Excerpt from Quarterly Report (Consolidated Financial Statements) (January 1 Part 4. Financial Section 1. Preparation Method of Condensed Quarterly Consolidated Financial Statements (1) The condensed quarterly consolidated financial statements of Dentsu Inc. (hereinafter referred to as the Company ) are prepared in accordance with International Accounting Standards 34 Interim Financial Reporting (hereinafter referred to as IAS 34 ) under the provisions of Article 93 of the Ordinance on Terminology, Forms and Preparation Methods of Quarterly Consolidated Financial Statements (Cabinet Office Ordinance No. 64, 2007; hereinafter referred to as the Ordinance ). (2) In the condensed quarterly consolidated financial statements, figures less than one million yen are rounded down to the nearest million yen. 2. Audit Certificate Pursuant to Article 193-2, Paragraph 1 of the Financial Instruments and Exchange Act, the Company s condensed quarterly consolidated financial statements for the third quarter ended (from July 1 and the condensed consolidated financial statements for the first nine months (from January 1 of fiscal year 2017, which were compiled in Japanese, were subject to a quarterly review by KPMG AZSA LLC. 1/26
1. Condensed Quarterly Consolidated Financial Statements (1) Condensed Quarterly Consolidated Statement of Financial Position Notes FY2016 (As of December 31, 2016) The third quarter (As of ) ASSETS CURRENT ASSETS: Cash and cash equivalents 242,410 169,461 Trade and other receivables 1,275,044 1,216,099 Inventories 18,862 29,010 Other financial assets 12 17,814 22,506 Other current assets 60,621 77,977 Subtotal 1,614,753 1,515,055 Non-current assets classified as held for sale 3,357 3,357 Total current assets 1,618,111 1,518,413 NON-CURRENT ASSETS: Property, plant and equipment 193,757 191,545 Goodwill 718,717 785,407 Intangible assets 274,074 277,169 Investment property 37,837 37,419 Investments accounted for using the equity method 55,691 56,376 Other financial assets 12 224,723 294,215 Other non-current assets 13,183 14,779 Deferred tax assets 19,133 18,390 Total non-current assets 1,537,118 1,675,303 TOTAL ASSETS 5 3,155,230 3,193,717 2/26
Notes FY2016 (As of December 31, 2016) The third quarter (As of ) LIABILITIES AND EQUITY LIABILITIES: CURRENT LIABILITIES: Trade and other payables 1,230,496 1,117,758 Borrowings 12 130,490 102,324 Other financial liabilities 12 26,781 49,070 Income tax payables 34,248 8,434 Provisions 1,179 2,108 Other current liabilities 176,030 165,712 Subtotal 1,599,226 1,445,410 Liabilities directly associated with non-current assets classified as held for sale 8 8 Total current liabilities 1,599,235 1,445,418 NON-CURRENT LIABILITIES: Borrowings 12 273,108 373,846 Other financial liabilities 12 166,216 160,325 Liability for retirement benefits 31,377 33,580 Provisions 4,295 4,287 Other non-current liabilities 20,141 20,392 Deferred tax liabilities 78,893 104,609 Total non-current liabilities 574,033 697,042 Total liabilities 2,173,269 2,142,461 EQUITY: Share capital 74,609 74,609 Share premium account 99,751 99,751 Treasury shares (20,168) (40,179) Other components of equity 121,346 195,593 Retained earnings 657,203 669,634 Total equity attributable to owners of the parent 932,742 999,408 Non-controlling interests 49,218 51,847 Total equity 981,961 1,051,256 TOTAL LIABILITIES AND EQUITY 3,155,230 3,193,717 3/26
(2) Condensed Quarterly Consolidated Statement of Income For the nine months ended and Notes Turnover (Note 1) 5 3,493,053 3,652,364 Revenue 5 588,278 657,143 Cost 36,171 36,771 Gross profit 5 552,107 620,371 Selling, general and administrative expenses 472,457 556,486 Other income 7 9,234 7,321 Other expenses 8 4,886 7,432 Operating profit 83,998 63,774 Share of results of associates 2,248 2,630 Profit before interest and tax 86,247 66,405 Finance income 9 3,985 12,516 Finance costs 9 8,353 8,885 Profit before tax 81,879 70,036 Income tax expense 26,608 21,948 Profit for the period 55,271 48,088 Profit attributable to: Owners of the parent 50,929 44,513 Non-controlling interests 4,341 3,574 Earnings per share Basic earnings per share (Yen) 10 178.61 157.31 Diluted earnings per share (Yen) 10 178.61 157.30 4/26
Reconciliation from operating profit to underlying operating profit Notes Operating profit 83,998 63,774 Amortization of intangible assets incurred in acquisitions Other adjusting items (selling, general and administrative expenses) 15,743 25,066 3,938 4,226 Other adjusting items (other income) (2,923) (1,439) Other adjusting items (other expenses) 1,475 3,207 Underlying operating profit (Note 2) 5 102,233 94,835 5/26
For the third quarter ended and Notes Third quarter ended (From July 1 Third quarter ended (From July 1 Turnover (Note 1) 1,121,089 1,187,711 Revenue 195,111 217,658 Cost 11,622 11,896 Gross profit 183,488 205,761 Selling, general and administrative expenses 158,546 188,107 Other income 2,235 2,935 Other expenses 1,830 2,122 Operating profit 25,347 18,467 Share of results of associates 811 969 Profit before interest and tax 26,159 19,436 Finance income 2,100 5,423 Finance costs 3,188 3,240 Profit before tax 25,071 21,619 Income tax expense 8,854 6,584 Profit for the period 16,216 15,034 Profit attributable to: Owners of the parent 15,144 13,800 Non-controlling interests 1,072 1,234 Earnings per share Basic earnings per share (Yen) 10 53.11 48.95 Diluted earnings per share (Yen) 10 53.11 48.95 6/26
Reconciliation from operating profit to underlying operating profit Notes Third quarter ended (From July 1 Third quarter ended (From July 1 Operating profit 25,347 18,467 Amortization of intangible assets incurred in acquisitions Other adjusting items (selling, general and administrative expenses) 5,006 8,807 3,217 3,370 Other adjusting items (other income) (394) (720) Other adjusting items (other expenses) 442 555 Underlying operating profit (Note 2) 33,620 30,480 (Notes) 1 Turnover represents the total amount billed and billable to clients by the Group, net of discounts, VAT and other sales-related taxes. Disclosure of turnover information is not required under IFRS; however, it is voluntarily disclosed in the Condensed Quarterly Consolidated Statement of Income since management has concluded that the information is useful for users of the financial statements. 2 The underlying operating profit is a KPI to measure recurring business performance which is calculated as operating profit added with amortization of M&A related intangible assets, acquisition costs, share-based compensation expenses related to acquired companies and one-off items such as impairment loss and gain/loss on sales of non-current assets. The underlying operating profit is not defined under IFRS; however, it is voluntarily disclosed in the Condensed Quarterly Consolidated Statement of Income since management has concluded that the information is useful for users of the financial statements. 7/26
(3) Condensed Quarterly Consolidated Statement of Comprehensive Income For the nine months ended and Notes PROFIT FOR THE PERIOD 55,271 48,088 OTHER COMPREHENSIVE INCOME ITEMS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS: Net change in financial assets measured at fair value through other comprehensive income Remeasurements of defined benefit plans Share of other comprehensive income of investments accounted for using the equity method ITEMS THAT MAY BE RECLASSIFIED TO PROFIT OR LOSS: Exchange differences on translation of foreign operations Effective portion of the change in the fair value of cash flow hedges Share of other comprehensive income of investments accounted for using the equity method 12 4,091 45,559 47 19 (493) 149 (171,472) 31,043 (10,696) (1,938) (491) 177 Other comprehensive income, net of tax (179,014) 75,010 COMPREHENSIVE INCOME FOR THE PERIOD (123,743) 123,099 COMPREHENSIVE INCOME FOR THE PERIOD ATTRIBUTABLE TO: Owners of the parent (125,926) 118,892 Non-controlling interests 2,182 4,207 8/26
For the third quarter ended and Third quarter ended Third quarter ended (From July 1 (From July 1 PROFIT FOR THE PERIOD 16,216 15,034 OTHER COMPREHENSIVE INCOME ITEMS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS: Net change in financial assets measured at fair value through other comprehensive income Remeasurements of defined benefit plans Share of other comprehensive income of investments accounted for using the equity method ITEMS THAT MAY BE RECLASSIFIED TO PROFIT OR LOSS: Exchange differences on translation of foreign operations Effective portion of the change in the fair value of cash flow hedges Share of other comprehensive income of investments accounted for using the equity method 5,300 24,181 13 (14) (141) 50 (24,941) 20,143 266 377 (86) 69 Other comprehensive income, net of tax (19,589) 44,809 COMPREHENSIVE INCOME FOR THE PERIOD (3,372) 59,843 COMPREHENSIVE INCOME FOR THE PERIOD ATTRIBUTABLE TO: Owners of the parent (4,572) 57,725 Non-controlling interests 1,199 2,118 9/26
(4) Condensed Quarterly Consolidated Statement of Changes in Equity For the nine months ended Total equity attributable to owners of the parent Other components of equity Notes Share capital Share premium account Treasury shares Share options Exchange differences on translation of foreign operations Effective portion of the change in the fair value of cash flow hedges As of January 1, 2016 74,609 99,751 (20,155) 48 171,132 10,222 Profit for the period Other comprehensive income (169,889) (10,696) Comprehensive income for the period - - - - (169,889) (10,696) Repurchase of treasury shares (7) Disposal of treasury shares (0) 0 Dividends 6 Transactions with noncontrolling interests in subsidiaries that do not result in a loss of control 11 Transfer from other components of equity to retained earnings Other changes (0) Transactions with owners-total - (0) (7) (0) - - As of 74,609 99,751 (20,163) 48 1,243 (474) Total equity attributable to owners of the parent Other components of equity Notes Net change in financial assets measured at fair value through other comprehensive income Remeasurements of defined benefit plans Total Retained earnings Total Noncontrolling interests Total equity As of January 1, 2016 83,639 (4,003) 261,039 652,972 1,068,216 34,526 1,102,743 Profit for the period - 50,929 50,929 4,341 55,271 Other comprehensive income 3,682 47 (176,855) (176,855) (2,158) (179,014) Comprehensive income for the period 3,682 47 (176,855) 50,929 (125,926) 2,182 (123,743) Repurchase of treasury shares - (7) (7) Disposal of treasury shares - 0 0 Dividends 6 - (22,811) (22,811) (3,826) (26,637) Transactions with noncontrolling interests in subsidiaries that do not result in a loss of control Transfer from other components of equity to retained earnings 11 - (73,029) (73,029) (6,853) (79,883) (16,721) (16,721) 16,721 - - Other changes (0) (0) (0) Transactions with owners-total (16,721) - (16,721) (79,119) (95,848) (10,680) (106,528) As of 70,600 (3,956) 67,462 624,782 846,442 26,029 872,471 10/26
For the nine months ended Total equity attributable to owners of the parent Other components of equity Notes Share capital Share premium account Treasury shares Share options Exchange differences on translation of foreign operations Effective portion of the change in the fair value of cash flow hedges As of January 1, 2017 74,609 99,751 (20,168) 48 37,403 7,120 Profit for the period Other comprehensive income 30,967 (1,938) Comprehensive income for the period - - - - 30,967 (1,938) Repurchase of treasury shares 6 (20,011) Disposal of treasury shares (0) 0 Dividends 6 Transactions with noncontrolling interests in subsidiaries that do not result in a loss of control 11 Transfer from other components of equity to retained earnings Transactions with owners-total - (0) (20,010) - - - As of 74,609 99,751 (40,179) 48 68,370 5,181 Total equity attributable to owners of the parent Other components of equity Notes Net change in financial assets designated as fair value through other comprehensive income Remeasurements of defined benefit plans Total Retained earnings Total Noncontrolling interests Total equity As of January 1, 2017 84,409 (7,634) 121,346 657,203 932,742 49,218 981,961 Profit for the period - 44,513 44,513 3,574 48,088 Other comprehensive income 45,337 12 74,378 74,378 632 75,010 Comprehensive income for the period 45,337 12 74,378 44,513 118,892 4,207 123,099 Repurchase of treasury shares 6 - (20,011) (20,011) Disposal of treasury shares - 0 0 Dividends 6 - (25,516) (25,516) (3,381) (28,897) Transactions with noncontrolling interests in subsidiaries that do not result in a loss of control Transfer from other components of equity to retained earnings 11 - (6,697) (6,697) 1,802 (4,895) (132) (132) 132 - - Transactions with owners-total (132) - (132) (32,082) (52,225) (1,578) (53,804) As of 129,615 (7,622) 195,593 669,634 999,408 51,847 1,051,256 11/26
(5) Condensed Quarterly Consolidated Statement of Cash Flows Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 81,879 70,036 ADJUSTMENTS FOR: Depreciation and amortization 31,281 42,393 Impairment loss 69 705 Interest and dividend income (3,621) (3,943) Interest expense 4,929 8,141 Share of results of associates (2,248) (2,630) Increase (decrease) in liability for retirement benefits (706) 2,023 Other net (1,553) (12,433) Cash flows from operating activities before adjusting changes in working capital and others 110,030 104,292 CHANGES IN WORKING CAPITAL: (Increase) decrease in trade and other receivables 89,374 100,503 (Increase) decrease in inventories (2,193) (9,189) (Increase) decrease in other current assets Increase (decrease) in trade and other payables Increase (decrease) in other current liabilities (6,375) (14,913) (118,015) (141,907) (7,414) (8,602) Change in working capital (44,623) (74,108) Subtotal 65,406 30,184 Interest received 1,072 1,380 Dividends received 3,556 3,589 Interest paid (4,460) (7,842) Income taxes paid (33,233) (55,317) Net cash flow from operating activities 32,343 (28,005) 12/26
Notes CASH FLOWS FROM INVESTING ACTIVITIES Payment for purchase of property, plant and equipment, intangible assets and investment property Proceeds from sale of property, plant and equipment, intangible assets and investment property Net cash (paid) received on acquisition of subsidiaries Net cash (paid) received on disposal of subsidiaries (14,691) (15,945) 5,093 2,067 (161,361) (47,983) (24) 72 Payments for purchases of securities (7,834) (12,908) Proceeds from sales of securities 39,444 6,593 Other net (1,093) (614) Net cash flow from investing activities (140,466) (68,718) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings 81,979 (79,883) Proceeds from long-term borrowings 30,463 154,049 Repayment of long-term borrowings (33,274) (1,360) Payment for acquisition of interest in a subsidiary from non-controlling interests Payments for purchase of treasury shares (4,170) (1,957) 6 (7) (20,011) Dividends paid 6 (22,811) (25,516) Dividends paid to non-controlling interests (3,625) (2,613) Other net (1,592) (343) Net cash flow from financing activities 46,960 22,363 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (23,377) 1,411 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (84,539) (72,948) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 263,322 242,410 CASH AND CASH EQUIVALENTS AT END OF PERIOD 178,782 169,461 13/26
Notes on the Condensed Quarterly Consolidated Financial Statements 1. Reporting Entity Dentsu Inc. (hereinafter referred to as the Company ) is a joint stock corporation under the Companies Act of Japan located in Japan. The addresses of the Company s registered corporate headquarters and principal business offices are available on the Company s website (http://www.dentsu.co.jp/). The details of businesses and principal business activities of the Company and its subsidiaries (hereinafter referred to as the Group ) are stated in 5. Segment Information. The condensed quarterly consolidated financial statements for the third quarter ended were approved by Toshihiro Yamamoto, Representative Director and President & CEO, and Shoichi Nakamoto, Representative Director and Senior Executive Vice President & CFO, on November 14, 2017. 2. Basis of Preparation Compliance with the International Financial Reporting Standards (hereinafter referred to as IFRS ) The Company s condensed quarterly consolidated financial statements meet all requirements of Article 1-2 Specified Company for Designated IFRS stipulated in the Ordinance and are prepared in accordance with IAS 34 under the provisions of Article 93 of the Ordinance. The condensed quarterly consolidated financial statements do not include all the information that must be disclosed in the annual consolidated financial statements, and therefore should be used in conjunction with the consolidated financial statements for the previous fiscal year. 3. Significant Accounting Policies Significant accounting policies applied to the condensed quarterly consolidated financial statements for the third quarter ended are identical to those applied to the consolidated financial statements for the previous fiscal year. Meanwhile, income taxes for the nine months (third quarter) ended September 30, 14/26
2017 are calculated based on the estimated annual effective tax rate. 4. Significant Accounting Judgments, Estimates and Assumptions The preparation of the condensed quarterly consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of revenues, expenses, assets and liabilities. These estimates and assumptions are based on the best judgment of management in light of historical experience and various factors deemed to be reasonable as of the fiscal year-end date. However, given their nature, actual results may differ from those estimates and assumptions. The estimates and underlying assumptions are continuously reviewed. The effects of a change in estimates are recognized in the period of the change and future periods. Estimates and assumptions that may have a material effect on the amounts in the condensed quarterly consolidated financial statements for the third quarter ended are identical to those for the consolidated financial statements for the previous fiscal year. 5. Segment Information (1) Description of reportable segments The Group s reportable segments are those for which discrete financial information is available, and for which the Board of Directors conducts regular reviews to make decisions about resources to be allocated and to assess performance. The Group is mainly engaged in providing communications-related services focusing on advertising, and manages its Japan business and international business separately. Accordingly, the Group has two reportable segments: Japan business segment and international business segment. 15/26
(2) Information on reportable segments Segment profit is based on operating profit net of Amortization of intangible assets incurred in acquisitions and Other adjusting items. Intersegment revenues are based on the prevailing market price. Turnover (Note 1) Revenue (Note 2) Japan business International business Total Reconciliations Consolidated 1,397,274 2,103,621 3,500,896 (7,843) 3,493,053 311,414 284,707 596,121 (7,843) 588,278 Gross profit (Note 3) Segment profit (underlying operating profit) (Note 3) (Adjusting items) 269,616 282,612 552,229 (121) 552,107 74,300 27,926 102,227 5 102,233 Amortization of intangible assets incurred in - - - - (15,743) acquisitions Other adjusting items (selling, general and administrative - - - - (3,938) expenses) Other adjusting items (other income) - - - - 2,923 Other adjusting items (other expenses) - - - - (1,475) Operating profit - - - - 83,998 Share of results of associates - - - - 2,248 Finance income - - - - 3,985 Finance costs - - - - 8,353 Profit before tax - - - - 81,879 Segment assets (Note 4) 1,183,860 1,680,211 2,864,071 (168,203) 2,695,868 16/26
Turnover (Note 1) Revenue (Note 2) Japan business International business Total Reconciliations Consolidated 1,370,280 2,288,287 3,658,567 (6,202) 3,652,364 303,715 359,630 663,346 (6,202) 657,143 Gross profit (Note 3) Segment profit (underlying operating profit) (Note 3) (Adjusting items) 263,162 357,382 620,544 (172) 620,371 63,540 31,308 94,849 (14) 94,835 Amortization of intangible assets incurred in - - - - (25,066) acquisitions Other adjusting items (selling, general and administrative - - - - (4,226) expenses) Other adjusting items (other income) - - - - 1,439 Other adjusting items (other expenses) - - - - (3,207) Operating profit - - - - 63,774 Share of results of associates - - - - 2,630 Finance income - - - - 12,516 Finance costs - - - - 8,885 Profit before tax - - - - 70,036 Segment assets (Note 4) 1,221,536 2,091,882 3,313,418 (119,701) 3,193,717 (Notes) 1. Turnover represents the total amount billed and billable to clients by the Group, net of discounts, VAT and other sales-related taxes. Disclosure of turnover information is not required under IFRS; however, it is voluntarily disclosed in the Condensed Quarterly Consolidated Statement of Income since management has concluded that the information is useful for users of the financial statements. 2. Reconciliations for revenue are due to eliminations of intersegment transactions (same amount as for turnover). 3. Reconciliations for gross profit and segment profit (underlying operating profit) are due to eliminations of intersegment transactions. 4. Reconciliations for segment assets are due to eliminations of intersegment transactions. 17/26
6. Capital (1) Dividends Dividends paid are as follows: Resolution Annual Shareholders Meeting (March 30, 2016) Board of Directors (August 12, 2016) Class of shares Ordinary shares Ordinary shares Total dividends Dividends per share (Yen) 11,405 40.00 Basis date December 31, 2015 11,405 40.00 June 30, 2016 Effective date March 31, 2016 September 2, 2016 Resolution Board of Directors (February 14, 2017) Board of Directors (August 9, 2017) Class of shares Ordinary shares Ordinary shares Total dividends Dividends per share (Yen) 12,831 45.00 Basis date December 31, 2016 12,685 45.00 June 30, 2017 Effective date March 9, 2017 September 1, 2017 (2) Purchase of treasury shares The Company conducted a share repurchase by resolution at its meeting of the Board of Directors held on February 14, 2017, pursuant to the Company s Articles of Incorporation in accordance with Article 156 of the Companies Act, as applied by replacing certain terms under the provisions of Article 165, Paragraph 3 of the Act, in the following manner. 1) Class of shares repurchased: Common shares of the Company 2) Total number of shares repurchased: 3,235,300 shares 3) Total repurchase cost: 19,999 million yen 4) Repurchase period: February 20, 2017 to May 17, 2017 5) Method of repurchase: Open market purchase on the Tokyo Stock Exchange 18/26
7. Other Income The breakdown of other income is as follows: Profit distributions 5,112 4,709 Foreign exchange gains 129 - Gain on sale of property, plant and equipment, intangible assets and investment property 1,891 660 Other 2,102 1,951 Total 9,234 7,321 8. Other Expenses The breakdown of other expenses is as follows: Amortization of long-term prepaid expenses 2,715 3,021 Foreign exchange losses - 385 Loss on sale of property, plant and equipment, intangible assets and investment property 109 5 Impairment losses 69 705 Share-based compensation expenses settled in cash - 1,883 Other 1,991 1,431 Total 4,886 7,432 9. Finance Income and Finance Costs (1) The breakdown of finance income is as follows: Interest income 1,372 1,493 Dividend income 2,248 2,449 Changes in fair value of contingent consideration - 7,266 Other 364 1,306 Total 3,985 12,516 19/26
(2) The breakdown of finance costs is as follows: Interest expense 5,071 8,245 Changes in fair value of contingent consideration 1,162 - Foreign exchange losses 966 403 Other 1,151 236 Total 8,353 8,885 10. Earnings Per Share (1) Basic earnings per share and diluted earnings per share Basic earnings per share (Yen) 178.61 157.31 Diluted earnings per share (Yen) 178.61 157.30 Third quarter ended (From July 1 Third quarter ended (From July 1 Basic earnings per share (Yen) 53.11 48.95 Diluted earnings per share (Yen) 53.11 48.95 20/26
(2) Basis of calculating basic earnings per share and diluted earnings per share Profit for the period used for calculation of basic earnings per share and diluted earnings per share Profit for the period attributable to owners of the parent Amounts not attributable to ordinary equity holders of the parent Profit for the period used for calculation of basic earnings per share 50,929 44,513 - - 50,929 44,513 Adjustment Share-based payment held by associates (Millions of Yen) Profit for the period used for calculation of diluted earnings per share Weighted average number of ordinary shares outstanding used for the calculation of basic earnings per share and diluted earnings per share Weighted average number of ordinary shares outstanding used for the calculation of basic earnings per share (Thousands of shares) Effect of dilutive potential ordinary shares (Thousands of shares) The weighted average number of ordinary shares outstanding used for the calculation of diluted earnings per share (Thousands of shares) (1) (0) 50,927 44,512 285,138 282,972 - - 285,138 282,972 Third quarter ended (From July 1 Third quarter ended (From July 1 Profit for the period used for calculation of basic earnings per share and diluted earnings per share Profit for the period attributable to owners of the parent Amounts not attributable to ordinary equity holders of the parent Profit for the period used for calculation of basic earnings per share 15,144 13,800 - - 15,144 13,800 Adjustment Share-based payment held by associates (Millions of Yen) Profit for the period used for calculation of diluted earnings per share Weighted average number of ordinary shares outstanding used for the calculation of basic earnings per share and diluted earnings per share Weighted average number of ordinary shares outstanding used for the calculation of basic earnings per share (Thousands of shares) Effect of dilutive potential ordinary shares (Thousands of shares) The weighted average number of ordinary shares outstanding used for the calculation of diluted earnings per share (Thousands of shares) (0) (0) 15,143 13,800 285,138 281,899 - - 285,138 281,899 21/26
11. Transactions with non-controlling interests in subsidiaries that do not result in a loss of control Transactions are mainly due to conclusion of agreements with non-controlling interest owners of an acquired company for purchasing shares owned by the said owners in the future under certain terms and conditions. On concluding the agreements, the fair value of the said agreements was recognized as financial liabilities, and the equivalent amount was deducted from retained earnings. 12. Financial Instruments (1) The carrying amount and fair value of financial instruments The breakdown of the carrying amount and fair value of financial instruments as of December 31, 2016 and is as follows: The fair value of financial assets and financial liabilities measured at amortized cost approximates their carrying amount, except for long-term borrowings. FY2016 (As of December 31, 2016) The third quarter (As of ) Carrying amount Fair value Carrying amount Fair value Long-term borrowings 275,831 277,518 421,645 424,237 (Note) Current portion that is scheduled for repayment within one year is included. The fair value of long-term borrowings is determined by discounting the total of the principal and interest by the interest rate assumed in a case where the same loan is newly made. The fair value hierarchy of long-term borrowings is categorized within Level 3. 22/26
(2) Fair value hierarchy of financial instruments Financial instruments measured at fair value on a recurring basis after initial recognition are categorized into the three levels of the fair value hierarchy according to observability and significance of input used in measurements. The fair value hierarchy is defined as follows: Level 1: Level 2: Fair value measured at the quoted price in the active market Fair value that is measured using the observable price other than categorized in Level 1 directly or indirectly Level 3: Fair value that is measured based on unobservable inputs When multiple inputs are used to measure fair value, fair value levels are determined based on the lowest level input that is significant to the entire fair value measurement. Transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of each quarter. There are no transfers between Level 1 and Level 2 for the fiscal year ended December 31, 2016 and the nine months ended. FY2016 (As of December 31, 2016) Level 1 Level 2 Level 3 Total Financial assets Derivative assets 26,240 26,240 Equity securities 168,406 12,314 180,720 Other 514 2,397 9,337 12,250 Total 168,920 28,637 21,652 219,211 Financial liabilities Derivative liabilities 4,478 4,478 Stock purchase obligations Other (mainly contingent consideration) 107,568 107,568 66,021 66,021 Total 4,478 173,589 178,067 23/26
The third quarter (As of ) Level 1 Level 2 Level 3 Total Financial assets Derivative assets 19,395 19,395 Equity securities 237,741 19,341 257,082 Other 520 2,849 11,702 15,072 Total 238,262 22,245 31,043 291,551 Financial liabilities Derivative liabilities 4,609 4,609 Stock purchase obligations Other (mainly contingent consideration) 110,229 110,229 70,186 70,186 Total 4,609 180,415 185,025 The fair values of interest rate swap contracts and foreign exchange contracts included in derivative assets and derivative liabilities are categorized within Level 2 as they are valuated using price estimates obtained from financial institutions or observable market data. The fair values of stocks included in equity securities and other (financial assets) for which active markets exist are categorized within Level 1 as they are determined based on market prices. For stocks in which active markets do not exist, the stocks valuated using observable market data are categorized within Level 2, while stocks valuated based mainly on market approaches using unobservable inputs are categorized within Level 3. Significant unobservable inputs mainly include the price/net asset value multiples, and fair value increases (decreases) based on the increase (decrease) of the price/net asset value multiples. The price/net asset value multiples used as of December 31, 2016 and are 0.68 and 0.70, respectively. The fair values of stock purchase obligations and other (financial liabilities) are categorized within Level 3 as they are valuated based on the discounted cash flow method using unobservable inputs. As the major unobservable inputs used in the valuation of other (financial liabilities) are mainly future profit levels, their fair values, etc. will increase (decrease) in line with the improvement (deterioration) of profit levels. The fair values of assets and liabilities categorized within Level 3 are measured using asset and liability valuation methods determined by the department in charge in 24/26
accordance with fair value measurement valuation policies and procedures. Fair value measurement results are approved by the appropriate personnel in charge. The schedule of financial instruments categorized within Level 3 is as follows: Financial assets Balance at the beginning of the period 19,984 21,652 Other comprehensive income (Note 1) (1,971) 622 Purchases or acquisitions 3,230 8,703 Sales or settlements (1,138) (266) Transfers out of Level 3 (Note 2) - (21) Other (509) 353 Balance at the end of the period 19,595 31,043 Financial liabilities Balance at the beginning of the period 90,421 173,589 Profit or loss (Note 3) 1,900 (8,011) Purchases (Note 4) 109,523 30,257 Sales or settlements (27,064) (17,863) Other (24,087) 2,445 Balance at the end of the period 150,692 180,415 (Notes) 1 Other comprehensive income is associated with financial assets measured at fair value through other comprehensive income and included in Net change in financial assets measured at fair value through other comprehensive income. 2 Transfers out of Level 3 for the nine months ended are due to investees listed on exchanges. 3 Profit or loss is associated with financial liabilities measured at fair value through profit or loss and included in finance income or finance costs. Profit or loss arising from financial instruments held at the end of the quarter amounted to 1,900 million (finance costs) and 8,011 million (finance income) for the nine months ended and the nine months ended, respectively. 4 Purchases for the nine months ended are mainly due to conclusion of agreements with non-controlling interest owners of an acquired company for purchasing shares owned by the said owners in the future under certain terms and conditions. 25/26
13. Subsequent Events No items to report 2. Other Information (1) Dividends from surplus With regard to the interim dividend for the fiscal year ending December 31, 2017 (from January 1, 2017 to December 31, 2017), the Company resolved at its meeting of the Board of Directors held on August 9, 2017 that dividends shall be paid to the shareholders whose names are recorded in the last register of shareholders as of June 30, 2017, in the following manner. 1) Total amount of dividends: JPY 12,685 million 2) Dividend per share: JPY 45.00 3) Effective date of the right to collect payment and commencement date of dividend payment: September 1, 2017 (2) Significant lawsuits, etc. Although there are pending lawsuits, etc. involving the Group, their impact on the Group s financial position and financial results is deemed to be insignificant. 26/26