and cash equivalents included in the consolidated financial statements comprise cash on hand, bank deposits
that may be withdrawn on demand and highly liquid investments purchased with initial maturities of three months or
less and which present low risk of fluctuation in value.
(4) Financial instruments
Investments in debt and equity securities
Investments in debt and equity securities are classified into three categories: 1) trading securities, 2) held-to-maturity
debt securities, or 3) other securities. These categories are treated differently for purposes of measuring and
accounting for changes in fair value.
Trading securities held for the purpose of generating profits from changes in market value are recognized at
their fair values in the consolidated balance sheets. Changes in unrealized gains and losses are included in current
income. Held-to-maturity debt securities are expected to be held to maturity and are recognized at amortized cost
computed based on the straight-line method in the consolidated balance sheets. Other securities for which market
quotations are available are recognized at fair value in the consolidated balance sheets. Unrealized gains and losses
for these other securities are reported as a separate component of equity, net of tax. Other securities for which
market quotations are unavailable are stated at cost, primarily based on the moving-average cost method. Other-
than-temporary declines in the value of other securities are reflected in current income.
Derivative instruments
Derivative instruments (i.e., forward exchange contracts, interest rate swaps and currency options) are recognized
as either assets or liabilities at their respective fair values at the date of contract, and gains and losses arising from
changes in fair value are recognized in earnings in the corresponding fiscal period.
On December 9, 2005, the Accounting Standards Board of Japan (ASBJ) issued an Accounting Standard —
ASBJ Statement No. 5 “Accounting Standard for Presentation of Net Assets in the Balance Sheet” and its Imple-
mentation Guidance — ASBJ Guidance No. 8 “Guidance on Accounting Standard for Presentation of Net Assets in
the Balance Sheet”. Effective as of April 1, 2006, Epson has adopted these new accounting standards. Prior to April
1, 2006, if certain hedging criteria are met, such gains and losses arising from changes in fair value were deferred as
assets or liabilities. Under the new accounting standards, such gains and losses are recorded as a separate com-
ponent of equity, net of tax.
For interest rate swaps, if certain hedging criteria are met, they are not recognized at their fair values as an alter-
native method under Japanese accounting standards. The amounts received or paid for such interest rate swap
arrangements are charged or credited to income as incurred.
Allowance for doubtful accounts
Allowance for doubtful accounts is calculated based on the aggregate amount of estimated credit losses for doubt-
ful receivables plus an amount for receivables other than doubtful receivables calculated using historical write-off
experience from certain prior periods.
(5) Inventories
Inventories are stated at the lower of cost or market value, where cost is primarily determined using the weighted-
average cost method.
(6) Property, plant and equipment
Property, plant and equipment, including significant renewals and improvements, are carried at cost less accumu-
lated depreciation. Maintenance and repairs, including minor renewals and improvements, are charged to income
as incurred. Depreciation of property, plant and equipment is mainly computed based on the declining-balance
method for the Company and its Japanese subsidiaries and on the straight-line method for foreign subsidiaries at
rates based on the estimated useful lives. For buildings acquired by the Company and its Japanese subsidiaries on
or after April 1, 1998, depreciation is computed based on the straight-line method, which is prescribed by Japanese