Square Enix 2008 Annual Report Download - page 18

The following statements are based on management’s view of
SQUARE ENIX CO., LTD. (the “Company”) as of June 30, 2008 and
have not been audited. The following management 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 chooses and applies
accounting policies, and makes estimates that affect the disclosure
of amounts in assets, liabilities, income and expenses. Management
formulated these estimates based on historical performance and
certain other factors. However, actual results may differ materially
from these estimates due to uncertainties inherent in the estimates.
Important accounting policies used in the preparation of the
Group’s consolidated financial statements are contained in the sec-
tion titled “Summary of Significant Accounting Policies Used in the
Preparation of Consolidated Financial Statements,” which begins
from page 28 of this report. In particular, judgments used in making
estimates 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
recognized based on receipt of a statement from the licensee. In
certain cases, the recognition of sales is determined based on
contracts entered into with suppliers and product type.
(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 its solvency declines, the Group may pro-
vide additional amounts to the provision for doubtful accounts or
record bad debt losses.
(3) Content Production Account
When the Group determines that the difference between actual
costs and market value of the content production account based on
expected future demand and market conditions have reached a cer-
tain level, the Group recognizes a write-down of the content produc-
tion account. If future demand and market conditions are worse than
management’s forecasts, there is the possibility that further write-
downs will become necessary.
(4) Unrealized Losses on Investments
The Group owns shares in certain financial institutions and compa-
nies with which it sells or purchases goods. These shareholdings
include stock in listed companies subject to price fluctuation risk in
the stock market and stock in privately held companies for which
share prices are difficult to calculate. In the event that the fair mar-
ket value of these shares as of the end of the fiscal year declines no
less than 50% of their acquisition cost, the entire amount is treated
as an impairment loss. In addition, in the event of a 30% to 50%
decline, an amount determined as necessary considering the impor-
tance and potential for recovery of the shares is treated as an
impairment loss. During fiscal 2007, the Company recorded a loss
on revaluation of investment securities amounting to ¥55 million.
Worsening market conditions or unstable performance at the
invested companies may require the recording of revaluation losses
in the event that losses are not reflected in current book value, or,
the book value becomes irrecoverable.
(5) Deferred Tax Assets
The Group records a valuation allowance to provide for amounts of
deferred tax assets thought likely to decrease. In evaluating the
necessity of a valuation allowance, the Company examines future tax-
able income and possible tax planning for deferred tax assets with a
high likelihood of realization. If the Company determines that all or a
portion of net deferred tax assets cannot be realized in the future, the
Company writes down such deferred tax assets during the fiscal year
in which the determination is made. If the Company determines that
deferred tax assets in excess of the recorded amount can be realized
in the future, the Company recognizes deferred tax assets to the
recoverable amount and increases profits by the same amount during
the period in which the determination is made.
2. Analysis of Financial Policy, Capital Resources
and Liquidity
The Group internally finances working capital and capital invest-
ments, and utilizes the issuance of corporate bonds. The Company
has issued yen-denominated zero-coupon bonds with warrants
which mature in 2010. As of March 31, 2008, the Group’s balance
of interest-bearing debt was ¥26 million. The net assets ratio stood
at 69.3%. Cash and cash equivalents at end of year totaled
¥111,479 million, an increase of ¥11,631 million compared with
the previous fiscal year end.
The Group believes that it will be possible to procure the funds
required for working capital and capital investments in the future to
maintain growth based on its sound financial standing and ability to
generate cash through operating activities.
Management’s Discussion and Analysis of Operating Results and Financial Position (JPNGAAP)
16