SONY CORPORATION 6-K
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of May 2018

Commission File Number: 001-06439

SONY CORPORATION

(Translation of registrant’s name into English)

1-7-1 KONAN, MINATO-KU, TOKYO, 108-0075, JAPAN

(Address of principal executive offices)

The registrant files annual reports under cover of Form 20-F.

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F,

 

Form 20-F X   Form 40-F     

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934, Yes No X

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-            

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SONY CORPORATION
(Registrant)
By: /s/ Hiroki Totoki
                (Signature)
Hiroki Totoki
Executive Vice President and
Chief Financial Officer

Date: May 22, 2018


Table of Contents

 

 

 

LOGO

Consolidated Financial Statements

For the fiscal year ended March 31, 2018

 

 

Sony Corporation

TOKYO, JAPAN


Table of Contents

Contents

 

Management’s Annual Report on Internal Control over Financial Reporting

     2  

Report of Independent Registered Public Accounting Firm

     3  

Consolidated Balance Sheets

     4  

Consolidated Statements of Income

     6  

Consolidated Statements of Comprehensive Income

     7  

Consolidated Statements of Cash Flows

     8  

Consolidated Statements of Changes in Stockholders’ Equity

     10  

Index to Notes to Consolidated Financial Statements

     13  

Notes to Consolidated Financial Statements

     14  

 

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Table of Contents

Management’s Annual Report on Internal Control over Financial Reporting

Sony’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Sony’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Sony’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Sony;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Sony are being made only in accordance with authorizations of management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Sony’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Sony’s management evaluated the effectiveness of Sony’s internal control over financial reporting as of March 31, 2018 based on the criteria established in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the evaluation, management has concluded that Sony maintained effective internal control over financial reporting as of March 31, 2018.

Sony’s independent registered public accounting firm, PricewaterhouseCoopers Aarata LLC, has issued an audit report on Sony’s internal control over financial reporting as of March 31, 2018, presented on page 3.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Sony Corporation (Sony Kabushiki Kaisha)

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Sony Corporation and its subsidiaries (the “Company”) as of March 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity for each of the three years in the period ended March 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers Aarata LLC

Tokyo, Japan

May 21, 2018

We have served as the Company’s auditor since 2006.

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Balance Sheets

 

 

March 31

 

     Yen in millions  
      2017     2018  

ASSETS

    

Current assets:

    

Cash and cash equivalents

     960,142       1,586,329  

Marketable securities

     1,051,441       1,176,601  

Notes and accounts receivable, trade

     1,006,961       1,061,442  

Allowance for doubtful accounts and sales returns

     (53,150     (48,663

Inventories

     640,835       692,937  

Other receivables

     223,632       190,706  

Prepaid expenses and other current assets

     525,861       516,744  

Total current assets

     4,355,722       5,176,096  

Film costs

     336,928       327,645  

Investments and advances:

    

Affiliated companies

     149,371       157,389  

Securities investments and other

     9,962,422       10,598,669  
       10,111,793       10,756,058  

Property, plant and equipment:

    

Land

     117,293       84,358  

Buildings

     666,381       655,434  

Machinery and equipment

     1,842,852       1,798,722  

Construction in progress

     28,779       38,295  
     2,655,305       2,576,809  

Less — Accumulated depreciation

     1,897,106       1,837,339  
       758,199       739,470  

Other assets:

    

Intangibles, net

     584,185       527,168  

Goodwill

     522,538       530,492  

Deferred insurance acquisition costs

     568,837       586,670  

Deferred income taxes

     98,958       96,772  

Other

     323,396       325,167  
       2,097,914       2,066,269  

Total assets

     17,660,556       19,065,538  

 

(Continued on following page.)

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

Consolidated Balance Sheets (Continued)

 

 

 

     Yen in millions  
      2017     2018  

LIABILITIES

    

Current liabilities:

    

Short-term borrowings

     464,655       496,093  

Current portion of long-term debt

     53,424       225,522  

Notes and accounts payable, trade

     539,900       468,550  

Accounts payable, other and accrued expenses

     1,394,758       1,514,433  

Accrued income and other taxes

     106,037       145,905  

Deposits from customers in the banking business

     2,071,091       2,159,246  

Other

     591,874       610,792  

Total current liabilities

     5,221,739       5,620,541  

Long-term debt

     681,462       623,451  

Accrued pension and severance costs

     396,715       394,504  

Deferred income taxes

     432,824       449,863  

Future insurance policy benefits and other

     4,834,492       5,221,772  

Policyholders’ account in the life insurance business

     2,631,073       2,820,702  

Other

     314,771       278,338  

Total liabilities

     14,513,076       15,409,171  

Redeemable noncontrolling interest

     12,058       9,210  

Commitments and contingent liabilities

    

EQUITY

                

Sony Corporation’s stockholders’ equity:

    

Common stock, no par value —

    

2017 — Shares authorized: 3,600,000,000; shares issued: 1,263,763,660

     860,645    

2018 — Shares authorized: 3,600,000,000; shares issued: 1,266,552,149

       865,678  

Additional paid-in capital

     1,275,337       1,282,577  

Retained earnings

     984,368       1,440,387  

Accumulated other comprehensive income —

    

Unrealized gains on securities, net

     126,635       126,191  

Unrealized losses on derivative instruments, net

     (58 )       (1,242 )  

Pension liability adjustment

     (308,736     (296,444

Foreign currency translation adjustments

     (436,610     (445,251
     (618,769     (616,746

Treasury stock, at cost

    

Common stock

    

2017 — 1,073,222 shares

     (4,335  

2018 — 1,127,101 shares

             (4,530
       2,497,246       2,967,366  

Noncontrolling interests

     638,176       679,791  

Total equity

     3,135,422       3,647,157  

Total liabilities and equity

     17,660,556       19,065,538  

The accompanying notes are an integral part of these statements.

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Income

 

 

Fiscal year ended March 31

     Yen in millions  
      2016      2017      2018  

Sales and operating revenue:

        

Net sales

     6,949,357        6,443,328        7,231,613  

Financial services revenue

     1,066,319        1,080,284        1,221,235  

Other operating revenue

     90,036        79,638        91,134  
       8,105,712        7,603,250        8,543,982  

Costs and expenses:

        

Cost of sales

     5,166,894        4,753,010        5,188,259  

Selling, general and administrative

     1,691,930        1,505,956        1,583,197  

Financial services expenses

     907,758        910,144        1,042,163  

Other operating expense, net

     47,171        149,001        4,072  
       7,813,753        7,318,111        7,817,691  

Equity in net income of affiliated companies

     2,238        3,563        8,569  

Operating income

     294,197        288,702        734,860  

Other income:

        

Interest and dividends

     12,455        11,459        19,784  

Gain on sale of securities investments, net

     52,068        225        1,517  

Other

     2,326        2,734        2,427  
       66,849        14,418        23,728  

Other expenses:

        

Interest

     25,286        14,544        13,566  

Loss on devaluation of securities investments

     3,309        7,629        4,955  

Foreign exchange loss, net

     20,565        22,181        30,634  

Other

     7,382        7,147        10,384  
       56,542        51,501        59,539  

Income before income taxes

     304,504        251,619        699,049  

Income taxes:

        

Current

     94,578        100,260        127,685  

Deferred

     211        23,798        24,085  
       94,789        124,058        151,770  

Net income

     209,715        127,561        547,279  

Less — Net income attributable to noncontrolling interests

     61,924        54,272        56,485  

Net income attributable to Sony Corporation’s stockholders

     147,791        73,289        490,794  

 

     Yen  
      2016      2017      2018  

Per share data:

        

Common stock

        

Net income attributable to Sony Corporation’s stockholders

        

— Basic

          119.40               58.07             388.32  

— Diluted

     117.49        56.89        379.75  

Cash dividends

     20.00        20.00        27.50  

The accompanying notes are an integral part of these statements.

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Comprehensive Income

 

 

Fiscal year ended March 31

 

     Yen in millions  
      2016     2017     2018  

Net income

     209,715       127,561       547,279  

Other comprehensive income, net of tax —

      

Unrealized gains (losses) on securities

     2,220       (30,293     1,070  

Unrealized gains (losses) on derivative instruments

     (1,198     1,140       (1,184

Pension liability adjustment

     (171,753     63,232       12,390  

Foreign currency translation adjustments

     (83,899     (17,988     (6,335

Total comprehensive income (loss)

     (44,915     143,652       553,220  

Less — Comprehensive income attributable to noncontrolling interests

     75,329       35,814       60,403  

Comprehensive income (loss) attributable to Sony Corporation’s stockholders

     (120,244     107,838       492,817  

The accompanying notes are an integral part of these statements.

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows

 

 

Fiscal year ended March 31

 

     Yen in millions  
      2016     2017     2018  

Cash flows from operating activities:

      

Net income

     209,715       127,561       547,279  

Adjustments to reconcile net income to net cash provided by operating activities —

      

Depreciation and amortization, including amortization of deferred insurance acquisition costs

     397,091       327,048       361,444  

Amortization of film costs

     299,587       297,505       359,274  

Accrual for pension and severance costs, less payments

     (6,383     9,297       4,113  

Other operating expense, net

     47,171       149,001       4,072  

(Gain) loss on sale or devaluation of securities investments, net

     (48,857     7,404       3,438  

(Gain) loss on revaluation of marketable securities held in the financial services business for trading purposes, net

     44,821       (55,789     (47,339

Loss on revaluation or impairment of securities investments held in the financial services business, net

     2,653       47       220  

Deferred income taxes

     211       23,798       24,085  

Equity in net (income) loss of affiliated companies, net of dividends

     5,045       4,409       (2,956

Changes in assets and liabilities:

      

Increase in notes and accounts receivable, trade

     (5,828     (37,529     (80,004

(Increase) decrease in inventories

     (57,804     11,199       (51,508

Increase in film costs

     (318,391     (331,179     (362,496

Decrease in notes and accounts payable, trade

     (49,525     (1,386     (87,939

Increase (decrease) in accrued income and other taxes

     (23,607     26,701       29,181  

Increase in future insurance policy benefits and other

     403,392       433,803       495,419  

Increase in deferred insurance acquisition costs

     (83,774     (93,234     (86,779

Increase in marketable securities held in the financial services business for trading purposes

     (107,433     (81,456     (89,797

(Increase) decrease in other current assets

     21,299       (21,402     3,776  

Increase (decrease) in other current liabilities

     (25,751     79,114       151,805  

Other

     45,457       (65,650     79,684  

Net cash provided by operating activities

     749,089       809,262       1,254,972  

Cash flows from investing activities:

      

Payments for purchases of fixed assets

     (375,411     (333,509     (262,989

Proceeds from sales of fixed assets

     26,472       13,098       60,599  

Payments for investments and advances by financial services business

     (1,221,093     (1,233,290     (963,210

Payments for investments and advances (other than financial services business)

     (20,830     (17,208     (13,801

Proceeds from sales or return of investments and collections of advances by financial services business

     534,072       289,901       317,159  

Proceeds from sales or return of investments and collections of advances (other than financial services business)

     81,535       16,078       6,596  

Proceeds from sales of businesses

     17,790       3,262       44,624  

Other

     (72,938     7,695       (11,175

Net cash used in investing activities

     (1,030,403     (1,253,973     (822,197

 

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(Continued on following page.)


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Continued)

 

 

 

     Yen in millions  
      2016     2017     2018  

Cash flows from financing activities:

      

Proceeds from issuance of long-term debt

     19,076       254,695       125,092  

Payments of long-term debt

     (270,669     (261,299     (44,561

Increase in short-term borrowings, net

     92,153       317,827       35,145  

Increase in deposits from customers in the financial services business, net

     165,169       277,152       169,479  

Proceeds from issuance of convertible bonds

     120,000              

Proceeds from issuance of new shares of common stock

     301,708              

Dividends paid

     (12,751     (25,301     (28,490

Payment for purchase of Sony/ATV shares from noncontrolling interests

           (76,565      

Other

     (34,564     (34,207     (10,209

Net cash provided by financing activities

     380,122       452,302       246,456  

Effect of exchange rate changes on cash and cash equivalents

     (64,609     (31,061     (53,044

Net increase (decrease) in cash and cash equivalents

     34,199       (23,470     626,187  

Cash and cash equivalents at beginning of the fiscal year

     949,413       983,612       960,142  

Cash and cash equivalents at end of the fiscal year

     983,612       960,142       1,586,329  

Supplemental data:

      

Cash paid during the fiscal year for —

      

Income taxes

     138,770       106,054       101,092  

Interest

     26,166       13,877       12,169  

Non-cash investing and financing activities —

      

Obtaining assets by entering into capital leases

     14,759       8,457       21,762  

The accompanying notes are an integral part of these statements.

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

 

 

 

    Yen in millions  
     Common
stock
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income
    Treasury
stock, at
cost
    Sony
Corporation’s
stockholders’
equity
    Noncontrolling
interests
    Total equity  

Balance at March 31, 2015

    707,038       1,185,777       813,765       (385,283     (4,220     2,317,077       611,392       2,928,469  

Issuance of new shares

    150,854       150,854             301,708         301,708  

Exercise of stock acquisition rights

    975       975             1,950         1,950  

Stock-based compensation

      1,516             1,516         1,516  

Comprehensive income:

               

Net income

        147,791           147,791       61,924       209,715  

Other comprehensive income, net of tax —

               

Unrealized gains (losses) on securities

          (13,417       (13,417     15,637       2,220  

Unrealized losses on derivative instruments

          (1,198       (1,198       (1,198

Pension liability adjustment

          (170,608       (170,608     (1,145     (171,753

Foreign currency translation adjustments

          (82,812       (82,812     (1,087     (83,899
           

 

 

 

Total comprehensive income (loss)

              (120,244     75,329       (44,915
           

 

 

 

Stock issue costs, net of tax

      (1,478           (1,478       (1,478

Dividends declared

        (25,225         (25,225     (20,868     (46,093

Purchase of treasury stock

            (110     (110       (110

Reissuance of treasury stock

      (12         71       59         59  

Transactions with noncontrolling interests shareholders and other

      (11,913           (11,913     (4,783     (16,696

 

 

Balance at March 31, 2016

    858,867       1,325,719       936,331       (653,318     (4,259     2,463,340       661,070       3,124,410  

 

 

 

(Continued on following page.)

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

Consolidated Statements of Changes in Stockholders’ Equity (Continued)

 

 

 

    Yen in millions  
     Common
stock
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income
    Treasury
stock, at
cost
    Sony
Corporation’s
stockholders’
equity
    Noncontrolling
interests
    Total equity  

Balance at March 31, 2016

    858,867       1,325,719       936,331       (653,318     (4,259     2,463,340       661,070       3,124,410  

Exercise of stock acquisition rights

    1,778       1,778             3,556         3,556  

Stock-based compensation

      1,601             1,601         1,601  

Comprehensive income:

               

Net income

        73,289           73,289       54,272       127,561  

Other comprehensive income, net of tax —

               

Unrealized losses on securities

          (14,101       (14,101     (16,192     (30,293

Unrealized gains on derivative instruments

          1,140         1,140         1,140  

Pension liability adjustment

          63,003         63,003       229       63,232  

Foreign currency translation adjustments

          (15,493       (15,493     (2,495     (17,988
           

 

 

 

Total comprehensive income

              107,838       35,814       143,652  
           

 

 

 

Stock issue costs, net of tax

      (30           (30       (30

Dividends declared

        (25,252         (25,252     (17,068     (42,320

Purchase of treasury stock

            (114     (114       (114

Reissuance of treasury stock

      (10         38       28         28  

Transactions with noncontrolling interests shareholders and other

      (53,721           (53,721     (41,640     (95,361

 

 

Balance at March 31, 2017

    860,645       1,275,337       984,368       (618,769     (4,335     2,497,246       638,176       3,135,422  

 

 

 

(Continued on following page.)

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

Consolidated Statements of Changes in Stockholders’ Equity (Continued)

 

 

 

    Yen in millions  
     Common
stock
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income
    Treasury
stock, at
cost
    Sony
Corporation’s
stockholders’
equity
    Noncontrolling
interests
    Total equity  

Balance at March 31, 2017

    860,645       1,275,337       984,368       (618,769     (4,335     2,497,246       638,176       3,135,422  

Issuance of new shares

    488       488             976         976  

Exercise of stock acquisition rights

    4,533       4,532             9,065         9,065  

Conversion of convertible bonds

    12       12             24         24  

Stock-based compensation

      3,160             3,160         3,160  

Comprehensive income:

               

Net income

        490,794           490,794       56,485       547,279  

Other comprehensive income, net of tax —

               

Unrealized gains (losses) on securities

          (444       (444     1,514       1,070  

Unrealized losses on derivative instruments

          (1,184       (1,184       (1,184

Pension liability adjustment

          12,292         12,292       98       12,390  

Foreign currency translation adjustments

          (8,641       (8,641     2,306       (6,335
           

 

 

 

Total comprehensive income

              492,817       60,403       553,220  
           

 

 

 

Stock issue costs, net of tax

      (879           (879       (879

Dividends declared

        (34,775         (34,775     (14,361     (49,136

Purchase of treasury stock

            (199     (199       (199

Reissuance of treasury stock

      0           4       4         4  

Transactions with noncontrolling interests shareholders and other

      (73           (73     (4,427     (4,500

 

 

Balance at March 31, 2018

    865,678       1,282,577       1,440,387       (616,746     (4,530     2,967,366       679,791       3,647,157  

 

 

The accompanying notes are an integral part of these statements.

 

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Index to Notes to Consolidated Financial Statements

 

 

Sony Corporation and Consolidated Subsidiaries

 

     Page  
 

Notes to Consolidated Financial Statements

  
  1.      Nature of operations      14  
  2.      Summary of significant accounting policies      14  
  3.      Inventories      26  
  4.      Film costs      26  
  5.      Investments in affiliated companies      27  
  6.      Transfer of financial assets      28  
  7.      Marketable securities and securities investments      29  
  8.      Leases      31  
  9.      Goodwill and other intangible assets      33  
  10.      Insurance-related accounts      35  
  11.      Short-term borrowings and long-term debt      36  
  12.      Housing loans and deposits from customers in the banking business      38  
  13.      Fair value measurements      39  
  14.      Derivative instruments and hedging activities      45  
  15.      Pension and severance plans      50  
  16.      Stockholders’ equity      57  
  17.      Stock-based compensation plans      60  
  18.      Kumamoto Earthquake      61  
  19.      Restructuring charges      61  
  20.      Supplemental consolidated statements of income information      64  
  21.      Income taxes      65  
  22.      Reconciliation of the differences between basic and diluted EPS      69  
  23.      Variable interest entities      69  
  24.      Acquisitions      70  
  25.      Divestitures      71  
  26.      Collaborative arrangements      72  
  27.      Commitments, contingent liabilities and other      72  
  28.      Business segment information      74  
  29.      Subsequent events      79  

 

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Notes to Consolidated Financial Statements

 

 

Sony Corporation and Consolidated Subsidiaries

 

1. Nature of operations

Sony Corporation and its consolidated subsidiaries (hereinafter collectively referred to as “Sony”) are engaged in the development, design, production, manufacture, offer and sale of various kinds of electronic equipment, instruments and devices for consumer, professional and industrial markets such as network services, game hardware and software, televisions, audio and video recorders and players, still and video cameras, mobile phones, and semiconductors. Sony’s primary manufacturing facilities are located in Asia including Japan. Sony also utilizes third-party contract manufacturers for certain products. Sony’s products and services are marketed throughout the world by sales subsidiaries and unaffiliated distributors as well as direct sales and offers via the internet. Sony is engaged in the development, production, manufacture, and distribution of recorded music and the management and licensing of the words and music of songs as well as production and distribution of animation titles, including game applications based on the animation titles. Sony is also engaged in the production, acquisition and distribution of motion pictures and television programming and the operation of television and digital networks. Further, Sony is also engaged in various financial services businesses, including life and non-life insurance operations through its Japanese insurance subsidiaries and banking operations through a Japanese internet-based banking subsidiary.

 

2. Summary of significant accounting policies

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with U.S. GAAP. These adjustments were not recorded in the statutory books and records as Sony Corporation and its subsidiaries in Japan maintain their records and prepare their statutory financial statements in accordance with accounting principles generally accepted in Japan, while its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the countries of their domicile.

 

(1) Significant accounting policies

Basis of consolidation and accounting for investments in affiliated companies -

The consolidated financial statements include the accounts of Sony Corporation and its majority-owned subsidiary companies, general partnerships and other entities in which Sony has a controlling interest, and variable interest entities for which Sony is the primary beneficiary. All intercompany transactions and accounts are eliminated. Investments in business entities in which Sony does not have control, but has the ability to exercise significant influence over operating and financial policies, generally through 20-50% ownership, are accounted for under the equity method. In addition, investments in general partnerships in which Sony does not have a controlling interest and limited partnerships are also accounted for under the equity method if more than minor influence over the operation of the investee exists (generally through more than 3-5% ownership). When the interest in the partnership is so minor that Sony has no significant influence over the operation of the investee, the cost method is used. Under the equity method, investments are stated at cost plus/minus Sony’s portion of equity in undistributed earnings or losses. Sony’s equity in current earnings or losses of such entities is reported net of income taxes and is included in operating income (loss) after the elimination of unrealized intercompany profits. If the value of an investment has declined and is judged to be other-than-temporary, the investment is written down to its estimated fair value.

On occasion, a consolidated subsidiary or an affiliated company accounted for by the equity method may issue its shares to third parties in either a public or private offering or upon conversion of convertible debt to common stock at amounts per share in excess of or less than Sony’s average per share carrying value. With respect to such transactions, the resulting gains or losses arising from the change in ownership interest are recorded in earnings within the fiscal year in which the change in interest transactions occur.

Gains or losses that result from a loss of a controlling financial interest in a subsidiary are recorded in earnings along with fair value remeasurement gains or losses on any retained investment in the entity, while a change in interest of a consolidated subsidiary that does not result in a change in control is accounted for as a capital transaction and no gains or losses are recorded in earnings.

 

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The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable tangible and intangible assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over Sony’s underlying net equity is recognized as goodwill as a component of the investment balance.

Use of estimates -

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates include those used in determining the valuation of investment securities, valuation of inventories, fair values of long-lived assets, fair values of goodwill and other intangible assets, fair values of assets and liabilities assumed in business combinations, product warranty liability, pension and severance plans, valuation of deferred tax assets, uncertain tax positions, film costs, and insurance related liabilities. Actual results could significantly differ from those estimates.

Translation of foreign currencies -

All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate fiscal year end exchange rates and all income and expense accounts are translated at exchange rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of accumulated other comprehensive income. Upon remeasurement of a previously held equity interest in accordance with the accounting guidance for business combinations achieved in stages, accumulated translation adjustments, if any, are included in earnings.

Receivables and payables denominated in foreign currencies are translated at appropriate fiscal year end exchange rates and the resulting translation gains or losses are recognized into income.

Cash and cash equivalents -

Cash and cash equivalents include all highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.

Marketable debt and equity securities -

Debt and equity securities designated as available-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of accumulated other comprehensive income, net of applicable taxes. Debt and equity securities classified as trading securities are carried at fair value with unrealized gains or losses included in income. Debt securities that are expected to be held-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to fair value by a charge to income when an other-than-temporary impairment is recognized. Realized gains and losses are determined on the average cost method and are reflected in income.

Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of the credit condition of the issuer, sovereign risk, and whether or not Sony is able to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.

In evaluating the factors for available-for-sale securities whose fair values are readily determinable, Sony presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally for a period of up to six months). This criterion is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration

 

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or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate that the decline in the fair value is other-than-temporary.

When an other-than-temporary impairment of a held-to-maturity debt security has occurred, the amount of the other-than-temporary impairment recognized in income depends on whether Sony intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost. If the debt security meets either of these two criteria, the other-than-temporary impairment is recognized in income, measured as the entire difference between the security’s amortized cost and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these two criteria, the net amount recognized in income is a credit loss equal to the difference between the amortized cost of the debt security and its net present value calculated by discounting Sony’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in accumulated other comprehensive income. Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in income are presented as a separate component of accumulated other comprehensive income.

Equity securities in non-public companies -

Equity securities in non-public companies are primarily carried at cost if fair value is not readily determinable. If the value of a non-public equity investment is estimated to have declined and such decline is judged to be other-than-temporary, Sony recognizes the impairment of the investment and the carrying value is reduced to its fair value. Determination of impairment is based on the consideration of several factors, including operating results, business plans and estimated future cash flows. Fair value is determined through the use of various methodologies such as discounted cash flows, valuation of recent financings and comparable valuations of similar companies.

Allowance for doubtful accounts -

Sony maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. Sony reviews accounts receivable by amounts due from customers which are past due to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, Sony makes judgments about the creditworthiness of customers based on past collection experience and ongoing credit risk evaluations.

Inventories -

Inventories in the Game & Network Services (“G&NS”), Music, Home Entertainment & Sound (“HE&S”), Imaging Products & Solutions (“IP&S”), Mobile Communications (“MC”) and Semiconductors segments as well as non-film inventories for the Pictures segment are valued at cost, not in excess of the net realizable value – i.e., estimated selling price in the ordinary course of business less predictable costs of completion and disposal, cost being determined on the “average cost” basis, except for the cost of finished products carried by certain subsidiary companies which is determined on the “first-in, first-out” basis.

Other receivables -

Other receivables include receivables which relate to arrangements with certain component manufacturers whereby Sony procures goods, including product components, for these component manufacturers and is reimbursed for the related purchases. No revenue or profit is recognized on these transfers. Sony will repurchase the inventory at a later date from the component manufacturers as either finished goods inventory or as partially assembled product.

Film costs -

Film costs include direct production costs, production overhead and acquisition costs for both motion picture and television productions and are stated at the lower of unamortized cost or estimated fair value and classified as noncurrent assets. Film costs are amortized, and the estimated liabilities for residuals and participations are accrued using an individual-film-forecast method based on the ratio of current period actual

 

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revenues to the estimated remaining total revenues. Film costs also include broadcasting rights, which are recognized when the license period begins and the program is available for use, and consist of acquired programming to be aired on Sony’s worldwide channel network. Broadcasting rights are stated at the lower of unamortized cost or net realizable value, classified as either current or noncurrent assets based on timing of expected use. Broadcasting rights are amortized based on estimated usage or on a straight-line basis over the useful life, as appropriate, although broadcasting rights licensed under multi-year live-event sports programming agreements are generally amortized based on the ratio of the current period’s actual advertising revenue and an allocation of subscription fee revenue to the estimated total remaining attributable revenues. Estimates used in calculating the fair value of film costs and the net realizable value of broadcasting rights are based upon assumptions about future demand and market conditions and are reviewed on a periodic basis.

Property, plant and equipment and depreciation -

Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method. Useful lives for depreciation range from two to 50 years for buildings and from two to 10 years for machinery and equipment. Significant renewals and additions are capitalized at cost. Maintenance and repairs, and minor renewals and betterments are charged to income as incurred.

Goodwill and other intangible assets -

Goodwill and indefinite lived intangible assets are tested annually for impairment during the fourth quarter of the fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Such an event or change in circumstances would include unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, which are periodically reviewed by Sony’s management.

In the fiscal year ended March 31, 2018, Sony elected not to perform an optional qualitative assessment of goodwill and instead proceeded directly to a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. Reporting units are Sony’s operating segments or one level below the operating segments. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the total amount of goodwill allocated to the reporting unit. Indefinite lived intangible assets are tested for impairment by comparing the fair value of the intangible asset with its carrying value, and if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

The fair value of a reporting unit or indefinite lived intangible asset is generally determined using a discounted cash flow analysis. This approach uses significant estimates and assumptions, including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, earnings multiples, the determination of appropriate comparable entities and the determination of whether a premium or discount should be applied to comparables. Consideration is also given to Sony’s market capitalization in relation to the sum of the calculated fair values of the reporting units, including reporting units with no goodwill, and taking into account corporate level assets and liabilities not assigned to individual reporting units as well as a reasonable control premium.

The assumptions used for projected future cash flows and the timing of such cash flows are based on the forecast and mid-range plan (“MRP”) of each reporting unit and take into account such factors as historical experience, market and industry information, and current and forecasted economic conditions. Perpetual growth rates are utilized to determine a terminal cash flow value and are generally set after the three-year forecasted period for the MRP. Certain reporting units, such as those in the Pictures segment, utilize longer forecast periods and base the terminal value on an exit price using an earnings multiple applied to the final year of the forecasted earnings, which also takes into consideration a control premium. Discount rates are derived from the weighted average cost of capital of market participants in similar businesses.

When a business within a reporting unit is disposed of, goodwill is allocated to the disposed business using the relative fair value method.

Intangible assets with finite useful lives mainly consist of patent rights, know-how, license agreements, customer relationships, trademarks, software to be sold, leased or otherwise marketed, internal-use software, music catalogs, artist contracts, and television carriage contracts (broadcasting agreements). Patent rights,

 

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know-how, license agreements, trademarks, software to be sold, leased or otherwise marketed, and internal-use software are generally amortized on a straight-line basis over three to 10 years. Customer relationships, music catalogs, artist contracts and television carriage contracts (broadcasting agreements) are amortized on a straight-line basis, generally, over 10 to 40 years.

Capitalized software -

The costs related to establishing the technological feasibility of software to be sold, leased or otherwise marketed are expensed as incurred as a part of research and development in cost of sales. Costs that are incurred to produce the finished product after technological feasibility is established are capitalized and amortized to cost of sales over the estimated economic life, which is generally three years. The technological feasibility of game software is established when the product master is completed. Consideration to capitalize game software development costs before this point is limited to the development costs of games for which technological feasibility can be proven at an earlier stage. At each balance sheet date, Sony performs reviews to ensure that unamortized capitalized software costs remain recoverable from future profits of the related software products.

The costs incurred for internal-use software during the application development stage are capitalized and amortized, mainly to selling, general and administrative expenses, on a straight-line basis over the estimated useful life. Costs related to the preliminary project stage and post implementation activities are expensed as incurred.

Deferred insurance acquisition costs -

Costs that vary with and are directly related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs include such items as commissions, medical examination costs and inspection report fees, and are subject to recoverability testing at least annually to ensure that the capitalized amounts do not exceed the present value of anticipated gross profits or premiums less benefits and maintenance expenses, as applicable. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits.

Product warranty -

Sony provides for the estimated cost of product warranties at the time revenue is recognized. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.

Certain subsidiaries in the G&NS, HE&S, IP&S, and MC segments offer extended warranty programs. The consideration received for extended warranty service is deferred and recognized as revenue on a straight-line basis over the term of the extended warranty.

Future insurance policy benefits -

Liabilities for future insurance policy benefits are primarily comprised of the present value of estimated future payments to policyholders. These liabilities are computed by the net level premium method based upon the assumptions as to future investment yield, morbidity, mortality, withdrawals and other factors. These assumptions are reviewed on a periodic basis. Liabilities for future insurance policy benefits also include liabilities for guaranteed benefits related to certain non-traditional life and annuity contracts.

Policyholders’ account in the life insurance business -

Liabilities for policyholders’ account in the life insurance business represent the contract value that has accrued to the benefit of the policyholders as of the balance sheet date. This liability is generally equal to the accumulated account deposits, plus interest credited, less policyholder withdrawals and other charges assessed against the account balances.

 

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Impairment of long-lived assets -

Sony reviews the recoverability of the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of, whenever events or changes in circumstances indicate that the individual carrying amount of an asset or asset group may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the cash flows are determined to be less than the carrying value of the asset or asset group, an impairment loss would be recognized during the period for the amount by which the carrying value of the asset or asset group exceeds estimated fair value. Long-lived assets that are to be disposed of other than by sale are considered held and used until they are disposed of. Long-lived assets that are to be disposed of by sale are reported at the lower of their carrying value or fair value less cost to sell and are not depreciated. Fair value is determined using the present value of estimated net cash flows or comparable market values. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates applied to determine terminal values, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables.

Fair value measurement -

Sony measures fair value as an exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Sony has elected the fair value option in the banking business for certain foreign securities. The election was made to mitigate accounting mismatches related to fluctuations of foreign exchange rates by allowing the gains and losses on the translation of these securities to be included in current earnings.

The accounting guidance for fair value measurements specifies a hierarchy of inputs to valuation techniques based on the extent to which inputs used in measuring fair value are observable in the market. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Sony’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Observable market data is used if such data is available without undue cost and effort. Each fair value measurement is reported in one of three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety.

These levels are:

 

Level 1

 

  Inputs are unadjusted quoted prices for identical assets and liabilities in active markets.

Level 2

 

  Inputs are based on observable inputs other than level 1 prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

Level 3

 

  One or more significant inputs are unobservable.

When available, Sony uses unadjusted quoted market prices in active markets to measure fair value and classifies such items within level 1. If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates and option volatilities. Items valued using internally generated models are classified according to the lowest level input that is significant to the valuation. For certain financial assets and liabilities, Sony determines fair value using third-party information such as indicative quotes from dealers and quantitative input from investment advisors following Sony’s established valuation procedures including validation against internally developed prices. Additionally, Sony considers both counterparty credit risk and Sony’s own creditworthiness in determining fair value. Sony attempts to mitigate credit risk to third parties by entering into netting agreements and actively monitoring the creditworthiness of counterparties and its exposure to credit risk through the use of credit limits and by selecting major international banks and financial institutions as counterparties.

Transfers between levels are deemed to have occurred at the beginning of the interim period in which the transfers occur.

Derivative financial instruments -

All derivatives are recognized as either assets or liabilities in the consolidated balance sheets at fair value on a gross basis. Changes in the fair value of derivative financial instruments are either recognized periodically in

 

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income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on whether the derivative financial instrument qualifies as a hedge and the derivative is being used to hedge changes in fair value or cash flows.

The accounting guidance for hybrid financial instruments permits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under accounting guidance for derivative instruments and hedging activities. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. Certain subsidiaries in the Financial Services segment had hybrid financial instruments, disclosed in Note 7 as debt securities, that contain embedded derivatives where the entire instrument was carried at fair value.

In accordance with accounting guidance for derivative instruments and hedging activities, various derivative financial instruments held by Sony are classified and accounted for as described below.

Fair value hedges

Changes in the fair value of derivatives designated and effective as fair value hedges for recognized assets or liabilities or unrecognized firm commitments are recognized in earnings as offsets to changes in the fair value of the related hedged assets or liabilities.

Cash flow hedges

Changes in the fair value of derivatives designated and effective as cash flow hedges for forecasted transactions or exposures associated with recognized assets or liabilities are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of the ineffective portion are recognized immediately in earnings.

Derivatives not designated as hedges

Changes in the fair value of derivatives that are not designated as hedges are recognized immediately in earnings.

Assessment of hedges

When applying hedge accounting, Sony formally documents all hedging relationships between the derivatives designated as hedges and the hedged items, as well as its risk management objectives and strategies for undertaking various hedging activities. Sony links all hedges that are designated as fair value or cash flow hedges to specific assets or liabilities on the consolidated balance sheets or to the specific forecasted transactions. Sony also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are designated as hedges are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, Sony discontinues hedge accounting. Hedge ineffectiveness, if any, is included immediately in earnings.

Stock-based compensation -

Sony accounts for stock-based compensation using the fair value based method, measured on the date of grant using the Black-Scholes option-pricing model. The expense is mainly included in selling, general and administrative expenses. Stock-based compensation is recognized, net of an estimated forfeiture rate, over the requisite service period using the accelerated method of amortization for grants with graded vesting. The estimated forfeiture rate is based on Sony’s historical experience in the stock acquisition rights plans where the majority of the vesting terms have been satisfied.

Revenue recognition -

Revenues from sales in the G&NS, Music, HE&S, IP&S, MC and Semiconductors segments are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when the customer has taken title to the product and the risks and rewards of ownership have been

 

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substantively transferred. If the sales contract contains a customer acceptance provision, then sales are recognized after customer acceptance occurs or the acceptance provisions lapse. Revenues are recognized net of anticipated returns and sales incentives. Revenues from prepaid subscription fees, such as within the G&NS segment, are recognized ratably over the subscription term.

Revenue arrangements with customers may include multiple elements, including any combination of products, services and software. An example includes sales of electronics products with rights to receive promotional goods. For Sony’s multiple element arrangements where at least one of the elements is not subject to existing software or film revenue recognition guidance, elements are separated into more than one unit of accounting when the delivered element(s) have value to the customer on a standalone basis, and delivery of the undelivered element(s) is probable and substantially in the control of Sony. Revenue is then allocated to each unit of accounting based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence of selling price (“VSOE”) if it exists, based next on third-party evidence of selling price (“TPE”) if VSOE does not exist, and, finally, if both VSOE and TPE do not exist, based on estimated selling prices (“ESP”). VSOE is limited to either the price charged for an element when it is sold separately or, for an element not yet being sold separately, the price established by management having the relevant authority; it must be probable that the price, once established, will not change before the separate introduction of the element into the market place. TPE is the price of Sony’s or any competitor’s largely interchangeable products or services in standalone sales to similarly situated customers. ESP is the price at which Sony would transact if the element were sold by Sony regularly on a standalone basis. When determining ESP, Sony considers all relevant inputs, including sales, cost and margin analysis of the product, targeted rate of return of the product, competitors’ and Sony’s pricing practices and customer perspectives.

Certain software products published by Sony provide limited online features at no additional cost to the customer. Generally, such features are considered to be incidental to the overall software product and an inconsequential deliverable. Accordingly, revenue related to software products containing these limited online features is not deferred.

Revenues from sales in the Pictures segment are recognized when persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectability is reasonably assured. Revenues from the theatrical exhibition of motion pictures are recognized as the customer exhibits the film. Revenues from the licensing of motion picture and television programming for pay and free television exhibition and other markets are recognized when the product is available for exploitation by the licensee and when any restrictions regarding the use of the product lapse. For home entertainment distribution, revenues from the sale of DVDs and Blu-ray DiscTM, net of anticipated returns and sales incentives, are recognized when delivery has occurred and the product is available for sale to the public, and revenues from electronic sell-through and video-on-demand are recognized when the product is made available for viewing via digital distribution platforms. Certain motion picture and television program licensing arrangements involve an allocation to multiple elements, for example a fee for multiple territories and availability dates, that is based on relative fair value using management’s best estimate. Revenues from the sale of broadcast advertising are recognized when the advertisement is aired. Revenues from subscription fees received by television networks are recognized when the service is provided.

Traditional life insurance policies that the life insurance subsidiary underwrites, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. Premiums from these policies are reported as revenue when due from policyholders.

Amounts received as payment for non-traditional contracts such as interest sensitive whole life contracts, individual annuity contracts and other contracts without life contingencies are recognized in policyholders’ account in the life insurance business. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized over the period of the contracts, and included in financial services revenue.

Property and casualty insurance policies that the non-life insurance subsidiary underwrites are primarily automotive insurance contracts which are categorized as short-duration contracts. Premiums from these policies are reported as revenue over the period of the contract in proportion to the amount of insurance protection provided.

Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

 

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Consideration given to a customer or a reseller -

Sales incentives or other cash consideration given to a customer or a reseller, including payments for buydowns, slotting fees and cooperative advertising programs, are accounted for as a reduction of revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, the fair value of the benefit is reasonably estimated and documentation from the reseller is received to support the amounts paid to the reseller. Payments meeting these criteria are recorded as selling, general and administrative expenses. For the fiscal years ended March 31, 2016, 2017 and 2018, consideration given to a reseller, primarily for free promotional shipping and cooperative advertising programs included in selling, general and administrative expenses, totaled 13,178 million yen, 12,046 million yen and 12,319 million yen, respectively.

Cost of sales -

Costs classified as cost of sales relate to the producing and manufacturing of products and include items such as material cost, subcontractor cost, depreciation of fixed assets, amortization of intangible assets, personnel expenses, research and development costs, and amortization of film costs related to motion picture and television productions.

Research and development costs -

Research and development costs, included in cost of sales, include items such as salaries, personnel expenses and other direct and indirect expenses associated with research and product development. Research and development costs are expensed as incurred.

Selling, general and administrative -

Costs classified as selling expenses relate to promoting and selling products and include items such as advertising, promotion, shipping and warranty expenses. General and administrative expenses include operating items such as officers’ salaries, personnel expenses, depreciation of fixed assets, office rental for sales, marketing and administrative divisions, a provision for doubtful accounts and amortization of intangible assets.

Financial services expenses -

Financial services expenses include a provision for policy reserves and amortization of deferred insurance acquisition costs, and all other operating costs, such as personnel expenses, depreciation of fixed assets, and office rental of subsidiaries, in the Financial Services segment.

Advertising costs -

Advertising costs are expensed when the advertisement or commercial appears in the selected media.

Shipping and handling costs -

The majority of shipping and handling, warehousing and internal transfer costs for finished goods are included in selling, general and administrative expenses. An exception to this is in the Pictures segment where such costs are charged to cost of sales as they are an integral part of producing and distributing motion pictures and television programming. All other costs related to Sony’s distribution network are included in cost of sales, including inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs for raw materials and in-process inventory. Amounts paid by customers for shipping and handling costs are included in net sales.

Income taxes -

The provision for income taxes is computed based on the pretax income included in the consolidated statements of income, and the tax liability attributed to undistributed earnings of subsidiaries and affiliated companies accounted for by the equity method expected to be remitted in the foreseeable future. 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.

 

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Carrying amounts of deferred tax assets require a reduction by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically with appropriate consideration given to all positive and negative evidence related to the realization of the deferred tax assets. Management’s judgments related to this assessment consider, among other matters, the nature, frequency and severity of current and cumulative losses on an individual tax jurisdiction basis, forecasts of future profitability after consideration of uncertain tax positions, excess of appreciated asset value over the tax basis of net assets, the duration of statutory carryforward periods, the past utilization of net operating loss carryforwards prior to expiration, as well as prudent and feasible tax planning strategies which would be employed by Sony to prevent net operating loss and tax credit carryforwards from expiring unutilized.

Sony records assets and liabilities for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Sony continues to recognize interest and penalties, if any, with respect to income taxes, including unrecognized tax benefits, as interest expense and as income tax expense, respectively, in the consolidated statements of income. The amount of income taxes Sony pays is subject to ongoing audits by various taxing authorities, which may result in proposed assessments. In addition, several significant items related to intercompany transfer pricing are currently the subject of negotiations between taxing authorities in different jurisdictions as a result of pending advance pricing agreement applications and competent authority requests. Sony’s estimate for the potential outcome for any uncertain tax issues is judgmental and requires significant estimates. Sony assesses its income tax positions and records tax benefits for all years subject to examinations based upon the evaluation of the facts, circumstances and information available at that reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, Sony records the amount that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If Sony does not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, Sony’s future results may include favorable or unfavorable adjustments to Sony’s estimated tax liabilities due to closure of income tax examinations, the outcome of negotiations between taxing authorities in different jurisdictions, new regulatory or judicial pronouncements or other relevant events. As a result, the amount of unrecognized tax benefits, and the effective tax rate, may fluctuate significantly.

The impact of the U.S. Tax Cuts and Jobs Act of 2017 (the “U.S. Tax Reform Act”) has been recorded on a provisional basis as defined in Staff Accounting Bulletin No. 118 (“SAB 118”) and additional guidance is to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax on historic foreign earnings. Additional guidance issued during the fiscal year ending March 31, 2019 could impact the information required for, and the calculation of, the transition tax charge. Further analysis performed and conclusions reached as part of the tax return filing process and the issuance of additional guidance related to the U.S. Tax Reform Act could affect the provisional amount recorded. Sony expects to complete its analysis of the impact of the U.S. Tax Reform Act no later than December 22, 2018.

Net income (loss) attributable to Sony Corporation’s stockholders per share (“EPS”) -

Basic EPS is computed based on the weighted-average number of shares of common stock outstanding during each period. The computation of diluted EPS reflects the maximum possible dilution from conversion, exercise, or contingent issuance of securities. All potentially dilutive securities are excluded from the calculation in a situation where there is a net loss attributable to Sony Corporation’s stockholders.

 

(2) Recently adopted accounting pronouncements

Simplifying the test for goodwill impairment -

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04 to simplify the accounting for goodwill impairment. This ASU eliminates the second step from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Sony has early adopted this ASU in the fiscal year ended March 31, 2018. The adoption of this ASU did not have a material impact on Sony’s results of operations and financial position.

 

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(3) Recent accounting pronouncements not yet adopted

Revenue from contracts with customers -

In May 2014, the FASB issued ASU 2014-09 addressing revenue recognition which will supersede the current revenue recognition requirements, including most industry-specific guidance. The guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

This guidance will be effective from the first quarter of Sony’s fiscal year beginning April 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior period presented (“full retrospective method”), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (“modified retrospective method”). Sony will adopt this guidance using the modified retrospective method.

Sony has substantially completed its assessment of the impact of adopting this new guidance and does not expect that the adoption will have a material impact on Sony’s results of operations and financial position. Although Sony does not expect the impact of adopting the guidance to be material, there are several areas where Sony’s revenue recognition is expected to change as compared with historical U.S. GAAP. The more significant of these areas are as follows:

In the Pictures segment, (1) licensing revenue associated with certain renewals or extensions of existing agreements for motion pictures and television programming will be recognized at a later point in time, which is when the licensee can use and benefit from the content, instead of when the agreement is renewed or extended, and (2) licensing revenue associated with minimum guarantees for symbolic intellectual property (e.g., brands, trademarks and logos) will be recognized over the license term instead of at the inception of the license term.

In the MC segment, incremental costs of obtaining contracts for internet-related service business will be recognized as assets and amortized to expense over the contract period.

In addition, the ASU will change the presentation of certain items in the consolidated financial statements, such as sales returns, with no impact to the timing of the recognition of revenue or expense.

Recognition and measurement of financial assets and financial liabilities -

In January 2016, the FASB issued ASU 2016-01 amending various aspects of the recognition, measurement, presentation, and disclosure requirements for financial instruments. The changes mainly relate to the requirement to measure equity investments in unconsolidated subsidiaries, other than those accounted for under the equity method of accounting, at fair value with changes in fair value recognized in earnings. However, this ASU permits entities to elect to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This ASU will be effective for Sony as of April 1, 2018. As a result of the adoption of this ASU, Sony will reclassify the unrealized gains and losses, net of tax, on equity securities previously classified as available-for-sale, from accumulated other comprehensive income to retained earnings. Sony anticipates that the adoption of this ASU will increase the volatility of Sony’s other income (expenses), net, resulting from the remeasurement of Sony’s equity investments.

Leases -

In February 2016, the FASB issued ASU 2016-02, which amends current leasing guidance. The ASU requires substantially all leases to be recognized on the balance sheet. This ASU will be effective for Sony as of the fiscal year beginning April 1, 2019, and early adoption is permitted. The impact of this ASU on Sony’s results of operations and financial position is being evaluated.

Measurement of credit losses on financial instruments -

In June 2016, the FASB issued ASU 2016-13, which amends the accounting guidance for credit losses on financial instruments. The ASU requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. This ASU will be effective for Sony as of the fiscal year beginning April 1, 2020, with early adoption permitted for the first quarter of the fiscal year beginning April 1, 2019. The impact of this ASU on Sony’s results of operations and financial position is being evaluated.

 

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Classification of certain cash receipts and cash payments -

In August 2016, the FASB issued ASU 2016-15, which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is effective from the first quarter of Sony’s fiscal year beginning April 1, 2018. Sony does not expect the impact on its consolidated financial statements to be material.

Intra-entity transfers of assets other than inventory -

In October 2016, the FASB issued ASU 2016-16, which amends the accounting for income taxes. This update requires recognition of the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. Under current U.S. GAAP, recognition of the income tax consequences for asset transfers other than inventory cannot be recognized until the asset is sold to a third party. This ASU is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. This ASU will be effective for Sony as of the fiscal year beginning April 1, 2018. The adoption of this ASU is not expected to have a material impact on Sony’s results of operations and financial position.

Restricted cash -

In November 2016, the FASB issued ASU 2016-18, which requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the statement of cash flows. This guidance also requires entities to disclose how the statement of cash flows that includes restricted cash and restricted cash equivalents with cash and cash equivalents reconciles to the balance sheet. The guidance is effective from the first quarter of Sony’s fiscal year beginning April 1, 2018. Sony does not expect the impact on its consolidated financial statements to be material.

Clarifying the definition of a business -

In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business. The ASU requires an entity first to determine whether substantially all of the fair value of a set of assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets. If this criterion is met, the acquired set of assets is not deemed to be a business. If the criterion is not met, the entity then must evaluate whether the set of assets meets the requirement to be deemed a business. To be considered a business, the acquired set of assets would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. This ASU is effective for Sony as of the fiscal year beginning April 1, 2018. The adoption of this ASU is not expected to have a material impact on Sony’s results of operations and financial position.

Presentation of net periodic pension and postretirement benefit costs -

In March 2017, the FASB issued ASU 2017-07, which requires separate presentation of service costs and other components of net benefit costs. The service costs will only be presented with other employee compensation costs in operating income or capitalized, while the other components of net benefit costs will be presented outside of operating income, and will not be eligible for capitalization. This ASU will be effective for Sony as of the fiscal year beginning April 1, 2018. This ASU is required to be applied on a retrospective basis for the presentation of service costs and other components of net benefit costs, and on a prospective basis for the capitalization of only the service costs component of net benefit costs. The adoption of this ASU is not expected to have a material impact on Sony’s results of operations and financial position.

Premium amortization on purchased callable debt securities -

In March 2017, the FASB issued ASU 2017-08, which requires certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be affected. This ASU will be effective for Sony as of April 1, 2019. The impact of this ASU on Sony’s results of operations and financial position is being evaluated.

Targeted improvements to accounting for hedging activities -

In August 2017, the FASB issued ASU 2017-12, which made targeted improvements to the accounting for hedging activities. The amendments in this update simplify certain aspects of hedge accounting for both

 

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non-financial and financial risks and better align the recognition and measurement of hedge results with an entity’s risk management activities. This ASU also amends certain presentation and disclosure requirements for hedging activities and changes how an entity assesses hedge effectiveness. This ASU will be effective for Sony as of the fiscal year beginning April 1, 2019. The impact of this ASU on Sony’s results of operations and financial position is being evaluated.

 

(4) Reclassifications

Certain reclassifications of the financial statements and accompanying footnotes for the fiscal years ended March 31, 2016 and 2017 have been made to conform to the presentation for the fiscal year ended March 31, 2018.

 

(5) Out-of-period adjustments

For the fiscal year ended March 31, 2016, Sony recorded an out-of-period adjustment to correct an error in the amount of accruals for certain sales incentives being recorded at a subsidiary. The error began in the fiscal year ended March 31, 2009 and continued until it was identified by Sony during the fiscal year ended March 31, 2016. The adjustment, which related to the HE&S segment, impacted net sales and increased income before income taxes in the consolidated statements of income by 8,447 million yen for the fiscal year ended March 31, 2016. Sony determined that the adjustment was not material to the consolidated financial statements for the fiscal year ended March 31, 2016 or any prior periods.

 

3. Inventories

Inventories are comprised of the following:

 

     Yen in millions  
     March 31  
     2017      2018  

Finished products

     399,850        422,461  

Work in process

     140,718        153,257  

Raw materials, purchased components and supplies

     100,267        117,219  
  

 

 

    

 

 

 

Inventories

     640,835        692,937  
  

 

 

    

 

 

 

 

4. Film costs

Film costs are comprised of the following:

 

     Yen in millions  
     March 31  
     2017      2018  

Motion picture productions:

     

Released

     80,539        81,755  

Completed and not released

     5,608        1,728  

In production and development

     94,197        78,868  

Television productions:

     

Released

     120,693        127,790  

In production and development

     7,707        1,174  

Broadcasting rights

     65,725        72,125  

Less: current portion of broadcasting rights included in inventories

     (37,541      (35,795
  

 

 

    

 

 

 

Film costs

     336,928        327,645  
  

 

 

    

 

 

 

Sony estimates that approximately 91% of the unamortized film costs of released motion picture and television productions at March 31, 2018 will be amortized within the next three years. Approximately 123 billion yen of completed film costs are expected to be amortized during the next twelve months. Approximately 158 billion yen of accrued participation liabilities included in accounts payable, other and accrued expenses are expected to be paid during the next twelve months.

 

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5. Investments in affiliated companies

The summarized combined financial information that is based on information provided by the equity investees including information for significant equity affiliates and the reconciliation of such information to the consolidated financial statements is shown below:

Balance Sheets

 

     Yen in millions  
     March 31  
     2017     2018  

Current assets

     361,492       404,658  

Noncurrent assets

     834,765       868,455  

Current liabilities

     248,450       273,067  

Noncurrent liabilities and noncontrolling interests

     761,546       768,007  

Percentage of ownership in equity investees

     20%-50     20%-50

Statements of Income

 

     Yen in millions  
     Fiscal year ended March 31  
     2016     2017     2018  

Net revenues

     358,256       387,229       468,933  

Operating income

     32,884       37,800       56,729  

Net income attributable to controlling interests

     8,388       11,529       27,301  

Percentage of ownership in equity investees

     20%-50     20%-50     20%-50

On June 29, 2012, an investor group which included a wholly-owned subsidiary of Sony Corporation completed its acquisition of EMI Music Publishing. To effect the acquisition, the investor group formed DH Publishing, L.P. (“DHP”), which acquired EMI Music Publishing for total consideration of 2.2 billion U.S. dollars. Sony invested 320 million U.S. dollars in DHP, through Nile Acquisition LLC, for a 39.8% equity interest. Nile Acquisition LLC is a joint venture with the third-party investor of Sony’s U.S.- based music publishing subsidiary in which Sony holds a 74.9% ownership interest. Sony accounts for its interest in DHP under the equity method. In addition, DHP entered into an agreement with Sony’s U.S.-based music publishing subsidiary in which the subsidiary provides administration services to DHP. DHP was determined to be a variable interest entity (“VIE”) as described in Note 23.

On January 30, 2017, Sony sold 17,302,700 shares of its 127,381,600 shares in its affiliated company M3, Inc. (“M3”) to a third party for cash consideration of 51,968 million yen, which is included within other in the investing activities section of the consolidated statements of cash flows. In connection with the sale, Sony’s share ownership decreased from 39.35% to 34.0% of the issued and outstanding shares of M3 and Sony recorded a gain of 37,167 million yen in other operating expense, net in the consolidated statements of income for the fiscal year ended March 31, 2017. Sony continues to account for its remaining interest in M3 under the equity method. Sony remains a major shareholder of M3 and will continue to pursue opportunities to collaborate with M3 in certain business areas, including medical.

The carrying value of Sony’s investment in M3 exceeded its proportionate share in the underlying net assets of M3 by 98,938 million yen at March 31, 2018. The excess is substantially attributable to the remeasurement to fair value of the remaining shares of M3, and allocated to identifiable tangible and intangible assets. The intangible assets relate primarily to M3’s medical web-portal. The unassigned residual value of the excess is recognized as goodwill as a component of the investment balance. The amounts allocated to intangible assets are amortized net of the related tax effects to equity in net income (loss) of affiliated companies over their respective estimated useful lives, principally 10 years, using the straight-line method.

With the exception of M3 as described above, there was no significant difference between Sony’s proportionate share in the underlying net assets of the investees and the carrying value of investments in affiliated companies at March 31, 2017 and 2018.

 

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Several affiliated companies are listed on the Tokyo Stock Exchange and Sony’s investments in these companies have an aggregate carrying value and fair value of 99,944 million yen and 533,932 million yen, respectively, as of March 31, 2018.

The number of affiliated companies accounted for under the equity method as of March 31, 2017 and 2018 were 109 and 107, respectively.

Account balances and transactions with affiliated companies accounted for under the equity method are presented below. There are no other material transactions or account balances with any other related parties.

 

     Yen in millions  
     March 31  
     2017      2018  

Accounts receivable, trade

     10,873        15,516  

Accounts payable, trade

     2,525        2,568  

Short-term borrowings

     20,650        22,849  

Capital lease obligations

     10,105        13,294  

 

     Yen in millions  
     Fiscal year ended March 31  
     2016      2017      2018  

Sales

     33,569        31,238        45,415  

Purchases

     2,259        1,966        3,180  

Lease payments

     32,291        16,492        7,749  

Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFI Leasing Company, Limited (“SFIL”), a leasing company in Japan, in the fiscal years ended March 31, 2016, 2017 and 2018. SFIL is accounted for under the equity method and is 34% owned by Sony. For the transactions with SFIL, refer to Note8.

MITSUI-SOKO Supply Chain Solutions, Inc. is accounted for under the equity method and is 34% owned by Sony as a result of the sale of the logistics business on April 1, 2015. As of the fiscal years ended March 31, 2017 and 2018, account balances with MITSUI-SOKO Supply Chain Solutions, Inc. and its subsidiaries were 4,922 million yen and 3,662 million yen, respectively, which are mainly included in accrued expenses. For the fiscal years ended March 31, 2017 and 2018, transactions were 13,752 million yen and 9,123 million yen, respectively, which are mainly included in general and administrative expenses. Refer to Note 25.

Dividends from affiliated companies accounted for under the equity method for the fiscal years ended March 31, 2016, 2017 and 2018 were 7,282 million yen, 7,970 million yen and 5,613 million yen, respectively.

 

6. Transfer of financial assets

Sony has established several accounts receivable sales programs mainly within the HE&S, IP&S and MC segments. Through these programs, Sony can sell receivables to a commercial bank or a special purpose entity associated with a sponsor bank. Total receivables sold during the fiscal years ended March 31, 2016, 2017 and 2018 were 53,267 million yen, 73,185 million yen and 84,718 million yen, respectively. These transactions are accounted for as sales in accordance with the accounting guidance for transfers of financial assets, because Sony has relinquished control of the receivables. Sony includes the sales proceeds from these receivables as cash flows within operating activities in the consolidated statement of cash flows because the receivables are the result of operating activities and are short term in nature. Gains and losses from these transactions were insignificant. Although Sony continues servicing the receivables subsequent to being sold or contributed, no servicing assets or liabilities are recorded as the costs of collection of the sold receivables and the income from servicing such receivables are insignificant.

Certain of the accounts receivable sales programs above also involve VIEs. Refer to Note 23.

 

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7. Marketable securities and securities investments

Marketable securities and securities investments, primarily included in the Financial Services segment, are comprised of debt and equity securities for which the aggregate cost, gross unrealized gains and losses and fair value pertaining to available-for-sale securities and held-to-maturity securities are as follows:

 

    Yen in millions  
    March 31, 2017     March 31, 2018  
    Cost     Gross
unrealized
gains
    Gross
unrealized
losses
    Fair value         Cost         Gross
unrealized
gains
    Gross
unrealized
losses
    Fair value  

Available-for-sale:

               

Debt securities:

               

Japanese national government bonds

    1,161,493       182,836       (928     1,343,401       1,227,139       182,830       (359     1,409,610  

Japanese local government bonds

    60,450       144       (63     60,531       67,574       107       (112     67,569  

Japanese corporate bonds

    163,785       7,864       (1,846     169,803       199,880       9,844       (1,016     208,708  

Foreign government bonds

    27,601       359       (918     27,042       72,204       622       (3,287     69,539  

Foreign corporate bonds

    396,097       4,168       (719     399,546       365,457       1,649       (641     366,465  

Other

    15,192             (0     15,192       99,349       1       (0     99,350  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,824,618       195,371       (4,474     2,015,515       2,031,603       195,053       (5,415     2,221,241  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    55,928       69,937       (377     125,488       55,676       71,723       (776     126,623  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity securities:

               

Japanese national government bonds

    5,661,191       1,520,904       (30,553     7,151,542       5,892,868       1,635,036       (20,890     7,507,014  

Japanese local government bonds

    4,101       449             4,550       3,850       413             4,263  

Japanese corporate bonds

    230,011       12,346       (22,071     220,286       345,818       16,912       (17,390     345,340  

Foreign government bonds

    253,019       5,269       (22,868     235,420       300,220       8,310       (18,570     289,960  

Foreign corporate bonds

    198       18             216       198       13             211  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    6,148,520       1,538,986       (75,492     7,612,014       6,542,954       1,660,684       (56,850     8,146,788  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    8,029,066       1,804,294       (80,343     9,753,017       8,630,233       1,927,460       (63,041     10,494,652  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the cost and fair value of debt securities classified as available-for-sale securities and held-to-maturity securities by contractual maturity:

 

     Yen in millions  
     March 31, 2018  
     Available-for-sale securities      Held-to-maturity securities  
     Cost      Fair value      Cost      Fair value  

Due in one year or less

     125,037        125,290        3,249        3,269  

Due after one year through five years

     421,676        422,987        27,805        29,417  

Due after five years through ten years

     542,642        626,888        334,206        382,175  

Due after ten years

     942,248        1,046,076        6,177,694        7,731,927  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,031,603        2,221,241        6,542,954        8,146,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from sales of available-for-sale securities were 315,043 million yen, 75,319 million yen and 39,982 million yen for the fiscal years ended March 31, 2016, 2017 and 2018, respectively. On these sales, gross realized gains were 67,205 million yen, 2,297 million yen and 1,257 million yen and gross realized losses were 186 million yen, 37 million yen and 2 million yen, respectively, for the fiscal years ended March 31, 2016, 2017 and 2018. Included in the gross realized gains of available-for-sale securities is 46,757 million yen from the sale of Olympus shares in the fiscal year ended March 31, 2016.

Marketable securities classified as trading securities, which consist of debt and equity securities held primarily in the Financial Services segment, totaled 921,320 million yen and 1,048,062 million yen as of March 31, 2017 and 2018, respectively. Sony recorded net unrealized losses of 45,841 million yen, net unrealized gains of 56,593 million yen, and net unrealized gains of 48,047 million yen for the fiscal years ended March 31

 

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2016, 2017 and 2018, respectively. Changes in the fair value of trading securities are primarily recognized in financial services revenue in the consolidated statements of income.

In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other, issued by a number of non-public companies. The aggregate carrying amounts of the investments in non-public companies as of March 31, 2017 and 2018 totaled 61,323 million yen and 52,361 million yen, respectively. Non-public equity investments are primarily valued at cost as fair value is not readily determinable.

The following tables present the gross unrealized losses on, and fair value of, Sony’s investment securities with unrealized losses, aggregated by investment category and the length of time that individual investment securities have been in a continuous unrealized loss position, at March 31, 2017 and 2018.

 

     Yen in millions  
     March 31, 2017  
     Less than 12 months     12 months or more     Total  
     Fair
value
     Unrealized
losses
    Fair
value
     Unrealized
losses
    Fair
value
     Unrealized
losses
 

Available-for-sale:

               

Debt securities:

               

Japanese national government bonds

     52,825        (909     2,018        (19     54,843        (928

Japanese local government bonds

     3,793        (6     14,270        (57     18,063        (63

Japanese corporate bonds

     53,302        (1,761     20,489        (85     73,791        (1,846

Foreign government bonds

     10,258        (577     7,792        (341     18,050        (918

Foreign corporate bonds

     27,944        (143     24,662        (576     52,606        (719
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     148,122        (3,396     69,231        (1,078     217,353        (4,474
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities

     11,878        (370     9        (7     11,887        (377
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity securities:

               

Japanese national government bonds

     277,328        (30,553                  277,328        (30,553

Japanese local government bonds

                                       

Japanese corporate bonds

     146,004        (22,071                  146,004        (22,071

Foreign government bonds

     196,740        (22,868                  196,740        (22,868

Foreign corporate bonds

                                       
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     620,072        (75,492                  620,072        (75,492
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     780,072        (79,258     69,240        (1,085     849,312        (80,343
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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     Yen in millions  
     March 31, 2018  
     Less than 12 months     12 months or more     Total  
     Fair
value
     Unrealized
losses
    Fair
value
     Unrealized
losses
    Fair
value
     Unrealized
losses
 

Available-for-sale:

               

Debt securities:

               

Japanese national government bonds

     10,118        (11     32,836        (348     42,954        (359

Japanese local government bonds

     9,324        (11     14,729        (101     24,053        (112

Japanese corporate bonds

     11,046        (10     64,119        (1,006     75,165        (1,016

Foreign government bonds

     40,156        (2,281     7,752        (1,006     47,908        (3,287

Foreign corporate bonds

     34,840        (69     21,191        (572     56,031        (641

Other

     1,840        (0     315        (0     2,155        (0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     107,324        (2,382     140,942        (3,033     248,266        (5,415
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities

     13,859        (776     15        (0     13,874        (776
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity securities:

               

Japanese national government bonds

                  304,564        (20,890     304,564        (20,890

Japanese local government bonds

                                       

Japanese corporate bonds

                  174,815        (17,390     174,815        (17,390

Foreign government bonds

     20,448        (704     134,230        (17,866     154,678        (18,570

Foreign corporate bonds

                                       
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     20,448        (704     613,609        (56,146     634,057        (56,850
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     141,631        (3,862     754,566        (59,179     896,197        (63,041
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

For the fiscal years ended March 31, 2016, 2017 and 2018, total realized impairment losses were 3,566 million yen, 7,566 million yen and 5,175 million yen, respectively.

At March 31, 2018, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature.

 

8. Leases

Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees’ residential facilities and other assets. Certain of these leases have renewal and purchase options. Sony has also entered into capital lease arrangements with third parties to finance certain of its motion picture productions, as well as sale and leaseback transactions for office buildings, machinery and equipment.

 

(1) Capital leases

Leased assets under capital leases are comprised of the following:

 

     Yen in millions  
     March 31  

Class of property

   2017      2018  

Machinery, equipment and others

     66,722        82,260  

Film costs

     4,943        4,007  

Accumulated amortization

     (53,330      (58,861
  

 

 

    

 

 

 
     18,335        27,406  
  

 

 

    

 

 

 

 

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The following is a schedule by fiscal year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2018:

 

Fiscal year ending March 31

   Yen in millions  

2019

     12,326  

2020

     15,101  

2021

     8,787  

2022

     4,773  

2023

     3,573  

Later fiscal years

     12,424  
  

 

 

 

Total minimum lease payments

     56,984  

Less — Amount representing interest

     7,150  
  

 

 

 

Present value of net minimum lease payments

     49,834  

Less — Current obligations

     11,432  
  

 

 

 

Long-term capital lease obligations

     38,402  
  

 

 

 

 

(2) Operating leases

The minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 2018 are as follows:

 

Fiscal year ending March 31

   Yen in millions  

2019

     57,810  

2020

     64,380  

2021

     38,495  

2022

     24,993  

2023

     20,280  

Later fiscal years

     81,305  
  

 

 

 

Total minimum future rentals

     287,263  
  

 

 

 

Rental expenses under operating leases for the fiscal years ended March 31, 2016, 2017 and 2018 were 94,000 million yen, 77,976 million yen and 77,950 million yen, respectively. Sublease rentals received under operating leases for the fiscal years ended March 31, 2016, 2017 and 2018 were 1,138 million yen, 1,157 million yen and 1,325 million yen, respectively. The total minimum rentals to be received in the future under noncancelable subleases for operating leases as of March 31, 2018 were 2,792 million yen.

 

(3) Sale and leaseback transactions

Sale and leaseback transactions with SFIL -

Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFIL. In the fiscal years ended March 31, 2016, 2017 and 2018, transactions with total proceeds of 1,856 million yen, 2,679 million yen and 2,538 million yen, respectively and terms which averaged two years, have been accounted for as financings and are included within proceeds from issuance of long-term debt in the financing activities section of the consolidated statements of cash flows.

 

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9. Goodwill and other intangible assets

Intangible assets other than goodwill acquired during the fiscal year ended March 31, 2018 totaled 110,788 million yen, of which 110,781 million yen is subject to amortization, and are comprised of the following:

 

     Intangible assets
acquired during the
fiscal year
     Weighted-average
amortization period
 
     Yen in millions      Years  

Patent rights, know-how and license agreements

     16,003        4  

Software to be sold, leased or otherwise marketed

     16,066        3  

Internal-use software

     69,205        5  

Other

     9,507        7  

In the fiscal year ended March 31, 2018, additions to internal-use software primarily related to the capitalization of new software across several business platforms.

Intangible assets subject to amortization are comprised of the following:

 

     Yen in millions  
     March 31, 2017      March 31, 2018  
     Gross carrying
amount
     Accumulated
amortization
     Gross carrying
amount
     Accumulated
amortization
 

Patent rights, know-how and license agreements

     317,337        (251,401      175,980        (142,724

Customer relationships

     37,289        (15,585      18,881        (7,615

Trademarks

     31,630        (15,554      16,310        (8,451

Software to be sold, leased or otherwise marketed

     117,897        (86,661      123,269        (92,457

Internal-use software

     473,750        (310,408      494,649        (315,516

Music catalogs

     218,321        (95,367      207,789        (94,210

Artist contracts

     31,393        (29,001      28,534        (27,650

Television carriage contracts (broadcasting agreements)

     74,780        (21,986      74,258        (25,884

Other

     62,212        (46,624      58,543        (47,586
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,364,609        (872,587      1,198,213        (762,093
  

 

 

    

 

 

    

 

 

    

 

 

 

The aggregate amortization expense for intangible assets for the fiscal years ended March 31, 2016, 2017 and 2018 was 125,616 million yen, 121,634 million yen and 123,450 million yen, respectively. The estimated aggregate amortization expense for intangible assets for the next five fiscal years is as follows:

 

Fiscal year ending March 31

   Yen in millions  

2019

     89,924  

2020

     73,516  

2021

     56,485  

2022

     39,050  

2023

     27,982  

 

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Total carrying amount of intangible assets having an indefinite life are comprised of the following:

 

     Yen in millions  
     March 31  
     2017      2018  

Trademarks

     70,220        68,922  

Distribution agreements

     18,834        18,834  

Other

     3,109        3,292  
  

 

 

    

 

 

 

Total

     92,163        91,048  
  

 

 

    

 

 

 

The changes in the carrying amount of goodwill by segment for the fiscal years ended March 31, 2017 and 2018 are as follows:

 

    Yen in millions  
    G&NS     Music     Pictures     HE&S     IP&S     MC     Semiconductors     Financial
Services
    All Other     Total  

Balance, March 31, 2016:

                   

Goodwill — gross

    152,293       162,078       221,517       5,320       8,637       179,331       49,621       3,020       31,536       813,353  

Accumulated impairments

          (306           (5,320     (300     (176,045           (706     (24,386     (207,063
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

    152,293       161,772       221,517             8,337       3,286       49,621       2,314       7,150       606,290  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) due to:

                   

Acquisitions*1

          7,689       29,363                               61             37,113  

Sales and dispositions

                (60                                         (60

Impairments

                (112,069                                         (112,069

Translation adjustments

    (355     (3,351     (598           (186           (77           (11     (4,578

Other

                                        (1,475           (2,683     (4,158
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2017:

                   

Goodwill — gross

    151,938       166,416       246,085       5,320       8,451       179,331       48,069       3,081       28,842       837,533  

Accumulated impairments

          (306     (107,932     (5,320     (300     (176,045           (706     (24,386     (314,995
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

    151,938       166,110       138,153             8,151       3,286       48,069       2,375       4,456       522,538  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) due to:

                   

Acquisitions

          2,877       12,842             1,204                   4,850             21,773  

Sales and dispositions

          (121                                               (121

Impairments

                                                           

Translation adjustments

    (1,332     (3,472     (6,583           162             (1,072           (85     (12,382

Other

                                        (1,204           (112     (1,316
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2018:

                   

Goodwill — gross

    150,606       165,700       246,620       5,320       9,817       179,331       45,793       7,931       27,912       839,030  

Accumulated impairments

          (306     (102,208     (5,320     (300     (176,045           (706     (23,653     (308,538
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

    150,606       165,394       144,412             9,517       3,286       45,793       7,225       4,259       530,492  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sony realigned its business segments from the first quarter of the fiscal year ended March 31, 2018. As a result of this realignment, the operation of the former Components segment is now included in All Other. In connection with this realignment, the carrying amounts of associated goodwill for the former Components segment have been reclassified into All Other for the fiscal years ended March 31, 2016 and 2017. Refer to Note 28.

 

*1 Acquisitions for the fiscal year ended March 31, 2017 relate mainly to the TEN Sports Network acquisition in the Pictures segment. Refer to Note 24.

Impairment of goodwill in the Pictures segment -

During the fiscal year ended March 31, 2017, Sony made a downward revision in the future profitability projection for the Motion Pictures business within the Pictures segment primarily due to a lowering of previous expectations regarding the home entertainment business, mainly driven by an acceleration of market decline. The future profitability projection for the Motion Pictures business also reflected a reduction in underlying profitability projections of film performance largely mitigated by measures identified to improve the profitability of the Motion Pictures business.

Sony assessed the aforementioned events and circumstances and determined that it was more likely than not that the fair value of the Production & Distribution reporting unit (which includes the Motion Pictures and the Television Productions businesses) was less than its carrying value. Accordingly, Sony conducted the goodwill

 

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impairment tests using this new profitability projection and recalculated the implied fair value of the goodwill of the reporting unit. As a result of this recalculation, the carrying value of the goodwill was determined to be zero.

Consequently, the entire amount of the goodwill in the Production & Distribution reporting unit, 112,069 million yen, was impaired, in the fiscal year ended March 31, 2017. The impairment loss was included in other operating expense, net in the consolidated statements of income, and was recorded entirely within the Pictures segment.

 

10. Insurance-related accounts

Sony’s Financial Services segment subsidiaries in Japan maintain their accounting records as described in Note 2 in accordance with the accounting principles and practices generally accepted in Japan, which vary in some respects from U.S. GAAP.

Those differences are mainly that insurance acquisition costs for life and non-life insurance contracts are charged to income when incurred in Japan whereas in the U.S. those costs are deferred and amortized generally over the premium-paying period of the related insurance policies, and that future policy benefits for life insurance contracts calculated locally under the authorization of the supervisory administrative agencies are comprehensively adjusted using the net level premium method with certain adjustments of actuarial assumptions for U.S. GAAP purposes. For the purpose of preparing the consolidated financial statements, appropriate adjustments have been made to reflect the accounting for these items in accordance with U.S. GAAP.

The combined amounts of statutory net equity of the insurance subsidiaries, which is not measured in accordance with U.S. GAAP, as of March 31, 2017 and 2018 were 502,999 million yen and 525,976 million yen, respectively.

 

(1) Insurance policies

Life insurance policies that a subsidiary in the Financial Services segment underwrites, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. The life insurance revenues for the fiscal years ended March 31, 2016, 2017 and 2018 were 803,549 million yen, 754,242 million yen and 857,766 million yen, respectively. Property and casualty insurance policies that a subsidiary in the Financial Services segment underwrites are primarily automotive insurance contracts, which are categorized as short-duration contracts. The non-life insurance revenues for the fiscal years ended March 31, 2016, 2017 and 2018 were 93,928 million yen, 97,581 million yen and 105,497 million yen, respectively.

 

(2) Deferred insurance acquisition costs

Amortization of deferred insurance acquisition costs charged to income for the fiscal years ended March 31, 2016, 2017 and 2018 amounted to 92,203 million yen, 36,130 million yen and 68,137 million yen, respectively.

 

(3) Future insurance policy benefits

Liabilities for future policy benefits, which mainly relate to individual life insurance policies, are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities, which require significant management judgment and estimates, are computed by the net level premium method based upon the assumptions as to future investment yield, morbidity, mortality, withdrawals and other factors. Future policy benefits are computed using interest rates ranging from 1.0% to 4.5% and are based on factors such as market conditions and expected investment returns. Morbidity, mortality and withdrawal assumptions for all policies are based on either the subsidiary’s own experience or various actuarial tables. Generally these assumptions are locked-in throughout the life of the contract upon the issuance of new insurance, although significant changes in experience or assumptions may require Sony to provide for expected future losses. At March 31, 2017 and 2018, future insurance policy benefits amounted to 4,823,687 million yen and 5,211,421 million yen, respectively.

 

(4) Policyholders’ account in the life insurance business

Policyholders’ account in the life insurance business represents an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges. Policyholders’ account includes universal life

 

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insurance and investment contracts. Universal life insurance includes interest sensitive whole life contracts and variable contracts. The credited rates associated with interest sensitive whole life contracts range from 1.8% to 2.0%. For variable contracts, policy values are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio. Investment contracts mainly include single payment endowment contracts, single payment educational endowment contracts, individual variable annuities and policies after the start of annuity payments. The credited rates associated with investment contracts, except for individual variable annuities, range from 0.01% to 6.3%. For individual variable annuities, policy values are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio.

Policyholders’ account in the life insurance business is comprised of the following:

 

     Yen in millions  
     March 31  
     2017      2018  

Universal life insurance

     1,809,142        1,951,906  

Investment contracts

     686,182        738,404  

Other

     135,749        130,392  
  

 

 

    

 

 

 

Total

     2,631,073        2,820,702  
  

 

 

    

 

 

 

 

11. Short-term borrowings and long-term debt

Short-term borrowings are comprised of the following:

 

     Yen in millions  
     March 31  
     2017      2018  

Unsecured loans:

     

with a weighted-average interest rate of 7.29%

     64,046     

with a weighted-average interest rate of 3.95%

        64,480  

Secured loans:

     

with a weighted-average interest rate of 0.00%

     20,000     

with a weighted-average interest rate of 0.12%

        27  

Repurchase agreement:

     

with a weighted-average interest rate of 0.01%

     310,609     

with a weighted-average interest rate of 0.18%

        335,586  

Secured call money:

     

with a weighted-average interest rate of (0.08)%

     70,000     

with a weighted-average interest rate of (0.07)%

        96,000  
  

 

 

    

 

 

 
     464,655        496,093  
  

 

 

    

 

 

 

At March 31, 2018, a certain subsidiary in the Financial Services segment pledged securities investments with a book value of 267,538 million yen as collateral for 335,586 million yen of short-term repurchase agreements. The repurchase agreement provides for net settlement upon a termination event.

At March 31, 2018, a certain subsidiary in the Financial Services segment pledged marketable securities and securities investments with a book value of 119,213 million yen as collateral for 96,000 million yen of secured call money.

In addition, certain subsidiaries in the Financial Services segment pledged marketable securities and securities investments with an aggregate book value of 9,618 million yen as collateral for cash settlements, variation margins of futures markets and certain other purposes.

 

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Long-term debt is comprised of the following:

 

     Yen in millions  
     March 31  
     2017      2018  

Unsecured loans, representing obligations principally to banks:

     

Due 2017 to 2024, with interest rates ranging from 0.24% to 5.10% per annum

     63,248     

Due 2018 to 2024, with interest rates ranging from 0.01% to 5.10% per annum

        49,454  

Unsecured 0.43% bonds, due 2018

     10,000     

Unsecured 0.86% bonds, due 2018

     150,000        150,000  

Unsecured 2.00% bonds, due 2018

     16,300        16,300  

Unsecured 0.05% bonds, due 2019

     69,793        69,879  

Unsecured 2.07% bonds, due 2019

     50,000        50,000  

Unsecured 0.23% bonds, due 2021

     89,670        89,744  

Unsecured 0.11% bonds, due 2022

        10,000  

Unsecured 1.41% bonds, due 2022

     10,000        10,000  

Unsecured 0.28% bonds, due 2023

     15,000        15,000  

Unsecured 0.22% bonds, due 2025

        10,000  

Unsecured 0.42% bonds, due 2026

     24,887        24,899  

Unsecured zero coupon convertible bonds, due 2022

     120,000        119,976  

Secured 0.00% loans, due 2019 to 2020

     70,000     

Secured 0.00% loans, due 2019 to 2022

        170,002  

Capital lease obligations and other:

     

Due 2017 to 2027, with interest rates ranging from 0.36% to 8.90% per annum

     34,224     

Due 2018 to 2047, with interest rates ranging from 0.36% to 11.88% per annum

        52,929  

Guarantee deposits received

     11,764        10,790  
  

 

 

    

 

 

 
     734,886        848,973  

Less — Portion due within one year

     53,424        225,522  
  

 

 

    

 

 

 
     681,462        623,451  
  

 

 

    

 

 

 

At March 31, 2018, a certain subsidiary in the Financial Services segment pledged marketable securities and securities investments with a book value of 38,375 million yen and housing loans with a book value of 306,589 million yen as collateral for a 170,000 million yen long-term secured loan.

In March 2012, Sony executed a 1,365 million U.S. dollar unsecured bank loan with a group of lenders having six to ten year maturity terms in connection with Sony’s acquisition of Ericsson’s 50% equity interest in Sony Ericsson. This bank loan utilizes the Japan Bank for International Cooperation Facility, which was established to facilitate overseas mergers and acquisitions by Japanese companies as a countermeasure against yen appreciation. The terms of this U.S. dollar loan require accelerated repayment of the entire outstanding balance if Sony Corporation or its wholly-owned subsidiaries discontinue the business of mobile devices featuring telephone functionality. In March 2016, Sony repaid 682 million U.S. dollars of the 1,365 million U.S. dollars. In September 2016, Sony repaid the remaining 683 million U.S. dollars.

On July 21, 2015, Sony issued 120,000 million yen of 130% callable unsecured zero coupon convertible bonds with stock acquisition rights due 2022 (the “Zero Coupon Convertible Bonds”). The bondholders are entitled to stock acquisition rights effective from September 1, 2015 to September 28, 2022. The initial conversion price is 5,008 yen per common share. In addition to the standard anti-dilution provisions, the conversion price is reduced for a certain period before an early redemption triggered upon the occurrence of certain corporate events including a merger, corporate split and delisting event. The reduced amount of the conversion price will be determined by a formula that is based on the effective date of the reduction and Sony’s common stock price. The reduced conversion price ranges from 3,526.5 yen to 5,008.0 yen per common share. The conversion price is also adjusted for dividends in excess of 25 yen per common share per fiscal year. Sony has the option to redeem all of the Zero Coupon Convertible Bonds outstanding at 100% of the principal amount after July 21, 2020, if the closing sales price per share of Sony’s common stock on the Tokyo Stock Exchange is 130% or more of the conversion price of the Zero Coupon Convertible Bonds for 20 consecutive trading days.

 

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Sony was not required to bifurcate any of the embedded features contained in the Zero Coupon Convertible Bonds for accounting purposes. There are no significant adverse debt covenants under the Zero Coupon Convertible Bonds.

In September 2016, Sony issued unsecured straight bonds in the aggregate principal amount of 200,000 million yen. The proceeds from the issuance of the bonds have been applied to the repayment of borrowings and debt.

There are no significant adverse debt covenants or cross-default provisions related to the other short-term borrowings and long-term debt.

Aggregate amounts of annual maturities of long-term debt are as follows:

 

Fiscal year ending March 31

   Yen in millions  

2019

     225,522  

2020

     155,490  

2021

     58,620  

2022

     204,428  

2023

     16,437  

Later fiscal years

     188,476  
  

 

 

 

Total

     848,973  
  

 

 

 

At March 31, 2018, Sony had unused committed lines of credit amounting to 459,860 million yen and can generally borrow up to 180 days from the banks with whom Sony has committed line contracts. Furthermore, at March 31, 2018, Sony has commercial paper programs totaling 818,720 million yen. Sony can issue commercial paper for a period generally not in excess of 270 days up to the size of the programs.

 

12. Housing loans and deposits from customers in the banking business

 

(1) Housing loans in the banking business

Sony acquires and holds certain financial receivables in the normal course of business. The majority of financing receivables held by Sony consists of housing loans in the banking business and no other significant financial receivables exist.

A subsidiary in the banking business monitors the credit quality of housing loans based on the classification set by the financial conditions and the past due status of individual obligors. Past due status is monitored on a daily basis and the aforementioned classification is reviewed on a quarterly basis.

The allowance for the credit losses is established based on the aforementioned classifications and the evaluation of collateral. The amount of housing loans in the banking business and the corresponding allowance for credit losses as of March 31, 2017 were 1,449,790 million yen and 866 million yen, respectively, and as of March 31, 2018 were 1,522,415 million yen and 717 million yen, respectively. During the fiscal years ended March 31, 2017 and 2018, charge-offs on housing loans in the banking business and changes in the allowance for credit losses were not significant.

The balance of housing loans placed on nonaccrual status or past due status were not significant as of March 31, 2017 and 2018.

 

(2) Deposits from customers in the banking business

All deposits from customers in the banking business within the Financial Services segment are interest bearing deposits. At March 31, 2017 and 2018, the balances of time deposits issued in amounts of 10 million yen or more were 275,638 million yen and 279,943 million yen, respectively. These amounts have been classified as current liabilities mainly due to the ability of the customers to make withdrawals prior to maturity.

 

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At March 31, 2018, aggregate amounts of annual maturities of time deposits with a remaining term of more than one year are as follows:

 

Fiscal year ending March 31

   Yen in millions  

2020

     39,058  

2021

     19,395  

2022

     9,120  

2023

     11,295  

2024

     9,736  

Later fiscal years

     19,203  
  

 

 

 

Total

     107,807  
  

 

 

 

 

13. Fair value measurements

As discussed in Note 2, assets and liabilities subject to the accounting guidance for fair value measurements held by Sony are classified and accounted for as described below.

 

(1) Assets and liabilities that are measured at fair value on a recurring basis

The following section describes the valuation techniques used by Sony to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.

Trading securities, available-for-sale securities and other investments

Where quoted prices are available in an active market, securities are classified in level 1 of the fair value hierarchy. Level 1 securities include exchange-traded equities. If quoted market prices are not available for the specific security or the market is inactive, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and mainly classified in level 2 of the hierarchy. Level 2 securities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, such as the majority of government bonds and corporate bonds. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the fair value hierarchy. Level 3 securities primarily include certain hybrid financial instruments and certain private equity investments not classified within level 1 or level 2.

Derivatives

Exchange-traded derivatives valued using quoted prices are classified within level 1 of the fair value hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the majority of Sony’s derivative positions are valued using internally developed models that use as their basis readily observable market parameters — i.e., parameters that are actively quoted and can be validated to external sources, including industry pricing services. Depending on the types and contractual terms of derivatives, fair value can be modeled using a series of techniques, such as the Black-Scholes option pricing model, which are consistently applied. Where derivative products have been established for some time, Sony uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit rating of the counterparty. Further, many of these models do not contain a high level of subjectivity as the techniques used in the models do not require significant judgment, and inputs to the model are readily observable from actively quoted markets. Such instruments are generally classified within level 2 of the fair value hierarchy.

In determining the fair value of Sony’s interest rate swap derivatives, Sony uses the present value of expected cash flows based on market observable interest rate yield curves commensurate with the term of each instrument. For foreign currency derivatives, Sony’s approach is to use forward contract and option valuation models employing market observable inputs, such as spot currency rates, time value and option volatilities. These derivatives are classified within level 2 since Sony primarily uses observable inputs in its valuation of its derivative assets and liabilities.

 

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The fair value of Sony’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2017 and 2018 are as follows:

 

    Yen in millions  
    March 31, 2017  
                            Presentation in the consolidated balance sheets  
    Level 1     Level 2     Level 3     Total     Marketable
securities
    Securities
investments
and other
    Other
current
assets/

liabilities
    Other
noncurrent
assets/

liabilities
 

Assets:

               

Trading securities

    611,108       310,212             921,320       921,320                    

Available-for-sale securities

               

Debt securities

               

Japanese national government bonds

          1,343,401             1,343,401       18,483       1,324,918              

Japanese local government bonds

          60,531             60,531       8,518       52,013              

Japanese corporate bonds

          168,493       1,310       169,803       8,433       161,370              

Foreign government bonds*1

          27,042             27,042       1,007       26,035              

Foreign corporate bonds*2

          358,369       41,177       399,546       86,708       312,838              

Other*3

                15,192       15,192             15,192              

Equity securities

    125,306       182             125,488             125,488              

Other investments*4

    6,589       4,525       10,483       21,597             21,597              

Derivative assets*5

    981       26,279             27,260                   25,409       1,851  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    743,984       2,299,034       68,162       3,111,180       1,044,469       2,039,451       25,409       1,851  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

               

Derivative liabilities*5

    520       33,930             34,450                   15,743       18,707  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    520       33,930             34,450                   15,743       18,707  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Yen in millions  
    March 31, 2018  
                            Presentation in the consolidated balance sheets  
    Level 1     Level 2     Level 3     Total     Marketable
securities
    Securities
investments
and other
    Other
current
assets/

liabilities
    Other
noncurrent
assets/

liabilities
 

Assets:

               

Trading securities

    712,113       335,949             1,048,062       1,048,062                    

Available-for-sale securities

               

Debt securities

               

Japanese national government bonds

          1,409,610             1,409,610       20,473       1,389,137              

Japanese local government bonds

          67,569             67,569       8,548       59,021              

Japanese corporate bonds

          208,708             208,708       8,041       200,667              

Foreign government bonds*1

          69,539             69,539             69,539              

Foreign corporate bonds*2

          338,587       27,878       366,465       88,228       278,237              

Other*3

          15,736       83,614       99,350             99,350              

Equity securities

    126,330       293             126,623             126,623              

Other investments*4

    6,192       5,099       9,104       20,395             20,395              

Derivative assets*5

    2,194       37,332             39,526                   37,003       2,523  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    846,829       2,488,422       120,596       3,455,847       1,173,352       2,242,969       37,003       2,523  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

               

Derivative liabilities*5

    1,407       34,317             35,724                   20,550       15,174  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,407       34,317             35,724                   20,550       15,174  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*1 2,215 million yen and 2,875 million yen are included in foreign securities for which the fair value option has been elected and classified in level 2 for the fiscal years ended March 31, 2017 and 2018, respectively, and are included in the consolidated balance sheets as securities investments and other.

 

*2 165,236 million yen and 160,470 million yen are included in foreign securities for which the fair value option has been elected and classified in level 2 for the fiscal years ended March 31, 2017 and 2018, respectively. In the consolidated balance sheets, 32,167 million yen and 25,955 million yen are included as marketable securities and 133,069 million yen and 134,515 million yen are included as securities investment and other for the fiscal years ended March 31, 2017 and 2018, respectively.

 

*3 14,619 million yen and 93,971 million yen are included in foreign securities for which the fair value option has been elected and classified in level 2 and level 3 for the fiscal years ended March 31, 2017 and 2018, respectively, and are included in the consolidated balance sheets as securities investments and other.

 

*4 Other investments include certain hybrid financial instruments and certain private equity investments.

 

*5 Derivative assets and liabilities are recognized and disclosed on a gross basis.

 

*6 Net gains of 502 million yen and 544 million yen arising from financial instruments for which the fair value option has been elected are included in financial services revenue in the consolidated statements of income for the fiscal years ended March 31, 2017 and 2018, respectively.

Transfers into level 1 were 2,833 million yen and 3,522 million yen for the fiscal years ended March 31, 2017 and 2018, respectively, as quoted prices for certain trading securities and available-for-sale securities became available in an active market. Transfers out of level 1 were 3,103 million yen and 3,086 million yen for the fiscal years ended March 31, 2017 and 2018, respectively, as quoted prices for certain trading securities and available-for-sale securities were not available in an active market.

 

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The changes in fair value of level 3 assets and liabilities for the fiscal years ended March 31, 2017 and 2018 are as follows:

 

     Yen in millions  
     Fiscal year ended March 31, 2017  
     Assets  
     Available-for-sale securities         
     Debt securities     
     Japanese
corporate bonds
     Foreign
corporate bonds
     Other      Other
investments
 

Beginning balance

     3,346        15,853        884        13,463  

Total realized and unrealized gains (losses):

           

Included in earnings*1

            1,091        514        328  

Included in other comprehensive income (loss)*2

     (20      (84      (1      (2,416

Purchases

            35,335        14,026        247  

Sales

                           

Settlements

            (10,021      (231      (1,139

Transfers into level 3*3

            1,008                

Transfers out of level 3*4

     (2,016      (2,005              
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

     1,310        41,177        15,192        10,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

Changes in unrealized gains (losses) relating to instruments still held at reporting date:

           

Included in earnings*1

            11        79        (27
     Yen in millions  
     Fiscal year ended March 31, 2018  
     Assets  
     Available-for-sale securities         
     Debt securities     
     Japanese
corporate bonds
     Foreign
corporate bonds
     Other      Other
investments
 

Beginning balance

     1,310        41,177        15,192        10,483  

Total realized and unrealized gains (losses):

           

Included in earnings*1

            (307      (3,032      (65

Included in other comprehensive income (loss)*2

            (84      1        (489

Purchases

            12,604        74,736        139  

Sales

                          (10

Settlements

            (18,540      (3,283      (954

Transfers into level 3*3

                           

Transfers out of level 3*4

     (1,310      (6,972              
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

            27,878        83,614        9,104  
  

 

 

    

 

 

    

 

 

    

 

 

 

Changes in unrealized gains (losses) relating to instruments still held at reporting date:

           

Included in earnings*1

            (468      (2,278      (65

 

*1 Earning effects are included in financial services revenue in the consolidated statements of income.

 

*2 Unrealized gains (losses) are included in unrealized gains (losses) on securities in the consolidated statements of comprehensive income.

 

*3 Certain corporate bonds were transferred into level 3 because differences between the fair value determined by indicative quotes from dealers and the fair value determined by internally developed prices became significant and the observability of the inputs used decreased.

 

*4 Certain corporate bonds were transferred out of level 3 because observable market data became available.

 

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Level 3 assets include certain private equity investments, and certain domestic and foreign corporate bonds for which quoted prices are not available in a market and where there is less transparency around inputs. In determining the fair value of such assets, Sony uses third-party information such as indicative quotes from dealers without adjustment. For validating the fair values, Sony primarily uses internal models which include management judgment or estimation of assumptions that market participants would use in pricing the asset.

 

(2) Assets and liabilities that are measured at fair value on a nonrecurring basis

Sony also has assets and liabilities that are required to be remeasured to fair value on a nonrecurring basis when certain circumstances occur. During the fiscal years ended March 31, 2017 and 2018, such remeasurements to fair value related primarily to the following:

 

     During the fiscal year ended March 31, 2017  
     Estimated fair value      Amounts
included in
earnings
 
     Level 1      Level 2      Level 3     

Assets:

           

Long-lived assets impairments

                   72        (39,137

Goodwill impairments

                   0        (112,069
           

 

 

 
              (151,206
           

 

 

 
     During the fiscal year ended March 31, 2018  
     Estimated fair value      Amounts
included in
earnings
 
     Level 1      Level 2      Level 3     

Assets:

           

Long-lived assets impairments

                   19,375        (53,741
           

 

 

 
              (53,741
           

 

 

 

Long-lived assets impairments

Sony recorded an impairment loss of 30,643 million yen for the fiscal year ended March 31, 2016, included within All Other, related to long-lived assets in the battery business asset group. In the fiscal year ended March 31, 2016, due to increasingly competitive markets, Sony conducted a further strategic review of the business and evolving market trends. Following this review, Sony further reduced the corresponding estimated future cash flows of this business and the estimated ability to recover the entire carrying amount of the long-lived assets within the period applicable to the impairment determination, resulting in an impairment charge.

Sony recorded impairment losses of 59,616 million yen and 23,860 million yen for the fiscal years ended March 31, 2016 and 2017, respectively, included within the Semiconductors segment, related to long-lived assets in the camera module business asset group. Due to a decrease in the projected future demand of camera modules, Sony conducted a strategic review of the business and its market conditions. Following this review, Sony reduced the corresponding estimated future cash flows and the estimated ability to recover the entire carrying amount of the long-lived assets within the period applicable to the impairment determination, resulting in an impairment charge for the fiscal year ended March 31, 2016. Sony decided to halt all development and production of high-functionality camera modules for external sales during the fiscal year ended March 31, 2017.

Sony recorded an impairment loss of 31,341 million yen for the fiscal year ended March 31, 2018, included within the MC segment, related to long-lived assets in the smartphone business asset group. Due to smartphone sales results and changes in the business environment since January 2018, Sony conducted a strategic review of its future profitability forecast for the smartphone business. Following this review, Sony reduced the corresponding estimated future cash flows of this business and the estimated ability to recover the entire carrying amount of the long-lived assets within the period applicable to the impairment determination, resulting in an impairment charge for the fiscal year ended March 31, 2018.

These measurements are classified as level 3 because significant unobservable inputs, such as the condition of the assets or projections of future cash flows, the timing of such cash flows and the discount rate reflecting the risk inherent in future cash flows, were considered in the fair value measurements. For the fiscal year ended March 31, 2016, a discount rate of 10% and projected revenue growth rates ranging from zero to 14% were used

 

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in the fair value measurements related to the long-lived assets for the battery business and a discount rate of 10% and projected revenue growth rates ranging from zero to 108% were used in the fair value measurements related to the long-lived assets for the camera module business. The high end of the camera module revenue growth rate reflects projected revenue from the introduction of new products in the near term. For the fiscal year ended March 31, 2017, a discount rate of 10% and projected declining revenue rates ranging from (1)% to 8% were used in the fair value measurements related to the long-lived assets for the camera module business. For the fiscal year ended March 31, 2018, a discount rate of 8.5% and projected revenue growth rates ranging from (8)% to 6% were used in the fair value measurements related to the long-lived assets for the smartphone business.

Goodwill impairments

Sony recorded an impairment loss of 112,069 million yen during the fiscal year ended March 31, 2017 against the goodwill of the Production & Distribution reporting unit in the Pictures segment. Refer to Note 9. Sony’s determination of the estimated fair value of the reporting unit was based on the present value of expected future cash flows including a terminal value which is based on an exit price using an earnings multiple applied to the final year of the forecasted earnings, and which also takes into consideration a control premium. These measurements are classified as level 3 because significant unobservable inputs, such as the projections of future cash flows, the timing of such cash flows, the earnings multiple, the growth rates beyond the forecast and mid-range plan periods, and the discount rate reflecting the risk inherent in future cash flows, were considered in the fair value measurements. An earnings multiple of 9.0x, growth rates beyond the forecast and mid-range plan periods ranging from 3.0% to 4.5% and a discount rate of 9.5% were used in the fair value measurement.

 

(3) Financial instruments

The estimated fair values by fair value hierarchy level of certain financial instruments that are not reported at fair value are summarized as follows:

 

     Yen in millions  
     March 31, 2017  
     Estimated fair value      Carrying
amount
 
     Level 1      Level 2      Level 3      Total      Total  

Assets:

              

Housing loans in the banking business

            1,603,784               1,603,784        1,449,790  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

            1,603,784               1,603,784        1,449,790  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Long-term debt including the current portion

            745,599               745,599        734,886  

Investment contracts included in policyholders’ account in the life insurance business

            710,191               710,191        686,182  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

            1,455,790               1,455,790        1,421,068  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Yen in millions  
     March 31, 2018  
     Estimated fair value      Carrying
amount
 
     Level 1      Level 2      Level 3      Total      Total  

Assets:

              

Housing loans in the banking business

            1,686,842               1,686,842        1,522,415  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

            1,686,842               1,686,842        1,522,415  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Long-term debt including the current portion

            877,576               877,576        848,973  

Investment contracts included in policyholders’ account in the life insurance business

            766,558               766,558        738,404  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

            1,644,134               1,644,134        1,587,377  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The summary excludes cash and cash equivalents, call loans, time deposits, notes and accounts receivable, trade, call money, short-term borrowings, notes and accounts payable, trade and deposits from customers in the banking business because the carrying values of these financial instruments approximated their fair values due to their short-term nature. The summary also excludes held-to-maturity securities disclosed in Note 7.

Cash and cash equivalents, call loans and call money are classified in level 1. Time deposits, short-term borrowings, deposits from customers in the banking business are classified in level 2. Held-to-maturity securities, included in marketable securities and securities investments and other in the consolidated balance sheets, primarily include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, such as the majority of government bonds and corporate bonds and are substantially all classified in level 2. The fair values of housing loans in the banking business, included in securities investments and other in the consolidated balance sheets, were estimated based on the discounted future cash flows using interest rates reflecting London Interbank Offered Rate base yield curves with certain risk premiums. The fair values of long-term debt including the current portion and investment contracts included in policyholders’ account in the life insurance business were estimated based on either the market value or the discounted future cash flows using Sony’s current incremental borrowing rates for similar liabilities.

 

14. Derivative instruments and hedging activities

Sony has certain financial instruments including financial assets and liabilities acquired in the normal course of business. Such financial instruments are exposed to market risk arising from the changes in foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate swap agreements (including interest rate and currency swap agreements). Certain other derivative financial instruments are entered into in the Financial Services segment for asset-liability management (“ALM”) purposes. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. These derivatives generally mature or expire within six months after the balance sheet date. Other than derivatives utilized in the Financial Services segment for ALM, Sony does not use derivative financial instruments for trading or speculative purposes. These derivative transactions utilized for ALM in the Financial Services segment are executed within certain limits in accordance with an internal risk management policy.

Derivative financial instruments held by Sony are classified and accounted for as described below.

Fair value hedges

Both the derivatives designated as fair value hedges and the hedged items are reflected at fair value in the consolidated balance sheets. Changes in the fair value of the derivatives designated as fair value hedges, as well as offsetting changes in the carrying value of the underlying hedged items, are recognized in income. For the

 

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fiscal years ended March 31, 2016, 2017 and 2018, these fair value hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.

Cash flow hedges

Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income (“OCI”) and reclassified into earnings when the hedged transaction affects earnings. For the fiscal year ended March 31, 2016, the ineffective portions of the hedging relationships were not significant. For the fiscal year ended March 31, 2017 and 2018, these cash flow hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness for cash flow hedges.

Derivatives not designated as hedges

Changes in the fair value of derivatives not designated as hedges are recognized in income.

A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:

Foreign exchange forward contracts and foreign currency option contracts

Foreign exchange forward contracts and purchased and written foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated or anticipated by Sony’s transactions and accounts receivable and payable denominated in foreign currencies. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.

Sony also entered into foreign exchange forward contracts which effectively fixed the cash flows from certain foreign currency denominated payables. Accordingly, these derivatives have been designated as cash flow hedges.

Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.

Foreign exchange forward contracts, foreign currency option contracts and currency swap agreements held by certain subsidiaries in the Financial Services segment are marked-to-market with changes in value recognized in financial services revenue.

Interest rate swap agreements (including interest rate and currency swap agreements)

Interest rate swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments and available-for-sale debt securities resulting from adverse fluctuations in interest rates, foreign currency exchange rates and changes in fair values.

Interest rate swap agreements entered into in the Financial Services segment are used for reducing the risk arising from the changes in the fair value of fixed rate available-for-sale debt securities. These derivatives are considered to be a hedge against changes in the fair value of available-for-sale debt securities in the Financial Services segment. Accordingly, these derivatives have been designated as fair value hedges.

Certain subsidiaries in the Financial Services segment have interest rate swap agreements as part of their ALM, which are marked-to-market with changes in value recognized in financial service revenues.

Any other interest rate swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate debt, are marked-to-market with changes in value recognized in other income and expenses.

Other agreements

Certain subsidiaries in the Financial Services segment have equity future contracts, other currency contracts and hybrid financial instruments as part of their ALM, which are marked-to-market with changes in value recognized in financial services revenue. The hybrid financial instruments, disclosed in Note 7 as debt securities, contained embedded derivatives that are not required to be bifurcated because the entire instruments are carried at fair value.

 

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The estimated fair values of Sony’s outstanding derivative instruments are summarized as follows:

 

Derivatives designated as

hedging instruments

 

Yen in millions

 
 

Balance sheet location

  Fair value    

Balance sheet location

  Fair value  
      March 31         March 31  
 

Asset derivatives

  2017     2018    

Liability derivatives

  2017     2018  

Interest rate contracts

 

Prepaid expenses and other current assets

    43       12     Current liabilities: Other     497       160  

Interest rate contracts

  Other assets: Other     95       286     Liabilities: Other     13,713       10,281  

Foreign exchange contracts

 

Prepaid expenses and other current assets

          48     Current liabilities: Other     31       1,535  
   

 

 

   

 

 

     

 

 

   

 

 

 
              138       346         14,241       11,976  
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as

hedging instruments

 

Yen in millions

 
 

Balance sheet location

  Fair value    

Balance sheet location

  Fair value  
      March 31         March 31  
 

Asset derivatives

  2017     2018    

Liability derivatives

  2017     2018  

Interest rate contracts

 

Prepaid expenses and other current assets

    3       12     Current liabilities: Other     221       299  

Interest rate contracts

  Other assets: Other     1,599       1,871     Liabilities: Other     4,374       3,612  

Foreign exchange contracts

 

Prepaid expenses and other current assets

    24,382       34,737     Current liabilities: Other     14,475       17,149  

Foreign exchange contracts

 

Other assets: Other

    157       366     Liabilities: Other     620       1,281  

Equity contracts

 

Prepaid expenses and other current assets

    981       2,194     Current liabilities: Other     519       1,407  
   

 

 

   

 

 

     

 

 

   

 

 

 
      27,122       39,180         20,209       23,748  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives

      27,260       39,526         34,450       35,724  
   

 

 

   

 

 

     

 

 

   

 

 

 

Presented below are the effects of derivative instruments on the consolidated statements of income for the fiscal years ended March 31, 2016, 2017 and 2018.

 

Derivatives under fair value

hedging relationships

 

Yen in millions

 
 

Location of gain or (loss) recognized in
income on derivative

   Amount of gain or (loss) recognized
in income on derivative
 
     Fiscal year ended March 31  
     2016      2017      2018  

Interest rate contracts

  Financial services revenue      (8,300      1,967        (52

Foreign exchange contracts

  Foreign exchange loss, net      3        (31       
    

 

 

    

 

 

    

 

 

 

Total

       (8,297      1,936        (52
    

 

 

    

 

 

    

 

 

 
   

Yen in millions

 

Derivatives under cash flow

hedging relationships

 

Location of gain or (loss) recognized in
income on derivative

   Fiscal year ended March 31  
     2016      2017      2018  
         Amount of gain or (loss)
recognized in OCI on derivative
 

Foreign exchange contracts

       1,914        6,715        (2,295
    

 

 

    

 

 

    

 

 

 

Total

       1,914        6,715        (2,295
    

 

 

    

 

 

    

 

 

 
         Amount of gain or (loss) reclassified
from accumulated OCI into income
(effective portion)
 

Foreign exchange contracts

  Foreign exchange loss, net      (8              

Foreign exchange contracts

  Cost of sales      (3,104      (5,583      1,111  
    

 

 

    

 

 

    

 

 

 

Total

       (3,112      (5,583      1,111  
    

 

 

    

 

 

    

 

 

 

 

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Derivatives not designated as
hedging instruments

 

Yen in millions

 
 

Location of gain or (loss) recognized in
income on derivative

   Amount of gain or (loss) recognized
in income on derivative
 
     Fiscal year ended March 31  
     2016      2017      2018  

Interest rate contracts

  Financial services revenue      (5,499      (935 )        (1,544

Foreign exchange contracts

  Financial services revenue      4,166        (5,365      2,013  

Foreign exchange contracts

  Foreign exchange loss, net      (14,501      12,339        21,370  

Equity contracts

  Financial services revenue      3,267        (18,597      (11,665
    

 

 

    

 

 

    

 

 

 

Total

       (12,567      (12,558      10,174  
    

 

 

    

 

 

    

 

 

 

The following table summarizes additional information, including notional amounts, for each type of derivative:

 

     Yen in millions  
     March 31, 2017      March 31, 2018  
     Notional
amount
     Fair
value
     Notional
amount
     Fair
value
 

Foreign exchange contracts:

           

Foreign exchange forward contracts

     1,062,933        3,011        1,105,393        7,071  

Currency option contracts purchased

     212        1        206        1  

Currency option contracts written

     214        (1      156        (1

Currency swap agreements

     1,439,395        4,074        1,230,254        4,613  

Other currency contracts

     64,944        2,328        84,623        3,502  

Interest rate contracts:

           

Interest rate swap agreements

     415,719        (17,065      398,291        (12,171

Equity contracts:

           

Equity future contracts

     96,016        462        106,876        787  

 

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All derivatives are recognized as either assets or liabilities in the consolidated balance sheets on a gross basis, but certain subsidiaries have entered into master netting agreements or other similar agreements, which are mainly International Swaps and Derivatives Association (ISDA) Master Agreements. An ISDA Master Agreement is an agreement between two counterparties that may have multiple derivative contracts with each other, and such ISDA Master Agreement may provide for the net settlement of all or a specified group of these derivative contracts, through a single payment, in a single currency, in the event of a default on or affecting any one derivative contract, or a termination event affecting all or a specified group of derivative contracts. Presented below are the effects of offsetting derivative assets, derivative liabilities, financial assets and financial liabilities as of March 31, 2017 and 2018.

 

     Yen in millions  
     As of March 31, 2017  
     Gross amounts
presented in the
consolidated
balance sheet
     Gross amounts not offset in the
consolidated balance sheet that are
subject to master netting agreements
        
        Financial
instruments
     Cash
collateral
     Net amounts  

Derivative assets subject to master netting agreements

     11,554        6,584        277        4,693  

Derivative assets not subject to master netting agreements

     15,706              15,706  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     27,260        6,584        277        20,399  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities subject to master netting agreements

     33,261        6,644        18,631        7,986  

Derivative liabilities not subject to master netting agreements

     1,189              1,189  

Repurchase, securities lending and similar arrangements

     310,609        309,987               622  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     345,059        316,631        18,631        9,797  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Yen in millions  
     As of March 31, 2018  
     Gross amounts
presented in the
consolidated
balance sheet
     Gross amounts not offset in the
consolidated balance sheet that are
subject to master netting agreements
        
        Financial
instruments
     Cash
collateral
     Net amounts  

Derivative assets subject to master netting agreements

     15,404        7,724        449        7,231  

Derivative assets not subject to master netting agreements

     24,122              24,122  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     39,526        7,724        449        31,353  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities subject to master netting agreements

     34,455        8,326        14,334        11,795  

Derivative liabilities not subject to master netting agreements

     1,269              1,269  

Repurchase, securities lending and similar arrangements

     335,586        334,246               1,340  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     371,310        342,572        14,334        14,404  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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15. Pension and severance plans

 

(1) Defined benefit and severance plans

Upon terminating employment, employees of Sony Corporation and its subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. Sony Corporation and certain of its subsidiaries’ pension plans utilize a point-based plan under which a point is added every year reflecting the individual employee’s performance over that year. Under the point-based plan, the amount of payment is determined based on the sum of cumulative points from past services and interest points earned on the cumulative points regardless of whether or not the employee is voluntarily retiring.

Under the plans, in general, the defined benefits cover 65% of the indemnities under existing regulations to employees. The remaining indemnities are covered by severance payments by the companies. The pension benefits are payable at the option of the retiring employee either in a lump-sum amount or monthly pension payments. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations.

From April 1, 2012, Sony Corporation and substantially all of its subsidiaries in Japan have modified existing defined benefit pension plans such that life annuities will no longer accrue additional service benefits, with those participants instead accruing fixed-term annuities. The defined benefit pension plans were closed to new participants and a defined contribution plan was also introduced.

In addition, several of Sony’s foreign subsidiaries have defined benefit pension plans or severance indemnity plans, which cover substantially all of their employees. Under such plans, the related cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on the current rate of pay and length of service.

The components of net periodic benefit costs for the fiscal years ended March 31, 2016, 2017 and 2018 were as follows:

Japanese plans:

 

     Yen in millions  
     Fiscal year ended March 31  
     2016      2017      2018  

Service cost

     24,670        26,811        25,185  

Interest cost

     8,689        5,912        8,024  

Expected return on plan assets

     (20,853      (17,829      (16,440

Recognized actuarial loss

     8,588        20,436        16,099  

Amortization of prior service costs

     (9,489      (9,490      (8,693
  

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

     11,605        25,840        24,175  
  

 

 

    

 

 

    

 

 

 

Foreign plans:

 

     Yen in millions  
     Fiscal year ended March 31  
     2016      2017      2018  

Service cost

     3,504        2,958        3,181  

Interest cost

     12,096        10,426        10,393  

Expected return on plan assets

     (14,117      (11,000      (11,687

Amortization of net transition asset

     10        9        5  

Recognized actuarial loss

     4,236        2,552        3,014  

Amortization of prior service costs

     (478      (463      (574

Losses on curtailments and settlements

     354        43        1,058  
  

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

     5,605        4,525        5,390  
  

 

 

    

 

 

    

 

 

 

The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal year are 17,706 million yen and 8,114 million yen, respectively.

 

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The changes in the benefit obligation and plan assets as well as the funded status and composition of amounts recognized in the consolidated balance sheets were as follows:

 

     Japanese plans     Foreign plans  
     Yen in millions     Yen in millions  
     March 31     March 31  
     2017     2018     2017     2018  

Change in benefit obligation:

        

Benefit obligation at beginning of the fiscal year

     1,034,284       1,004,676       356,875       352,442  

Service cost

     26,811       25,185       2,958       3,181  

Interest cost

     5,912       8,024       10,426       10,393  

Plan participants’ contributions

                 490       573  

Actuarial (gain) loss

     (33,333     21,920       20,045       663  

Foreign currency exchange rate changes

                 (23,183     8,858  

Curtailments and settlements

                 (1,507     (5,422

Other

     (5     (8            

Benefits paid

     (28,993     (49,223     (13,662     (14,291
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of the fiscal year

     1,004,676       1,010,574       352,442       356,397