Square Enix 2009 Annual Report Download - page 18

The following statements are based on management’s view of
SQUARE ENIX HOLDINGS CO., LTD. (the “Company”) as of June 30,
2009 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 consolidated
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
section titled “Summary of Significant Accounting Policies Used in
the Preparation of Consolidated Financial Statements,” 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
ordinarily 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
provide 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 certain level, the Group recognizes a write-down of the content
production 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 companies
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 market
value of these shares as of the end of the fiscal year declines no
less than 50% of their acquisition cost, as a rule, the 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
importance and potential for recovery of the shares is treated as an
impairment loss. During the fiscal year ended March 31, 2009, the
Company recorded a loss on revaluation of investment securities
amounting to ¥120 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 cur-
rent 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
taxable 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 investments,
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, 2009, the Group’s balance of
interest-bearing debt was ¥59 million. The net assets ratio stood at
69.1%. Cash and cash equivalents at end of year totaled ¥111,875
million, an increase of ¥395 million compared with the previous
fiscal year end.
Cash flows in the fiscal year ended March 31, 2009, as well as
the principal factors behind these cash flows, are described below.
(1) Net cash provided by operating activities
For the year ended March 31, 2009 compared to the year ended
March 31, 2008, the largest contributing factors to the decrease in
net cash provided by operating activities were lower income before
income taxes and minority interests of ¥9,153 million (a decrease of
Management’s Discussion and Analysis of Operating Results and Financial Position (JPNGAAP)
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