Notes to Consolidated Financial Statements 1. Basis of Preparation Toagosei Co., Ltd. (the “Company”) and its domestic subsidiaries maintain their books of account in conformity with accounting principles generally accepted in Japan, and its foreign subsidiaries maintain their books of account in conformity with those in their countries of domicile. The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards, and have been compiled from the consolidated financial statements prepared by the Company as required by the Financial Instruments and Exchange Act of Japan. As permitted by the Financial Instruments and Exchange Act of Japan, amounts of less than one million yen have been omitted. Consequently, the totals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sum of the individual amounts. Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation. 2. Summary of Significant Accounting Policies (a) Principles of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates The accompanying consolidated financial statements include the accounts of the Company and any significant subsidiaries controlled directly or indirectly by the Company. Affiliated companies over which the Company exercises significant influence in terms of their operating and financial policies have been included in the accompanying consolidated financial statements on an equity basis. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in subsidiaries and affiliates which are not consolidated or accounted for by the equity method are carried at cost or less. Where there has been a permanent decline in the value of such investments, the Company has written down the investments. The differences at the respective dates of acquisition between the cost and the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for by the equity method are being amortized by the straight-line method over a period of five years. (b) Foreign currency translation Revenue and expense accounts of foreign consolidated subsidiaries are translated at the rates of exchange in effect at the balance sheet date, and, except for the components of net assets, the balance sheet accounts are also translated into yen at the same exchange rates. The components of net assets are translated at the historical exchange rates. (c) Cash equivalents All highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents. (d) Securities and investment securities Securities other than those of subsidiaries and affiliates are classified into three categories: trading, held-to-maturity and other securities. Trading securities are carried at fair value and held-to-maturity securities are carried at amortized cost. Marketable securities classified as other securities are carried at fair value determined based on the average of quoted prices (or their equivalent) in the one-month period prior to the balance sheet date with changes in unrealized holding gain or loss, net of the applicable income taxes, included directly in net assets. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold is determined by the moving average method. (e) Inventories Inventories are stated at cost determined by the moving average method with certain exceptions as mentioned below. Effective for the year ended December 31, 2008, two consolidated subsidiaries, whose fiscal year ends at the end of March have adopted new accounting standards, “Accounting Standard for Valuation of inventory” (Accounting Standards Board of Japan Statement No.9, July 5, 2006). In applying the accounting standard, the inventories held for the selling purpose are stated at the lower of cost or net salable value, cost being determined by the average method in the period. The adoption of the new accounting standards results in the decrease of operating income and income before income taxes and minority interests by \3 million (U.S.$32 thousand), as compared with the corresponding amounts which would have been recorded under the previous method. (f) Property, plant and equipment and depreciation (except for lease assets) Depreciation of property, plant and equipment of the Company and its consolidated subsidiaries is calculated principally by the straight-line method based on the estimated useful lives of the respective assets and their residual value except for certain consolidated subsidiaries for which depreciation is calculated by the declining-balance method based on the estimated useful lives of the respective assets and their residual value. Pursuant to the amendment to the Corporate Tax Law, the remaining balances of tangible fixed assets acquired on and before March 31, 2007 and being fully depreciated up to the maximum amount of depreciation are further depreciated from this fiscal year by the Company and domestic consolidated subsidiaries using a straight-line method over 5 years. As a result, operating income and income before income taxes and minority interests decreased \1,135 million (U.S.$12,469 thousand), for the year ended December 31, 2008, compared with the corresponding amounts which would have been recorded under the previous method. (g) Intangible fixed assets (except for lease assets) Amortization of intangible fixed assets, primarily consisted of software, is calculated by the straight-line method based on the estimated useful life of respective assets in this category (5 years for software). (h) Income taxes Deferred tax assets and liabilities have been recognized in the consolidated financial statements determined with respect to the differences between financial reporting and the tax bases of assets and liabilities and were measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse. (i) Research and development costs Research and development costs are charged to income when incurred. (j) Leases Non-cancelable lease transactions are primarily 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 assets to the lessee are accounted for as finance leases in the Company and consolidated subsidiaries with some exceptions as mentioned in below. Effective for the year ended December 31, 2008, two consolidated Toagosei Co., Ltd. and Consolidated Subsidiaries December 31, 2008 32 Annual Report 2008