Square Enix 2014 Annual Report Download - page 31

The following statements are based on management’s view of SQUARE ENIX
HOLDINGS CO., LTD. (the “Company”) as of June 30, 2014 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 the following
accounting policies.
(1) Revenue recognition
Sales revenue of the Group is ordinarily recognized when products
are 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) Allowance for doubtful accounts
The Group provides an allowance for doubtful accounts based on
estimated irrecoverable amounts to prepare for bad debt losses on
receivables. In the event that the financial condition of a counterparty
deteriorates and its solvency declines, the Group may provide
additional amounts to the allowance for doubtful accounts or record
bad debt losses.
(3) Content production account
When the Group determines that the estimated market value of the
content production account—based on expected future demand and
market conditions—has fallen below actual costs, 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 value of these shares as of the end of the fiscal
year declines by 50% or more of their acquisition cost, the entire
amount is treated as an impairment loss. In addition, in the event that
the fair value of marketable shares declines 30% to 50%, an amount
determined as necessary considering the importance and potential
for recovery of the shares is treated as an impairment loss.
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 be recovered. 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.
Management Discussion and Analysis of Operating Results and Financial Position (JPNGAAP)
SQUARE ENIX HOLDINGS CO., LTD. and Consolidated Subsidiaries
Years ended March 31
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