Square Enix 2007 Annual Report Download - page 18

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The following statements are based on management’s view of
SQUARE ENIX CO., LTD. (the Company), as of June 30, 2007, and
has not been audited. The following management’s discussion and
analysis also contains forward-looking statements concerning the
future performance of the Company. Please read the disclaimer
regarding forward-looking statements at the beginning of this
annual report.
1. Significant Accounting Policies and
Estimates
The consolidated financial statements of the SQUARE ENIX Group
(the Group) are prepared in accordance with generally accepted
accounting principles in Japan (JPNGAAP). In preparing the consoli-
dated financial statements, management shall choose and apply
accounting policies, and make estimates that affect the disclosure
of amounts in assets, liabilities, income and expenses. Management
formulated these estimates based on historical performance and
other factors. However, actual results may differ materially from
these estimates due to uncertainties inherent in the estimates.
Important accounting policies used in the Group’s consolidated
financial statements are contained in the section titled “Summary
of Significant Accounting Policies Used in the Preparation of
Consolidated Financial Statements,” which begins from page 29 of
this report. In particular, judgments for the estimates made in the
preparation of the consolidated financial statements are affected
by accounting policies.
(1) Revenue Recognition
Sales revenue of the Group is recognized when products are ordi-
narily shipped or services are provided, while royalty revenue is rec-
ognized based on the statement from the licensee. In certain cases,
the recognition of sales is decided according to contracts with sup-
pliers and type of products.
(2) Provision for Doubtful Accounts
The Group provides a provision for doubtful accounts based on
estimated irrecoverable amounts to prepare for bad debt losses on
accounts receivable. In the event that the financial condition of a
supplier deteriorates and their solvency declines, the Group may
provide additional amounts to the provision for doubtful accounts
or record bad debts and losses.
(3) Content Production Account
When the Group determines that differences between actual costs
and market value of the content production account based on
expected future demand and market conditions, have reached a
certain level, the Group will then recognize a write-down of the
content production account. If future demand and market condi-
tions are worse than management’s forecasts, there is the possibil-
ity that further write-offs will then become necessary.
(4) Unrealized Losses on Investments
The Group owns shares in financial institutions and companies with
which it sells or purchases goods. These shareholdings include
stock in listed companies subject to price fluctuation risks in the
stock market and stock in privately held companies for which share
prices are difficult to calculate. In the event that the fair market
value of these shares as of the end of fiscal 2006, ended March 31,
2007, have declined no less than 50% of their acquisition cost, the
entire amount is treated as an impairment.
In the event of a 30% to 50% decline, an amount determined
as necessary considering its significance and potential for recovery
is treated as an impairment. During fiscal 006, the Company
recorded a loss on valuation of investment securities amounting to
¥194 million. A worsening in market conditions or unstable perfor-
mance at the invested company may require the recording of reval-
uation losses in the event that losses are not reflected in the
current book value, or, the book value becomes irrecoverable.
(5) Deferred Tax Assets
The Group records a valuation allowance to provide for amounts
thought likely to decrease in deferred tax assets. In evaluating the
necessity of a valuation allowance, the Company examines future
taxable income and possible tax planning for deferred tax assets
with a high likelihood of realization. If the Company decides that
all or a portion of net deferred tax assets cannot be realized in the
future, the Company writes down deferred tax assets during the
fiscal year the decision is made. If the Company decides that
deferred tax assets in excess of the recorded amount can be real-
ized in the future, the Company recognizes deferred tax assets to
the recoverable amount and increases profits by the same amount
during the period the decision is made.
2. Analysis of Financial Policy, Capital
Resources and Liquidity
The Company internally finances working capital and capital invest-
ment, and utilizes the issuance of corporate bonds. The Company
has issued yen-denominated zero-coupon warrant bonds with
maturity in 2010. As of March 31, 2007, there was no outstanding
balance of interest-bearing debt. Net Assets stood at 60.0%. Cash
and cash equivalents at end of year amounting to ¥99,847 million,
¥24,595 million increase from the prior year.
The Group believes that it is possible to procure the funds
required for working capital and capital investment in the future to
maintain growth based on its sound financial standing and ability
to generate cash through operating activities.
3. Analysis of Business Performance
in Fiscal 2006 (Ended March 31,
2007)
Assets
Total Assets
Years ended March 31 Millions of yen
2006 2007 Change
¥213,348 ¥215,679 ¥2,331
Total assets as of March 31, 2007, amounted to ¥215,679 million,
an increase of ¥2,331 million compared with the previous fiscal
year-end. The major factors contributing to this change are as
follows.
Management’s Discussion and Analysis of Operating
Results and Financial Position (JPNGAAP)
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