Notes to Consolidated Financial Statements - 1

Transcription

1 Notes to Consolidated Financial Statements Dentsu Inc. and Consolidated Subsidiaries Years ended March 31, and BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations and in conformity with accounting principles generally accepted in Japan ( Japanese GAAP ), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. Under Japanese GAAP, a consolidated statement of comprehensive income is required from the fiscal year ended March 31, and has been presented herein. Accordingly, accumulated other comprehensive income is presented in the consolidated balance sheet and the consolidated statement of changes in equity. Information with respect to other comprehensive income for the year ended March 31, 2010 is disclosed in Note 22. In addition, net income before minority interests is disclosed in the consolidated statement of income from the year ended March 31,. Japanese yen figures less than a million yen are rounded down to the nearest million yen and U.S. dollar figures less than a thousand dollars are rounded down to the nearest thousand dollars, except for per share data. 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 2010 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 Dentsu Inc. (the "Company") 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 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 at March 31, include the accounts of the Company and its 130 (122 in 2010) significant subsidiaries (collectively, the "Group"). Investments in 36 (34 in 2010) affiliated companies are accounted for by the equity method. Under the control or influence concept, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method. The excess of the cost of an acquisition over the fair value of the net assets of the acquired subsidiary at the date of acquisition are amortized over an estimated effective period, from 5 to 20 years, or if immaterial, are charged to income when incurred. The amortization of goodwill for the years ended March 31, and 2010 were 10,796 million ($129,839 thousand) and 2,010 million, respectively. 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. b. Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements In May 2006, the Accounting Standards Board of Japan (the ASBJ ) issued ASBJ Practical Issues Task Force (PITF) No. 18, Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements. PITF No. 18 prescribes: (1) the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should, in principle, be unified for the preparation of the consolidated financial statements, (2) financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United Notes to Consolidated Financial Statements - 1

2 States of America ( U.S. GAAP ) tentatively may be used for the consolidation process, (3) however, the following items should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: 1) amortization of goodwill; 2) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; 3) expensing capitalized development costs of R&D; 4) cancellation of the fair value model of accounting for property, plant, and equipment and investment properties and incorporation of the cost model of accounting; 5) recording the prior years effects of changes in accounting policies in the income statement where retrospective adjustments to financial statements have been incorporated; and 6) exclusion of minority interests from net income, if included. c. Unification of Accounting Policies Applied to Foreign Affiliated Companies for the Equity Method In March 2008, the ASBJ issued ASBJ Statement No. 16, Accounting Standard for Equity Method of Accounting for Investments. The new standard requires adjustments to be made to conform the affiliate s accounting policies for similar transactions and events under similar circumstances to those of the parent company when the affiliate s financial statements are used in applying the equity method unless it is impracticable to determine adjustments. In addition, financial statements prepared by foreign affiliated companies in accordance with either International Financial Reporting Standards or U.S. GAAP tentatively may be used in applying the equity method if the following items are adjusted so that net income is accounted for in accordance with Japanese GAAP unless they are not material: 1) amortization of goodwill; 2) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; 3) expensing capitalized development costs of R&D; 4) cancellation of the fair value model of accounting for property, plant, and equipment and investment properties and incorporation of the cost model of accounting; 5) recording the prior years effects of changes in accounting policies in the income statement where retrospective adjustments to the financial statements have been incorporated; and 6) exclusion of minority interests from net income, if included. This standard was applicable to the equity method of accounting for fiscal years beginning on or after April 1, The Company applied this accounting standard effective April 1, Additional Information In applying the equity method to the Company s investment in Publicis Groupe S.A., no adjustment has been recorded with respect to the amortization of goodwill recognized by Publicis Groupe S.A. as the Company was unable to obtain the relevant prior period information (e.g., timing of initial recording and initial book value) from the Publicis Groupe S.A. under applicable French laws. Therefore, the Company has determined that it is impracticable to determine the relevant adjustments as allowed for under the Practical Solution on Unification of Accounting Policies Applied to Associates Accounted for Using the Equity Method (ASBJ PITF No. 24, March 10, 2008). d. Business Combinations In October 2003, the Business Accounting Council (the BAC ) issued a Statement of Opinion, Accounting for Business Combinations, and in December 2005, 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. The accounting standard for business combinations allows companies to apply the pooling-of-interests method of accounting only when certain specific criteria are met such that the business combination is essentially regarded as a uniting-of-interests. For business combinations that do not meet the uniting-of-interests criteria, the business combination is considered to be an acquisition and the purchase method of accounting is required. This standard also prescribes the accounting for combinations of entities under common control and for joint ventures. 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 current accounting standard accounts for research and development costs to be charged to income as incurred. Under the revised standard, in-process research and development (IPR&D) costs acquired in a business combination is capitalized as an 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, 2010, with early adoption permitted for fiscal years beginning on or after April 1, e. Cash Equivalents Cash equivalents are short term investments that are readily convertible into cash and that are exposed to insignificant Notes to Consolidated Financial Statements - 2

3 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. f. Inventories Inventories are stated at cost, substantially determined by the specific identification method or net selling value. g. Marketable and Investment Securities Marketable and investment securities are classified and accounted for, depending on management s intent, as either (1) held-to-maturity debt securities, which management has the positive intent and ability to hold to maturity, are reported at amortized cost, or (2) available-for-sale securities, which are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. Non-marketable available-for-sale securities are stated at cost determined mainly 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. h. Allowance for Doubtful Accounts The allowance for doubtful accounts is stated in amounts considered to be appropriate based on past credit loss experience and an evaluation of potential losses in the receivables outstanding. i. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment of the Company and its consolidated domestic subsidiaries is computed substantially by the declining-balance method based on the estimated useful lives of the assets, while the straight-line method is applied to buildings acquired after April 1, 1998, and most property, plant and equipment of consolidated foreign subsidiaries. The range of useful lives is principally from 3 to 65 years for buildings and structures, and from 2 to 20 years for furniture and fixtures. The useful lives for lease assets are the terms of the respective leases. j. 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. k. Intangible Assets Intangible assets are carried at cost less accumulated amortization, which is calculated by the straight-line method. Software for sale to the market is amortized in proportion to the actual sales of the software during the current year to the estimated total sales over the estimated salable years of the software, or at the amount to be amortized by the straight-line method over the estimated salable years, not exceeding 3 years. Software for internal use is amortized by the straight-line method over the estimated useful lives, principally over 5 years. l. Land Revaluation Under the Law of Land Revaluation, the Company elected a one-time revaluation of its own-use land to a value based on real estate appraisal information at March 31, The resulting increase in land revaluation difference represents unrealized appreciation of land and is stated, net of applicable taxes, as a component of equity. There was no effect on the consolidated statements of income. Continuous readjustment is not permitted unless the land value subsequently declines significantly such that the amount of the decline in value should be removed from the land revaluation difference account and related deferred tax liabilities. m. Allowance for Losses on Investment Securities and Investments in Unconsolidated Subsidiaries The allowance for losses on investment securities and investments in unconsolidated subsidiaries is stated in amounts considered to be appropriate based on the estimated losses on non-marketable investment securities to be incurred in the future. The Group accounted for this allowance since 2005 in terms of financial soundness and future uncertainties. n. Accrued Pension and Severance Costs The Company and certain consolidated subsidiaries have defined benefit pension plans for employees. Some consolidated subsidiaries have defined contribution pension plans. Notes to Consolidated Financial Statements - 3

4 The Group accounts for the liability for employees retirement benefits based on the projected benefit obligations and plan assets at the balance sheet date. Retirement benefits for directors and corporate auditors are provided at the amount which would be required if all directors and corporate auditors retired at the balance sheet date. o. 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 the 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 the 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 increase or a decrease in the carrying amount of the liability and the capitalized amount of the related asset retirement cost. This standard was effective for fiscal years beginning on or after April 1, The Company applied this accounting standard effective April 1, The effect of this change was to decrease operating income by 66 million ($801 thousand) and income before income taxes and minority interests by 526 million ($6,335 thousand) for the year ended March 31,. p. Stock Options ASBJ Statement No.8, Accounting Standard for Stock Options, and related guidance are applicable to stock options granted on and after May 1, This standard requires companies to recognize compensation expense for employee stock options based on the fair value at the date of grant and over the vesting period as consideration for receiving goods or services. The standard also requires companies to account for stock options granted to non-employees based on the fair value of either the stock option or the goods or services received. In the balance sheet, the stock option is presented as a stock acquisition right as a separate component of equity until exercised. The standard allows unlisted companies to measure options at their intrinsic value if they cannot reliably estimate fair value. The Group has applied the accounting standard for stock options to those granted on and after May 1, q. 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 issued in June 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 notes 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. In addition, the revised accounting standard permits leases which existed at the transition date and which do not transfer ownership of the leased property to the lessee to be measured at the obligations under finance leases less interest expense at the transition date and recorded as acquisition cost of lease assets. The Group applied the revised accounting standard effective April 1, In addition, the Group accounted for leases which existed at the transition date and which do not transfer ownership of the leased property to the lessee as acquisition cost of lease assets measured at the obligations under finance leases less interest expense at the transition date. All other leases are accounted for as operating leases. r. Construction Contracts In December 2007, the ASBJ issued ASBJ Statement No. 15, Accounting Standard for Construction Contracts, and ASBJ Guidance No. 18, Guidance on Accounting Standard for Construction Contracts. Under this accounting standard, the construction Notes to Consolidated Financial Statements - 4

5 revenue and construction costs should be recognized by the percentage-of-completion method if the outcome of a construction contract can be estimated reliably. When total construction revenue, total construction costs and the stage of completion of the contract at the balance sheet date can be reliably measured, the outcome of a construction contract can be estimated reliably. If the outcome of a construction contract cannot be reliably estimated, the completed-contract method should be applied. When it is probable that the total construction costs will exceed total construction revenue, an estimated loss on the contract should be immediately recognized by providing for a loss on construction contracts. This standard is applicable to construction contracts and software development contracts and was effective for fiscal years beginning on or after April 1, The Company applied the accounting standard effective April 1, s. Income Taxes The provision for income taxes is computed based on the pretax income included in the consolidated statements of 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. t. 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 statements of income to the extent that they are not hedged by forward exchange contracts. u. Foreign Currency Financial Statements The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for equity, which is translated at the historical rate. Differences arising from such translation were shown as "Foreign currency translation adjustments" under accumulated other comprehensive income in a separate component of equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchange rate. v. Derivatives and Hedging Activities The Group uses derivative financial instruments, such as foreign exchange forward contracts and interest swap transactions, to manage its exposures to fluctuations in foreign currency exchange risks and interest rate risk. The Group does not enter into derivatives for trading or speculative purposes. Derivative financial instruments are classified and accounted for as follows: (1) all derivatives (except for those described below as (2)) are recognized as either assets or liabilities and measured at fair value, with gains and losses recognized in the consolidated statements of income, and (2) if derivatives qualify for hedge accounting, because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses are deferred until maturity of the hedged transactions. The foreign exchange forward contracts utilized by the Company and certain consolidated subsidiaries are measured at market value at the balance sheet date, and the unrealized gains or losses are deferred until the underlying transactions or settlements are completed. Some consolidated subsidiaries translate receivables and payables denominated in foreign currencies at the contracted rate if the forward contracts qualify for hedge accounting. The interest rate swaps which qualify for hedge accounting and which meet specific matching criteria are not remeasured at market value, but the differential paid or received under the swap agreements are recognized and included in interest expense or income. w. Per Share Information Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock. Diluted net income per share of common stock assumes full conversion of the outstanding convertible bonds at the beginning of the year (or at the time of issuance) with an applicable adjustment for related interest expense, net of tax, and full exercise of outstanding warrants. Cash dividends per share presented in the accompanying consolidated statements of income are dividends applicable to the respective years, including dividends to be paid after the end of the year. x. New Accounting Pronouncements Accounting Changes and Error Corrections In December 2009, the ASBJ issued ASBJ Statement No. 24, Accounting Standard for Notes to Consolidated Financial Statements - 5

6 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 with a revision of accounting standards, the new policy is applied retrospectively unless the revised accounting standards include specific transitional provisions. When the revised accounting standards include specific transitional provisions, an 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. This accounting standard and the guidance are applicable to accounting changes and corrections of prior period errors which are made from the beginning of the fiscal year that begins on April 1,. 3. BUSINESS COMBINATIONS (Share exchange) The Company completed a share exchange and conversion of cyber communications inc., into a wholly-owned subsidiary in the Board meeting held on May 21, 2009 through simple share exchange procedures in accordance with Article 796, Paragraph 3, of the Companies Act of Japan (the Companies Act ). Prior to this decision for the share exchange, the Company conducted a tender offer to acquire all of the outstanding shares of cyber communications inc. (except the shares of cyber communications inc. held by the Company and the treasury stock held by cyber communications inc.) during the period from February 2, 2009 to March 16, 2009, with the aim of making cyber communications inc. a wholly-owned subsidiary of the Company. As a result, as of March 31, 2010, the Company held 445,709 shares of cyber communications inc. (86.05% of voting rights), and then executed the aforementioned share exchange, to make cyber communications inc. a wholly-owned subsidiary as originally planned. 1. Purpose of the share exchange The Group needs to execute the development of technologies in the digital domain and the expansion of the platform business to improve its competitiveness and to strongly execute actions to improve corporate value in the medium and long term. To execute the restructuring of the organization in the digital domain of the Group, the Company completed the share exchange to make cyber communications inc. a wholly-owned subsidiary. 2. Outline of the accounting procedures applied In accordance with the Accounting Standard for Business Combinations (Business Accounting Council, October 31, 2003) and the Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures (ASBJ Guidance No. 10, November 15, 2007), the share exchange was accounted for as a transaction with minority shareholders. 3. Outline of the share exchange (1) Acquisition cost and details Consideration DENTSU INC. shares (Treasury stock of the Company) 3,031 million Direct payments required for acquisition Advisory fees, etc. 111 million Acquisition cost 3,142 million (2) Exchange ratio by class of shares, number of shares delivered and method of calculating exchange ratio a. Exchange ratio by class of shares and number of shares delivered Shares were exchanged at the ratio of one share of common stock in cyber communications inc. per shares of common stock in the Company. However, no share exchange was made for the 445,709 shares of common stock in cyber communications inc. owned by the Company. Notes to Consolidated Financial Statements - 6

7 Rather than issuing new shares, the exchange was made using treasury stock owned by the Company (1,683,444 shares of common stock). b. Method of calculating exchange ratio The Company commissioned Nomura Securities Co., Ltd., and cyber communications inc. commissioned Mitsubishi UFJ Securities Co., Ltd. (currently, Mitsubishi UFJ Morgan Stanley Co., Ltd.) to compute a share exchange ratio for each company as a third party computational authority. Nomura Securities Co., Ltd. computed the share exchange ratio, which was computed with the averaging method of stock market for the Company and also the averaging method of stock market, comparing method of similar companies and a DCF method for cyber communications inc. Mitsubishi UFJ Securities Co., Ltd. (currently, Mitsubishi UFJ Morgan Stanley Co., Ltd.) computed the share exchange ratio, which was computed with stock market analysis for the Company and also stock market analysis, comparing method of similar companies and a DCF method for cyber communications inc. The stock value of cyber communications inc. was negotiated and discussed based on the same price as a takeover bid price, and in an evaluation by an independent committee and the Company which was set before the takeover bid noted above, the share exchange ratio was judged to be valid. c. Appraised value of exchanged shares: 3,031 million (3) Amount of goodwill generated, its method of amortization, and amortization period a. Amount of goodwill: 2,366 million b. Reason generated: A difference between the acquisition cost and the decrease in minority interest in earnings resulting from the additional acquisition. c. Method of amortization and amortization period: Amortized over 20 years using the straight-line method (Merger: Between Information Services International-Dentsu, Ltd. ( ISID, Ltd. ) and Brainy Works, Ltd.) 1. Companies subject to merger, legal form of merger, company name following merger and overview of transaction, including objective of transaction: (1) Companies subject to merger Name Description of business Absorbing Company ISID, Ltd. Consulting, System Development, Development and Sales of Software Packages, Operation and Maintenance Services Absorbed Company Brainy Works, Ltd. System Development, Development and Sales of Software Packages (2) Legal form of merger Absorbing Company: ISID, Ltd. Absorbed Company: Brainy Works, Ltd. (3) Name following merger Following merger ISID, Ltd. (4) Overview of transaction, including objective of transaction To meet increasingly sophisticated direct needs, to intensify solutions for accounting and human resources and for local financial institutions, and to improve efficiency of group management by streamlining overlapping administrative sectors, ISID, Ltd., which is a consolidated subsidiary of the Company, absorbed its wholly-owned subsidiary, Brainy Works, Ltd. on October 1, Overview of accounting procedures implemented Procedures for transactions under common control were applied, based on the Accounting Standard for Business Combinations in Japan (Business Accounting Council, October 31, 2003) and the Implementation Guideline on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures (Accounting Standards Board of Japan Guidance No. 10, November 15, 2007). Notes to Consolidated Financial Statements - 7

8 (Transfer of business from ISID Techno Solutions to ISID, Ltd.) 1. Companies subject to transfer of business, legal form of transfer of business, company name following transfer of business, and overview of transaction, including objective of transaction: (1) Companies subject to transfer of business Name Description of Business All Businesses of ISID Techno Solutions, Ltd. Sales of Software for Manufacturing Industry, Technical Support Service (2) Legal form of transfer of business Transferring Company: ISID Techno Solutions, Ltd. Transferred Company: ISID, Ltd. (3) Name following transfer of business ISID, Ltd. (4) Overview of transaction, including objective of transaction Business circumstances for software sales in the manufacturing industry and technical support service of ISID Techno Solutions, Ltd. were judged to be difficult after the third quarter of the prior fiscal year, and it was difficult to anticipate prospects of a rapid recovery. As a result, in order not to create adverse effects to clients, ISID, Ltd., which is a consolidated subsidiary of the Company, was transferred the business of ISID Techno Solutions, Ltd. on October 1, Overview of accounting procedures implemented Procedures for transactions under common control were applied, based on the Accounting Standard for Business Combinations in Japan (Business Accounting Council, October 31, 2003) and the Implementation Guideline on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures (Accounting Standards Board of Japan Guidance No. 10, November 15, 2007). 4. MARKETABLE AND INVESTMENT SECURITIES Marketable and investment securities at March 31, and 2010 consisted of the following: Current: 2010 Debt securities Other $1, $ 1,131 Non-current: Equity securities 64,953 68,892 $781,162 Debt securities 1,997 1,992 24,026 Other 910 1,567 10,951 67,862 72,452 $816,140 Notes to Consolidated Financial Statements - 8

9 The carrying amounts and aggregate fair values of marketable and investment securities at March 31, and 2010 were as follows: March 31 Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as: Available-for-sale: Equity securities 22,248 5,747 (1,563) 26,431 Debt securities 2,005 0 (7) 1,997 Other Held-to-maturity 2010 March 31 Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as: Available-for-sale: Equity securities 27,278 6,603 (4,181) 29,700 Debt securities 2,005 (14) 1,990 Other Held-to-maturity March 31 Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as: Available-for-sale: Equity securities $267,567 $69,118 $(18,806) $317,879 Debt securities 24,113 1 (88) 24,026 Other 6, ,124 Held-to-maturity Proceeds from sales of available-for-sale securities for the year ended March 31, 2010 were 1,119 million. Gross realized gains and losses on these sales, computed on the moving-average cost basis, were 152 million and 481 million, respectively, for the year ended March 31, The information of available-for-sale securities which were sold during the year ended March 31, was as follows: March 31, Proceeds Realized Gains Realized Losses Available-for-sale: Equity securities 1, Debt securities Other 1, Notes to Consolidated Financial Statements - 9

10 March 31, Proceeds Realized Gains Realized Losses Available-for-sale: Equity securities $14,776 $2,093 $903 Debt securities Other $14,776 $2,093 $903 The impairment losses on available-for-sale equity securities for the years ended March 31, and 2010 were 5,549 million ($66,737 thousand) and 1,118 million, respectively. 5. INVENTORIES Inventories at March 31, and 2010 consisted of the following: 2010 Merchandise and finished goods $ 1,990 Works ,729 Work-in-process 8,184 10,184 98,433 Raw materials and supplies ,595 9,458 11,208 $113, INVESTMENT PROPERTY On November 28, 2008, the ASBJ issued ASBJ Statement No. 20, Accounting Standard for Investment Property and Related Disclosures, and issued ASBJ Guidance No. 23, Guidance on Accounting Standard for Investment Property and Related Disclosures. This accounting standard and the guidance are applicable to investment property and related disclosures at the end of the fiscal years ending on or after March 31, The Group applied the accounting standard and guidance effective March 31, The Group holds some rental properties such as office buildings and land in Tokyo and other areas. Net of rental income and operating expenses for those rental properties was 1,115 million ($13,415 thousand) for the fiscal year ended March 31,. In addition, the carrying amounts, changes in such balances and market prices of such properties were as follows. Carrying Amount Fair Value March 31, 2010 Decrease March 31, March 31, 54,862 (1,089) 53,773 63,203 Carrying Amount Fair Value March 31, 2010 Decrease March 31, March 31, $659,806 $(13,103) $646,703 $760,116 Notes: 1) Carrying amount recognized in consolidated balance sheet is net of accumulated depreciation. 2) Fair value of properties as of March 31, is mainly measured in evaluations of real estate appraisal value. Notes to Consolidated Financial Statements - 10

11 7. LONG-LIVED ASSETS At March 31,, the Group reviewed its long-lived assets for impairment, and as a result, recognized an impairment loss of 3,660 million ($44,023 thousand) as other expense for assets for business property. The recoverable amount of long-term prepaid expenses was measured at its value in use, and the discount rates used for computation of present value of future cash flows were 1.26% and 2.67%. Others were considered to have no recoverable value. At March 31, 2010, the Group reviewed its long-lived assets for impairment, and as a result, recognized an impairment loss of 318 million as other expense for assets for business property. Those assets were considered to have no recoverable value. 8. SHORT TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings consisted of loans from banks and other financial institutions of 3,138 million ($37,750 thousand) at March 31,, loans from banks and other financial institutions of 3,382 million at March 31, 2010.The weighted-average interest rates applicable to the borrowings at March 31, and 2010 were 2.05% and 1.95%, respectively. Long-term debt at March 31, and 2010 consisted of the following: 2010 Loans from banks and other financial institutions, maturing in installments through 2022 bearing weighted-average interest of 1.49% () and 1.45% (2010) Collateralized 6 Unsecured 97, ,185 $1,173,410 Lease obligations 3,327 3,578 40, , ,770 1,213,424 Less current portion (19,823) (20,167) (238,408) Long-term debt, less current portion 81,072 99,602 $ 975,015 Annual maturities of long-term debt, excluding finance leases (see Note 17) at March 31, were as follows: Year Ending March and thereafter 18,607 24,358 25,856 5,106 5,026 18,615 97,569 $ 223, , ,956 61,407 60, ,872 $1,173,410 The carrying amounts of assets pledged as collateral for trade accounts payable of 452 million ($5,444 thousand) at March 31, were as follows: Cash and cash equivalents Investment securities $1, $1,277 Notes to Consolidated Financial Statements - 11

12 As is customary in Japan, both short-term and long-term bank loans are made under general agreements which provide that security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all obligations due the bank. At March 31,, the Group is not in default of its obligations and none of the cash deposits with banks were offset against any recorded obligations. 9. ACCRUED PENSION AND SEVERANCE COSTS The Company and certain consolidated subsidiaries have defined benefit pension plans covering substantially all employees after three years of service. Some consolidated subsidiaries have defined contribution pension plans. The Company and certain consolidated subsidiaries have offered an early retirement program to its employees. The program provides additional benefit payments for employees who elect early retirement benefit before the mandatory retirement age of 60. Related expenses for the years ended March 31, and 2010, which are recognized when the employees accept the offer and the amount can be reasonably estimated, and other were 1,980 million ($23,815 thousand) and 684 million, respectively. The liability for employees retirement benefits at March 31, and 2010 consisted of the following: 2010 Projected benefit obligation 157, ,412 $1,896,502 Fair value of plan assets (89,806) (97,999) (1,080,052) Unrecognized prior service benefits 10,047 11, ,840 Unrecognized actuarial loss (52,599) (47,464) (632,584) Net liability 25,336 23, ,705 Prepaid pension cost 7,841 7,943 94,304 The liability for employees retirement benefits 33,177 31,942 $ 399,009 The components of net periodic benefit costs and relevant gains and losses for the years ended March 31, and 2010 were as follows: 2010 Service cost 7,125 7,155 $ 85,698 Interest cost 3,125 3,095 37,582 Expected return on plan assets (1,349) (1,255) (16,229) Recognized actuarial loss 3,464 3,961 41,662 Amortization of prior service benefits (842) (1,003) (10,129) Contributions for defined contribution pension plans ,865 Net periodic benefit costs 12,011 12, ,450 Expenses for early retirement program and other 1, ,815 13,991 13,226 $168,265 Notes to Consolidated Financial Statements - 12

13 Assumptions used for the years ended March 31, and 2010 were set forth as follows: 2010 Discount rate Expected rate of return on plan assets Recognition period of actuarial gain/loss Amortization period of prior service benefits mainly 2.0% mainly 2.5% mainly 17 years mainly 17 years mainly 2.0% mainly 2.5% mainly 17 years mainly 17 years The liability for retirement benefits at March 31, and 2010 for directors and corporate auditors was 661 million ($7,954 thousand) and 862 million, respectively, which was included in the liability for retirement benefits on the consolidated balance sheets. The retirement benefits for directors and corporate auditors are paid subject to the approval of the shareholders. 10. ASSET RETIREMENT OBLIGATIONS The changes in asset retirement obligations for the year ended March 31, were as follows: Balance at beginning of year Additional provisions associated with the acquisition of property, plant and equipment Reduction associated with meeting asset retirement obligations Balance at end of year (12) 838 $8,866 1,357 (144) 10, EQUITY Japanese companies are subject to 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. For companies that meet certain criteria such as; (1) having a board of directors, (2) having independent auditors, (3) having a board of corporate auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the board of directors may declare dividends (except for dividends-in-kind) at anytime during the fiscal year if the Company has prescribed so in its articles of incorporation. The Company meets all the above criteria. The Companies Act permits companies to distribute dividends-in-kind (non-cash 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 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 aggregate amount of legal reserve and additional paid-in capital equals 25% of the amount of 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. Notes to Consolidated Financial Statements - 13

14 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. 12. STOCK OPTIONS a. The stock options outstanding at March 31, are follows: Information Services International-Dentsu, Ltd. Stock Option Persons Granted Number of Options Granted Date of Grant Exercise Price Exercise Period 2001 Stock Option 9 directors 4 employees 100,000 shares September 6, ,843 From July 1, 2003 to June 28, 2002 Stock Option 10 directors 3 employees 6 others 116,000 shares November 20, ,700 From June 26, 2004 to June 25, 2012 Criteria Communications INC. Stock Option Persons Granted Number of Options Granted Date of Grant Exercise Price Exercise Period 2005 Stock Option 1 affiliated company 22,500 shares January 31, ,000 From listed day to August 25, 2015 Note: As of March 1,, Criteria Communications INC. was merged into cyber communications inc. Notes to Consolidated Financial Statements - 14

15 b. The stock option activity is as follows: DENTSU INC. For the year ended March 31, Stock Option Non-vested March 31, 2009 Outstanding Granted Canceled Vested March 31, 2010 Outstanding Vested March 31, 2009 Outstanding Vested Exercised Canceled March 31, 2010 Outstanding 355, ,200 Exercise price Average stock price at exercise 2,285 cyber communications inc. For the year ended March 31, Stock Option 2004 Stock Option 2005 Stock Option Non-vested March 31, 2009 Outstanding Granted Canceled Vested March 31, 2010 Outstanding Vested March 31, 2009 Outstanding 1,652 2,690 3,683 Vested Exercised Canceled 1,652 2,690 3,683 March 31, 2010 Outstanding Exercise price 60, , ,005 Average stock price at exercise Notes to Consolidated Financial Statements - 15

16 Information Services International-Dentsu, Ltd. For the year ended March 31, 2010 Non-vested March 31, 2009 Outstanding Granted Canceled Vested March 31, 2010 Outstanding 2001 Stock Option 2002 Stock Option Vested March 31, 2009 Outstanding Vested Exercised Canceled March 31, 2010 Outstanding 50,000 4,000 46,000 60,000 6,000 54,000 Exercise price Average stock price at exercise 5,843 1,700 For the year ended March 31, Non-vested March 31, 2010 Outstanding Granted Canceled Vested March 31, Outstanding Vested March 31, 2010 Outstanding Vested Exercised Canceled March 31, Outstanding 46,000 46,000 54,000 54,000 Exercise price Average stock price at exercise 5,843 1,700 Notes to Consolidated Financial Statements - 16

17 Criteria Communications INC. For the year ended March 31, Stock Option 2005 Stock Option 2005 Stock Option Non-vested March 31, 2009 Outstanding , Granted Canceled 55 Disposed Vested March 31, 2010 Outstanding 22,500 Vested March 31, 2009 Outstanding Vested Exercised Canceled March 31, 2010 Outstanding Exercise price 20,000 20,000 20,000 Average stock price at exercise For the year ended March 31, Non-vested March 31, 2010 Outstanding 22,500 Granted Canceled Disposed 22,500 Vested March 31, Outstanding Vested March 31, 2010 Outstanding Vested Exercised Canceled March 31, Outstanding Exercise price 20,000 Average stock price at exercise Note: As of March 1,, Criteria Communications INC. was merged into cyber communications inc. Notes to Consolidated Financial Statements - 17

18 13. OTHER INCOME (EXPENSES) Other net for the years ended March 31, and 2010 consisted of the following: 2010 Amortization of long-term prepaid expenses (1,322) (855) $ (15,903) Gain on negative goodwill 654 7,875 Gain on sales of investment securities 1, ,848 Expenses for early retirement program (1,980) (369) (23,815) Other ,233 Other net (229) (578) $ (2,761) 14. INCOME TAXES The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in a normal effective statutory tax rate of approximately 41.0% for the years ended March 31, and The tax effects of significant temporary differences and tax loss carryforwards, which resulted in deferred tax assets and liabilities at March 31, and 2010, were as follows: 2010 Deferred tax assets: Accrued pension and severance costs 41,976 41,181 $504,828 Accrued expenses 8,232 7,359 99,013 Write-down of marketable and investment securities 8,864 7, ,606 Tax loss carryforwards 7,552 7,467 90,834 Inventories ,181 Other 11,393 11, ,024 Less valuation allowance (10,442) (8,495) (125,587) 68,174 66,677 $819,901 Deferred tax liabilities: Gain on contribution of securities to the employee retirement benefit trust (18,907) (18,927) $(227,389) Unrealized gain on available-for-sale securities (1,745) (892) (20,994) Other (216) (914) (2,609) (20,870) (20,734) $(250,993) Net deferred tax assets 47,304 45,942 $ 568,908 The tax effects of land revaluation at March 31, and 2010 were as follows: 2010 Deferred tax assets on land revaluation 9,019 9,019 $108,478 Less valuation allowance (9,019) (9,019) (108,478) Deferred tax liabilities on land revaluation (10,293) (10,293) (123,795) Net deferred tax liabilities on land revaluation difference (10,293) (10,293) $(123,795) Notes to Consolidated Financial Statements - 18