Significant components of the deferred tax assets and liabilities held as of December 31, 2008 and 2007 were as follows: Millions of yen Thousands of U.S. dollars 2008 2007 2008 Deferred tax assets: Valuation loss on securities ..... \ 1,344 \ 1,030 $ 14,775 Elimination of unrealized profit ... 1,448 1,437 15,909 Accrued retirement benefits .... 1,604 1,966 17,624 Accrued enterprise tax ............ 112 296 1,233 Allowance for doubtful receivables ... 2,336 1,396 25,672 Accrued bonuses .................... 68 75 750 Net operating loss carry forwards ... 1,599 1,880 17,572 Impairment loss on property, plant and equipment ............ 1,288 1,251 14,151 Other ...................................... 737 1,086 7,885 Gross deferred tax assets ........ 10,520 10,420 115,574 Valuation allowance ............... (6,118) (5,166) (67,211) Total deferred tax assets ............. 4,402 5,253 48,363 Deferred tax liabilities: Reserve under Special Taxation Measures Law ....................... (444) (478) (4,887) Undistributed earnings of overseas partnerships ............ (509) (616) (5,598) Gain on contribution of securities to retirement benefit trust ......... (805) (822) (8,853) Valuation difference on other securities ................ (469) (3,586) (5,155) Other ...................................... (2) (2) (27) Total deferred tax liabilities ......... (2,232) (5,505) (24,523) Net deferred tax assets ................ \ 2,170 \ 252 $ 23,840 11. Capital Surplus and Retained Earnings The new Corporation Law of Japan (the “Law”), which superseded most of the provisions of the Commercial Code of Japan, went into effect on May 1, 2006. The Law provides that an amount equal to 10% of the amount to be disbursed as distributions of capital surplus (other than the capital reserve) and retained earnings (other than the legal reserve) be transferred to the capital reserve and the legal reserve, respectively, until the sum of the capital reserve and the legal reserve equals 25% of the capital stock account. Such distributions can be made at any time by resolution of the shareholders, or by the Board of Directors if certain conditions are met. The legal reserve amounted to \3,990 million (U.S.$43,831 thousand) and \3,990 million as of December 31, 2008 and 2007, respectively. 12. Research and Development Costs Research and development costs included in selling, general and administrative expenses and manufacturing costs for the years ended December 31, 2008 and 2007 were \4,753 million (U.S.$52,217 thousand) and \4,794 million, respectively. 13. Leases The following pro forma amounts represent the acquisition cost, accumulated depreciation and net book value of leased property as of December 31, 2008 and 2007, which would have been reflected in the consolidated balance sheets if finance lease accounting had been applied to the finance lease transactions currently accounted for as operating leases: Millions of yen Thousands of U.S. dollars 2008 2007 2008 Acquisition cost: Buildings and structures .......... \ 38 \ . $ 422 Machinery and equipment ...... 842 898 9,257 Other intangible fixed assets ... 22 1 244 \903 \900 $9,924 Accumulated depreciation: Buildings and structures .......... \ 23 \ . $ 257 Machinery and equipment ...... 541 456 5,952 Other intangible fixed assets ... 3 0 39 \569 \456 $6,251 Net book value: Buildings and structures .......... \ 14 \ . $ 162 Machinery and equipment ...... 300 441 3,305 Other intangible fixed assets ... 18 1 205 \334 \443 $3,673 Lease payments relating to finance lease transactions accounted for as operating leases amounted to \185 million (U.S.$2,033 thousand) and \159 million, which were equal to the depreciation expense of the leased assets computed by the straight-line method over the respective lease terms, for the years ended December 31, 2008 and 2007, respectively. Future minimum lease payments (including the interest portion thereon) subsequent to December 31, 2008 for non-cancelable operating leases and finance lease transactions accounted for as operating leases are summarized as follows: Millions of yen Thousands of U.S. dollars Year ending December 31, Operating leases Finance leases Operating leases Finance leases 2009........................... \114 \154 $1,259 $1,700 2010 and thereafter .... 152 179 1,671 1,972 Total ........................... \266 \334 $2,930 $3,673 14. Derivative Transactions The Company intends to utilize derivative financial instruments for the purpose of hedging its exposure against adverse fluctuations in foreign currency exchange rates and interest rates, but does not enter into such transactions for speculation or trading purposes. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the derivative financial instruments, but any such loss would not be material because the Company enters into transactions only with financial institutions holding high credit ratings. The notional amounts of the derivative financial instruments do not necessarily represent the amounts exchanged by the parties and, therefore, are not a direct measure of the Company’s risk exposure in connection with derivative financial instruments. There was no disclosure of fair value information for derivatives as of December 31, 2007 since all the derivatives as of that date have been accounted for as hedges. 36 Annual Report 2008