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over the average remaining years of service of the eligible employees (13 to 15 years). Actuarial gain or loss of two consolidated subsidiaries are amortized by the straight-line method over a period (5 years and 10 years, respectively) which is shorter than the average remaining years of service of the eligible employees. In addition, directors of the Company and one consolidated subsidiary are customarily entitled to lump-sum payments under the unfunded retirement benefits plans. The provision for retirement benefits for these officers has been made at estimated amounts. On April 1, 2004, the Company changed its rules for tax-qualified pension plans and lump-sum payment plans. As a result, unrecognized prior year service cost to reduce the retirement benefit obligation was incurred. The unrecognized prior year service cost is being amortized by the straight-line method over a period (14 years) which is shorter than the average remaining years of service of the eligible employees. On October 1, 2010, one consolidated subsidiary changed its rules for tax-qualified pension plans and lump-sum payment plans. As a result, an unrecognized prior year service cost to reduce the retirement benefit obligation was incurred. The unrecognized prior year service cost is being amortized by the straight-line method over a period (15 years) which is shorter than the average remaining years of service of the eligible employees. (m) Derivative financial instruments The Company has entered into various contracts of derivative financial instruments in order to manage certain risks arising from adverse fluctuations in interest rates. Derivative financial instruments are carried at fair value with any changes in unrealized gain or loss charged or credited to income, unless when those which meet certain hedging criteria for special accounting treatment under which any differences paid or received on the interest rate swaps are recognized as adjustments to interest expense over the life of such swaps, thereby adjusting the effective interest rate on the hedged items, which are the underlying borrowings. (n) Appropriation of retained earnings Under Corporation Law of Japan, the appropriation of retained earnings with respect to a given financial year is made by resolution of the shareholders at a general meeting to be held subsequent to the close of such financial year. The accounts for that year do not, therefore, reflect such appropriations. 3. Changes in Accounting Policy Six consolidated subsidiaries previously applied the declining-balance method for depreciation of property, plant and equipment depreciation (except for leased assets). Effective from the beginning of the fiscal year, January 1, 2012, the consolidated companies adopted the straight-line method. The consolidated companies changed the depreciation method in order to standardize cost management between parent and subsidiaries after the Company merged the sales departments of the consolidated subsidiaries and changed to manufacturing subsidiaries and in order to reflect appropriate periodic profit and loss by matching long-term and stable revenues with depreciation of property, plant and equipment allocated based on the straight-line method over their useful lives. As a result, depreciation for the fiscal year ended December 31, 2012 decreased by \439 million (U.S.$5,077 thousand) and operating income and income before income taxes and minority interests increased by \423 million (U.S.$4,889 thousand) compared with the amounts that would have been recorded under the previous method. 4. Accounting Standards Issued but Not Yet Effective Accounting standard for retirement benefits “Accounting Standard for Retirement Benefits” (ASBJ Statement No. 26 issued on May 17, 2012) and “Guidance on Accounting Standard for Retirement Benefits” (ASBJ Guidance No. 25 issued on May 17, 2012). Under the revised accounting standard, actuarial gains and losses and unrecognized prior service costs that are yet to be recognized in profit or loss shall be recognized within net assets (accumulated other comprehensive income), after adjusting for tax effects, and the deficit or surplus shall be recognized as a liability or asset. The retirement benefit obligation can be attributed to each period by the benefit formula basis by the straight-line method and the calculation method for the discount rate shall be changed. The Company expects to apply the revised accounting standard from the fiscal year ended December 31, 2014 and apply the revised calculation method for the projected benefit obligation and service cost from beginning of the fiscal year ended December 31, 2015. As of December 31, 2012, the Company is in the process of measuring the effects of applying the revised accounting standard on financial statements. 5. Additional Information Effective January 1, 2012, the Company and its consolidated subsidiaries adopted the “Accounting Standard for Accounting Changes and Error Corrections” (ASBJ Statement No. 24 issued on December 4, 2009) and “Guidance on Accounting Standard for Accounting Changes and Error Corrections” (ASBJ Guidance No. 24 issued on December 4, 2009). 6. U.S. Dollar Amounts The translation of yen amounts into U.S. dollar amounts is made at \86.58 = U.S.$1.00, the approximate exchange rate at December 31, 2012, and is included solely for convenience. The translation should not be construed as a representation that yen have been, could have been, or could in the future be, converted into U.S. dollars at the above or any other rate. 7. Inventories Inventories at December 31, 2012 and 2011 were as follows: Millions of yen Thousands of U.S. dollars 2012 2011 2012 Merchandise and finished products ... \10,981 \11,878 $126,834 Work in process ............................................ 414 437 4,790 Raw materials and supplies ................... 4,593 4,675 53,055 \15,989 \16,991 $184,680 8. Property, Plant and Equipment Property, plant and equipment, net at December 31, 2012 and 2011 were summarized as follows: Millions of yen Thousands of U.S. dollars 2012 2011 2012 Land ..................................................................... \17,299 \16,857 $199,809 Buildings and structures.......................... 20,096 19,897 232,115 Machinery, equipment and other ..... 20,798 21,587 240,218 Construction in progress ........................ 7,637 3,217 88,214 Leased assets .................................................. 234 193 2,704 \66,065 \61,754 $763,062 Toagosei Co., Ltd. 39 |