Ricoh 2004 Annual Report Download - page 32

convertible into cash and have an original maturity of three months or less,
such as money management funds and free financial funds.
(f) Derivative Financial Instruments and Hedging Activities
As discussed further in Note 15, Ricoh manages its exposure to certain
market risks, primarily foreign currency and interest rate risks, through the
use of derivative instruments. As a matter of policy, Ricoh does not enter into
derivative contracts for trading or speculative purposes. On April 1, 2001
Ricoh adopted Statement of Financial Accounting Standards (“SFAS”)
No.133 “Accounting for Derivative Instruments and Hedging Activities”, and
SFAS No.138, “Accounting for Certain Derivative Instruments and Certain
Hedging Activities” which require that all derivative instruments be recorded
on the balance sheet at their respective fair values. In accordance with the
transition provisions of SFAS 133, Ricoh recorded a cumulative effect
adjustment, net of tax, resulting in a decrease in net income of ¥66 million
and a decrease in other comprehensive income (loss) of ¥1,864 million at
April 1, 2001.
In accordance with SFAS 133, Ricoh, when it enters into a derivative
contract, makes a determination as to whether or not for accounting
purposes the derivative is part of a hedging relationship. In general, a
derivative may be designated as either (1) a hedge of the fair value of a
recognized asset or liability or an unrecognized firm commitment (“fair
value hedge”), (2) a hedge of the variability of the expected cash flows
associated with an existing asset or liability or a forecasted transaction
(“cash flow hedge”), or (3) a foreign currency fair value or cash flow hedge
(“foreign currency hedge”). Ricoh formally documents 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 fair value, cash flow, or foreign currency hedges to specific assets and
liabilities on the consolidated balance sheet or to specific firm commitments
or forecasted transactions.
For derivative contracts that are designated and qualify as fair value
hedges including foreign currency fair value hedges, the derivative
instrument is marked-to-market with gains and losses recognized in current
period earnings to offset the respective losses and gains recognized on the
underlying exposure. For derivative contracts that are designated and
qualify as cash flow hedges including foreign currency cash flow hedges, the
effective portion of gains and losses on these contracts is reported as a
component of accumulated other comprehensive income (loss) and
reclassified into earnings in the same period the hedged item or transaction
affects earnings. Any hedge ineffectiveness on cash flow hedges is
immediately recognized in earnings. For all derivative instruments that are
not designated as part of a hedging relationship and for designated
derivative instruments that do not qualify for hedge accounting, the
contracts are recorded at fair value with the gain or loss recognized in
current period earnings.
In accordance with the transitional provisions of SFAS 133, gains and
losses on qualifying hedges of existing assets or liabilities at April 1, 2001,
were included in the carrying amounts of those assets or liabilities and were
ultimately recognized in income as part of those carrying amounts. Gains
and losses related to qualifying hedges of firm commitments and
anticipated transactions were deferred and recognized in income, or as
adjustments of carrying amounts, when the hedged transaction occurred.
(g) Allowance for doubtful trade receivables and finance
receivables
Ricoh records allowances for doubtful receivables that are based upon
historical experience and specific customer collection issues. The estimated
amount of probable credit losses in its existing receivables is determined
from write-off history adjusted to reflect current economic conditions and
specific allowances for receivables including nonperforming leases,
impaired loans or other accounts of which Ricoh has concluded it will be
unable to collect all amounts due according to original terms of the lease or
loan agreement. Account balances net of expected recovery from available
collateral are charged-off against the allowances when collection is
considered remote.
(h) Securities
Ricoh conforms with SFAS No.115, “Accounting for Certain Investments in
Debt and Equity Securities” which requires all investments in debt and
marketable equity securities to be classified as either held-to-maturity,
trading, or available-for-sale securities. As of March 31, 2003 and 2004, all
of Ricoh’s investments in debt and marketable equity securities are classified
as available-for-sale securities. Those available-for-sale securities are
reported at fair value with unrealized gains and losses, net of related taxes,
excluded from earnings and reported in accumulated other comprehensive
income (loss). Available-for-sale securities, which mature or are expected to
be sold in one year, are classified as current assets.
Individual securities classified as available-for-sale securities are
reduced to their then fair value for any declines in market value determined
to be other than temporary. These impairment losses are charged against
earnings at the time that a decline has been determined to be other than
temporary based primarily on the financial condition of the issuer and the
extent and length of time of the decline. Investments whose market values
have declined below cost that extends for nine months are automatically
written-down to their then fair value in all cases.
The cost of the securities sold is computed based on the average cost of
each security held at the time of sale.
Non-marketable equity securities owned by Ricoh primarily relate to
less than 20% owned companies and are stated at cost.
As discussed further in Note 5, Ricoh changed its accounting policy with
respect to the recognition of unrealized gains and losses as realized in the
statements of income on transfers of marketable equity securities. In
relation to this change, Ricoh has recognized in its fiscal 2004 consolidated
statement of income a cumulative effect of accounting change, net of tax, of
¥7,373 million ($70,894 thousand).
(i) Inventories
Inventories are mainly stated at the lower of average cost or net realizable
values. Inventory costs include raw materials, labor and manufacturing
overheads.
(j) Property, Plant and Equipment
For the Company and its domestic subsidiaries, depreciation of property,
plant and equipment is computed principally by using the declining-
balance method over the estimated useful lives. Most of the foreign
subsidiaries have adopted the straight-line method for computing
depreciation, which currently accounts for approximately 41% of the
consolidated depreciation expense. The depreciation period generally
31