Tokyo Commodity Exchange, Inc. and a Subsidiary

Transcription

1 Tokyo Commodity Exchange, Inc. and a Subsidiary Consolidated Financial Statements for the Year Ended March 31, 2016, and Independent Auditor's Report

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3 Tokyo Commodity Exchange, Inc. and a Subsidiary Consolidated Balance Sheet March 31, 2016 Thousands of U.S. Dollars Millions of Yen (Note 1) ASSETS CURRENT ASSETS: Member deposits Deposits held in banks (Notes 6 and 13) $ 2,177 Clearing margin Deposits held in banks (Notes 7 and 13) 79,878 64, ,888 Over-the-counter clearing margin Deposits held in banks (Notes 7 and 13) Clearing funds Deposits held in banks (Notes 7 and 13) 6,500 4,278 57,687 Over-the-counter clearing funds Deposits held in banks (Notes 7 and 13) Cash and cash equivalents (Note 13) 4,645 2,824 41,225 Time deposits and banking arrangements other than cash equivalents (Note 13) 800 3,800 7,100 Marketable securities (Notes 4 and 13) 6,593 Operating accounts receivable (Note 13) Income taxes receivable 354 3,138 Accrued receivables on mark-to-market loss (Note 13) 1, ,305 Supplies Deferred tax assets (Note 11) Other current assets 206 1,015 1,830 Total current assets 93,773 84, ,207 PROPERTY AND EQUIPMENT: Buildings and structures 3,653 3,652 32,421 Other 1,911 1,776 16,956 Total 5,564 5,428 49,377 Accumulated depreciation (3,346) (3,061) (29,697) Net property and equipment 2,218 2,367 19,680 INVESTMENTS AND OTHER ASSETS: Software ,406 Software in progress 3,420 1,565 30,354 Investment securities (Notes 4 and 13) 1, ,572 Investments in associated companies (Note 2.a) Long-term time deposits (Note 13) 12,000 22, ,496 Deferred tax assets (Note 11) Other assets ,389 Thousands of U.S. Dollars Millions of Yen (Note 1) LIABILITIES AND EQUITY CURRENT LIABILITIES: Suspense receipt of delivery payment (Notes 5 and 13) 1,589 1,567 $ 14,098 Clearing margin (Notes 7 and 13) 93,854 92, ,929 Accounts payable ,406 Income taxes payable 13 Current portion of long-term debt 57 Accrued payments on mark-to-market profit (Note 13) 1, ,305 Other current liabilities (Note 7) ,091 Total current liabilities 97,224 94, ,829 LONG-TERM LIABILITIES: Liability for employees' retirement benefits (Note 8) ,377 Provision for directors' and audit & supervisory board members' retirement benefits Member deposits (Notes 6 and 13) ,177 Long-term accounts payable for directors' retirement benefits Clearing funds (Notes 7 and 13) 6,500 6,258 57,687 Other (Note 7) Total long-term liabilities 7,697 7,540 68,314 EQUITY (Note 9): Common stock authorized, 15,000,000 shares; issued, 3,041,000 shares in 2016 and ,989 1,989 17,655 Nonvoting stock authorized, 100,000 shares; issued, 83,573 shares in 2016 and 2015 Capital surplus 2,011 2,011 17,851 Retained earnings 5,023 5,512 44,570 Total equity 9,023 9,512 80,076 Total investments and other assets 17,953 25, ,332 TOTAL 113, ,668 $ 1,011,219 TOTAL 113, ,668 $ 1,011,219 See notes to consolidated financial statements

4 Tokyo Commodity Exchange, Inc. and a Subsidiary Consolidated Statement of Operations and Comprehensive Income Year Ended March 31, 2016 Thousands of U.S. Dollars Millions of Yen (Note 1) REVENUES: Annual membership fee $ 726 Exchange fee 2,398 2,166 21,280 Clearing fee ,358 Income from market data distribution Income from trading system services ,293 Other operating revenue Total revenues 3,008 2,729 26,693 GENERAL AND ADMINISTRATIVE EXPENSES (Notes 8 and 10) 3,567 3,687 31,657 Operating loss (559 ) (958 ) (4,964 ) OTHER INCOME (EXPENSE): Interest and dividend income 483 1,024 4,286 Gain on sales of securities 50 Cancellation cost of system in use (Note 12) (430) (3,816) Interest expense (1) (2) Other net Other income net 100 1, (LOSS) INCOME BEFORE INCOME TAXES (459 ) 132 (4,077 ) INCOME TAXES (Note 11): Current Deferred 7 (3) 63 Total income taxes NET (LOSS) INCOME (489 ) 42 (4,341 ) NET (LOSS) INCOME ATTRIBUTABLE TO Owners of the parent (489) 42 (4,341) COMPREHENSIVE (LOSS) INCOME (489 ) 42 $ (4,341 ) TOTAL COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO Owners of the parent (489 ) 42 $(4,341 ) Yen U.S. Dollars PER SHARE OF COMMON STOCK (Note 2.o) Basic net (loss) income ( ) $ (1.43 ) See notes to consolidated financial statements

5 Tokyo Commodity Exchange, Inc. and a Subsidiary Consolidated Statement of Changes in Equity Year Ended March 31, 2016 Thousands Millions of Yen Number of Shares of Common Stock Outstanding Common Stock Capital Surplus Retained Earnings Total Equity BALANCE, APRIL 1, ,125 1,989 2,011 5,470 9,470 Net income attributable to owners of the parent BALANCE, MARCH 31, ,125 1,989 2,011 5,512 9,512 Net loss attributable to owners of the parent (489) (489) BALANCE, MARCH 31, ,125 1,989 2,011 5,023 9,023 Common Stock Thousands of U.S. Dollars (Note 1) Capital Retained Surplus Earnings Total Equity BALANCE, MARCH 31, 2015 $ 17,655 $ 17,851 $ 48,911 $ 84,417 Net loss attributable to owners of the parent (4,341 ) (4,341 ) BALANCE, MARCH 31, 2016 $ 17,655 $ 17,851 $ 44,570 $ 80,076 See notes to consolidated financial statements

6 Tokyo Commodity Exchange, Inc. and a Subsidiary Consolidated Statement of Cash Flows Year Ended March 31, 2016 Thousands of U.S. Dollars Millions of Yen (Note 1) OPERATING ACTIVITIES: (Loss) income before income taxes (459) 132 $ (4,077) Adjustments for: Income taxes paid (452) (88) (4,009) Income taxes refunded Depreciation and amortization ,580 Changes in assets and liabilities: Increase in liability for employees' retirement benefits Increase (decrease) in provision for directors' and audit & supervisory board members' retirement benefits 5 (6) 47 Gain on sales of securities (50) Cancellation cost of system in use 430 3,816 Increase in operating accounts receivable (11) (7) (98) Increase (decrease) in suspense receipt of delivery payment 21 (2,516) 188 Other net 684 (785) 6,072 Total adjustments 1,313 (2,933) 11,654 Net cash provided by (used in) operating activities 854 (2,801) 7,577 INVESTING ACTIVITIES: Decrease in time deposits net 3,000 1,000 26,624 Decrease in long-term loans receivable net Purchases of property and equipment (137) (322) (1,220) Purchases of software (1,895) (1,751) (16,819) Proceeds from sales of securities 1,050 Other net Net cash provided by investing activities 1, ,090 FINANCING ACTIVITIES Repayment of long-term debt (57 ) (72 ) (506 ) Net cash used in financing activities (57 ) (72 ) (506 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,821 (2,812) 16,161 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,824 5,636 25,064 CASH AND CASH EQUIVALENTS, END OF YEAR 4,645 2,824 $ 41,225 See notes to consolidated financial statements

7 Tokyo Commodity Exchange, Inc. and a Subsidiary Notes to Consolidated Financial Statements Year Ended March 31, BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared from the accounts maintained by Tokyo Commodity Exchange, Inc. (the "Exchange"), in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act, the Commodity Derivatives Act and its related accounting regulations and in accordance with accounting principles generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2015 consolidated financial statements to conform to the classifications used in The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Exchange is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of to $1, the approximate rate of exchange at March 31, Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation The consolidated financial statements as of March 31, 2016, include the accounts of the Exchange and its subsidiary (together, the "Group"). Under the control and influence concepts, any company in which the Exchange, directly or indirectly, is able to exercise control over operations is fully consolidated. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is eliminated. Investments in associated companies are stated at cost. If the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements would not be material. b. Business Combination In October 2003, the Business Accounting Council issued a Statement of Opinion, "Accounting for Business Combinations," and in December 2005, the Accounting Standards Board of Japan (the "ASBJ") issued ASBJ Statement No. 7, "Accounting Standard for Business Divestitures," and ASBJ Guidance No. 10, "Guidance for Accounting Standard for Business Combinations and Business Divestitures." In December 2008, the ASBJ issued a revised accounting standard for business combinations, ASBJ Statement No. 21, "Accounting Standard for Business Combinations." Major accounting changes under the revised accounting standard are as follows: (1) The revised standard requires accounting for business combinations only by the purchase method. As a result, the pooling-of-interests method of accounting is no longer allowed. (2) The previous accounting standard required research and development costs to be charged to income as incurred. Under the revised standard, in-process research and development costs (IPR&D) acquired in the business combination are capitalized as an - 6 -

8 intangible asset. (3) The previous accounting standard provided for a bargain purchase gain (negative goodwill) to be systematically amortized over a period not exceeding 20 years. Under the revised standard, the acquirer recognizes the bargain purchase gain in profit or loss immediately on the acquisition date after reassessing and confirming that all of the assets acquired and all of the liabilities assumed have been identified after a review of the procedures used in the purchase allocation. This standard was applicable to business combinations undertaken on or after April 1, In September 2013, the ASBJ issued revised ASBJ Statement No. 21, "Accounting Standard for Business Combinations," revised ASBJ Guidance No. 10, "Guidance on Accounting Standards for Business Combinations and Business Divestitures," and revised ASBJ Statement No. 22, "Accounting Standard for Consolidated Financial Statements." Major accounting changes are as follows: (a) Transactions with noncontrolling interest A parent's ownership interest in a subsidiary might change if the parent purchases or sells ownership interests in its subsidiary. The carrying amount of noncontrolling interest is adjusted to reflect the change in the parent's ownership interest in its subsidiary while the parent retains its controlling interest in its subsidiary. Under the previous accounting standard, any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is accounted for as an adjustment of goodwill or as profit or loss in the consolidated statement of income. Under the revised accounting standard, such difference is accounted for as capital surplus as long as the parent retains control over its subsidiary. (b) Presentation of the consolidated balance sheet In the consolidated balance sheet, "minority interest" under the previous accounting standard is changed to "noncontrolling interest" under the revised accounting standard. (c) Presentation of the consolidated statement of income In the consolidated statement of income, "income before minority interest" under the previous accounting standard is changed to "net income" under the revised accounting standard, and "net income" under the previous accounting standard is changed to "net income attributable to owners of the parent" under the revised accounting standard. (d) Provisional accounting treatments for a business combination If the initial accounting for a business combination is incomplete by the end of the reporting period in which the business combination occurs, an acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. Under the previous accounting standard guidance, the impact of adjustments to provisional amounts recorded in a business combination on profit or loss is recognized as profit or loss in the year in which the measurement is completed. Under the revised accounting standard guidance, during the measurement period, which shall not exceed one year from the acquisition, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and that would have affected the measurement of the amounts recognized as of that date. Such adjustments shall be recognized as if the accounting for the business combination had been completed at the acquisition date. (e) Acquisition-related costs Acquisition-related costs are costs, such as advisory fees or professional fees, which an acquirer incurs to effect a business combination. Under the previous accounting standard, the acquirer accounts for acquisition-related costs by including them in the acquisition costs of the investment. Under the revised accounting standard, acquisition-related costs shall be accounted for as expenses in the periods in which the costs are incurred

9 The above accounting standards and guidance for (a) transactions with noncontrolling interest, (b) presentation of the consolidated balance sheet, (c) presentation of the consolidated statement of income, and (e) acquisition-related costs are effective for the beginning of annual periods beginning on or after April 1, Earlier application is permitted from the beginning of annual periods beginning on or after April 1, 2014, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income. In the case of earlier application, all accounting standards and guidance above, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income, should be applied simultaneously. Either retrospective or prospective application of the revised accounting standards and guidance for (a) transactions with noncontrolling interest and (e) acquisition-related costs is permitted. In retrospective application of the revised standards and guidance, the accumulated effects of retrospective adjustments for all (a) transactions with noncontrolling interest and (e) acquisition-related costs which occurred in the past shall be reflected as adjustments to the beginning balance of capital surplus and retained earnings for the year of the first-time application. In prospective application, the new standards and guidance shall be applied prospectively from the beginning of the year of the first-time application. The revised accounting standards and guidance for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income shall be applied to all periods presented in financial statements containing the first-time application of the revised standards and guidance. The revised standards and guidance for (d) provisional accounting treatments for a business combination are effective for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, Earlier application is permitted for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, The Company applied the revised accounting standards and guidance for (a) transactions with noncontrolling interest, (b) presentation of the consolidated balance sheet, (c) presentation of the consolidated statement of operations, and (e) acquisition-related costs above, effective April 1, 2015, and (d) provisional accounting treatments for a business combination above for a business combination which occurred on or after April 1,2015. With respect to (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income, the applicable line items in the 2015 consolidated financial statements have been accordingly reclassified and presented in line with those in There was no impact from these accounting changes. c. Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits, certificates of deposit, commercial paper and bond funds, all of which mature or become due within three months of the date of acquisition. d. Marketable and Investment Securities Marketable and investment securities are classified and accounted for, depending on management's intent, as follows: (1) held-to-maturity debt securities, which are expected to be held to maturity with the positive intent and ability to hold to maturity, are reported at amortized cost; (2) investment securities in associated companies are reported at cost determined by the moving-average method; and (3) available-for-sale securities, which are not classified as either of the aforementioned securities, are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity

10 Nonmarketable available-for-sale securities are stated at cost determined by the moving-average method. For other-than-temporary declines in fair value, investment securities are reduced to net realizable value by a charge to income. e. Property and Equipment Property and equipment are stated at cost. Depreciation is computed by the declining-balance method while the straight-line method is applied to buildings acquired after April 1, The range of useful lives is principally from 6 to 50 years for buildings and structures. The useful lives for lease assets are the terms of the respective leases. f. Long-Lived Assets The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss would be recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. g. Other Assets Software is stated at cost. Amortization is computed by the straight-line method at rates based on the estimated useful lives (5 years) of the assets. h. Allowance for Doubtful Accounts The allowance for doubtful accounts is stated in amounts considered to be appropriate based on the Group's past credit loss experience and an evaluation of potential losses in the receivables outstanding. i. Net Defined Benefit Liability The Group has an unfunded severance indemnities plan for its employees and apply a simplified method whereby amounts paid for voluntary resignations at the end of the term are treated as retirement benefit liabilities. j. Provision for Directors' and Audit & Supervisory Board Members' Retirement Benefits In a consolidated subsidiary of the Exchange, retirement benefits to directors and audit & supervisory board members are provided at the amount that would be required if all directors and audit & supervisory board members retired at the balance sheet date. k. Asset Retirement Obligations In March 2008, the ASBJ published the accounting standard for asset retirement obligations, ASBJ Statement No. 18, "Accounting Standard for Asset Retirement Obligations" and ASBJ Guidance No. 21, "Guidance on Accounting Standard for Asset Retirement Obligations." Under this accounting standard, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from the acquisition, construction, development and normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an adjustment to the carrying amount of the liability and the capitalized amount of the related asset retirement cost

11 l. Leases In March 2007, the ASBJ issued ASBJ Statement No. 13, "Accounting Standard for Lease Transactions," which revised the previous accounting standard for lease transactions. The revised accounting standard for lease transactions was effective for fiscal years beginning on or after April 1, Under the previous accounting standard, finance leases that were deemed to transfer ownership of the leased property to the lessee were capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain "as if capitalized" information was disclosed in the note to the lessee's financial statements. The revised accounting standard requires that all finance lease transactions be capitalized to recognize lease assets and lease obligations in the balance sheet. m. Income Taxes The provision for income taxes is computed based on the pretax income included in the consolidated statement of operations and comprehensive income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted tax laws to the temporary differences. n. Foreign Currency Transactions All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the consolidated statement of operations and comprehensive income. o. Per Share Information Basic net income (loss) per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share is not disclosed because no dilutive shares exist. The Board of Directors approved the proposal to forego a dividend from the appropriation of retained earnings for the year ended March 31, 2016, at the meeting held on May 27, p. Accounting Changes and Error Corrections In December 2009, the ASBJ issued ASBJ Statement No. 24, "Accounting Standard for Accounting Changes and Error Corrections" and ASBJ Guidance No. 24, "Guidance on Accounting Standard for Accounting Changes and Error Corrections." Accounting treatments under this standard and guidance are as follows: (1) Changes in Accounting Policies When a new accounting policy is applied following revision of an accounting standard, the new policy is applied retrospectively unless the revised accounting standard includes specific transitional provisions, in which case the entity shall comply with the specific transitional provisions. (2) Changes in Presentation When the presentation of financial statements is changed, prior-period financial statements are reclassified in accordance with the new presentation. (3) Changes in Accounting Estimates A change in an accounting estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospectively if the change affects both the period of the change and future periods. (4) Corrections of Prior-Period Errors When an error in prior-period financial statements is discovered, those statements are restated. q. Consolidated Corporate Tax System The Group has applied for a consolidated corporate tax system from the year ended March 31,

12 3. CHANGES IN ACCOUNTING ESTIMATES Change in Useful Life The previously estimated useful life for the current trading system equipment and software used for measuring depreciation was set using methods and standards stipulated in the Corporation Tax Act. Effective the fiscal year ended March 31, 2016, the useful life was changed to end in September 2016 due to the decision to migrate to the next generation trading system scheduled to be implemented in September 2016, and the new estimated useful life for the current trading system equipment and software was prospectively applied. Due to the change of the useful life, depreciation for the year ended March 31, 2016, increased by 67 million ($595 thousand), and operating loss, loss before income taxes and net loss each increased by 67 million ($595 thousand). 4. MARKETABLE AND INVESTMENT SECURITIES Marketable and investment securities as of March 31, 2016 and 2015, consisted of the following: Thousands of Millions of Yen U.S. Dollars Current Government bonds 6,593 Total 6,593 Non-current: Available-for-sale securities 3 3 $ 28 Government bonds 1,977 17,544 Total 1,980 3 $ 17,572 The costs and aggregate fair value of marketable and investment securities at March 31, 2016 and 2015, were as follows: March 31, 2016 Cost Unrealized Gains Millions of Yen Unrealized Losses Fair Value Securities classified as held-to-maturity debt securities 1, ,091 March 31, 2015 Securities classified as held-to-maturity debt securities 6, ,611 March 31, 2016 Cost Thousands of U.S. Dollars Unrealized Unrealized Gains Losses Fair Value Securities classified as held-to-maturity debt securities $ 17,544 $ 1,011 $ 18,

13 5. SUSPENSE RECEIPT OF DELIVERY PAYMENT Suspense receipt of delivery payment represents a cash deposit of delivery payments relating to transactions in the Oil Market Division and Agricultural Product & Sugar Market Division. 6. MEMBER DEPOSITS According to the Commodity Derivatives Act and other relevant rules of the Exchange, the Exchange receives member deposits from each member. Deposited assets are in the form of cash or acceptable substitute securities in accordance with the rules of the Exchange. The substitute securities are not included in the balance sheet because the Exchange is not authorized to dispose of the securities. The applied price of the substitute securities as of March 31, 2016 and 2015, is 20 million ($181 thousand) and 26 million, respectively. 7. CLEARING MARGIN, OVER-THE-COUNTER CLEARING MARGIN, CLEARING FUNDS AND OVER-THE-COUNTER CLEARING FUNDS According to the Commodity Derivatives Act and other relevant rules of Japan Commodity Clearing House Co., Ltd. ("JCCH"), JCCH receives clearing margin, over-the-counter clearing margin, clearing funds and over-the-counter clearing funds from each member. Over-the-counter clearing margin is included in other current liabilities, and over-the-counter clearing funds is included in long-term liabilities ("Other"). Deposited assets are in the form of cash or acceptable substitute securities in accordance with the rules of JCCH. The substitute securities are not included in the balance sheet because JCCH is not authorized to dispose of the securities. The applied price of the substitute securities for clearing margin as of March 31, 2016 and 2015, is 42,170 million ($374,242 thousand) and 50,480 million, respectively. The applied price of the substitute securities for clearing funds as of March 31, 2016 and 2015, is 1,784 million ($15,831 thousand) and 2,588 million, respectively. 8. RETIREMENT BENEFITS Retirement allowances for employees are determined on the basis of length of service and current base salary at the time of termination. If the termination is involuntary, the employee is usually entitled to a larger payment than in the case of voluntary termination. The liability for employees' retirement benefits at March 31, 2016 and 2015, consisted of the following: Thousands of Millions of Yen U.S. Dollars Projected benefit obligation $ 7,377 Net liability $ 7,377 The components of net periodic retirement benefit costs for the years ended March 31, 2016 and 2015, are as follows: Thousands of Millions of Yen U.S. Dollars Service cost $ 593 Net periodic retirement benefit costs $

14 9. EQUITY Japanese companies are subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: a. Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders' meeting. Additionally for companies that meet certain criteria including (1) having a Board of Directors, (2) having independent auditors, (3) having an Audit & Supervisory Board, and (4) the term of service of the directors being prescribed as one year rather than the normal two-year term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends-in-kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. The Board of Directors of companies with board committees (namely appointment committee, compensation committee and audit committee) can also do so because such companies with board committees already, by nature, meet the above criteria under the Companies Act, even though such companies have an audit committee instead of an Audit & Supervisory Board. The Exchange is organized as a company with board committees. The Companies Act permits companies to distribute dividends-in-kind (noncash assets) to shareholders subject to a certain limitation and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than 3 million. b. Increases/Decreases and Transfer of Common Stock, Reserve and Surplus The Exchange converted its organizational structure from a membership organization to a corporation on December 1, 2008, pursuant to the provision of Article 121 of the Commodity Derivatives Act. According to the organizational conversion plan approved at the extraordinary meeting of members held on July 29, 2008, the Exchange, at the time of the conversion to corporation, allocated 12,400 shares of common stock and nonvoting stock, from the calculations based on a unit number of contribution and the corporate value of the Exchange on the day preceding the conversion to corporation, to each former member (91 members as of November 30, 2008). This led to the total number of shares issued to reach 1,211,973 shares. Member's capital of 598 million was transferred into common stock and admission money of 629 million was transferred into other capital surplus. Cash-in-lieu payments at the conversion to corporation of 8 million were distributed from other capital surplus. Also at the time of the conversion to corporation, the Exchange raised 2,782 million through third-party fundraising by issuing 1,912,600 shares of new common stock at an issue price of 1,455 per share and one-half of the raised amount was allocated to additional paid-in capital

15 The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders. c. Treasury Stock and Treasury Stock Acquisition Rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by a specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. d. Nonvoting Stock Nonvoting shareholders may not exercise voting rights with respect to any of the matters that can be voted on at the general meeting of shareholders. Under the current share multiplier prescribed by the Exchange, 1 share of nonvoting stock corresponds to 100 shares of common stock. Under certain circumstances, 1 share of nonvoting stock will be converted into 100 shares of common stock. When the Exchange distributes a dividend to the common stockholders, it shall also distribute a dividend to the nonvoting stockholders at the rate of 1.2 times per 1 share of nonvoting stock (equivalent to 100 shares of common stock). If the Exchange distributes residual assets to the common stockholders, it shall also distribute residual assets to the nonvoting stockholders based on the proportion of 100 shares of common stock to 1 nonvoting stock. 10. DETAILS OF OPERATING EXPENSES The major elements of "operating expenses" for the years ended March 31, 2016 and 2015, are as follows: Thousands of Millions of Yen U.S. Dollars System maintenance and operation costs 1,488 1,686 $ 13,205 Depreciation and amortization ,

16 11. INCOME TAXES The Group is subject to Japanese national and local income taxes which, in the aggregate, resulted in normal effective statutory tax rates of approximately 33.1% and 35.6% for the years ended March 31, 2016 and 2015, respectively. The tax effects of significant temporary differences and tax loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2016 and 2015, are as follows: Thousands of Millions of Yen U.S. Dollars Deferred tax assets: Advances received for trading system usage fees from other company 13 Accounts payable for cancellation cost of system in use net 133 $ 1,178 Accrued bonuses Net defined benefit liability ,275 Long-term accounts payable for directors' retirement benefits Tax loss carryforwards 1,485 1,513 13,176 Other Less valuation allowance (1,944) (1,870) (17,256) Total Net deferred tax assets 5 12 $ 44 A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying consolidated statement of operations and comprehensive income for the year ended March 31, 2016, with the corresponding figures for 2015 is as follows: Normal effective statutory tax rate 33.1 % 35.6 % Expenses not deductible for income tax purposes (0.5) 1.5 Inhabitant tax (0.6) 2.0 Changes in valuation allowance ( 34.7) ( 28.2) Effect by consolidated taxation system (3.5) 54.8 Effect of reduction of income tax rates on deferred tax assets (0.4) 2.9 Other net Actual effective tax rate (6.5) % 68.6 % New tax reform laws enacted in 2016 in Japan changed the normal effective statutory tax rate for the fiscal year beginning on or after April 1, 2016, and the fiscal year beginning on or after April 1, 2017, to approximately 30.9% and for the fiscal year beginning on or after April 1, 2018, to approximately 30.6%. The effect of this change was immaterial. 12. CANCELLATION COST OF SYSTEM IN USE 430 million is the cancellation fee of the current trading system in conjunction with the migration to the next generation trading system scheduled to be implemented in September

17 13. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES a. Policy Relating to the Status of Investments in Financial Instruments In accordance with the Group's risk-free investment policy, funds are invested in a range of conservative financial instruments such as time deposits, government bonds and the like. In general, the Group mostly raises funds through its own resources, but partly relies on financial institutions for larger investments, such as funds needed to invest in trading systems. In addition, overdraft agreements were also secured with banks in case of an emergency. Financial securities held are mostly government bonds, in accordance with the Group's rules that provide for safe and reliable fund management. As for operating accounts receivable from Group members, apart from a rigorous review at the time of membership acquisition, the financial status of members is also reexamined annually in order to reduce credit risk. b. Fair Values of Financial Instruments Fair values of financial instruments are based on quoted prices in active markets. If a quoted price is not available, other rational valuation techniques are used instead. (1) Fair value of financial instruments March 31, 2016 Carrying Amount Millions of Yen Fair Value Unrealized Gain/Loss Member deposits Deposits held in banks Clearing margin Deposits held in banks 79,878 79,878 Over-the-counter clearing margin Deposits held in banks Clearing funds Deposits held in banks 6,500 6,500 Over-the-counter clearing funds Deposits held in banks Cash and cash equivalents 4,645 4,645 Time deposits and banking arrangements other than cash equivalents Operating accounts receivable Accrued receivables on mark-to-market loss 1,049 1,049 Investment securities 1,977 2, Long-term time deposits 12,000 12, Total 107, , Suspense receipt of delivery payment 1,589 1,589 Clearing margin 93,854 93,854 Accrued payments on mark-to-market profit 1,049 1,049 Total 96,492 96,

18 March 31, 2015 Carrying Amount Millions of Yen Fair Value Unrealized Gain/Loss Member deposits Deposits held in banks Clearing margin Deposits held in banks 64,723 64,723 Over-the-counter clearing margin Deposits held in banks Clearing funds Deposits held in banks 4,278 4,278 Over-the-counter clearing funds Deposits held in banks Cash and cash equivalents 2,824 2,824 Time deposits and banking arrangements other than cash equivalents 3,800 3,800 Marketable securities 6,593 6, Operating accounts receivable Accrued receivables on mark-to-market loss Long-term time deposits 22,900 23, Total 105, , Suspense receipt of delivery payment 1,567 1,567 Clearing margin 92,236 92,236 Accrued payments on mark-to-market profit Total 94,326 94,326 March 31, 2016 Carrying Amount Thousands of U.S. Dollars Fair Value Unrealized Gain/Loss Member deposits Deposits held in banks $ 2,177 $ 2,177 Clearing margin Deposits held in banks 708, ,888 Over-the-counter clearing margin Deposits held in banks Clearing funds Deposits held in banks 57,687 57,687 Over-the-counter clearing funds Deposits held in banks Cash and cash equivalents 41,225 41,225 Time deposits and banking arrangements other than cash equivalents 7,100 7,100 Operating accounts receivable Accrued receivables on mark-to-market loss 9,305 9,305 Investment securities 17,544 18,555 $ 1,011 Long-term time deposits 106, , Total $ 951,169 $ 952,391 $ 1,222 Suspense receipt of delivery payment $ 14,098 $ 14,098 Clearing margin 832, ,929 Accrued payments on mark-to-market profit 9,305 9,305 Total $ 856,332 $ 856,

19 Member Deposits Deposits Held in Banks, Clearing Margin Deposits Held in Banks, Over-the-Counter Clearing Margin Deposits Held in Banks, Clearing Funds Deposits Held in Banks, Over-the-Counter Clearing Funds Deposits Held in Banks, Cash and Cash Equivalents, Time Deposits and Banking Arrangements Other Than Cash Equivalents, Operating Accounts Receivable and Accrued Receivables on Mark-to-Market Loss The carrying values of member deposits deposits held in banks, clearing margin deposits held in banks, over-the-counter clearing margin deposits held in banks, clearing funds deposits held in banks, over-the-counter clearing funds deposits held in banks, cash and cash equivalents, time deposits and banking arrangements other than cash equivalents, operating accounts receivable and accrued receivables on mark-to-market loss approximate fair value because of their short maturities. Investment Securities The fair values of investment securities are measured at the reference prices for OTC bond transactions published by the Japan Securities Dealers Association. The information of the fair value for investment securities by classification is included in Note 4. Long-Term Time Deposits The fair value is determined by the present value of principal and interest discounted using the current assumed rate for similar time deposits. Suspense Receipt of Delivery Payment, Clearing Margin and Accrued Payments on Mark-to-Market Profit The carrying values of suspense receipt of delivery payment, clearing margin and accrued payments on mark-to-market profit approximate fair value because of their short settlements. (2) Carrying amount of financial instruments whose fair value cannot be reliably determined Carrying Amount Thousands of Millions of Yen U.S. Dollars Investment securities that do not have a quoted market price in an active market 3 3 $ 28 Member deposits ,177 Clearing funds 6,500 6,258 57,687 Total 6,748 6,505 $ 59,

20 c. Maturity Analysis for Financial Assets and Securities with Contractual Maturities March 31, 2016 Due in 1 Year or Less Millions of Yen Due after 1 Year through 5 Years Due after 5 Years through 10 Years Due after 10 Years Member deposits Deposits held in banks 245 Clearing margin Deposits held in banks 79,878 Over-the-counter clearing margin Deposits held in banks 10 Clearing funds Deposits held in banks 6,500 Over-the-counter clearing funds Deposits held in banks 20 Cash and cash equivalents 4,645 Time deposits and banking arrangements other than cash equivalents 800 Operating accounts receivable 54 Accrued receivables on mark-to-market loss 1,049 Investment securities 2,000 Long-term time deposits 12,000 Total 93,201 12,000 2,000 March 31, 2015 Member deposits Deposits held in banks 244 Clearing margin Deposits held in banks 64,723 Over-the-counter clearing margin Deposits held in banks 39 Clearing funds Deposits held in banks 4,278 Over-the-counter clearing funds Deposits held in banks 25 Cash and cash equivalents 2,824 Time deposits and banking arrangements other than cash equivalents 3,800 Marketable securities 6,592 Operating accounts receivable 43 Accrued receivables on mark-to-market loss 523 Long-term time deposits 22,900 Total 83,091 22,

21 March 31, 2016 Due in 1 Year or Less Thousands of U.S. Dollars Due after Due after 1 Year 5 Years through through 5 Years 10 Years Due after 10 Years Member deposits Deposits held in banks $ 2,177 Clearing margin Deposits held in banks 708,888 Over-the-counter clearing margin Deposits held in banks 89 Clearing funds Deposits held in banks 57,687 Over-the-counter clearing funds Deposits held in banks 178 Cash and cash equivalents 41,225 Time deposits and banking arrangements other than cash equivalents 7,100 Operating accounts receivable 480 Accrued receivables on mark-to-market loss 9,305 Investment securities $ 17,749 Long-term time deposits $ 106,496 Total $ 827,129 $ 106,496 $ 17, SEGMENT INFORMATION In March 2008, the ASBJ revised ASBJ Statement No. 17, "Accounting Standard for Segment Information Disclosures" and issued ASBJ Guidance No. 20, "Guidance on Accounting Standard for Segment Information Disclosures." Under the standard and guidance, an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available and such information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. a. Description of Reportable Segments The Group's reportable segments correspond to segments for which separate financial information is available and for which regular reviews by the Board of Directors are conducted in order to decide how resources should be allocated and to evaluate business performances. The Group consists of two reportable business segments: the "Exchange business," consisting of the establishment and operations of commodity futures markets primarily by the Exchange, and the "Clearing business," consisting of commodity futures transaction clearing operations primarily by JCCH, the consolidated subsidiary. b. Methods of Measurement for the Amounts of Operating Revenue, Profit (Loss), Assets and Other Items for Each Reportable Segment The accounting methods used in each reportable segment are consistent with those in Note 2, "Summary of Significant Accounting Policies." Segment (loss) profit is adjusted to reconcile it to (loss) income before income taxes less certain extraordinary items in the accompanying consolidated statement of operations

22 c. Information about Operating Revenue, Profit (Loss), Assets and Other Items Reportable Segment Exchange Clearing Business Business Millions of Yen 2016 Total Reconciliations (Note) Consolidated Operating revenue: Operating revenue from external customers 2, ,008 3,008 Intersegment operating revenue or transfers Total 2, ,008 3,008 Segment (loss) profit (456) (29) Segment assets 10, , ,844 (1,900) 113,944 Other: Depreciation Interest income Interest expense Increase in property, equipment and intangible assets 2, ,151 2,151 Reportable Segment Exchange Clearing Business Business Millions of Yen 2015 Total Reconciliations (Note) Consolidated Operating revenue: Operating revenue from external customers 2, ,729 2,729 Intersegment operating revenue or transfers Total 2, ,729 2,729 Segment (loss) profit (617) Segment assets 10, , ,656 (1,988) 111,668 Other: Depreciation Interest income 16 1,008 1,024 1,024 Interest expense Increase in property, equipment and intangible assets 2, ,065 2,

23 Thousands of U.S. Dollars 2016 Reportable Segment Reconcil- Exchange Business Clearing Business Total iations (Note) Consolidated Operating revenue: Operating revenue from external customers $ 24,334 $ 2,359 $ 26,693 $ 26,693 Intersegment operating revenue or transfers Total $ 24,344 $ 2,359 $ 26,693 $ 26,693 Segment (loss) profit $ 1,592 $ 2,198 $ 3,790 $ (4,051) $ (261) Segment assets 96, ,845 1,028,084 (16,865) 1,011,219 Other: Depreciation 3, ,580 4,580 Interest income 21 4,265 4,286 4,286 Interest expense Increase in property, equipment and intangible assets 18, ,087 19,087 Note: The amounts noted under the reconciliations column correspond to overall net amounts in the business segments. d. Related Information (1) Information about products and services Information about revenues from customers of the Group for the years ended March 31, 2016 and 2015, is as follows: Exchange Fee, etc. Millions of Yen 2016 Clearing Fee, etc. Other Total Revenues from customers 2, ,008 Exchange Fee, etc. Millions of Yen 2015 Clearing Fee, etc. Other Total Revenues from customers 2, ,729 Exchange Fee, etc. Thousands of U.S. Dollars 2016 Clearing Fee, etc. Other Total Revenues from customers $ 22,007 $ 2,359 $ 2,327 $ 26,