Mitsubishi 2001 Annual Report Download - page 55

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MITSUBISHI MOTORS CORPORATION Annual Report 2001 [53]
(n) Research and development costs
Research and development costs are expensed when incurred.
(o) Derivative financial instruments
MMC and its consolidated subsidiaries are exposed to risks arising from fluctuations in foreign currency exchange
rates and interest rates. In order to manage those risks, MMC and its consolidated subsidiaries enter into various
derivative agreements including forward foreign exchange contracts and interest rate swaps. Forward foreign
exchange contracts are utilized to manage risks arising from foreign currency receivables from the export of
finished goods. Interest rate swaps are utilized to manage interest rate risk for debts. MMC and its consolidated
subsidiaries do not utilize derivatives for trading purposes.
Forward foreign exchange contracts are accounted for using deferral hedge accounting. Deferral hedge accounting
requires unrealized gains or losses to be deferred as liabilities or assets. Receivables and payables hedged by qualified
forward foreign exchange contracts are translated at the corresponding foreign exchange contract rates.
MMC and its consolidated subsidiaries have also developed a hedging policy to control various aspects of the
derivative transactions including authorization levels and transaction volumes. Based on this policy, MMC and its
consolidated subsidiaries hedge, within certain limits, the risks arising from changes in foreign currency exchange
rates and interest rates. MMC and its consolidated subsidiaries review, every month, the effectiveness of all hedging
policies considering the cumulative cash flows and changes in the market.
[2. Change in Accounting Policy]
Until the year ended March 31, 1999, severance payments to directors and corporate auditors of the domestic
consolidated subsidiaries had been charged to income when paid. Effective April 1, 1999, an accrual for such sev-
erance payments was recorded at an estimate of the amount which would be required to be paid if those eligible
officers terminated their services as of the balance sheet date in order to conform to MMC. The cumulative effect
of this change amounted to ¥3,767 million at April 1, 1999 and was recorded as other income and expenses for the
year ended March 31, 2000.
[3. New Accounting Standards]
(a) Effective the year ended March 31, 2001, MMC and its consolidated subsidiaries adopted the new accounting
standard for retirement benefits. In accordance with this standard, the allowance for retirement benefits for
employees is provided based on the projected retirement benefit obligation and the pension assets. In prior years,
the retirement benefits had been provided as 40% of the retirement benefits payable at the year-end for employees
who terminate services voluntarily. As a result of the adoption of this standard in the current year, retirement
benefit costs increased by ¥116,984 million ($944,181 thousand), and loss before income taxes and minority inter-
ests increased by ¥117,569 million ($948,902 thousand).
(b) A new accounting standard for financial instruments, which became effective April 1, 2000, requires that secu-
rities be classified into three categories: trading, held-to-maturity or other securities. Under the new standard,
trading securities are carried at fair value and held-to-maturity securities are carried at amortized cost. Market-
able securities classified as other securities are carried at fair value with changes in unrealized holding gain or loss,
net of the applicable income taxes, included directly in stockholders’ equity. Non-marketable securities classified
as other securities are carried at cost. Cost of securities sold is determined by the moving average method.
As of April 1, 2000, MMC and its consolidated subsidiaries assessed their intent to hold their investments in
securities and classified their investments as “held-to-maturity securities” or “other securities” and accounted for
the securities at March 31, 2001 in accordance with the new standard referred to above. As a result of the adoption
of this standard in the current year, securities in current assets decreased by ¥51,475 million ($415,456 thousand)
and investment securities increased by ¥51,475 million ($415,456 thousand).
The effect of the adoption of this new standard for financial instruments was to increase Loss before income
taxes and minority interests by ¥9,680 million ($78,128 thousand) for the year ended March 31, 2001.
(c) A revised accounting standard for foreign currency translation became effective April 1, 2000. As a result of
translating the long-term foreign loan receivable using the foreign exchange rate at the balance sheet date, the
foreign exchange loss and Loss before income taxes and minority interests increased by ¥224 million ($1,808 thou-
sand). Translation adjustments were classified in “Assets” in the prior year’s consolidated financial statements. In
the current year, they are included in “Stockholders’ equity” and “Minority interests.”