Omron 2004 Annual Report Download - page 48

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Income Taxes
Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts. Future tax benefits, such as net operating loss carry forwards and tax credit carry forwards, are rec-
ognized to the extent that such benefits are more likely than not to be realized. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.
Product Warranties
A liability for the estimated warranty related cost is established at the time revenue is recognized and is included in other current liabili-
ties. The liability is established using historical information including the nature, frequency, and average cost of warranty claims.
Derivatives
Derivative instruments and hedging activities are accounted for in accordance with SFAS No.133, “Accounting for Derivative
Instruments and Hedging Activities,” SFAS No.138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No.133,” and SFAS No.149, “Amendment of Statement 133 on Derivative Instruments and Hedging
Activities.” These standards establish accounting and reporting standards for derivative instruments and for hedging activities, and
require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.
For foreign exchange forward contracts and foreign currency options, on the date the derivative contract is entered into, the
Companies designate the derivative as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related
to a recognized asset or liability (“cash flow” hedge or “foreign currency” hedge). The Companies formally document all relationships
between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that are designated as cash flow or foreign currency hedges to specific assets
and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions. Based on the Companies’
policy, all foreign exchange forward contracts and foreign currency options entered into must be highly effective in offsetting changes in
cash flows of hedged items.
Changes in fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow or foreign currency
hedge are recorded in other comprehensive income (loss), until earnings are affected by the variability in cash flows of the designated
hedged item.
The cumulative effect adjustment upon the adoption SFAS No.133 and No.138, net of the related income tax effect, resulted in a
decrease to net loss of approximately ¥ 384 million at the date of adoption. The adoption of SFAS No.149 had no impact on the con-
solidated financial statements.
Cash Dividends
Cash dividends are reflected in the consolidated financial statements at proposed amounts in the year to which they are applicable,
even though payment is not approved by shareholders until the annual general meeting of shareholders held early in the following fiscal
year. Resulting dividends payable are included in Other current liabilities in the consolidated balance sheets.
Revenue Recognition
The Companies recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss
has transferred, the sales price is fixed or determinable, and collectibility is probable. These criteria are met when products are received
by customers or services are performed.
Stock-Based Compensation
The Companies account for stock-based awards to employees using the intrinsic value method in accordance with APB Opinion
No.25, “Accounting for Stock Issued to Employees,” including related interpretations, and follow the disclosure only provision of SFAS
No.123, “Accounting for Stock Based Compensation.”
At March 31, 2004, the Company had a stock-based employee compensation plan, which is described more fully in Note 9. No
stock-based employee compensation cost is reflected in the results of operations, as all options granted under those plans had an
exercise price exceeding the market value of the underlying common stock on the date of grant. The following table illustrates the effect
on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No.123,
to stock-based employee compensation.