Hitachi 2005 Annual Report Download - page 44

Hitachi, Ltd. Annual Report 2006
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(l) Impairment of Long-lived Assets
The Company reviews the carrying value of long-lived assets or related group of assets to be held and used, including
intangible assets with finite useful lives, for impairment whenever events or circumstances occur that indicate that the
carrying value of the assets may not be recoverable. The assets are considered to be impaired when estimated
undiscounted cash flows expected to result from the use of the assets and their eventual disposition is less than their
carrying values. The impairment losses are measured as the amount by which the carrying value of the asset exceeds
the fair value. In determining the fair value, the Company uses available quoted market prices and present value
techniques, if appropriate, based on the estimated future cash flow expected to result from the use of the assets and
their eventual disposition.
(m) Retirement and Severance Benefits
The Company accounts for retirement and severance benefits in accordance with SFAS No. 87, “Employers’ Accounting
for Pensions.” Unrecognized gains and losses are amortized using the straight-line method over the average remaining
service period of active employees.
(n) Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended. SFAS No. 133 requires that all derivative financial instruments, such
as forward exchange and interest rate swap contracts, be recognized in the financial statements as either assets or
liabilities and measured at fair value regardless of the purpose or intent for holding them.
The Company designates and accounts for hedging derivatives as follows:
•“Fair value” hedge: a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment.
The changes in fair value of the recognized assets or liabilities or unrecognized firm commitment and the derivatives
are recorded in earnings if the hedge is considered highly effective.
•“Cash flow” hedge: a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related
to a recognized asset or liability. The changes in the fair value of the derivatives designated as cash flow hedges are
recorded as other comprehensive income if the hedge is considered highly effective. This treatment is continued until
earnings are affected by the variability in cash flows or the unrecognized firm commitment of the designated hedged
item, at which point changes in fair value of the derivative is recognized in income.
•“Foreign currency” hedge: a hedge of foreign-currency fair value or cash flow. The changes in fair value of the recognized
assets or liabilities or unrecognized firm commitment and the derivatives are recorded as either earnings or other
comprehensive income if the hedge is considered highly effective. Recognition as earnings or other comprehensive
income is dependent on the treatment of foreign currency hedges as fair value or cash flow hedges.
The Company follows the documentation requirements as prescribed by the standard, which includes risk management
objective and strategy for undertaking various hedge transactions. In addition, a formal assessment is made at the hedge’s
inception and periodically on an ongoing basis, as to whether the derivative used in hedging activities is highly effective
in offsetting changes in fair values or cash flows of hedged items. Hedge accounting is discontinued for ineffective
hedges, if any. Subsequent changes in the fair value of derivatives related to discontinued hedges are recognized in
earnings immediately.