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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 Receivables and payables in foreign currencies are translated into yen at the rates of exchange in effect at the balance sheet date. Assets and liabilities of the foreign consolidated subsidiaries are translated at the same exchange rates. Revenue and expense accounts of the foreign consolidated subsidiaries had been also translated at the same exchange rates. However, effective from the year commencing January 1, 2009, those are translated at periodical average rates during the year. This change was made to exclude the influence of abrupt fluctuations in foreign exchange rates near the year-end. The effect of the change to income was insignificant. (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 were stated at cost determined by the moving average method until December 31, 2008. Effective from the year commencing January 1, 2009, the inventories held for the selling purpose are stated at the lower of cost or net realizable value, cost being determined by the average method in the period. This change was due to the adoption of “Accounting Standard for Valuation of Inventory” (Accounting Standards Board of Japan Statement No.9, July 5, 2006). The adoption of the new accounting standard resulted in a decrease of operating income and income before income taxes and minority interests by \262 million (U.S.$2,845 thousand), respectively, 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. Reflecting the amended Corporate Tax Law, the Company revised the estimated useful lives of machinery. The effect of the change was to increase operating income and income before income taxes and minority interests by \177 million (U.S. $1,928 thousand), respectively. (g) Intangible fixed assets (except for lease assets) Amortization of intangible fixed assets, primarily consisting of software, is calculated by the straight-line method based on the estimated useful life of the respective assets in this category (5 years for software). (h) Income taxes Deferred tax assets and liabilities are recognized in the consolidated financial statements determined with respect to the differences between financial reporting and the tax bases of assets and liabilities and are 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 Lease transactions had been primarily accounted for as operating leases (regardless of whether such leases were classified as operating or finance leases) except for the lease agreements which stipulate the transfer of ownership of the leased assets to the lessee. Effective from the year commencing January 1, 2009, the Company, adopted new accounting standards, “Accounting Standard for Lease Transactions” (Accounting Standards Board of Japan Statement No.13, June 17, 1993, revised on March 30, 2007) and “Guidance on Accounting Standard for Lease Transactions,” (Accounting Standards Board of Japan Guidance No.16, January 18, 1994, revised on March 30, 2007). The revised accounting standards require that all finance lease transactions shall be capitalized by recognizing lease assets and corresponding lease obligations in the balance sheet. Depreciation of leased assets shall be calculated based on the assumption that the useful life equals the lease term and the residual value is zero. Toagosei Co., Ltd. and Consolidated Subsidiaries December 31, 2009 30 Annual Report 2009