Epson 2008 Annual Report Download - page 31

56 Seiko Epson Corporation
57Annual Report 2008
(1) Consolidation and investments in affiliates
The accompanying consolidated financial statements include the
accounts of the Company and those of its subsidiaries that are
controlled by Epson. Under the effective control approach, all majority-
owned companies are to be consolidated. Additionally, companies in
which share ownership equals 50% or less may be required to be
consolidated in cases where such companies are effectively controlled
by other companies through the interests held by a party who has a
close relationship with the parent in accordance with Japanese
accounting standards. All significant inter-company transactions and
accounts, along with unrealized inter-company profits, are eliminated
upon consolidation.
Investments in affiliates in which Epson has significant influence
are accounted for using the equity method. Consolidated income
includes Epson’s current equity in net income or loss of affiliates after
elimination of significant unrealized inter-company profits.
The difference between the cost and the underlying net assets of
investments in subsidiaries is recognized as “goodwill” and is included
in intangible assets account (if the cost is in excess) or in long-term
liabilities (if the underlying net asset is in excess). Goodwill is amortized
on a straight-line basis over a period of five years.
(2) Foreign currency translation and transactions
Foreign currency transactions are translated using foreign exchange
rates prevailing at the respective transaction dates. Receivables and
payables in foreign currencies are translated at the foreign exchange
rates prevailing at the respective balance sheet dates and the resulting
transaction gains or losses are taken into income currently.
All the assets and liabilities of foreign subsidiaries and affiliates are
translated at the foreign exchange rates prevailing at the respective
balance sheet dates, and all the income and expense accounts are
translated at the average foreign exchange rates for the respective
periods. Foreign currency translation adjustments are recorded in the
consolidated balance sheets as translation adjustments and minority
interests in subsidiaries.
(3) Cash and cash equivalents
Cash and cash equivalents included in the consolidated financial
statements comprise cash on hand, bank deposits that may be
withdrawn on demand and highly liquid investments purchased with
initial maturities of three months or less and which present low risk of
fluctuation in value.
(4) Financial instruments
Investments in debt and equity securities
Investments in debt and equity securities are classified into three
categories: 1) trading securities, 2) held-to-maturity debt securities, or
3) other securities. These categories are treated differently for purposes
of measuring and accounting for changes in fair value.
Trading securities held for the purpose of generating profits from
changes in market value are recognized at their fair values in the
consolidated balance sheets. Changes in unrealized gains and losses
are included in current income. Held-to-maturity debt securities are
expected to be held to maturity and are recognized at amortized cost
computed based on the straight-line method in the consolidated
balance sheets. Other securities for which market quotations are
available are recognized at fair value in the consolidated balance
sheets. Unrealized gains and losses for these other securities are
(1) Nature of operations
Seiko Epson Corporation (the “Company”) was originally established
as a manufacturer of watches but later expanded its business to
provide key devices and solutions for the digital color imaging markets
through the application of its proprietary technologies. The Company
operates its manufacturing and sales business mainly in Japan, the
Americas, Europe and Asia/Oceania.
(2) Basis of presenting consolidated financial statements
The Company and its subsidiaries in Japan maintain their records and
prepare their financial statements in accordance with accounting
principles generally accepted in Japan.
Prior to April 1, 2007, the Company used the financial statements
prepared by its foreign subsidiaries in conformity with accounting
principles generally accepted in their respective countries of domicile
for the consolidation process.
On May 17, 2006, the Accounting Standards Board of Japan
(ASBJ) issued Practical Issues Task Force No.18 — “Practical Solution
on Unification of Accounting Policies Applied to Foreign Subsidiaries
for Consolidated Financial Statements.” Effective April 1, 2007, the
Company and its consolidated subsidiaries and affiliates (collectively
“Epson”) has elected to early adopt the new accounting standards.
For the presentation of consolidated financial statements, the
accounting policies and procedures applied to a parent company and
its subsidiaries for similar transactions and events under similar
circumstances should be unified, in principle. However, prior to April 1,
2007, the accounting policies applied to a parent company and those
of foreign subsidiaries were tentatively not required to be uniform. This
rule applied unless the accounting policies of foreign subsidiaries were
acknowledged as unreasonable. Under the new accounting standards,
financial statements prepared by foreign subsidiaries in accordance
with International Financial Reporting Standards or the generally
1. Basis of presenting consolidated financial statements
3. Summary of significant accounting policies
Notes to Consolidated Financial Statements
Seiko Epson Corporation and Subsidiaries
As of March 31, 2008, the Company had 100 consolidated
subsidiaries. It has applied the equity method in respect to two
2. Number of group companies
unconsolidated subsidiaries and four affiliates.
accepted accounting principles in the United States tentatively may be
used for the consolidation process. In addition, some items should be
adjusted in the consolidation process so that net income is accurately
accounted for, unless they are not material.
The adoption of the new accounting standards did not have a
material effect on Epson’s results of operations and financial position
for the year ended March 31, 2008.
The accompanying consolidated financial statements of Epson
are prepared on the basis of accounting principles generally accepted
in Japan, which are different in certain respects as to application and
disclosure requirements of International Financial Reporting Standards,
and are compiled from the consolidated financial statements prepared
by the Company as required by the Financial Instruments and
Exchange Law of Japan.
The accompanying consolidated financial statements formed
before the year ended March 31, 2007 incorporate certain
reclassifications and rearrangements in order to present them in a form
that is more familiar to readers outside Japan. In addition, the notes to
the consolidated financial statements include certain information that
is not required under accounting principles generally accepted in
Japan, but which is provided herein as additional information. However,
neither of the reclassifications nor rearrangements had a material effect
on the financial statements. The accompanying consolidated financial
statements for the year ended March 31, 2008 are presented without
those reclassifications and rearrangements.
The amounts in the accompanying consolidated financial
statements and the notes thereto for the years prior to April 1, 2007
are rounded off. However, amounts in the accompanying consolidated
financial statements and the notes thereto for the years starting from
April 1, 2007 are rounded down.
reported as a separate component of equity/net assets, net of taxes.
Other securities for which market quotations are unavailable are stated
at cost, primarily based on the moving-average cost method. Other-
than-temporary declines in the value of other securities are reflected in
current income.
Derivative instruments
Derivative instruments (i.e., forward exchange contracts, interest rate
swaps and currency options) are recognized as either assets or
liabilities at their respective fair values at the date of contract, and gains
and losses arising from changes in fair value are recognized in earnings
in the corresponding fiscal period.
On December 9, 2005, the ASBJ issued an Accounting Standard
— ASBJ Statement No.5 “Accounting Standard for Presentation of
Net Assets in the Balance Sheet” and its Implementation Guidance —
ASBJ Guidance No.8 “Guidance on Accounting Standard for
Presentation of Net Assets in the Balance Sheet.” Effective as of April
1, 2006, Epson has adopted these new accounting standards. Prior to
April 1, 2006, if certain hedging criteria were met, such gains and
losses arising from changes in fair value would be deferred as assets
or liabilities. Under the new accounting standards, such gains and
losses are recorded as a separate component of equity/net assets, net
of taxes.
For interest rate swaps, if certain hedging criteria are met, they are
not recognized at their fair values as an alternative method under
Japanese accounting standards. The amounts received or paid for
such interest rate swap arrangements are charged or credited to
income as incurred.
Allowance for doubtful accounts
Allowance for doubtful accounts is calculated based on the aggregate
amount of estimated credit losses for doubtful receivables plus an
amount for receivables other than doubtful receivables calculated
using historical write-off experience from certain prior periods.
(5) Inventories
Inventories are stated at the lower of cost or market value, where cost
is primarily determined using the weighted-average cost method.
(6) Property, plant and equipment
Property, plant and equipment, including significant renewals and
improvements, are carried at cost less accumulated depreciation.
Maintenance and repairs, including minor renewals and improvements,
are charged to income as incurred. Depreciation of property, plant
and equipment is mainly computed based on the declining-balance
method for the Company and its Japanese subsidiaries and on the
straight-line method for foreign subsidiaries at rates based on the
estimated useful lives. For buildings acquired by the Company and its
Japanese subsidiaries on or after April 1, 1998, depreciation is
computed based on the straight-line method, which is prescribed by
Japanese income tax laws.