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64 MITSUBISHI MOTORS CORPORATION ANNUAL REPORT 2006
(o) Leases
Non-cancelable lease transactions at MMC and its domestic consolidated subsidiaries are accounted for as operating
leases regardless of whether such leases are classified as operating or finance leases, except that lease agreements,
which stipulate the transfer of ownership of the leased property to the lessee, are accounted for as finance leases.
Non-cancelable lease transactions at foreign subsidiaries, except for operating leases, are capitalized.
(p) 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 forecast exports of finished goods
and related foreign currency receivables. Interest rate swaps are utilized to manage interest rate risk for debts. MMC
and its consolidated subsidiaries do not utilize derivatives for speculation or trading purposes.
Derivative financial instruments are recorded at fair value, excluding certain instruments described below which
are recorded in accordance with the special hedge provisions of the accounting standard.
Forward foreign exchange contracts related to forecast exports of finished goods are accounted for using deferral
hedge accounting. Deferral hedge accounting requires unrealized gains or losses to be deferred as liabilities or assets.
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 the changes in foreign currency exchange
rates and interest rates. Forward foreign exchange contracts are designated to hedge the exposure to variability in
expected future cash flows.
For interest rate swaps accounted for as special hedges, instead of measuring hedge effectiveness, confirmation
of the conditions for special hedge accounting is carried out.
3. Changes in Accounting Policies
(a) Accounting Standard for Impairment of Fixed Assets
Effective for the year ended March 31, 2006, the accounting standard for impairment of fixed assets, “Opinion
concerning Establishment of the Accounting Standard for the Impairment of Fixed Assets” (The Business Accounting
Council, August 9, 2002) and “Guidance for Accounting Standard for Impairment of Fixed Assets” (Accounting
Standards Board of Japan (ASB) Guidance, No. 6 October 31, 2003) have been adopted. As a result, loss before
income taxes and minority interest increased by ¥26,176 million ($222,832 thousand) this reporting period. The
effects on the segment information are stated in Note 21. The accumulated impairment loss has been deducted
directly from the book value of property, plant and equipment in accordance with Japanese accounting standards.
In addition, although some of overseas subsidiaries have reported impairment losses in this period, the above
figure does not include those losses, as these subsidiaries have already been adopting local accounting standards
for impairment of fixed assets on the basis of local Generally Accepted Accounting Principles.
(b) Accounting Standard for Retirement Benefits
Effective for the year ended March 31, 2006, the accounting standard for retirement benefits “Amendment of
Accounting Standards for Retirement Benefits” (Accounting Standard No. 3 March 16, 2005) and “Guidance for
Amendment of Accounting Standards for Retirement Benefits” (ASB Guidance No. 7 March 16, 2005) have been
adopted. The effect of the adoption of this change in accounting policy for retirement benefits was insignificant in
net loss of fiscal year 2005. The effects on the segment information are stated in Note 21.