Square Enix 2015 Annual Report Download - page 54

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Notes Regarding Financial Instruments
1. Matters concerning financial instruments
(1) Policies regarding financial instruments
With regard to the management of funds, the Group only utilizes
financial instruments with low market risk, such as deposits.
With regard to fund procurement, the Group utilizes borrowings
from financial institutions. Forward-exchange transactions are
carried out within the amount of foreign currency-denominated
transactions conducted by the Group. It is the Group’s policy not to
engage in derivative transactions for speculative purposes.
(2) Types of financial instruments held, risks associated with these
financial instruments and the risk management system
The Group is exposed to customer credit risk through notes and
accounts receivable, which are trade receivables. The Group
endeavors to reduce this risk by managing the outstanding balance
and due date for each transaction in accordance with internal
rules at each Group company for sales management. Owing to
the Group’s global business operations, a portion of its notes
and accounts receivable are denominated in foreign currencies,
which are exposed to exchange rate fluctuation risk. Although the
Group, in principle, does not engage in derivative transactions,
for the purpose of hedging against the risk of future fluctuations
in foreign exchange rates, it enters into forward foreign exchange
contracts from time to time. Although forward foreign exchange
contracts involve exposure to exchange rate fluctuation risk, each
counterparty to these transactions is, without exception, a highly
creditworthy bank. Hence, the Group judges that credit risk through
counterparty breach of contract (counterparty risk) is negligible.
With regard to forward foreign exchange transactions, all risk is
centrally managed by the accounting division under the approval
of a representative director and the director assigned to oversee
accounting and finance matters.
Investment securities mainly comprise stock market listed
shares, and, hence, are exposed to market price fluctuation risk.
However, fair values are monitored and regularly reported to the
Board of Directors.
Guarantee deposits consist of deposits required to be furnished
by the Group when it enters into real estate leases relating to
the Group’s headquarters, other offices and amusement arcade
facilities. Although these deposits involve exposure to counterparty
credit risk, for the headquarters and other offices, and for
amusement arcades, the general affairs division and the sales
division, respectively, confirm the creditworthiness of the lessors
through regular contact. In addition, the accounting division checks
with each of these divisions on the situation at the end of each
fiscal year.
Notes and accounts payable are defined as those trade
payables due within one year. Short-term loans are used to meet
short-term working capital requirements. The Group avoids the
settlement liquidity risk associated with short-term payables,
including notes and accounts payable, accrued corporate taxes and
short-term loans, through the monthly review of its funding plan
and other methods. Although foreign currency-denominated trade
payables involve exposure to exchange rate fluctuations, the Group
reduces this risk through similar methods to those used to manage
the risk associated with foreign currency-denominated trade
receivables. The Group is exposed to interest rate risk through
short-term loans. The Group, however, is able to respond flexibly to
interest rate fluctuations since the borrowing periods are short.
In terms of derivative transactions, the Group mainly uses
forward foreign exchange contracts as hedging instruments in
order to hedge the risk of fluctuations in foreign exchange rates
relating primarily to business transactions denominated in foreign
currencies.
(3) Supplementary information regarding the fair value, and others, of
financial instruments
The fair value of financial instruments includes amounts based
on market prices as well as those calculated using an appropriate
formula when there is no applicable market price. Since variable
factors are included in the calculation of such fair values, the
adoption of different assumptions may lead to changes in these
fair value amounts. The contract amounts, etc., of derivative
transactions discussed in “Derivative Transactions” of the Notes do
not indicate the market risk associated with derivative transactions.
2. Fair value of financial instruments
With regard to financial instruments held by the Company and its
consolidated subsidiaries, the values presented on the consolidated
balance sheet as of March 31, 2015 and 2014, the estimated fair
value and the difference between these amounts are as follows.
Items for which fair value is difficult to estimate are not included in
the following table (Note 2).
Notes to Consolidated Financial Statements (JPNGAAP)