Consolidated Financial Statements for the FY2012 (April 1, 2012 to March 31, 2013) Mitsubishi UFJ Securities Holdings Co., Ltd.
Financial Section 1. Preparation of Consolidated Financial Statements The consolidated financial statements of Mitsubishi UFJ Securities Holdings Co., Ltd. (the Company ) were prepared based on the Regulations on Terminology, Forms, and Preparation Methods of Consolidated Financial Statements (Ordinance of the Ministry of Finance No. 28 of 1976) and the provisions of Articles 46 and 68 of the Regulations and in accordance with the Cabinet Office Ordinance on Financial Instruments Businesses, etc. (Cabinet Office Ordinance No. 52 of 2007) and the Rule on Uniform Accounting Standards of Securities Dealers (Self-regulatory Rule of Japan Securities Dealers Association, November 14, 1974). 2. Audit Certification Based on the provisions of Article 193-2, Paragraph 1 of the Financial Instruments and Exchange Act of Japan, the Company was audited by Deloitte Touche Tohmatsu LLC with respect to its consolidated financial statements for the year ended March 31, 2013 (April 1, 2012 to March 31, 2013). 3. Particular Efforts to Secure the Appropriateness of Consolidated Financial Statements The Company makes particular efforts to secure the appropriateness of the consolidated financial statements. Specifically, the Company joins in Financial Accounting Standards Foundation and participates in their trainings in order to establish the management system to properly understand the contents of accounting standards and adequately adopt changes in accounting standards, etc. -1-
Consolidated Financial Statements (1) Consolidated Financial Statements 1) Consolidated Balance Sheets As of March 31, 2012 As of March 31, 2013 Assets Current assets Cash and deposits *2 452,899 719,879 Cash segregated as deposits for regulatory purposes 98,242 148,307 Trading products *2 12,183,845 15,530,676 Trading securities and others 4,743,416 6,006,975 Derivatives 7,440,428 9,523,700 Trade date accrual 232,720 Private equity and other securities *2 31,791 21,199 Margin transaction assets 39,566 56,470 Loans on margin 29,395 49,520 Cash collateral pledged for securities borrowing on margin 10,171 6,950 Collateralized short-term financing agreements 7,684,079 8,194,267 Cash collateral pledged for securities borrowed 3,621,431 3,283,734 Loan receivables under resale agreements 4,062,647 4,910,532 Advances paid 8,716 7,634 Short-term guarantee deposits 645,600 782,160 Short-term loans receivable 101 117 Stocks issued by parent company 254 344 Short-term investment securities 241,410 181,082 Income taxes receivable 9,147 3,110 Deferred tax assets 11,575 22,909 Other current assets 88,561 85,978 Allowance for doubtful accounts (48) (21) Total current assets 21,728,465 25,754,116 Noncurrent assets Property and equipment *1 29,209 27,777 Buildings 15,760 14,415 Equipment 7,899 8,114 Land 5,399 5,017 Leased assets 0 Construction in progress 149 230 Intangible assets 26,233 43,783 Software 25,773 24,168 Other 460 19,615 Investments and other assets 652,350 680,800 Investment securities *4 630,686 661,497 Long-term loans receivable 3,585 437 Deferred tax assets 3,289 1,096 Other 15,924 18,805 Allowance for doubtful accounts (1,136) (1,035) Total noncurrent assets 707,794 752,361 Total assets 22,436,260 26,506,478-2-
As of March 31, 2012 As of March 31, 2013 Liabilities Current liabilities Trading products 10,762,769 12,471,740 Trading securities and others 3,290,150 2,864,481 Derivatives 7,472,619 9,607,258 Trade date accrual 68,720 Margin transaction liabilities 15,258 18,911 Borrowings on margin *2 7,798 6,394 Cash received for securities lending on margin 7,460 12,517 Collateralized short-term financing agreements 7,486,103 9,142,300 Cash collateral received for securities loaned 3,093,995 3,924,370 Loan payables under repurchase agreements 4,392,107 5,217,930 Deposits received 89,715 167,420 Guarantee deposits received 757,258 772,533 Short-term loans payable *2 617,497 996,569 Current portion of bonds payable *2 158,678 161,719 Current portion of long-term loans payable *2 111,056 26,046 Commercial papers 530,100 446,700 Income taxes payable 3,164 8,700 Accrued bonuses 15,321 28,560 Asset retirement obligations 1,107 278 Other current liabilities 47,463 61,930 Total current liabilities 20,595,495 24,372,132 Noncurrent liabilities Bonds payable *2 689,490 803,310 Long-term loans payable *2 310,489 379,572 Deferred tax liabilities 3,840 10,284 Liability for retirement benefits 11,575 10,960 Liability for directors retirement benefits 541 489 Asset retirement obligations 3,927 4,093 Other noncurrent liabilities 257 214 Total noncurrent liabilities 1,020,123 1,208,924 Reserves under the special laws Reserve for financial products transaction liabilities *5 989 1,021 Total reserves under the special laws 989 1,021 Total liabilities 21,616,609 25,582,077-3-
As of March 31, 2012 As of March 31, 2013 Net assets Shareholders equity Capital stock 75,518 75,518 Capital surplus 426,948 426,948 Retained earnings 145,830 185,613 Total shareholders equity 648,297 688,081 Accumulated other comprehensive income Valuation difference on available-for-sale securities (4,166) 6,067 Deferred gains or losses on hedges (898) 36 Foreign currency translation adjustment (47,709) (27,724) Total accumulated other comprehensive income (52,775) (21,620) Minority interests 224,128 257,939 Total net assets 819,651 924,400 Total liabilities and net assets 22,436,260 26,506,478-4-
2) Consolidated Statements of Income and Consolidated Statements of Comprehensive Income Consolidated Statements of Income March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Operating revenue Commissions 143,016 171,957 Brokerage commission 19,301 22,694 Commission for underwriting, secondary distribution and solicitation for selling and others for professional investors 15,907 29,233 Fee for offering, secondary distribution and solicitation for selling and others for professional investors 33,337 47,470 Other fees 74,469 72,559 Net trading income 86,031 107,329 Net loss on private equity and other securities (2,173) (4,735) Net gain (loss) from sales of other assets (486) 125 Financial revenue 80,538 75,846 Total operating revenue 306,926 350,524 Financial expenses 68,341 44,441 Net operating revenue 238,585 306,082 Selling, general and administrative expenses Trading related expenses 66,682 74,326 Personnel expenses *1 97,278 110,469 Real estate expenses 25,334 20,931 Office cost 23,995 25,974 Depreciation and amortization 16,424 14,301 Taxes and dues 4,961 4,462 Other 5,448 6,415 Total selling, general and administrative expenses 240,124 256,881 Operating income (loss) (1,539) 49,201 Non-operating income Interest income 7,210 6,967 Equity in earnings of affiliates 30,268 24,221 Other 4,994 5,529 Total non-operating income 42,473 36,717 Non-operating expenses Interest expenses 467 Loss on retirement of noncurrent assets 370 386 Foreign exchange losses 876 1,066 Stock issuance cost 348 Other 693 238 Total non-operating expenses 2,756 1,690 Ordinary income 38,177 84,228-5-
March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Extraordinary income Gain on sales of investment securities 5,408 4,697 Gain on sales of shares of associated companies 12,318 Gain on sales of noncurrent assets *2 129 457 Reversal of reserve for financial products transaction liabilities 382 Total extraordinary income 18,238 5,154 Extraordinary loss Loss on sales of investment securities 2,116 238 Loss on sales of shares of associated companies 75 1,322 Loss on valuation of investment securities *3 4,529 110 Loss on sales of noncurrent assets *4 340 29 Impairment loss *5 2,403 1,420 Provision of reserve for financial products transaction liabilities 3 Head office transfer cost 1,881 Early extra retirement payments 20,512 Extra retirement payments 321 Other 84 Total extraordinary losses 31,859 3,531 Income before income taxes and minority interests 24,556 85,851 Income taxes-current 5,891 9,746 Income taxes-deferred (4,108) (6,829) Total income taxes 1,782 2,916 Income before minority interests 22,773 82,935 Minority interests in income 6,190 35,988 Net income 16,583 46,946-6-
Consolidated Statements of Comprehensive Income March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Income before minority interests 22,773 82,935 Other comprehensive income Valuation difference on available-for-sale securities 3,362 13,239 Deferred gains or losses on hedges (905) 935 Foreign currency translation adjustment (7,073) 21,388 Share of other comprehensive income in affiliates under equity method 2,576 19 Total other comprehensive income * (2,039) 35,582 Comprehensive income 20,734 118,517 Comprehensive income attributable to: Owners of the parent 15,174 78,102 Minority interests 5,559 40,415-7-
3) Consolidated Statements of Changes in Net Assets March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Shareholders equity Capital stock Balance at beginning 65,518 75,518 Changes of items during the year Issuance of new shares 10,000 Total changes of items during the year 10,000 Balance at end 75,518 75,518 Capital surplus Balance at beginning 416,948 426,948 Changes of items during the year Issuance of new shares 10,000 Total changes of items during the year 10,000 Balance at end 426,948 426,948 Retained earnings Balance at beginning 126,812 145,830 Changes of items during the year Dividends from surplus (7,163) Net income 16,583 46,946 Change of scope of consolidation 2,434 Total changes of items during the year 19,017 39,783 Balance at end 145,830 185,613 Total shareholders equity Balance at beginning 609,280 648,297 Changes of items during the year Issuance of new shares 20,000 Dividends from surplus (7,163) Net income 16,583 46,946 Change of scope of consolidation 2,434 Total changes of items during the year 39,017 39,783 Balance at end 648,297 688,081 Accumulated other comprehensive income Valuation difference on available-for-sale securities Balance at beginning (7,682) (4,166) Changes of items during the year Net changes of items other than shareholders equity 3,515 10,234 Total changes of items during the year 3,515 10,234 Balance at end (4,166) 6,067-8-
March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Deferred gains or losses on hedges Balance at beginning 6 (898) Changes of items during the year Net changes of items other than shareholders equity (905) 935 Total changes of items during the year (905) 935 Balance at end (898) 36 Foreign currency translation adjustment Balance at beginning (43,690) (47,709) Changes of items during the year Net changes of items other than shareholders equity (4,019) 19,985 Total changes of items during the year (4,019) 19,985 Balance at end (47,709) (27,724) Total accumulated other comprehensive income Balance at beginning (51,366) (52,775) Changes of items during the year Net changes of items other than shareholders equity (1,409) 31,155 Total changes of items during the year (1,409) 31,155 Balance at end (52,775) (21,620) Subscription rights to shares Balance at beginning 4 Changes of items during the year Net changes of items other than shareholders equity (4) Total changes of items during the year (4) Balance at end Minority interests Balance at beginning 244,188 224,128 Changes of items during the year Net changes of items other than shareholders equity (20,059) 33,810 Total changes of items during the year (20,059) 33,810 Balance at end 224,128 257,939 Total net assets Balance at beginning 802,106 819,651 Changes of items during the year Issuance of new shares 20,000 Dividends from surplus (7,163) Net income 16,583 46,946 Change of scope of consolidation 2,434 Net changes of items other than shareholders equity (21,473) 64,965 Total changes of items during the year 17,544 104,749 Balance at end 819,651 924,400-9-
4) Consolidated Statements of Cash Flows March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Net cash provided by (used in) operating activities Income before income taxes and minority interests 24,556 85,851 Depreciation and amortization 16,424 14,301 Amortization of goodwill 188 243 Increase (decrease) in liability for retirement benefits 859 (728) Increase (decrease) in liability for directors retirement benefits 53 (81) Increase (decrease) in allowance for doubtful accounts (3,144) (128) Increase (decrease) in reserve for financial products transaction liabilities (382) 3 Interest and dividends income (88,756) (84,585) Interest expenses 68,809 44,441 Equity in (earnings) losses of affiliates (30,268) (24,221) Loss (gain) on sales of investment securities (3,291) (4,458) Loss (gain) on sales of shares of associated companies (12,243) 1,322 Loss (gain) on valuation of investment securities 4,015 (1,926) Loss (gain) on sales of noncurrent assets 211 (427) Impairment loss 2,403 1,420 Head office transfer cost 1,881 Early extra retirement payments 20,512 Extra retirement payments 321 Decrease (increase) in cash segregated as deposits for customers (19,047) (36,902) Decrease/increase in trading productsassets/liabilities (201,581) (1,620,931) Decrease (increase) in trade date accrual (209,779) 300,578 Decrease/increase in assets/liabilities for margin transaction 18,048 (13,250) Decrease/increase in collateralized short-term financing agreements 854,507 1,185,728 Decrease/increase in advance paid/deposits received 12,208 68,206 Decrease (increase) in short-term guarantee deposits (157,354) (75,190) Increase (decrease) in guarantee deposits received 9,734 (76,445) Other, net (501) 44,235 Subtotal 308,064 (192,624) Interest and dividends income received 104,259 102,668 Interest expenses paid (74,473) (38,891) Head office transfer cost paid (1,700) (464) Early extra retirement payments paid (25,411) (742) Extra retirement payments paid (282) Income taxes paid (15,928) (8,575) Income taxes refund 1,221 8,713 Net cash provided by (used in) operating activities 296,032 (130,199) -10-
March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Net cash provided by (used in) investing activities Payments into time deposits (3,369) (2,302) Proceeds from withdrawal of time deposits 4,486 35,317 Purchase of short-term investment securities (490,586) (718,479) Proceeds from sales and redemption of securities 517,476 654,890 Purchase of investment securities (149,132) (159,344) Proceeds from sales and redemption of investment securities 193,937 289,256 Purchase of property and equipment (9,183) (2,725) Proceeds from sales of property and equipment 60 1,001 Payments for retirement of property and equipment (911) (1,155) Purchase of intangible assets (11,509) (9,281) Proceeds from sales of intangible assets 9,025 91 Decrease (increase) in call and other loans (258) 9,731 Purchase of investments in subsidiaries resulting in change of scope of consolidation *2 (14,986) Proceeds from sales of investments in subsidiaries resulting in change of scope of consolidation 794 17 Other, net 2 13 Net cash provided by (used in) investing activities 60,833 82,043 Net cash provided by (used in) financing activities Net increase (decrease) in short-term loans payable (711,570) 349,439 Increase (decrease) in commercial papers 91,300 (83,400) Proceeds from long-term loans payable 83,000 169,600 Repayment of long-term loans payable (81,811) (184,573) Proceeds from issuance of bonds payable 266,592 380,468 Redemption of bonds payable (186,289) (281,524) Proceeds from issuance of common stock 20,000 Cash dividends paid (7,163) Payments of cash dividends to minority shareholders (20,544) (7,902) Repayments to minority shareholders (14,082) Proceeds from stock issuance to minority shareholders 10,390 70 Net cash provided by (used in) financing activities (543,014) 335,014 Effect of exchange rate change on cash and cash equivalents (3,875) 8,425 Net increase (decrease) in cash and cash equivalents (190,024) 295,284 Cash and cash equivalents at beginning 612,678 422,521 Increase (decrease) in cash and cash equivalents resulting from change of scope of consolidation (133) Cash and cash equivalents at end *1 422,521 717,806-11-
Notes to Consolidated Financial Statements A. Key Matters Forming the Basis of Preparation of Consolidated Financial Statements March 31, 2013 (April 1, 2012 to March 31, 2013) 1. Scope of consolidation (1) Number of consolidated subsidiaries: 21 Names of consolidated subsidiaries Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. Mitsubishi UFJ Merrill Lynch PB Securities Co., Ltd. KOKUSAI Asset Management Co., Ltd. MUS Principal Investments Co., Ltd. MU Hands-on Capital Ltd. MUS Business Service Co., Ltd. MUS Information Systems Co., Ltd. MUS Facility Service Co., Ltd. Mitsubishi UFJ Securities International plc Mitsubishi UFJ Wealth Management Bank (Switzerland), Ltd. Mitsubishi UFJ Securities (USA), Inc. Mitsubishi UFJ Securities (HK) Holdings, Limited Mitsubishi UFJ Securities (HK), Limited Mitsubishi UFJ Securities (Singapore), Limited Ling Zheng Investment Consulting (Shanghai) Co., Ltd. TMI Nominees Limited MFHK Nominees Limited MM Partnership Corporate Value Up Fund Investment Limited Liability Partnership Hands-on No.1 Venture Capital Investment Limited Partnership Hands-on No.1-2 Venture Capital Investment Limited Partnership (Addition) Mitsubishi UFJ Merrill Lynch PB Securities Co., Ltd. The above company was included in the scope of consolidation since the Company made an additional purchase of its shares. (Exclusion) THC Phoenix Japan Venture Capital Investment Limited Partnership Asset Finance Corporation Limited TROR Corporation Limited The above 3 companies were excluded from the scope of consolidation due to completion of liquidation. MUS Roosevelt Capital Partners, Ltd. MUS Roosevelt Capital Advisers (HK), Limited MUS Roosevelt China Pacific Fund, L.P. The above 3 companies were excluded from the scope of consolidation since the Company sold its shares. (2) Names of companies or other entities not considered to be subsidiaries although the Company holds the majority of voting rights (business execution rights) of the companies and entities Gunma Challenge Fund Venture Capital Investment Limited Partnership FOODSNET Corporation YAMAGATA FOODS Co., Ltd. GREEN BELL Co., Ltd. PATLITE Corporation Dream Infinity Inc. (Reasons for not treating as subsidiaries) The companies were not treated as subsidiaries because their majority was owned by the Company s consolidated subsidiaries engaged in the venture capital business that maintained the position of general partner in those partnerships in order to render quasi-administrative services as their main businesses, or because shares and other instruments were held as business for such purposes of acquiring capital gains through incubation business and business revitalization, and not for the purpose of controlling the companies. -12-
2. Application of equity method (1) Number of affiliates under equity method: 3 Names of affiliates under equity method Morgan Stanley MUFG Securities Co., Ltd. Marunouchi Capital Co., Ltd. Maybank Asset Management Singapore Pte. Ltd. (former KE Capital Partners Pte. Ltd.) (Exclusion) Sino Roosevelt Investment Partners Limited The above company was excluded from the scope of affiliates under equity method since there are no longer any holders of voting rights of the above company who have a close relationship with the Company. (2) Names of companies or other entities not treated as affiliates although the Company holds between 20% and 50% of the voting rights of the companies and entities REVO TRADING Co., Ltd. (Reason for not treating as affiliates) The company was not treated as an affiliate because shares and other instruments were held as business by the Company s consolidated subsidiaries engaged in the venture capital business for such purposes of acquiring capital gains through incubation business and business revitalization, and not for the purpose of controlling the company. 3. Financial closing dates and other details of consolidated subsidiaries The financial closing dates of consolidated subsidiaries are as follows: End of December 13 subsidiaries End of February 1 subsidiary End of March 7 subsidiaries Of the consolidated subsidiaries whose financial closing date differs from the consolidated balance sheet date, 14 subsidiaries whose difference in closing dates was three months or less were accounted for based on the financial statements as of the financial closing date of each subsidiary. Necessary adjustments were made to the consolidated financial statements for any significant that took place between the end of the fiscal year of each subsidiary and the end of the consolidated fiscal year. 4. Accounting policies (1) Valuation standards and methods for trading securities, etc. In principle, the fair value method is applied for trading securities (securities for trading purposes) and derivatives. (2) Valuation standards and methods for non-trading securities, etc. 1) Held-to-maturity debt securities The amortized cost method is applied. 2) Available-for-sale securities a. Securities with market value The fair value method based on listed market prices or other prices as of the end of the year under review (any valuation difference is recorded directly to net assets and the cost of securities sold is determined by the moving average method). b. Non-marketable securities The moving average cost method is applied. 3) Investments in limited liability investment partnerships and others The Company records investments in limited liability investment partnerships and similar partnerships (deemed to be securities under the provisions set forth in Article 2, Paragraph 2 of the Financial Instruments and Exchange Act of Japan) using the net amount of ownership in such partnerships computed based on the most recent financial statements available for the report date stipulated in the partnership agreement. (3) Method of depreciation and amortization of major depreciable and amortizable assets 1) Method of depreciation of property and equipment (excluding leased assets) The Company applies the declining balance method. Domestic consolidated subsidiaries and overseas consolidated subsidiaries mainly apply the straight-line method. The useful lives of major items are as follows: Buildings 8 to 50 years Equipment 3 to 15 years -13-
2) Method of amortization of intangible assets The Company applies the straight-line method. For software used internally, the straight-line method is applied based on the period of potential use by the Company (mainly 5 years). 3) Method of depreciation of leased assets The Company applies the straight-line method over the lease period as the useful life and the residual value is assumed to be zero. However, finance lease not involving the transfer of ownership whose transaction commenced on or before March 31, 2008 follow the same method as operating leases. (4) Accounting standards for major allowances 1) Allowance for doubtful accounts In order to prepare for loan losses, the allowance is provided based on the historical experience with respect to write-offs for general debentures. For specific debentures including doubtful accounts, an individual estimate of the amount of uncollectible accounts is provided as the allowance. 2) Accrued bonuses In order to prepare for the payment of bonuses to employees, the allowance is provided at an estimate of the amount to be paid according to the prescribed calculation method. 3) Provision for directors bonuses In order to prepare for the payment of directors bonuses, the estimated amount to be paid is provided as an allowance. 4) Liability for retirement benefits In order to prepare for the payment of retirement benefits to employees, the amount of an estimate based on the retirement benefit obligation and the fair value of employees pension plan assets as of the end of the year, is provided. Past service cost is amortized by the straight-line method over a certain term within the average remaining service period of the eligible employees (mainly 12 years). With regard to unrecognized actuarial gain or loss, the amount is amortized by the straight-line method over certain terms within the average remaining service period of the eligible employees (mainly 12 years) for each applicable fiscal year, and expensed mainly from the year following the year in which the gain or loss is recognized. 5) Liability for directors retirement benefits In order to prepare for the payment of directors retirement benefits, some of the consolidated subsidiaries record the amount accrued as of the end of the year under review based on internal rules. (5) Major hedge accounting 1) Hedge accounting The fair value hedge and the deferred hedge that specify currency swaps, foreign exchange contracts and interest rate swaps as hedging instruments are applied. 2) Hedging instruments and hedged items a. Exchange rate volatility risk (a) Hedging instruments Currency swaps and foreign exchange contracts (b) Hedged items Foreign currency denominated financial assets and liabilities (loan receivables under resale agreements, short-term investment securities, investment securities, ownership in investments in overseas subsidiaries, etc. and bonds payable) b. Interest rate volatility risk (a) Hedging instruments Interest rate swaps (b) Hedged items Investment securities 3) Hedging policy Currency swaps and foreign exchange contracts are used to avoid the exchange rate volatility risk in part of foreign currency denominated financial assets and liabilities, while interest rate swaps are used to avoid the interest rate volatility risk in some investment securities. As such, hedged items are identified on an individual contract basis. 4) Method of assessing the effectiveness of hedging activities The effectiveness of hedged items and hedging instruments is periodically assessed. -14-
(6) Amortization method and amortization period of goodwill Goodwill is amortized evenly over the period, not exceeding 20 years, which is estimated upon acquisition in accordance with the business condition of each subsidiary. However, immaterial goodwill is amortized at one time in the year of acquisition. (7) Scope of cash in the consolidated statements of cash flows Cash and cash equivalents include cash on hand and deposits readily convertible to cash including current deposits and ordinary deposits (excluding time deposits with a deposit period of over three months). (8) Other key matters for the preparation of consolidated financial statements Accounting of consumption taxes Consumption taxes are accounted for based on the tax exclusion method. -15-
B. New Accounting Pronouncements Accounting Standard for Retirement Benefits (ASBJ Statement No. 26, May 17, 2012) and Guidance on Accounting Standard for Retirement Benefits (ASBJ Guidance No. 25, May 17, 2012) (1) Overview In light of improvements to financial reporting and international convergence, this accounting standard and guidance mainly focus on a) changes in the treatment of unrecognized actuarial gain or loss and unrecognized past service cost, and enhancement of disclosures, and b) a revision to the method of calculating retirement benefit obligations and current service cost. (2) Application schedule The accounting standard and guidance are scheduled to be applied from the end of the fiscal year starting April 1, 2013 in the case of a) above and from the beginning of the fiscal year starting April 1, 2014 in the case of b) above. (3) Effect of application of this accounting standard and guidance The effect of the application of this accounting standard and guidance is currently being estimated. C. Changes in the Method of Presentation (Consolidated statements of cash flows) Income taxes refund, which was previously included in Income taxes paid of Net cash provided by (used in) operating activities, is reclassified as a separate line item effective from the year under review, since the significance of the amount increased. The relevant items in the consolidated financial statements for the year ended March 31, 2012 are reclassified in order to reflect this change. As a result, in the consolidated statements of cash flows for the year ended March 31, 2012, an outflow of 14,707 million yen that was previously shown as Income taxes paid of Net cash provided by (used in) operating activities is reclassified as an outflow of 15,928 million yen in Income taxes paid and an inflow of 1,221 million yen in Income taxes refund. -16-
D. Notes to Consolidated Balance Sheets *1. Accumulated depreciation of property and equipment As of March 31, 2012 As of March 31, 2013 Accumulated depreciation 28,603 25,808 *2. Assets pledged as collateral I. As of March 31, 2012 Obligations secured by pledged assets Balance as of March 31, 2012 Cash and deposits Assets pledged as collateral Trading products Short-term loans payable 122,500 100,582 100,582 Funds-supplying operations against pooled collateral 122,500 100,582 100,582 Current portion of long-term loans payable 26,056 26,056 26,056 Borrowings on margin 7,798 6,883 6,883 Current portion of bonds payable 8,782 8,036 8,036 Bonds payable 27,380 28,078 28,078 Long-term loans payable 9,721 9,798 9,798 Total 202,240 26,056 153,379 179,435 (Notes) 1. Assets pledged as collateral are presented at book values as of the end of the year. 2. In addition to the above, securities of 165,166 million yen borrowed based on the loan for consumption agreement and securities of 127,078 million yen received as collateral were pledged as collateral for short-term loans payable (funds-supplying operations against pooled collateral), and private equity and other securities of 2,076 million yen were pledged as collateral for long-term loans payable of operating investees. Trading products of 40,502 million yen were deposited as maintenance margin for futures while trading products of 3,213 million yen were pledged as collateral for DVP settlements. Total II. As of March 31, 2013 Obligations secured by pledged assets Assets pledged as collateral Balance as of March 31, 2013 Trading products Total Short-term loans payable 147,000 162,450 162,450 Funds-supplying operations against pooled collateral 147,000 162,450 162,450 Current portion of long-term loans payable 9,733 9,740 9,740 Borrowings on margin 6,256 5,190 5,190 Current portion of bonds payable 6,103 6,084 6,084 Bonds payable 21,629 23,238 23,238 Total 190,723 206,705 206,705 (Notes) 1. Assets pledged as collateral are presented at book values as of the end of the year. 2. In addition to the above, securities of 105,516 million yen borrowed based on the loan for consumption agreement and securities of 191,222 million yen received as collateral were pledged as collateral for short-term loans payable (funds-supplying operations against pooled collateral). Trading products of 41,701 million yen were deposited as maintenance margin for futures while trading products of 3,127 million yen were pledged as collateral for DVP settlements. -17-
3. Fair values of securities pledged and received under securities financing and the loan for consumption agreement for securities are as follows: (1) Pledged securities As of March 31, 2012 As of March 31, 2013 Securities lending on margin 8,318 14,540 Securities pledged for borrowings on margin 7,798 6,405 Securities loaned under the loan for consumption agreement 3,370,855 4,116,809 Securities sold on repurchase agreements 6,300,023 6,503,345 Other securities pledged as collateral 101,590 132,627 (2) Received securities As of March 31, 2012 As of March 31, 2013 Securities received on loans on margin 31,018 51,430 Securities borrowing on margin 10,171 6,951 Securities borrowed under the loan for consumption agreement 4,064,667 3,709,914 Securities purchased on resale agreements 5,959,258 6,167,541 Other securities received as collateral 164,088 257,622 *4. Investments in affiliates are as follows: As of March 31, 2012 As of March 31, 2013 Investment securities (stocks) 280,754 284,994 *5. Legal provisions stipulating the recording of reserves under the special laws are as follows: Reserve for financial products transaction liabilities Article 46-5 of the Financial Instruments and Exchange Act of Japan 6. Overdraft agreements and loan commitments (Lender) In the year ended March 31, 2012, consolidated subsidiary Mitsubishi UFJ Securities International plc had signed loan commitments and other agreements as a lender. The unused credit line under these agreements is as follows: As of March 31, 2012 As of March 31, 2013 Total loan commitment 15,572 Loan balance Unused balance 15,572 (Borrower) To efficiently secure working capital, the Company and its consolidated subsidiaries (the Group ) have signed an overdraft agreement and other agreements with 9 correspondent banks (9 correspondent banks as of the end of the year ended March 31, 2012). The unused overdraft facility balance under these agreements is as follows: As of March 31, 2012 As of March 31, 2013 Overdraft facility limit 248,969 257,367 Debt balance 8,000 8,000 Unused facility 240,969 249,367-18-
E. Notes to Consolidated Statements of Income *1. Personnel expenses include the following items. March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Accrued bonuses 13,545 24,230 Retirement benefit expenses 7,395 5,087 *2. Details of gain on sales of noncurrent assets are as follows: March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Buildings 5 279 Equipment 7 2 Land 7 160 Software 90 Intangible assets (other) 1 Investments and other assets (other) 18 13 Total 129 457 *3. Loss on valuation of investment securities The Group applied impairment accounting for listed and unlisted investment securities in accordance with the accounting standards for financial instruments. *4. Details of loss on sales of noncurrent assets are as follows: March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Buildings 380 (7) Equipment 2 6 Land (103) Software 4 Intangible assets (other) 26 Investments and other assets (other) 60 Total 340 29-19-
*5. Impairment loss The Group recorded impairment loss of the following asset groups. I. March 31, 2012 (April 1, 2011 to March 31, 2012) Location Use Type Amount of impairment loss Koto-ku, Tokyo Operations systems Software 1,831 Buildings 317 Chiyoda-ku, Tokyo Office of the headquarters, etc. Equipment 20 Other 0 Buildings 205 Kamakura City, Kanagawa Pref. and 10 other Land 21 Branch facilities places Equipment 7 Other 0 With regard to Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., a principal consolidated subsidiary of the Company, the Group defines the unit of management accounting of the company as a cash-flow generating unit categorized into wholesale and retail, and groups the units according to the respective headquarters and branches. When judging the indications of impairment, a group is set for each property for consolidated subsidiaries that hold leasing property, while the entire business is in principle treated as one asset group for other companies including the Company. During the year under review, the carrying amounts for the following items were reduced to recoverable amounts, recognizing such reduction as an impairment loss (2,403 million yen) included in extraordinary loss: buildings, equipment and other related to assets pertaining to headquarters office spaces that have been relocated and are not expected to be used; buildings, land, equipment and other related to assets, such as branches and offices, scheduled for closing in connection with the review of the branch network; and software retired because of partial renewal of operations systems. Among the recoverable amounts of these asset groups, those for buildings, equipment and other related to assets pertaining to headquarters office spaces that have been relocated and are not expected to be used, as well as buildings, land, equipment and other related to assets, such as branches and offices, scheduled for closing in connection with the review of the branch network, are measured based on fair value less costs to sell and are valued based on real estate appraisal or rational estimates. Software is measured based on value in use and calculated by discounting future cash flows at 1.0% to 1.3%. II. March 31, 2013 (April 1, 2012 to March 31, 2013) Location Use Type Amount of impairment loss Shibuya-ku, Tokyo and 1 other place Office scheduled for relocation Buildings 712 Equipment 41 Koto-ku, Tokyo Operations systems Software 487 Land 56 Kofu City, Yamanashi Pref. and 1 other place Branch facilities Buildings 51 Equipment 0 Buildings 60 Other places Idle assets Land 8 Equipment 0 With regard to Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., a principal consolidated subsidiary of the Company, the Group defines the unit of management accounting of the company as a cash-flow generating unit categorized into wholesale and retail, and groups the units according to the respective headquarters and branches. When judging the indications of impairment, a group is set for each property for consolidated subsidiaries that hold leasing property, while the entire business is in principle treated as one asset group for other companies including the Company. During the year under review, the carrying amounts for the following items were reduced to recoverable amounts, recognizing such reduction as an impairment loss (1,420 million yen) included in extraordinary loss: buildings and equipment pertaining to office spaces scheduled for relocation and not expected to be used; software retired because of partial renewal of operations systems; and land, buildings and equipment which are branch facilities with fair values that have decreased and idle assets. Among the recoverable amounts of these asset groups, those for land, buildings and equipment which are branch facilities and idle assets are measured based on fair value less costs to sell and are valued based on real estate appraisal or rational estimates. Buildings and equipment pertaining to office spaces scheduled for relocation and not expected to be used, and software, are measured based on value in use and calculated by discounting future cash flows at 0.7% to 0.8%. -20-
F. Notes to Consolidated Statements of Comprehensive Income * Reclassification adjustments and tax effect amounts pertaining to other comprehensive income March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Valuation difference on available-for-sale securities: Amount recognized during the year 3,424 21,579 Reclassification adjustment 2,010 (2,186) Amount before tax effect adjustment 5,435 19,393 Tax effect amount (2,072) (6,154) Valuation difference on available-for-sale securities 3,362 13,239 Deferred gains or losses on hedges: Amount recognized during the year (1,204) 40 Reclassification adjustment 1,204 Amount before tax effect adjustment (1,204) 1,245 Tax effect amount 299 (310) Deferred gains or losses on hedges (905) 935 Foreign currency translation adjustment: Amount recognized during the year (7,073) 20,517 Reclassification adjustment 871 Foreign currency translation adjustment (7,073) 21,388 Share of other comprehensive income in affiliates under equity method: Amount recognized during the year 669 19 Reclassification adjustment 1,907 Share of other comprehensive income in affiliates under equity method 2,576 19 Total other comprehensive income (2,039) 35,582-21-
G. Notes to Consolidated Statements of Changes in Net Assets I. March 31, 2012 (April 1, 2011 to March 31, 2012) 1. Type and total number of shares issued, and type and number of treasury shares (Thousands of shares) As of As of Increase Decrease April 1, 2011 March 31, 2012 Shares issued Common stock (Note 1) 716,985 20,000 736,985 Total 716,985 20,000 736,985 (Notes) 1. The increase in the total number of common shares issued of 20,000 thousand shares was due to the issuance of new shares through an allotment to the shareholder. 2. Not applicable with regard to treasury stock. 2. Subscription rights to shares, and treasury subscription rights to shares Not applicable. 3. Cash dividends (1) Dividend payments Not applicable. (2) Of those dividends whose record dates fall within the year under review, items for which the effective dates are after the end of the said period Not applicable. II. March 31, 2013 (April 1, 2012 to March 31, 2013) 1. Type and total number of shares issued, and type and number of treasury shares (Thousands of shares) As of As of Increase Decrease April 1, 2012 March 31, 2013 Shares issued Common stock 736,985 736,985 Total 736,985 736,985 (Note) Not applicable with regard to treasury stock. 2. Subscription rights to shares, and treasury subscription rights to shares Not applicable. 3. Cash dividends (1) Dividend payments Resolution Board of Directors meeting on October 30, 2012 Type of shares Total dividends Dividend per share (Yen) Common stock 7,163 9.72 Record date September 30, 2012 Effective date November 15, 2012 (2) Of those dividends whose record dates fall within the year under review, items for which the effective dates are after the end of the said period Total dividends Resource of Dividend per Resolution Type of shares (Millions of Record date Effective date dividends share (Yen) yen) The ordinary general meeting of shareholders on June 26, 2013 Common stock 7,148 Retained earnings 9.70 March 31, 2013 June 26, 2013-22-
H. Notes to Consolidated Statements of Cash Flows *1. Reconciliation of cash and cash equivalents to those in the consolidated balance sheet March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Cash and deposits 452,899 719,879 Time deposits with a deposit period of over three months (30,378) (2,073) Cash and cash equivalents at end 422,521 717,806 *2. Major breakdown of assets and liabilities of companies made consolidated subsidiaries through share acquisitions in the year ended March 31, 2013 The breakdown of assets and liabilities from the consolidation of Mitsubishi UFJ Merrill Lynch PB Securities Co., Ltd. at the time it was made a consolidated subsidiary through share acquisition, and the relation between the purchase price and payment for purchase of shares, are as follows: Current assets 35,534 Noncurrent assets 1,862 Goodwill 19,492 Current liabilities (23,334) Noncurrent liabilities (930) Reserves under the special laws (27) Minority interests (6,421) Previously held equity interests (600) Purchase price of shares 25,577 Other (0) Cash and cash equivalents (10,589) Purchase of shares, net of cash paid 14,986-23-
I. Notes on Lease Transactions (Lessee) 1. Finance lease transaction Finance lease not involving the transfer of ownership 1) Description of leased assets Property and equipment I. As of March 31, 2012 Mainly multifunction machines (equipment) II. As of March 31, 2013 Not applicable. 2) Method of depreciation of leased assets Provided in Key Matters Forming the Basis of Preparation of Consolidated Financial Statements, 4. Accounting policies, (3) Method of depreciation and amortization of major depreciable and amortizable assets. Please note that finance lease not involving the transfer of ownership whose transaction commenced on or before March 31, 2008 follow the same method as operating leases. Its details are as follows: (1) Purchase price equivalent, accumulated depreciation and amortization equivalent, accumulated impairment loss equivalent and year-end value equivalent of lease property As of March 31, 2012 Purchase price equivalent Accumulated depreciation and amortization equivalent Year-end value equivalent Equipment 17 15 2 Software 6,154 5,660 494 Total 6,172 5,675 496 As of March 31, 2013 Purchase price equivalent Accumulated Year-end value depreciation and equivalent amortization equivalent Equipment Software Total (2) Year-end value equivalent of future lease commitments, etc. As of March 31, 2012 As of March 31, 2013 Year-end value equivalent of future lease commitments Due within one year 547 Due after one year Total 547 (3) Lease payments, transfer from accumulated impairment loss on leased assets, depreciation and amortization equivalent, interest expenses equivalent and impairment loss March 31, 2012 (April 1, 2011 to March 31, 2012) March 31, 2013 (April 1, 2012 to March 31, 2013) Lease payments 2,116 551 Depreciation and amortization equivalent 1,925 495 Interest expenses equivalent 42 5-24-
(4) Calculation method of depreciation and amortization equivalent The straight-line method is applied over the lease period as the useful life and the residual value is assumed to be zero. (5) Calculation method of interest equivalent The difference between the total lease amount and the purchase price equivalent of the lease property is considered to be the interest equivalent and is distributed to each period based on the interest method. (Impairment loss) There was no impairment loss on leased assets. 2. Operating leases Future lease commitments related to irrevocable operating leases As of March 31, 2012 As of March 31, 2013 Due within one year 7,888 9,071 Due after one year 47,176 47,484 Total 55,064 56,556-25-
J. Notes on Financial Instruments 1. Matters relating to the status of financial instruments (1) Financial instrument policy The Company and its consolidated subsidiaries (the Group ) hold various financial instruments in order to provide financial products and services that meet customer needs. The Group also engages in underwriting securities such as bonds and stocks, and therefore temporarily holds these financial instruments in some cases. Furthermore, the Group carries out trading for such purposes as controlling risks of positions and market making. The Group also uses various financial instruments as a means of fund-raising. (2) Details and risk of financial instruments Financial instruments held by the Group are broadly classified into four types: i) spot of securities, represented by stocks and bonds; ii) derivatives listed on exchanges such as futures and options of stock price indices and futures and futures options of government bonds [listed derivative, foreign listed derivative ]; iii) derivatives not listed on exchanges such as swaps, forward foreign exchange contracts, currency options, bond over-the-counter (OTC) options, and securities OTC derivative [OTC derivative ]; and, iv) securitized products and other securities. The Group also uses repurchase, securities lending and borrowing, long-term loans payable, derivative embedded MTN, structured loans, and others, as means of fund-raising and capital management. With regard to hedging instruments, hedged items, hedging policy, method of assessing the effectiveness of hedging activities, etc. concerning hedge accounting, please refer to Major hedge accounting in Key Matters Forming the Basis of Preparation of Consolidated Financial Statements. [Major risks of financial instruments] The main risks that may arise from financial instruments held by the Group that could influence the financial condition of the Group are market risk and credit risk. Market risk means market fluctuation risk, a risk that losses will be suffered as a result of fluctuations in the values of assets and liabilities held (including off-balance assets and liabilities) due to changes in various indices including interest rates, prices of securities and foreign exchange rates (market risk factors), and product liquidity risk, a risk that losses may be suffered because the necessary amount of products cannot be traded at proper levels as a result of disruption in the market or lack of trading volume. Credit risk means a risk that losses will be suffered as a result of the circumstances of a party to which the Group grants credit, an issuer of securities held by the Group, or a reference entity in a credit derivative contract or other transaction, such as a deterioration of financial conditions or non-fulfillment of contracts. Financial instruments also involve funding liquidity risk, which means the possibility of incurring losses as a result of the Group being unable to ensure the necessary funds for holding financial instruments due to a deterioration of its financial conditions or being forced to raise funds on far less advantageous terms than usual. In addition, there is operational risk from internal processes, human resources or systems involved in the handling of financial instruments being inappropriate or ceasing to function, or from external circumstances. (3) Risk management structure for financial instruments [Risk governance] Regarding the risk management structure for major financial instruments of the Group, the Company has established Market Risk Management Rules, Credit Risk Management Rules, Funding Liquidity Risk Management Rules and Operational Risk Management Rules at the Risk Management Committee, to which the Board of Directors delegates resolutions on important matters related to risk management, and a management structure conforming to the relevant Rules is in place. The statuses of various risks are monitored by the Company s risk management divisions, which are independent from the front businesses, and the divisions report the results of its monitoring to the management on a daily basis and to the Risk Management Committee and the Board of Directors on a monthly basis. Mark-to-market valuation is monitored on a daily basis by the product control divisions of major Group companies. These divisions also perform independent inspections and report the results at relevant committees on a monthly basis. In the year ending March 31, 2014, the Group will introduce the Risk Appetite Framework. Under this framework, the Group will seek to secure a balance between profitability and risk, strengthen risk governance and optimize capital management. To achieve this, the Group will create organic connections among operational strategies, profit targets and policies for managing various risks at the Company and major Group companies, and manage them in an integrated manner. [Market risk] The Company and major Group companies each establish limits for market risk by methods including the following: 1) management by market risk amount, 2) management by stress-testing and 3) management by sensitivity level. The risk management divisions manage market risk by monitoring the level of compliance with these methods. The risk management divisions summarize the status of market risk management and report it to the Risk Management Committee and the Board of Directors on a monthly basis. -26-