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Notes to
Consolidated Financial Statements
1.Basis of Presentation of Financial Statements
Kobe Steel,Ltd.(the "Company"),a Japanese corporation,
maintains its records and prepares its financial statements in
Japanese yen in accordance with generally accepted accounting
principles and practices in Japan.The accompanying
consolidated financial statements have been translated from
the considated financial statements which are prepared for
Japanese domestic purposes,in accordance with the provisions
of the Securities and Exchange Law of Japan and filed
with the Ministry of Finance of Japan and stock exchanges in
Japan.Certain modifications,including presentation of the
statements of stockholders' equity and cash flow,have been
made in the accompanying consolidated financial statements
to facilitate understanding by foreign readers.
Certain reclassifications have been made in the accompanying
consolidated financial statements for year ended March 31,1994
to conform to the presentation for 1995.
For convenience only,U.S.dollar amounts presented in the
accompanying consolidated financial statements have been
translated from Japanese yen at the rate of ¥89.35 to US$1,
the rate prevailing on March 31,1995.
2. Summary of accounting policies
(1)Consolidated
The consolidated financial statements include the accounts of
the Company and its significant majority-owned subsidiaries
(the "group").For the year ended March 31,1995,the
accounts of 105(37 in 1994) subsidiaries have been included
in the consolidated financial statements.Intercompany
transactions and accounts have been eliminated.Foreign
subsidiaries financial statements,prepared under accounting
principles generally accepted in the respective countries,are
used in the preparation of the consolidated financial
statements.
Investments in unconsolidated subsidiaries and 20 percent
to 50 percent owned affiliates,except for insignificant
companies,are accounted for by the equity method.For the
year ended March 31,1995,44(11 in 1994)investments were
accounted for by the equity method.
The difference,if considered significant,between the cost
of investments and the equity in their net assets at their dates
of acquisition is amortized over five years (forty years for
acquisitions made by certain foreign consolidated
subsidiaries).
When the Company's share of the net losses of an affiliate
exceeds the adjusted cost of the investment,the Company
discontinues applying the equity method and the investment
is reduced to zero.At March 31,1995 and 1994,the Company's
share of such accumulated losses which were not reflected
in the carrying amount of investments were ¥607 million
($6,794 thousand) and ¥136 million,respectively.
(2)Cash Equivalents
The Company considers time deposits(due within one year)
to be cash equivalents.
(3)Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided in amounts
considered to be sufficient to cover possible losses on collection.
With respect to the Company and consolidated
domestic subsidiaries,it is determined by adding the
uncollectable amounts individually estimated for doubtful
accounts to a maximum amount permitted for tax purposes,
which is calculated collectively.The allowance for doubtful
accounts of foreign consolidated subsidiaries is determined by
estimates of management.
(4)Marketable Securities and Investments in Securities
Listed equity securities included in both marketable securities
and investments in securities,except for certain equity
securities of unconsolidated subsidiaries and affiliates,in
which the Company's ownership equals or exceeds 25
percent,are principally stated at the lower of moving average
cost or market value.Other securities,excluding investments
accounted for by the equity method,are stated at moving
average cost.If significant impairment of value is deemed
permanent,cost is appropriately reduced.
(5)Inventories
Inventories are valued at cost,as determined principally
by the following methods:
Two main works in the Iron and Steel Sector and the
three main plants in the Aluminum and copper Sector
................................................................... Last-in,first-out
Finished goods and work in process in one plant in the
Iron and Steel Sector and the Machinery Sector
..........................................................Specific identification
Others...........................................................................Average
(6)Depreciation of Plant and Equipment
Depreciation of plant and equipment is principally provided
using the straight-line method over estimated useful lives.
(7)Long-term Construction Contracts
Sales and the related costs of certain long-term(over one
year) construction contracts of the Company are recognized
by the percentage of completion method.
(8)Research and Development Expenses
Expenses of the Company in respect of the development of
new products and research into and the application of new
technologies (being in each case expenses which are expected
to contribute to future sales), are deferred and amortized over
a five-year period.
(9)Income and Enterprise Taxes
Income and enterprise taxes are payable by the Company and
its domestic consolidated subsidiaries on the basis of taxable
income. Income and enterprise taxes, which in the aggregate
indicate a statutory tax rate of approximately 52 percent,are
based on taxable income.Enterprise tax is included in selling,
general and administrative expenses.
Deferred taxes relating to timing differences between
financial accounting and tax reporting are recognized by
certain foreign consolidated subsidiaries and in respect of the
elimination of intercompany profits and other tax effects
resulting from consolidation. Long-term accrued income and
enterprise taxes are also recognized in respect of the
amortization of deferred income as described in Note 2(13)
below. Such income is recognized for the purposes of taxation,
and the provision for long-term accrued income and
enterprise taxes is reversed, at the time of redemption of the
related bonds.
(10)Reserve for Loss from Natural Disaster
In order to provide for the cost of repairs and other expenses
related to fixed assets that were damaged in the Great
Hanshin Earthquake disaster,the reserve for loss from natural
disaster is estimated in the amount considered necessary as of
the end of the year.
(11)Employees' Retirement Benefits
Substantially all employees of the Company and its domestic
consolidated subsidiaries are entitled to a lump-sum payment
at the time of retirement. The amount is, in general,
determined on the basis of length of service, base salary at
the date of retirement and cause of retirement. In the case of
involuntary retirement, the employee is entitled to a greater
payment than in the case of voluntary retirement.
Employees of the Company whose employment is
terminated after the age of 50 may elect to take part of their
retirement benefits in the form of pension payments. The
funds required to make pension payments are entrusted to an
outside trustee. The liability in respect of lump-sum
retirement benefits is stated at the present value of the
unfunded portion of the expected future retirement benefits
attributable to eligible enployees' years of service as at the
balance sheet date. Prior service costs in respect of the
pension plan, less that portion of the provision in respect of
lump-sum retirement benefits no longer required by resaon of
the introduction of the pension scheme, are amortized on the
declining balance method at the rete of 15 percent per annum.
The Company's domestic consolidated subsidiaries provide
for retirement benefits principally at the rate of 40 percent of
the expected future retirement benefits attributable to eligible
employees' years of service as at the balance sheet date.
Certain foreign consolidated subsidiaries also have retirement
benefits plans covering eligible employees.
(12)Allowance for Special Repairs
Blast furnaces and hot blast stoves, including related
machinery and equipment, periodcally require substantial
component replacement and repair. The estimated future
costs of such work are provided for and charged to income on
a straight-line basis over the period to the date of the
anticipated replancement and repair. The difference between
such estimated costs and actual costs is charged or credited to
income at hte time the work takes place.
(13)Tranclation of Foreign Currencies
Current receivables and payables denominated in foreign
currencies are translated at historical rates in accordance with
Statement No. 46 of the Audit Committee of the Japanese
Institute of Certified Public Accountants.
All other assets and liabilities denominated in foreign
currencies are translated at historical rates except those,
including bonds denominated in foreign currencies, hedged
by forward exchange contracts. Such bonds are translated into
Japanese yen at the contracted forward exchange rates and
the difference between the amount at the contracted forward
exchange rate and the amount at the spot rate at the date of
issue of the bonds is deferred and shown as deferred income
in the consolidated balance sheets. The deferred income is
amortized over the life of the forward exchange contracts. For
the years ended March 31, 1995 and 1994, amoritzation of
such deferred income amounting to ¥909 million($10,173
thousand) and ¥2,137 million respectively was credited to
"Other income (expenses): Other, net" in the consolidated
statements of operations.
Financial statements of consolidated foreign subsidiaries
are translated into Japanese yen at current rates for all
accounts, except for common stock, additional paid-in capital
and retained earnings at the beginning of the year which are
tranclated at historical rates. The resulting translation
adjustments are separately presented as "foreign currency
translation adjustments" in the consolidated financial
statements.
(14)Leases
Finance leases which do not transfer ownership and do not
have bargain purchase provisions are accounted for in the
same manner as operating leases by Company and
consolidated domestic subsidiaries. Finance leases of certain
foreign consolidated subsidiaries are capitalized in accordance
with generally accepted accounting principes in the
respective countries.
(15) Net Loss per 1,000 Shares
Computations of net loss per 1,000 shares are based on the
weighted average number of shares outstanding during the
year.
3. Accounting Change
During the year ended March 31, 1995 a consolidated
subsidiary changed its method of accounting for deferred
factory start up costs from amortizing them over five years to
charging them directly to income. As a result of the successful
completion of the first phase of the subsidiaries project to
produce 64 megadram memory chips, this change was made
to reflect its advancement to the production stage. The effect
of this change was to increase the loss before income taxes by
¥4,277 million ($47,868 thousand) and is shown in the
consolidated statement of operations as "Write off of deferred
factory start up costs".
4. Differences between Japanese Accounting Principles and
International Accounting Standards
The accompanying consolidated financial statements of the
Company are prepared in conformity with accounting
principles generally accepted in Japan, which differ from
International Accounting Standards("IAS") with respect to
the company and its consolidated subsidiaries as described
below. For the purpose of this comparison IAS extant at
January 1, 1995 are used even though certain IAS were not
effective with respect to the years ended March 31, 1995 and
1994.
(1) Consolidation and the Equity Method of Accounting
With respect to the year ended March 31, 1995, generally
accepted accounting principles in Japan require that (i) all
subsidiaries be consolidated and (ii) all affiliated companies
be accounted for by the equity method with the exception
that investments that are immaterial may be excluded from
this treatment. These Japanese accounting principles are in
substantial agreement with IAS 27 and IAS 28 which require,
except on certain specific grounds, the consolidation of all
subsidiaries and the application of the equity method to all
affiliated companies.
However, under generally accepted accounting principles in
Japan in effect for the year ended March 31, 1994, (i)
subsidiaries whose total assets, net sales and net income were
not significant in the aggregate (i.e. significant being defined
as 10 percent or more of the respective amounts in the
consolidated financial statements) were excluded from
consolidation; and (ii) the equity method was not required for
unconsolidated subsidiaries and affiliated companies whose
net income in the aggregate was not significant under similar
criteria. For the year ended March 31, 1994, total assets, net
sales and net losses of unconsolidated subsidiaries, which
included inter-company amounts, represented 9.61%, 8.44%
and 4.55%, respectively, of the combined totals, before
consolidation, of the Group.
(2) Tax Effect Accounting
Income taxes are provided, in principle, based on taxable
income and on the basis of amounts currently payable for
each period. The Company dose not recognize the tax effect
of timing differences, except as indicated in Note 2(9).
Therefore, the Company's policy is not in accordance with
IAS 12 which requires that the tax expense for a period be
determined on the basis of tax effect accounting.
It has not been practicable to quantify the effect on net
income of this difference in accounting policy.
(3) Leases
IAS 17 requires that finance leases be reflected in the lessee's
accounts by recording an asset and liability equal to the lower
of the net fair value of the leased property and the precent
value of the minimum lease payments. The asset should be
depreciated and rentals apportioned between finance charges
and reduction of the outstanding liability. With respect to the
year ended March 31, 1995, newly introduced Japanese
accounting principles require that finance leases, as defined
therein, be capitalized with the exception that finance leases
that do not transfer ownership and do not have bargain
purchase provisions may be accounted for in the same
manner as operating leases. For the year ended March 31,
1995, the Company had no finance leases that were required
to be capitalized. For the year ended March 31, 1994, all leases
were accoounted for as operating leases in accordance with
generally accepted accounting principles in Japan in effect for
that year.
It has not been practicable to quantify the effect no net
income of this difference in accounting policy.
(4)Translation of Foreign Currencies
Short-term and long-term receivables and payables
denominated in foreign currencies, except for long-term debt
covered by forward exchange contracts, are translated at the
exchange rate existing at the time of the transaction. This is
not in accordance with IAS 21 which requires foreign currency
monetary items to be translated at the rate of exchange in
effect at each balance sheet date, except when covered by
forward exchange contracts.
The effect of applying IAS 21 to the financial statements
would be to increase loss before income taxes for the year
ended March 31, 1995 and 1994 by approximately ¥1,400
million ($15,669 thousand) and ¥460 million, respectively.
Financial statements of foreign subsidiaries are translated
into Japanese yen in the manner described in Note 2(13). The
translation policy is not in accordance with IAS 21 which
requires income and expenses be translated at exchange rates
at the dates of the transactions.
(5) Inventories
As noted in Note 2(5), the Company values inventories at
cost in accordance with generally accepted accounting
principles in Japan. IAS 2 requires that inventories be
mesaured at the lower of cost and net realizable value.
Furthermore, for determining the cost of certain inventories
the Company applies the last-in, first-out(LIFO) method
which is an allowed alternative treatment under IAS 2 for
which additional disclosure is required.
It has not been practicable to quantify the effect on net
income of this difference in accounting policy and determine
the additional disclosure required under IAS 2 when the LIFO
method is applied.
(6) Research and Development Expenses
Expenses in respect of the development of new products and
in respect of research into and the application of new
technologies (in each case expenses which are expected to
contribute to future seles) are deferred and amortized over a
five year period. This is not in accordance with IAS 9, which
requires research and development costs to be charged as an
expense of the period in which they are incurred except to the
extent that development costs are deferredon certain
specified grounds.
The effect of applying IAS 9 to the financial statements
would be to decrease the loss before income taxes for the
years ended March 31, 1995 by approximately ¥5,500 million
($61,556 thousand) and increase the loss before income taxes
for the year ended March 31, 1994 by approximately ¥800
million.
(7)Changes in Accounting policy
Under generally accepted accounting principles in Japan, the
effects of changes in accounting policy are reflected in the
statement of operations for the year of the change. IAS 8
provides that a change in accounting policy should be applied
periods are reasonably determinable.
The effect of applying IAS 8, with respect to the change in
accounting policy described in Note 3, retrospectively to the
financial statements for the year ended March 31, 1994, would
have been to reduce income before income taxes by factory
start-up costs in the amount of ¥6,417 million.
(8) Market Value Information on Marketable Securities
Market value information relating to marketable securities is
required to be disclosed on the non-consolidated basis in the
Securities Report filed with the Ministry of Finance under the
Securities and Exchange Law of Japan. Such market value
information does not constitute any part of the financial
statements and related notes thereto and, accordingly, is not
subject to audit by the independent auditors. IAS 25 requires
the disclosure of the market value of marketable securities,
other than long-term investments, if different from the
carrying amount in the financial statements.
The following shows the unaudited market value and
unrealized gains and losses on securities held by the
Company at March 31, 1995 and 1994:
Thousands of
U.S.dollars
Millions of yen (Note 1) Millions of yen
============================== ========================== ========= ==========================
March 31,1995 March 31,1995 March 31,1994
------------------------------ -------------------------- --------- --------------------------
Balance Unreali- Unreali- Balance Unreali-
sheet Market zed gain zed gain sheet Market zed gain
amount value (loss) (loss) amount value (loss)
-------- -------- -------- --------- -------- -------- --------
Marketable securities:
Corporate stocks............ ¥175,592 ¥207,639 ¥32,047 $358,668 ¥199,686 ¥273,762 ¥74,076
Bonds....................... 5 7 2 22 5 8 3
-------- -------- -------- --------- -------- -------- --------
175,597 207,646 32,049 358,690 199,691 273,770 74,079
-------- -------- -------- --------- -------- -------- --------
Investments in securities:
Corporate stocks............ 44,001 76,770 32,769 366,749 39,642 87,228 47,586
Other....................... - - - - 593 465 (128)
-------- -------- -------- --------- -------- -------- --------
44,001 76,770 32,769 366,749 40,235 87,693 47,458
-------- -------- -------- --------- -------- -------- --------
Total......................... ¥219,598 ¥284,416 ¥64,818 $725,439 ¥239,926 ¥361,463 ¥121,537
======== ======== ======== ========= ======== ======== ========
-------- -------- -------- --------- -------- -------- --------
These amounts do not include unlisted stocks. The
Company does not have any outstanding options or futures
transactions.
5.Short-Term Borrowings and Long-Term Debt
----------------------------------------------------------------------
Short-term borrowings at March 31, 1995 and 1994 consisted
of the following:
Thousands of
U.S.dollars
Million of yen (Note 1)
========================================================= ===================== ===========
1995 1994 1995
--------------------------------------------------------- ---------- ---------- -----------
Bank loans............................................... ¥326,794 ¥268,755 $3,657,459
Commercial paper......................................... 102,000 143,000 1,141,578
---------- ---------- -----------
¥428,794 ¥411,755 $4,799,037
========== ========== ===========
---------- ---------- -----------
Long-term Debt at March 31, 1995 and 1994 consisted of the
following:
Thousands of
U.S.dollars
Million of yen (Note 1)
========================================================= ===================== ===========
1995 1994 1995
--------------------------------------------------------- ---------- ---------- -----------
7.7% to 8.2% mortgage bonds, due 1995.................... ¥ 10,400 ¥ 27,600 $ 116,396
3.9% domestic mortgage bonds with warrants, due 1995..... - 50,000 -
4.875% U.S. dollar bonds with warrants, due 1995......... - 47,478 -
2.8% domestic bonds with warrants, due 1995.............. 50,000 50,000 559,597
4.5% U.S. dollar bonds with warrants, due 1996........... 48,626 48,626 544,219
Floating rate(Libor plus 0.2%) notes due 1996............ 20,000 20,000 223,839
2.65% to 7.1% yen bonds, due 1996 through 2003........... 370,000 310,000 4,141,018
Medium-term notes, due 1995 through 2002, issued by Kobe Steel
International(Netherlands) B.V., a consolidated
subsidiary............................................. 23,932 - 267,846
Loans, principally from banks and insurance Companies.... 430,532 405,106 4,818,490
---------- ---------- -----------
953,490 958,810 10,671,405
Less current portion..................................... 143,643 181,727 1,607,645
---------- ---------- -----------
¥809,847 ¥777,083 $9,063,760
========== ========== ===========
---------- ---------- -----------
Mortgage bonds totaling ¥10,400 million($116,396
thousand) at March 31, 1995 were secured by enterprise
mortgages, which give the holders a security interest in all
assets subordinate to that of present or future secured
creditors but senior to that of general unsecured creditors.
================================================================================
A summary of the terms for exercise of the detachable warrants is as follows:
================================================================================
Warrants originally issued with 2.8% 4.5%
bonds bonds
------------- -------------
Exercise period: On and after Jul. 15, '91 Jul.10, '91
To Jun. 16, '95 Jun.12, '96
Exercise price, which is subject to adjustment in certain circumstances ¥531.0($5.94) ¥531.0($5.94)
The aggregate annual maturities of long-term debt were as follows:
Thousands of
Million U.S.dollars
Years ending March 31 of yen (Note 1)
==================================================================== ========== ===========
1996................................................................ ¥143,643 $1,607,645
1997................................................................ 154,322 1,727,163
1998................................................................ 133,831 1,497,829
1999 and thereafter................................................. 521,694 5,838,768
---------- -----------
¥953,490 $10,671,405
========== ===========
---------- -----------
6.Stockholders' Equity
----------------------------------------------------------------------
Under the Commercial Code of Japan, the entire amount of
the issue price of shares is required to be accounted for as
stated capital, although a company may, by resolution of its
board of directors, account for an amount not exceeding one-
half of the issue price of the new shares as additional paid-in
capital.
The Commercial Code of Japan provides that an amount
equal to at least 10 percent of any disbursement as an appro-
priation of retained earnings in each period shall be appro-
priated as a legal reserve until the reserve equals 25 percent of
the amount of common stock. This reserve is not available for
dividends, but may be used to reduce a deficit by a resolution
of the stockholders or may be capitalized by a resolution of
the board of directors.
7.Contingent Liabilities
----------------------------------------------------------------------
At March 31, 1995 the Group was contingently liable as follows:
Thousands of
Million U.S.dollars
of yen (Note 1)
==================================================================== ========== ===========
Trade notes discounted.............................................. ¥72,246 $808,573
Trade notes endorsed................................................ 530 5,932
Guarantees of loans................................................. 11,149 124,779
---------- -----------
¥83,925 $939,284
========== ===========
---------- -----------
8.Selling, General and Administrative Expenses
----------------------------------------------------------------------
Selling, general and administrative expenses for the years
ended March 31, 1995 and 1994 can be analyzed as follows:
Thousands of
U.S.dollars
Million of yen (Note 1)
========================================================= ===================== ===========
1995 1994 1995
--------------------------------------------------------- ---------- ---------- -----------
Freight.................................................. ¥ 36,837 ¥ 36,857 $ 412,278
Employees' compensation.................................. 32,111 30,371 359,384
Research and development................................. 19,208 18,635 214,975
Depreciation............................................. 3,257 2,046 36,452
Other.................................................... 62,261 66,054 696,821
---------- ---------- -----------
¥153,674 ¥153,963 $1,719,910
========== ========== ===========
---------- ---------- -----------
9.Disaster Casualty Loss
----------------------------------------------------------------------
The Company and certain domestic subsidiaries suffered
extensive damage to fixed assets and incurred related cost of
production stoppage and repairs in the Great Hanshin
Earthquake of January 17, 1995, as follows:
Thousands of
Million U.S.dollars
of yen (Note 1)
==================================================================== ========== ===========
Destroyed plant and equipment....................................... ¥ 5,901 $ 66,044
Repairs and removal of debris....................................... 7,346 82,216
Fixed costs during production stoppage.............................. 15,600 174,594
Provision for loss from natural disaster(Note 2(10))................ 32,234 360,761
Other related expenses.............................................. 5,522 61,802
---------- -----------
¥66,603 $745,417
========== ===========
---------- -----------
10.Segment Information
----------------------------------------------------------------------
(1) Industry Segment
The Group's operations are divided into four principal
business segments: Iron and Steel, Aluminum and Copper,
Machinery, and Electronics and Information. Business
segment information was as follows:
Thousands of
U.S.dollars
Million of yen (Note 1)
========================================================= ===================== ===========
1995 1994 1995
--------------------------------------------------------- ---------- ---------- -----------
Sales to customers: Iron and Steel..................... ¥ 518,483 ¥ 553,335 $ 5,802,832
Aluminum and Copper................ 278,867 238,994 3,121,063
Machinery.......................... 438,994 390,267 4,913,195
Electronics and Information........ 67,794 - 758,746
Other.............................. 31,445 66,372 351,931
---------- ---------- -----------
Consolidated net sales........... 1,335,583 1,248,968 14,947,767
========== ========== ===========
---------- ---------- -----------
Inter-segment sales: Iron and Steel..................... 7,832 9,037 87,655
Aluminum and Copper................ 920 833 10,297
Machinery.......................... 14,163 21,759 158,511
Electronics and Information........ 13,025 - 145,775
Other.............................. 51,134 63,886 572,289
---------- ---------- -----------
87,074 95,515 974,527
========== ========== ===========
---------- ---------- -----------
Total sales: Iron and Steel..................... 526,315 562,372 5,890,487
Aluminum and Copper................ 279,787 239,827 3,131,360
Machinery.......................... 453,157 412,026 5,071,706
Electronics and Information........ 80,819 - 904,521
Other.............................. 82,579 130,258 924,220
Eliminations....................... (87,074) (95,515) (974,527)
---------- ---------- -----------
Consolidated net sales........... 1,335,583 1,248,968 14,947,767
========== ========== ===========
---------- ---------- -----------
Operating expenses: Iron and Steel..................... 493,609 537,214 5,524,443
Aluminum and Copper................ 266,073 236,181 2,977,873
Machinery.......................... 427,815 399,443 4,788,081
Electronics and Information........ 66,978 - 749,614
Other.............................. 75,773 117,369 848,047
Eliminations....................... (86,228) (93,444) (965,059)
---------- ---------- -----------
Consolidated operating expenses.. 1,244,020 1,196,763 13,922,999
========== ========== ===========
---------- ---------- -----------
Operating income: Iron and Steel..................... 32,706 25,158 366,044
Aluminum and Copper................ 13,714 3,646 153,487
Machinery.......................... 25,342 12,583 283,625
Electronics and Information........ 13,841 - 154,907
Other.............................. 6,806 12,889 76,173
Eliminations....................... (846) (2,071) (9,468)
---------- ---------- -----------
Consolidated operating income.... ¥ 91,563 ¥ 52,205 $ 1,024,768
========== ========== ===========
---------- ---------- -----------
(2) Overseas sales
Overseas sales totals and totals as percentages of consolidated
net sales were ¥258,218 million($2,8889,961 thousand) and
¥224,264 million and 18.0 percent and 16.6 percent for the
years ended March 31, 1995 and 1994 respectively.
Overseas sales consisted of expected of export sales from Kobe Steel,
Ltd., export sales from domestic consolidated subsidiaries,
and sales from overseas consolidated subsidiaries excluding
sales to Japan.
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