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 2016
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/  Kenichiro Yoshida
 
                (Signature)
 
Kenichiro Yoshida
 
Executive Deputy President and
 
Chief Financial Officer
 
Date: May 20, 2016

 
 

 

 

 

 

 

 

 

 

 

 

 

1985-001-02-Sony_Logo

Consolidated Financial Statements

For the fiscal year ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sony Corporation

TOKYO, JAPAN

 

 

 
 

 

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 8
Consolidated Statements of Cash Flows  9
Consolidated Statements of Changes in Stockholders’ Equity 11
Index to Notes to Consolidated Financial Statements 13
Notes to Consolidated Financial Statements 14

 

 

 

1 
 

 

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, 2016 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, 2016.

  

Sony’s independent registered public accounting firm, PricewaterhouseCoopers Aarata, has issued an audit report on Sony’s internal control over financial reporting as of March 31, 2016, presented on page 3.

 

2 
 

 

Report of Independent Registered Public Accounting Firm

 

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

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, cash flows and stockholders’ equity present fairly, in all material respects, the financial position of Sony Corporation and its subsidiaries (the “Company”) at March 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2016, 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, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these 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 accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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.

 

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

Tokyo, Japan

May 20, 2016

 

3 
 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Balance Sheets

March 31

 

  Yen in millions
  2015 2016
ASSETS    
Current assets:    
Cash and cash equivalents  949,413   983,612 
Marketable securities  936,731   946,397 
Notes and accounts receivable, trade  986,500   926,375 
Allowance for doubtful accounts and sales returns  (86,598)  (72,783)
Inventories  665,432   683,146 
Other receivables  231,947   206,058 
Deferred income taxes  47,788   40,940 
Prepaid expenses and other current assets  466,688   482,982 
     Total current assets  4,197,901   4,196,727 
Film costs  305,232   301,228 
Investments and advances:        
Affiliated companies  171,063   164,874 
Securities investments and other  8,360,290   9,069,209 
   8,531,353   9,234,083 
Property, plant and equipment:        
Land  123,629   121,707 
Buildings  679,125   655,379 
Machinery and equipment  1,764,241   1,795,991 
Construction in progress  35,786   69,286 
   2,602,781   2,642,363 
Less – Accumulated depreciation  1,863,496   1,821,545 
   739,285   820,818 
Other assets:        
Intangibles, net  642,361   615,754 
Goodwill  561,255   606,290 
Deferred insurance acquisition costs  520,571   511,834 
Deferred income taxes  89,637   97,639 
Other  246,736   289,017 
   2,060,560   2,120,534 
Total assets  15,834,331   16,673,390 

 

 

 

(Continued on following page.)

 

4 
 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Balance Sheets (Continued)

  Yen in millions
  2015 2016
LIABILITIES    
Current liabilities:    
Short-term borrowings  62,008   149,272 
Current portion of long-term debt  159,517   187,668 
Notes and accounts payable, trade  622,215   550,964 
Accounts payable, other and accrued expenses  1,374,099   1,367,115 
Accrued income and other taxes  98,414   88,865 
Deposits from customers in the banking business  1,872,965   1,912,673 
Other  556,372   574,193 
     Total current liabilities  4,745,590   4,830,750 
Long-term debt  712,087   556,605 
Accrued pension and severance costs  298,753   462,384 
Deferred income taxes  445,876   450,926 
Future insurance policy benefits and other  4,122,372   4,509,215 
Policyholders’ account in the life insurance business  2,259,514   2,401,320 
Other  316,422   330,302 
Total liabilities  12,900,614   13,541,502 
Redeemable noncontrolling interest  5,248   7,478 
Commitments and contingent liabilities        
EQUITY        
Sony Corporation’s stockholders’ equity:        
Common stock, no par value –        
2015 – Shares authorized: 3,600,000,000; shares issued: 1,169,773,260  707,038     
2016 – Shares authorized: 3,600,000,000; shares issued: 1,262,493,760      858,867 
Additional paid-in capital  1,185,777   1,325,719 
Retained earnings  813,765   936,331 
Accumulated other comprehensive income –        
   Unrealized gains on securities, net  154,153   140,736 
   Unrealized losses on derivative instruments, net  —     (1,198)
   Pension liability adjustment  (201,131)  (371,739)
   Foreign currency translation adjustments  (338,305)  (421,117)
   (385,283)  (653,318)
Treasury stock, at cost        
Common stock        
2015 – 1,031,323 shares  (4,220)    
2016 – 1,047,745 shares      (4,259)
   2,317,077   2,463,340 
Noncontrolling interests  611,392   661,070 
Total equity  2,928,469   3,124,410 
Total liabilities and equity  15,834,331   16,673,390 

The accompanying notes are an integral part of these statements.

 

5 
 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Income

Fiscal year ended March 31

 

  Yen in millions
  2014 2015 2016
Sales and operating revenue:      
Net sales  6,682,274   7,035,537   6,949,357 
Financial services revenue  988,944   1,077,604   1,066,319 
Other operating revenue  96,048   102,739   90,036 
   7,767,266   8,215,880   8,105,712 
Costs and expenses:            
Cost of sales  5,140,053   5,275,144   5,166,894 
Selling, general and administrative  1,728,520   1,811,461   1,691,930 
Financial services expenses  816,158   882,990   907,758 
Other operating expense, net  48,666   181,658   47,171 
   7,733,397   8,151,253   7,813,753 
Equity in net income (loss) of affiliated companies  (7,374)  3,921   2,238 
Operating income  26,495   68,548   294,197 
Other income:            
Interest and dividends  16,652   12,887   12,455 
Gain on sale of securities investments, net  12,049   8,714   52,068 
Other  13,752   3,475   2,326 
   42,453   25,076   66,849 
Other expenses:            
Interest  23,460   23,600   25,286 
Loss on devaluation of securities investments  1,648   852   3,309 
Foreign exchange loss, net  9,224   20,533   20,565 
Other  8,875   8,910   7,382 
   43,207   53,895   56,542 
Income before income taxes  25,741   39,729   304,504 
Income taxes:            
Current  101,243   80,751   94,578 
Deferred   (6,661)   7,982   211 
   94,582   88,733   94,789 
Net income (loss)   (68,841)   (49,004)  209,715 
Less - Net income attributable to noncontrolling interests  59,528   76,976   61,924 
Net income (loss) attributable to Sony Corporation’s stockholders   (128,369)   (125,980)  147,791 

  

 

 

(Continued on following page.)

 

6 
 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Income (Continued)

 

  Yen
  2014 2015 2016
  Per share data:      
  Common stock      
Net income (loss) attributable to Sony Corporation’s stockholders      
– Basic  (124.99)  (113.04)  119.40 
– Diluted  (124.99)  (113.04)  117.49 
Cash dividends  25.00   —     20.00 

The accompanying notes are an integral part of these statements.

 

7 
 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Fiscal year ended March 31

 

  Yen in millions
  2014 2015 2016
Net income (loss)  (68,841)  (49,004)  209,715 
Other comprehensive income, net of tax ―            
Unrealized gains on securities  19,310   38,718   2,220 
Unrealized gains (losses) on derivative instruments  742   —     (1,198)
Pension liability adjustment  11,883   (21,187)  (171,753)
Foreign currency translation adjustments  158,884   65,790   (83,899)
Total comprehensive income (loss)  121,978   34,317   (44,915)
Less – Comprehensive income attributable to noncontrolling interests  62,437   93,995   75,329 
Comprehensive income (loss) attributable to Sony Corporation’s stockholders  59,541   (59,678)  (120,244)

The accompanying notes are an integral part of these statements.

 

 

8 
 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows

Fiscal year ended March 31

 

  Yen in millions
  2014 2015 2016
 Cash flows from operating activities:      
Net income (loss)  (68,841)  (49,004)  209,715 
Adjustments to reconcile net income (loss) to net cash provided by
operating activities –
           
Depreciation and amortization, including amortization of deferred
insurance acquisition costs
 376,695   354,624   397,091 
Amortization of film costs  285,673   272,941   299,587 
Accrual for pension and severance costs, less payments  (38,131)  9,638   (6,383)
Other operating expense, net  48,666   181,658   47,171 
Gain on sale or devaluation of securities investments, net  (10,401)  (7,916)  (48,857)
(Gain) loss on revaluation of marketable securities held in the
financial services business for trading purposes, net
 (58,608)  (100,729)  44,821 
(Gain) loss on revaluation or impairment of securities investments held
 in the financial services business, net
 (3,688)  (1,397)  2,653 
Deferred income taxes  (6,661)  7,982   211 
Equity in net income of affiliated companies, net of dividends  10,022   2,269   5,045 
Changes in assets and liabilities:            
(Increase) decrease in notes and accounts receivable, trade  (29,027)  33,843   (5,828)
(Increase) decrease in inventories  20,248   113,485   (57,804)
Increase in film costs  (266,870)  (252,403)  (318,391)
Increase (decrease) in notes and accounts payable, trade  103,379   (118,577)  (49,525)
Decrease in accrued income and other taxes  (3,110)  (11,033)  (23,607)
Increase in future insurance policy benefits and other  391,541   460,336   403,392 
Increase in deferred insurance acquisition costs  (77,656)  (79,861)  (83,774)
Increase in marketable securities held in the financial services
business for trading purposes
 (33,803)  (51,565)  (107,433)
(Increase) decrease in other current assets  (48,115)  16,276   21,299 
Increase (decrease) in other current liabilities  58,656   86,718   (25,751)
Other  14,147   (112,645)  45,457 
Net cash provided by operating activities  664,116   754,640   749,089 

  

 

 

(Continued on following page.)

 

 

9 
 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

 

  Yen in millions
  2014 2015 2016
Cash flows from investing activities:      
Payments for purchases of fixed assets  (283,457)  (215,916)  (375,411)
Proceeds from sales of fixed assets  99,694   36,777   26,472 
Payments for investments and advances by financial services business  (1,032,594)  (960,045)  (1,221,093)
Payments for investments and advances (other than financial services business)  (14,892)  (20,029)  (20,830)
Proceeds from sales or return of investments and collections of advances
by financial services business
 426,621   482,537   534,072 
Proceeds from sales or return of investments and collections of advances (other than financial services business)  75,417   49,479   81,535 
Proceeds from sales of businesses  15,016   93   17,790 
Other  3,693   (12,532)  (72,938)
          Net cash used in investing activities  (710,502)  (639,636)  (1,030,403)
Cash flows from financing activities:            
Proceeds from issuance of long-term debt  178,935   18,507   19,076 
Payments of long-term debt  (164,540)  (258,102)  (270,669)
Increase (decrease) in short-term borrowings, net  25,183   (51,013)  98,153 
Increase in deposits from customers in the financial services business, net  238,828   57,464   165,169 
Proceeds from issuance of convertible bonds  —     —     120,000 
Proceeds from issuance of new shares of common stock  —     —     301,708 
Dividends paid  (25,643)  (13,160)  (12,751)
Other  (44,886)  (16,891)  (40,564)
          Net cash provided by (used in) financing activities  207,877   (263,195)  380,122 
Effect of exchange rate changes on cash and cash equivalents  58,614   51,138   (64,609)
Net increase (decrease) in cash and cash equivalents  220,105   (97,053)  34,199 
Cash and cash equivalents at beginning of the fiscal year  826,361   1,046,466   949,413 
Cash and cash equivalents at end of the fiscal year  1,046,466   949,413   983,612 
Supplemental data:            
Cash paid during the fiscal year for –            
Income taxes  101,091   97,775   138,770 
Interest  23,819   21,982   26,166 
Non-cash investing and financing activities –            
Conversion of convertible bonds  31,220   118,780   —   
Obtaining assets by entering into capital leases  82,260   10,714   14,759 
Collections of deferred proceeds from sales of receivables –  35,196   22,512   2,298 

The accompanying notes are an integral part of these statements.

 

10 
 

 

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, 2013  630,923   1,110,531   1,094,775   (639,495)  (4,472)  2,192,262   479,742   2,672,004 
Exercise of stock acquisition rights  121   121               242       242 
Conversion of zero coupon convertible bonds  15,610   15,610               31,220       31,220 
Stock-based compensation      906               906       906 
Comprehensive income:                                
Net income (loss)          (128,369)          (128,369)  59,528   (68,841)
Other comprehensive income, net of tax –                                
    Unrealized gains on securities              18,430       18,430   880   19,310 
    Unrealized gains on derivative instruments              742       742       742 
    Pension liability adjustment              11,777       11,777   106   11,883 
    Foreign currency translation adjustments              156,961       156,961   1,923   158,884 
Total comprehensive income                      59,541   62,437   121,978 
Stock issue costs, net of tax          (127)          (127)      (127)
Dividends declared          (26,017)          (26,017)  (15,430)  (41,447)
Purchase of treasury stock                  (76)  (76)      (76)
Reissuance of treasury stock      (140)          264   124       124 
Transactions with noncontrolling interests shareholders and other      62               62   (1,745)  (1,683)
Balance at March 31, 2014  646,654   1,127,090   940,262   (451,585)  (4,284)  2,258,137   525,004   2,783,141 

 

 

 

(Continued on following page.)

  

11 
 

 

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, 2014  646,654   1,127,090   940,262   (451,585)  (4,284)  2,258,137   525,004   2,783,141 
Exercise of stock acquisition rights  994   994               1,988       1,988 
Conversion of zero coupon convertible bonds  59,390   59,390               118,780       118,780 
Stock-based compensation      873               873       873 
Comprehensive income:                                
                                 
Net income (loss)          (125,980)          (125,980)  76,976   (49,004)
Other comprehensive income, net of tax –                                
    Unrealized gains on securities              26,644       26,644   12,074   38,718 
    Pension liability adjustment              (21,092)      (21,092)  (95)  (21,187)
    Foreign currency translation adjustments              60,750       60,750   5,040   65,790 
Total comprehensive income (loss)                      (59,678)  93,995   34,317 
                                 
Stock issue costs, net of tax          (517)          (517)      (517)
Dividends declared          —             —     (14,108)  (14,108)
Purchase of treasury stock                  (101)  (101)      (101)
Reissuance of treasury stock      (99)          165   66       66 
Transactions with noncontrolling interests shareholders and other      (2,471)              (2,471)  6,501   4,030 
Balance at March 31, 2015  707,038   1,185,777   813,765   (385,283)  (4,220)  2,317,077   611,392   2,928,469 

 

  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 

The accompanying notes are an integral part of these statements.

 

 

12 
 

 

Index to Notes to Consolidated Financial Statements

Sony Corporation and Consolidated Subsidiaries

 

Notes to Consolidated Financial Statements Page
  1.   Nature of operations 14
  2.   Summary of significant accounting policies 14
  3.   Inventories 25
  4.   Film costs 25
  5.   Investments in affiliated companies 26
  6.   Transfer of financial assets 28
  7.   Marketable securities and securities investments 29
  8.   Leases 32
  9.   Goodwill and intangible assets 33
  10.   Insurance-related accounts 36
  11.   Short-term borrowings and long-term debt 37
  12.   Housing loans and deposits from customers in the banking business 39
  13.   Fair value measurements 40
  14.   Derivative instruments and hedging activities 47
  15.   Pension and severance plans 52
  16.   Stockholders’ equity 60
  17.   Stock-based compensation plans 63
  18.   Thai Floods 64
  19.   Restructuring charges 65
  20.   Supplemental consolidated statements of income information 68
  21.   Income taxes 69
  22.   Reconciliation of the differences between basic and diluted EPS 74
  23.   Variable interest entities 74
  24.   Acquisitions 76
  25.   Divestitures 77
  26.   Collaborative arrangements 78
  27.   Commitments, contingent liabilities and other 78
  28.   Business segment information 81
  29.   Subsequent events 87

 

 

13 
 

 

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, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer, professional and industrial markets as well as game consoles and software. Sony’s primary manufacturing facilities are located in Asia including Japan. Sony also utilizes third-party contract manufacturers for certain products. Sony’s products are marketed throughout the world by sales subsidiaries and unaffiliated distributors as well as direct sales via the Internet. Sony is engaged in the production, acquisition and distribution of motion pictures and television programming and the operation of television and digital networks. Sony is also engaged in the development, production, manufacture, and distribution of recorded music and the management and licensing of the words and music of songs. 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. In addition to the above, Sony is engaged in a network services business and an advertising agency business in Japan.

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.

 

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.

 

14 
 

 

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, intangible assets and 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 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.

 

15 
 

 

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 carrying 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 Mobile Communications (“MC”), Game & Network Services (“G&NS”), Imaging Products & Solutions (“IP&S”), Home Entertainment & Sound (“HE&S”), Devices and Music segments as well as non-film inventories for the Pictures segment are valued at cost, not in excess of market, 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. The market value of inventory is determined as the net realizable value – i.e., estimated selling price in the ordinary course of business less predictable costs of completion and disposal. Sony does not consider a normal profit margin when calculating the net realizable value.

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 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, and amortized based on estimated usage or on a straight-line basis over the useful life, as appropriate. Estimates used in calculating the fair value of the film costs and the net realizable value of the 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.

16 
 

 

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, 2016, Sony elected not to perform an optional qualitative assessment of goodwill and instead proceeded directly to a two-step quantitative impairment process which involves a comparison of the estimated fair value of a reporting unit to its carrying amount to identify potential impairment. 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 considered not impaired and the second step of the impairment test is not performed. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire 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 with a control premium applied to the final year of the projected cash flows. 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, 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.

 

17 
 

 

 

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 MC, G&NS, IP&S and HE&S 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.

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.

 

 

18 
 

 

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.

 

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 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.

 

19 
 

 

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 MC, G&NS, IP&S, HE&S, Devices and Music 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 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 on-line 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 on-line features is not deferred.

 

 

20 
 

 

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 product 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 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 product 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.

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, 2014, 2015 and 2016, consideration given to a reseller, primarily for free promotional shipping and cooperative advertising programs included in selling, general and administrative expenses, totaled 12,112 million yen, 10,503 million yen and 13,178 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 expense 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.

 

 

21 
 

 

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.

 

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.

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.

 

22 
 

 

(2)

Recently adopted accounting pronouncements

Reporting discontinued operations and disclosures of disposals of components of an entity -

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 that changes the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the ASU, only disposals representing a strategic shift in operations that has, or will have, a major effect on the entity’s operations and financial results should be presented as discontinued operations. Additionally, the ASU requires additional disclosures for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. This ASU is effective for Sony as of April 1, 2015. The effect of this ASU did not have a material impact on Sony’s results of operations and financial position.

(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 which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for one year and permits early adoption as of the original effective date of ASU 2014-09. This guidance will be effective for the first quarter of Sony’s fiscal year beginning April 1, 2018 (with early adoption permitted for the first quarter of the fiscal year beginning April 1, 2017). The guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Sony is currently evaluating the transition method, the timing of its adoption and the impact this ASU will have on Sony’s results of operations and financial position.

Amendments to the consolidation analysis -

In February 2015, the FASB issued ASU 2015-02 that changes how companies evaluate entities for consolidation. The changes primarily relate to (i) the identification of variable interests related to fees paid to decision makers or service providers, (ii) how entities determine whether limited partnerships or similar entities are variable interest entities, (iii) how related parties and de facto agents are considered in the primary beneficiary determination, and (iv) the elimination of the presumption that a general partner controls a limited partnership. This ASU is effective for Sony as of April 1, 2016. The adoption of this ASU is not expected to have a material impact on Sony’s results of operations and financial position.

Customer’s accounting for fees paid in a cloud computing arrangement -

In April 2015, the FASB issued ASU 2015-05 for fees paid in a cloud computing arrangement. The ASU requires entities to account for a cloud computing arrangement that includes a software license element in a manner consistent with the acquisition of other software licenses. A cloud computing arrangement without a software license element is to be accounted for as a service contract. This ASU does not affect the accounting for service contracts by a customer. This ASU is effective for Sony as of April 1, 2016. The adoption of this ASU is not expected to have a material impact on Sony’s results of operations and financial position.

Disclosures for short-duration insurance contracts -

In May 2015, the FASB issued ASU 2015-09 for disclosures relating to short-duration insurance contracts.  This ASU requires additional information to be disclosed related to the liability for unpaid claims and claim adjustment expenses and significant changes in methodologies and assumptions used for annual reporting periods.  This ASU is effective for Sony as of April 1, 2016.  Since this ASU will only impact disclosures, the adoption will have no impact on Sony’s results of operations and financial position.

Balance sheet classification of deferred taxes -

In November 2015, the FASB issued ASU 2015-17 amending the presentation of deferred income taxes and requiring that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. This ASU will be effective for Sony as of April 1, 2017 and early adoption is permitted as of the beginning of an interim or annual reporting period. The ASU may be adopted either prospectively or retrospectively. Sony is currently assessing the method of adoption and the impact that this ASU may have on Sony’s financial position and disclosures.

 

23 
 

 

Recognition and measurement of financial assets and financial liabilities -

In January 2016, the FASB issued ASU 2016-01 amending the existing requirements for the recognition and measurement of financial assets and financial liabilities. The changes primarily relate to (i) 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, (ii) an alternative approach for the measurement of equity investments that do not have a readily determinable fair value, (iii) the elimination of the other-than-temporary impairment model for equity investments and its replacement with a requirement to perform a qualitative assessment to identify impairment, and a requirement to recognize impairment losses in earnings based on the difference between fair value and the carrying value of the equity investment, (iv) the elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, (v) the addition of a requirement to use the exit price concept when measuring the fair value of financial instruments for disclosure purposes, and (vi) the addition of a requirement to present financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or market) and form of financial asset (e.g., loans, securities). This ASU will be effective for Sony as of April 1, 2018. The effect of this ASU is being evaluated for the impact it will have on Sony’s results of operations and financial position.

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. The guidance is to be applied using a modified retrospective approach from the earliest period presented and includes optional practical expedients. This ASU will be effective for Sony as of the fiscal year beginning April 1, 2019, and early adoption is permitted. The effect of this ASU is being evaluated for the impact it will have on Sony’s results of operations and financial position.

(4)

Reclassifications

Certain reclassifications of the financial statements and accompanying footnotes for the fiscal years ended March 31, 2014 and 2015 have been made to conform to the presentation for the fiscal year ended March 31, 2016.

(5)

Out-of-period adjustments

For the fiscal year ended March 31, 2015, Sony recorded an out-of-period adjustment to correct an error in the amounts of revenue and certain capitalizable assets being recorded at a subsidiary. The error began in the fiscal year ended March 31, 2012 and continued until it was identified by Sony during the fiscal year ended March 31, 2015. The adjustment, which related entirely to All Other, impacted net sales, cost of sales, and selling, general and administrative expenses, and decreased income before income taxes in the consolidated statements of income by 5,104 million yen in the aggregate for the fiscal year ended March 31, 2015. Sony determined that the adjustment was not material to the consolidated financial statements for the year ended March 31, 2015 or any prior periods.

 

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.

 

 

24 
 

 

3.

Inventories

Inventories are comprised of the following:

 

   Yen in millions
   March 31
   2015  2016
Finished products   468,408    448,273 
Work in process   96,700    130,383 
Raw materials, purchased components and supplies   100,324    104,490 
Inventories   665,432    683,146 

4.

Film costs

Film costs are comprised of the following:

 

   Yen in millions
   March 31
   2015  2016
Motion picture productions:      
Released   89,993    75,218 
Completed and not released   4,498    2,304 
In production and development   106,240    95,268 
Television productions:          
Released   78,510    88,538 
In production and development   2,952    14,410 
Broadcasting rights   69,223    62,589 
Less: current portion of broadcasting rights included in inventories   (46,184)   (37,099)
Film costs   305,232    301,228 

 

Sony estimates that approximately 92% of the unamortized film costs of released motion picture and television productions at March 31, 2016 will be amortized within the next three years. Approximately 117 billion yen of completed film costs are expected to be amortized during the next twelve months. Approximately 145 billion yen of accrued participation liabilities included in accounts payable, other and accrued expenses are expected to be paid during the next twelve months.

 

 

25 
 

 

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

   2015  2016
Current assets   280,485    367,465 
Noncurrent assets   770,847    773,126 
Current liabilities   208,271    245,731 
Noncurrent liabilities and noncontrolling interests   657,865    709,134 
           
Percentage of ownership in equity investees   20%-50%   20%-50%

 

Statements of Income

   Yen in millions
   Fiscal year ended March 31
   2014  2015  2016
Net revenues   306,383    308,399    358,256 
Operating income (loss)   (1,064)   34,962    32,884 
Net income (loss) attributable to controlling interests   (15,195)   (5,461)   8,388 
                
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 February 25, 2013, Sony sold 95,000 shares of its 886,908 shares in its consolidated subsidiary M3, Inc. (“M3”) to a third party for cash consideration of 14,236 million yen. In connection with the sale, Sony deconsolidated M3 as its share ownership fell to 49.8% of the issued and outstanding shares of M3. On September 17, 2013, Sony sold an additional 155,000 shares of M3 (9.75% of the issued and outstanding shares of M3) to a third party for cash consideration of 37,799 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 recorded a gain of 12,793 million yen in other operating expense, net in the consolidated statements of income for the fiscal year ended March 31, 2014. Although Sony’s ownership has decreased to 39.36% due to the above-mentioned sales and M3’s subsequent issuance of additional common stock, Sony remains a major shareholder of M3 and will continue to pursue opportunities to collaborate with M3 in certain business areas, including medical. Sony accounts for its remaining interest in M3 under the equity method.

 

The carrying value of Sony’s investment in M3 exceeded its proportionate share in the underlying net assets of M3 by 85,519 million yen at March 31, 2016. 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, 2015 and 2016.

 

 

26 
 

 

Several affiliated companies are quoted on the Tokyo Stock Exchange and Sony’s investments in these companies have an aggregate carrying value and fair value of 108,421 million yen and 365,160 million yen, respectively, as of March 31, 2016.

 

The number of affiliated companies accounted for under the equity method as of March 31, 2015 and 2016 were 98 and 102, 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
   2015  2016
Accounts receivable, trade   8,350    9,740 
Accounts payable, trade   1,887    2,044 
Capital lease obligations   50,001    21,025 

 

   Yen in millions
   Fiscal year ended March 31
   2014  2015  2016
Sales   23,647    29,393    33,569 
Purchases   1,533    1,498    2,259 
Lease payments   38,919    36,642    32,291 

 

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, 2014, 2015 and 2016. SFIL is accounted for under the equity method and is 34% owned by Sony. Refer to Note 8.

 

Sony 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. After the sale, Sony Supply Chain Solutions, Inc. changed the company name to MITSUI-SOKO Supply Chain Solutions, Inc. As of and for the fiscal year ended March 31, 2016, account balances and transactions with MITSUI-SOKO Supply Chain Solutions, Inc. and its subsidiaries were 4,741 million yen and 22,576 million yen, which are mainly included in accrued expenses and general and administrative expenses, respectively.

 

Dividends from affiliated companies accounted for under the equity method for the fiscal years ended March 31, 2014, 2015 and 2016 were 2,840 million yen, 6,149 million yen and 7,282 million yen, respectively.

 

 

27 
 

 

6.

Transfer of financial assets

Sony has established several accounts receivable sales programs mainly within the Electronics business. 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, 2014, 2015 and 2016 were 763,947 million yen, 633,190 million yen and 53,267 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. Gains and losses from these transactions, other than as described below, were insignificant, and although Sony continues servicing the receivables subsequent to being sold or contributed, no servicing liabilities are recorded as the costs of collection of the sold receivables are insignificant. Other than the cash proceeds from the sales below, net cash flows related to these transactions, including servicing fees, for the fiscal years ended March 31, 2014, 2015 and 2016 were insignificant.

 

Certain programs require that a portion of the sales proceeds be held back and deferred until collection of the related receivables by the purchaser. The portion of the sales proceeds held back and deferred are initially recorded at estimated fair value using a discounted cash flow model and are included in other current assets and other long-term assets. The significant assumptions used in valuing the deferred proceeds are the discount rate, the timing and amount of the cash flows. Sony includes collections on deferred proceeds as cash flows within operating activities in the consolidated statements of cash flows when the receivables are the result of operating activities and the associated interest rate risk is insignificant due to their short-term nature. When the interest rate risk associated with the deferred proceeds is greater than insignificant or the receivables are long-term in nature, as is the case for the program in the Pictures segment, Sony includes collections on deferred proceeds as cash flows within investing activities in the consolidated statements of cash flows.

 

In August 2014, Sony terminated an accounts receivable sales program within the Electronics business in the United States. The program required that a portion of the sales proceeds be held back and deferred until collection of the related receivables by the purchaser. As of March 31, 2014, deferred proceeds totaled 6,405 million yen. Total trade receivables sold, deferred proceeds from those sales and collections of deferred proceeds during the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

   Yen in millions
   Fiscal year ended March 31
   2014  2015  2016
Total trade receivables sold   247,863    50,400    —   
Deferred proceeds   36,678    16,150    —   
Collections of deferred proceeds   35,196    22,512    —   

 

During the fiscal year ended March 31, 2014, Sony established an accounts receivable sales program within the Pictures segment in the United States. Sony recognized a gain within other income from sales of accounts receivable under this program for the fiscal year ended March 31, 2014 of 1,394 million yen. The program requires that a portion of the sales proceeds be held back and deferred until collection of the related receivables by the purchaser, and the deferred proceeds totaled 22,188 million yen, 30,893 million yen and 30,291 million yen as of March 31, 2014, 2015 and 2016, respectively. Total trade receivables sold, deferred proceeds from those sales and collections of deferred proceeds during the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

   Yen in millions
   Fiscal year ended March 31
   2014  2015  2016
Total trade receivables sold   53,720    4,237    2,918 
Deferred proceeds   22,188    4,237    2,918 
Collections of deferred proceeds   —      —      2,298 

 

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

 

28 
 

 

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, 2015  March 31, 2016
   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   1,074,900    147,274    (80)   1,222,094    1,136,478    218,863    (6)   1,355,335 
Japanese local government bonds   66,442    465    (16)   66,891    60,707    86    (254)   60,539 
Japanese corporate bonds   108,109    767    (7)   108,869    132,739    11,472    (230)   143,981 
Foreign government bonds   34,168    7,397    (111)   41,454    35,896    5,724    (160)   41,460 
Foreign corporate bonds   452,145    13,645    (942)   464,848    415,994    5,738    (3,185)   418,547 
Other   —      —      —      —      884    0    —      884 
    1,735,764    169,548    (1,156)   1,904,156    1,782,698    241,883    (3,835)   2,020,746 
Equity securities   73,411    127,322    (741)   199,992    44,752    70,590    (21)   115,321 
Held-to-maturity securities:                                        
Japanese national government bonds   4,846,986    819,386    (103)   5,666,269    5,353,080    2,020,621    —      7,373,701 
Japanese local government bonds   4,996    428    —      5,424    4,480    522    —      5,002 
Japanese corporate bonds   26,848    4,501    —      31,349    61,811    17,382    —      79,193 
Foreign government bonds   32,682    11,534    —      44,216    42,934    10,631    —      53,565 
Foreign corporate bonds   57,783    25    —      57,808    198    24    —      222 
    4,969,295    835,874    (103)   5,805,066    5,462,503    2,049,180    —      7,511,683 
Total   6,778,470    1,132,744    (2,000)   7,909,214    7,289,953    2,361,653    (3,856)   9,647,750 

 

 

 

29 
 

 

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, 2016
   Available-for-sale securities  Held-to-maturity securities
   Cost  Fair value  Cost  Fair value
Due in one year or less   172,912    164,603    2,841    2,879 
Due after one year through five years   375,988    385,222    22,738    23,583 
Due after five years through ten years   304,275    341,233    237,263    279,200 
Due after ten years   929,523    1,129,688    5,199,661    7,206,021 
      Total   1,782,698    2,020,746    5,462,503    7,511,683 

Proceeds from sales of available-for-sale securities were 207,574 million yen, 217,651 million yen and 315,043 million yen for the fiscal years ended March 31, 2014, 2015 and 2016, respectively. On these sales, gross realized gains were 9,015 million yen, 15,656 million yen and 67,205 million yen and gross realized losses were 703 million yen, 32 million yen and 186 million yen, respectively, for the fiscal years ended March 31, 2014, 2015 and 2016. 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 764,473 million yen and 799,241 million yen as of March 31, 2015 and 2016, respectively. Sony recorded net unrealized gains of 59,137 million yen, 100,312 million yen for the fiscal years ended March 31, 2014 and 2015 and net unrealized losses of 45,841 million yen for the fiscal year ended March 31, 2016. 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, 2015 and 2016 totaled 64,963 million yen and 71,750 million yen, respectively. Non-public equity investments are primarily valued at cost as fair value is not readily determinable.

 

 

 

 

30 
 

 

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, 2015 and 2016.

 

   Yen in millions
   March 31, 2015
   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   24,699    (80)   372    —      25,071    (80)
Japanese local government bonds   3,772    (5)   1,702    (11)   5,474    (16)
Japanese corporate bonds   8,222    (7)   —      —      8,222    (7)
Foreign government bonds   4,607    (111)   —      —      4,607    (111)
Foreign corporate bonds   115,523    (887)   6,653    (55)   122,176    (942)
    156,823    (1,090)   8,727    (66)   165,550    (1,156)
Equity securities   4,636    (730)   9    (11)   4,645    (741)
Held-to-maturity securities:                              
Japanese national government bonds   19,986    (103)   —      —      19,986    (103)
Total   181,445    (1,923)   8,736    (77)   190,181    (2,000)

 

   Yen in millions
   March 31, 2016
   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   2,056    (6)   —      —      2,056    (6)
Japanese local government bonds   38,383    (223)   2,929    (31)   41,312    (254)
Japanese corporate bonds   41,206    (201)   3,125    (29)   44,331    (230)
Foreign government bonds   5,882    (147)   1,140    (13)   7,022    (160)
Foreign corporate bonds   127,369    (2,535)   30,919    (650)   158,288    (3,185)
    214,896    (3,112)   38,113    (723)   253,009    (3,835)
Equity securities   166    (10)   10    (11)   176    (21)
Total   215,062    (3,122)   38,123    (734)   253,185    (3,856)

 

For the fiscal years ended March 31, 2014, 2015 and 2016, total realized impairment losses were 1,806 million yen, 949 million yen and 3,566 million yen, respectively.

 

At March 31, 2016, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature.

 

 

31 
 

 

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  2015  2016
Machinery, equipment and others   129,432    123,816 
Film costs   8,647    6,696 
Accumulated amortization   (89,470)   (96,270)
    48,609    34,242 

 

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, 2016:

 

Fiscal year ending March 31  Yen in millions
2017   13,768 
2018   6,863 
2019   5,933 
2020   5,043 
2021   4,017 
Later fiscal years   4,578 
Total minimum lease payments   40,202 
Less - Amount representing interest   2,529 
Present value of net minimum lease payments   37,673 
Less - Current obligations   13,238 
Long-term capital lease obligations   24,435 
(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, 2016 are as follows:

 

Fiscal year ending March 31  Yen in millions
2017   59,236 
2018   46,690 
2019   32,252 
2020   44,455 
2021   20,119 
Later fiscal years   104,020 
Total minimum future rentals   306,772 

 

Rental expenses under operating leases for the fiscal years ended March 31, 2014, 2015 and 2016 were 101,410 million yen, 92,828 million yen and 94,000 million yen, respectively. Sublease rentals received under operating leases for the fiscal years ended March 31, 2014, 2015 and 2016 were 1,119 million yen, 1,180 million yen and 1,138 million yen, respectively. The total minimum rentals to be received in the future under noncancelable subleases for operating leases as of March 31, 2016 were 2,233 million yen.

 

32 
 

 

(3)Sale and leaseback transactions

Sale and leaseback transactions with SFIL -

In the fiscal year ended March 31, 2014, Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFIL. Transactions with total proceeds of 6,810 million yen 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. Additionally, a transaction with leasing companies including SFIL, with proceeds of 76,566 million yen, and terms which averaged three years, have been accounted for as a capital lease and are included within proceeds from sales of fixed assets in the investing activities section of the consolidated statements of cash flows. There was no gain or loss recorded in the sale and leaseback transactions.

 

In the fiscal year ended March 31, 2015, Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFIL. Transactions with total proceeds of 8,391 million yen 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.

 

In the fiscal year ended March 31, 2016, Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFIL. Transactions with total proceeds of 1,856 million yen 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.

9.

Goodwill and intangible assets

Intangible assets acquired during the fiscal year ended March 31, 2016 totaled 123,327 million yen, of which 123,300 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   29,175    7 
Software to be sold, leased or otherwise marketed   18,182    3 
Internal-use software   52,067    5 
Other   23,876    9 

 

In the fiscal year ended March 31, 2016, additions to internal-use software primarily related to the capitalization of new software across several business platforms.

 

 

 

33 
 

 

Intangible assets subject to amortization are comprised of the following:

 

  Yen in millions
  March 31, 2015  March 31, 2016
  Gross carrying
amount
  Accumulated
amortization
  Gross carrying
amount
  Accumulated
amortization
Patent rights, know-how and license agreements   304,686    (190,151)   337,675    (223,738)
Customer relationships   29,401    (6,677)   36,925    (12,531)
Trademarks   31,903    (13,054)   29,825    (12,979)
Software to be sold, leased or otherwise marketed   114,333    (84,640)   126,743    (94,009)
Internal-use software   451,738    (295,854)   448,109    (297,057)
Music catalogs   225,623    (88,816)   217,056    (91,303)
Artist contracts   32,387    (27,174)   31,923    (28,857)
Television carriage contracts (broadcasting agreements)   60,036    (11,272)   59,607    (15,563)
Other   68,897    (52,067)   59,218    (47,475)
 Total   1,319,004    (769,705)   1,347,081    (823,512)

 

The aggregate amortization expense for intangible assets for the fiscal years ended March 31, 2014, 2015 and 2016 was 135,664 million yen, 132,228 million yen and 125,616 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
2017   103,098 
2018   85,327 
2019   55,786 
2020   42,212 
2021   31,455 

 

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

 

   Yen in millions
   March 31
   2015  2016
Trademarks   70,938    70,081 
Distribution agreements   18,834    18,834 
Other   3,290    3,270 
 Total   93,062    92,185 

 

 

 

34 
 

 

The changes in the carrying amount of goodwill by segment for the fiscal years ended March 31, 2015 and 2016 are as follows:

 

   Yen in millions
   Mobile
Communications
  Game &
Network
Services
  Imaging
Products &
Solutions
  Home
Entertainment
& Sound
  Devices  Pictures  Music  Financial
Services
  All Other  Total
Balance, March 31, 2014:                              
Goodwill - gross   183,464    150,572    7,202    5,320    37,400    187,307    123,086    3,020    24,360    721,731 
Accumulated impairments   —      —      (300)   (5,320)   —      —      (306)   (706)   (23,296)   (29,928)
Goodwill   183,464    150,572    6,902    —      37,400    187,307    122,780    2,314    1,064    691,803 
Increase (decrease) due to:                                                  
Acquisitions*1   —      —      —      —      —      12,626    —      —      —      12,626 
Sales and dispositions   —      (617)   —      —      —      (54)   (4)   —      —      (675)
Impairments   (176,045)   —      —      —      —      —      —      —      (1,090)   (177,135)
Translation adjustments   (4,134)   4,444    (16)   —      362    24,357    9,593    —      39    34,645 
Other   1    —      —      —      —      3    —      —      (13)   (9)
Balance, March 31, 2015:                                                  
Goodwill - gross   179,331    154,399    7,186    5,320    37,762    224,239    132,675    3,020    24,386    768,318 
Accumulated impairments   (176,045)   —      (300)   (5,320)   —      —      (306)   (706)   (24,386)   (207,063)
Goodwill   3,286    154,399    6,886    —      37,762    224,239    132,369    2,314    —      561,255 
Increase (decrease) due to:                                                  
Acquisitions*2   —      —      1,589    —      20,634    12,082    38,487    —      —      72,792 
Sales and dispositions   —      —      —      —      —      —      —      —      —      —   
Impairments   —      —      —      —      —      —      —      —      —      —   
Translation adjustments   —      (2,106)   (138)   —      (1,625)   (14,804)   (9,084)   —      —      (27,757)
Other   —      —      —      —      —      —      —      —      —      —   
Balance, March 31, 2016:                                                  
Goodwill - gross   179,331    152,293    8,637    5,320    56,771    221,517    162,078    3,020    24,386    813,353 
Accumulated impairments   (176,045)   —      (300)   (5,320)   —      —      (306)   (706)   (24,386)   (207,063)
Goodwill   3,286    152,293    8,337    —      56,771    221,517    161,772    2,314    —      606,290 

 

Sony realigned its business segments during the fiscal year ended March 31, 2016. In connection with these realignments, the operations of So-net Corporation and its subsidiaries (“So-net”), which were included in All Other, are now included in the MC segment and the medical business, which was included in All Other, is now included in the IP&S segment. As part of these realignments, the carrying amounts of associated goodwill for So-net and the medical business have been reclassified for the fiscal years ended March 31, 2014 and March 31, 2015. Refer to Note 28.

*1 Acquisitions in the Pictures segment for the fiscal year ended March 31, 2015 mainly relate to the CSC Media Group Ltd. (“CSC Media Group”) acquisition. Refer to Note 24.

*2 Acquisitions for the fiscal year ended March 31, 2016 relate mainly to the Altair Semiconductor Ltd. (“Altair”) acquisition in the Devices segment, and the Orchard Media, Inc. (“The Orchard”) acquisition in the Music segment. Refer to Note 24.

 

Impairment of goodwill related to mobile communications business -

 

During the fiscal year ended March 31, 2015, Sony recorded an impairment charge of 176,045 million yen in the MC segment. The goodwill impairment reflects a revision in the strategy for the MC business to concentrate on its premium lineup and reduce the number of models in the mid-range lineup as well as concentrating on certain selected markets due to continued increasingly competitive markets in various geographical areas, primarily resulting from rapid growth by Chinese smartphone competitors. The impairment charge is included in other operating expenses, net in the consolidated statements of income, and is recorded entirely within the MC segment. Refer to Note 13.

 

 

35 
 

 

In conjunction with Sony’s review for goodwill impairment, Sony also assessed whether the carrying amount of any of the tangible or definite-lived intangible assets of the MC segment was recoverable. As a result of the assessment, Sony determined that there were no tangible or definite-lived intangible assets within the MC segment that were impaired.

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 to a 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, 2015 and 2016 were 457,268 million yen and 510,501 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, 2014, 2015 and 2016 were 670,506 million yen, 693,132 million yen and 803,549 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, 2014, 2015 and 2016 were 86,780 million yen, 90,431 million yen and 93,928 million yen, respectively.

(2)

Deferred insurance acquisition costs

Amortization of deferred insurance acquisition costs charged to income for the fiscal years ended March 31, 2014, 2015 and 2016 amounted to 45,236 million yen, 56,530 million yen and 92,203 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, 2015 and 2016, future insurance policy benefits amounted to 4,111,894 million yen and 4,497,951 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 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 1.9% 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 juvenile contracts and policies after the start of annuity payments. The credited rates associated with investment contracts range from 0.1% to 6.3%.

 

 

36 
 

 

 

Policyholders’ account in the life insurance business is comprised of the following:  Yen in millions
   March 31
   2015  2016
Universal life insurance   1,555,700    1,634,642 
Investment contracts   591,951    638,737 
Other   111,863    127,941 
 Total   2,259,514    2,401,320 

11.

Short-term borrowings and long-term debt

Short-term borrowings are comprised of the following:

 

  Yen in millions
  March 31
  2015       2016
Unsecured loans:      
with a weighted-average interest rate of 4.64% 56,008    
with a weighted-average interest rate of 7.70%     86,467 
Repurchase agreement:      
with a weighted-average interest rate of 0.01%     62,805 
Secured call money:      
with a weighted-average interest rate of 0.10%  6,000    
   62,008   149,272 

At March 31, 2016, certain subsidiaries in the Financial Services segment pledged securities investments with a book value of 48,691 million yen as collateral for 62,805 million yen of short-term repurchase agreements. The repurchase agreement provides for net settlement upon a termination event.

In addition, certain subsidiaries in the Financial Services segment pledged marketable securities and securities investments with an aggregate book value of 34,749 million yen as collateral for cash settlements, variation margins of futures markets and certain other purposes.

 

 

37 
 

 

Long-term debt is comprised of the following:

 

   Yen in millions
   March 31
   2015  2016
Unsecured loans, representing obligations principally to banks:      
Due 2015 to 2024, with interest rates ranging from 0.29% to 5.10% per annum   425,437      
Due 2016 to 2024, with interest rates ranging from 0.27% to 5.47% per annum        237,850 
Unsecured 1.57% bonds, due 2015, net of unamortized discount   30,000      
Unsecured 1.75% bonds, due 2015, net of unamortized discount   24,999      
Unsecured 0.55% bonds, due 2016   10,000    10,000 
Unsecured 0.66% bonds, due 2017   45,000    45,000 
Unsecured 0.43% bonds, due 2018   10,000    10,000 
Unsecured 0.86% bonds, due 2018   150,000    150,000 
Unsecured 2.00% bonds, due 2018   16,300    16,300 
Unsecured 2.07% bonds, due 2019   50,000    50,000 
Unsecured 1.41% bonds, due 2022   10,000    10,000 
Unsecured zero coupon convertible bonds, due 2022        120,000 
Secured 0.10% loans, due 2016 to 2019   20,000    40,000 
Capital lease obligations and other:          
Due 2015 to 2025, with interest rates ranging from 0.36% to 8.07% per annum   66,880      
Due 2016 to 2024, with interest rates ranging from 0.36% to 9.99% per annum        43,248 
Guarantee deposits received   12,988    11,875 
    871,604    744,273 
Less - Portion due within one year   159,517    187,668 
    712,087    556,605 

 

At March 31, 2016, certain subsidiaries in the Financial Services segment pledged marketable securities and securities investments with a book value of 44,241 million yen as collateral for 40,000 million yen of long-term loans.

 

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. As a result, the outstanding balance as of March 31, 2016 was 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. 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.

 

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

 

 

38 
 

 

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

 

Fiscal year ending March 31  Yen in millions
2017   187,668 
2018   82,616 
2019   202,151 
2020   75,474 
2021   4,429 
Later fiscal years   191,935 
Total   744,273 

 

At March 31, 2016, Sony had unused committed lines of credit amounting to 523,043 million yen and can generally borrow up to 180 days from the banks with whom Sony has committed line contracts. Furthermore, at March 31, 2016, Sony has commercial paper programs totaling 838,040 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, 2015 were 1,074,386 million yen and 1,037 million yen, respectively, and as of March 31, 2016 were 1,235,311 million yen and 910 million yen, respectively. During the fiscal years ended March 31, 2015 and 2016, 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, 2015 and 2016.

(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, 2015 and 2016, the balances of time deposits issued in amounts of 10 million yen or more were 256,391 million yen and 247,766 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.

 

At March 31, 2016, 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
2018   13,882 
2019   9,101 
2020   9,982 
2021   13,750 
2022   8,626 
Later fiscal years   51,827 
Total   107,168 

 

 

39 
 

 

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.

 

 

40 
 

 

The fair value of Sony’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2015 and 2016 are as follows:

 

  Yen in millions
  March 31, 2015
     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  452,830   311,643   —     764,473   764,473   —     —     —   
Available-for-sale securities                                
Debt securities                                
Japanese national government bonds  —     1,222,094   —     1,222,094   3,124   1,218,970   —     —   
Japanese local government bonds  —     66,891   —     66,891   1,474   65,417   —     —   
Japanese corporate bonds  —     105,363   3,506   108,869   27,030   81,839   —     —   
Foreign government bonds  2,861   38,593   —     41,454   136   41,318   —     —   
Foreign corporate bonds  —     455,357   9,491   464,848   139,540   325,308   —     —   
Equity securities  199,874   118   —     199,992   —     199,992   —     —   
Other investments*1  9,306   4,606   74,641   88,553   —     88,553   —     —   
Derivative assets*2  —     30,407   —     30,407   —     —     29,951   456 
Total assets  664,871   2,235,072   87,638   2,987,581   935,777   2,021,397   29,951   456 
Liabilities:                                
Derivative liabilities*2  612   47,712   —     48,324   —     —     23,092   25,232 
Total liabilities  612   47,712   —     48,324   —     —     23,092   25,232 
                                 

 

 

Yen in millions
  March 31, 2016
                  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  501,448   297,793   —     799,241   799,241   —     —     —   
Available-for-sale securities                                
Debt securities                                
Japanese national government bonds  —     1,355,335   —     1,355,335   5,084   1,350,251   —     —   
Japanese local government bonds  —     60,539   —     60,539   6,515   54,024   —     —   
Japanese corporate bonds  —     140,635   3,346   143,981   5,727   138,254   —     —   
Foreign government bonds  —     41,460   —     41,460   2,309   39,151   —     —   
Foreign corporate bonds  —     402,694   15,853   418,547   124,680   293,867   —     —   
Other  —     —     884   884   —     884   —     —   
Equity securities  115,200   121   —     115,321   —     115,321   —     —   
Other investments*1  7,179   4,027   13,463   24,669   —     24,669   —     —   
Derivative assets*2  437   17,391   —     17,828   —     —     17,257   571 
Total assets  624,264   2,319,995   33,546   2,977,805   943,556   2,016,421   17,257   571 
Liabilities:                                
Derivative liabilities*2  668   48,467   —     49,135   —     —     20,680   28,455 
Total liabilities  668   48,467   —     49,135   —     —     20,680   28,455 

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

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

Transfers into level 1 were 3,460 million yen and 3,556 million yen for the fiscal years ended March 31, 2015 and 2016, 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 13,376 million yen and 2,716 million yen for the fiscal years ended March 31, 2015 and 2016, respectively, as quoted prices for certain trading securities and available-for-sale securities were not available in an active market.

 

 

41 
 

 

The changes in fair value of level 3 assets and liabilities for the fiscal years ended March 31, 2015 and 2016 are as follows:

 

Yen in millions
Fiscal year ended March 31, 2015
Assets
Available-for-sale securities    
 Debt securities      
Japanese
corporate bonds
  Foreign
corporate bonds
  Other
Investments
 
Beginning balance  1,011   6,807   75,837 
Total realized and unrealized gains (losses):            
Included in earnings*1  —     522   1,397 
Included in other comprehensive income (loss)*2  (5)  593   153 
Purchases  2,500   15,222   522 
Settlements  —     (4,653)  (3,268)
Transfers out of level 3*3  —     (9,000)  —   
Ending balance  3,506   9,491   74,641 
Changes in unrealized gains relating to instruments still held at reporting date:            
Included in earnings*1  —     —     1,397 

 

  Yen in millions
  Fiscal year ended March 31, 2016
  Assets
  Available-for-sale securities    
  Debt securities    
  Japanese
corporate bonds
  Foreign
corporate bonds
  Other 

Other
Investments

 
Beginning balance  3,506   9,491   —     74,641 
Total realized and unrealized gains (losses):                
Included in earnings*1  6   458   —     (2,653)
Included in other comprehensive income (loss)*2  30   (791)  —     (2,316)
Purchases  2,798   11,214   1,000   657 
Sales  (3,000)  (4,872)  —     —   
Settlements  —     (641)  (116)  (56,866)
Transfers into level 3*4  2,002   1,498   —     —   
Transfers out of level 3*3  (1,996)  (504)  —     —   
Ending balance  3,346   15,853   884   13,463 
Changes in unrealized losses relating to instruments still held at reporting date:                
Included in earnings*1  —     (56)  —     (2,653)

*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 out of level 3 because quoted prices became available.

*4 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.

 

 

42 
 

 

Level 3 assets include certain hybrid financial instruments for which the price fluctuates primarily based on the main stock index in Japan (Nikkei index), 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, 2015 and 2016, such remeasurements to fair value related primarily to the following:

 

   During the fiscal year ended March 31, 2015
   Estimated fair value  Amounts included
in earnings
   Level 1    Level 2    Level 3   
Assets:            
Long-lived assets impairments   —      —      768    (18,926)
Goodwill impairments   —      —      0    (177,135)
                   (196,061)

 

   During the fiscal year ended March 31, 2016
   Estimated fair value  Amounts included
in earnings
   Level 1  Level 2    Level 3   
Assets:                  
Long-lived assets impairments   —      —      19,680    (92,544)
                   (92,544)

Long-lived assets impairments

Sony recorded impairment losses of 7,798 million yen and 4,929 million yen for the fiscal years ended March 31, 2014 and 2015, respectively, included within the HE&S segment, related to the LCD television asset group. These impairment losses primarily reflected a decrease in the estimated fair value of property, plant and equipment and certain intangible assets. For the LCD television asset group, the corresponding estimated future cash flows leading to the impairment charge reflected the deterioration in LCD television market conditions in Japan, Europe and North America, and unfavorable foreign exchange rates.

 

Sony recorded an impairment loss of 32,107 million yen and 30,643 million yen for the fiscal years ended March 31, 2014 and 2016, respectively, included within the Devices segment, related to long-lived assets in the battery business asset group. In the fiscal year ended March 31, 2014, in light of a lack of progress towards achieving adequate operating results, Sony conducted a strategic review of the business and evolving market trends. 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. 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 12,303 million yen for the fiscal year ended March 31, 2014, included within All Other, related to long-lived assets in the disc manufacturing business. In the fiscal year ended March 31, 2015, Sony recorded an impairment loss of 8,608 million yen related to long-lived assets in the disc manufacturing business. The long-lived asset impairments in the disc manufacturing business for fiscal years ended March 31, 2014 and 2015 related to lowered forecasts of cash flows outside of Japan and the United States, primarily attributable to the manufacturing and distribution operations in Europe, which began additional restructuring activities in March 2014 and March 2015, and reflects the faster than expected contraction of the physical media market.

 

Sony recorded impairment losses of 59,616 million yen for the fiscal year ended March 31, 2016, included within the Devices 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.

 

43 
 

 

 

Sony recorded impairment losses for long-lived assets relating to restructuring in the PC business during the fiscal year ended March 31, 2014. Refer to Notes 19 and 25.

 

These measurements are classified as level 3 because significant unobservable inputs, such as the conditions 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. A discount rate of 10% and projected revenue growth rates ranging from zero to 15% were used in the fair value measurements related to the long-lived assets for the battery business, and a discount rate of 10% and projected declining revenue rates ranging from (6)% to (13)% were used in the fair value measurements related to the long-lived assets for the disc manufacturing business for the fiscal year ended March 31, 2014. For the fiscal year ended March 31, 2015, a discount rate of 10% and projected declining revenue rates ranging from (5)% to (9)% were used in the fair value measurements related to the long-lived assets for the disc manufacturing business. 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 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.

Goodwill impairments

Sony recorded an impairment loss of 176,045 million yen for the fiscal year ended March 31, 2015 related to goodwill in the MC segment. Refer to Note 9. Sony’s determination of fair value of the MC reporting unit was based on the present value of expected future cash flows. These measurements are classified as a level 3 because significant unobservable inputs, such as the 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. A discount rate of 12% and projected revenue growth rates ranging from (3)% to 11% were used in the fair value measurements.

 

44 
 

 

(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, 2015
   Estimated fair value  Carrying
amount
   Level 1  Level 2  Level 3  Total  Total
Assets:               
Housing loans in the banking business   —      1,181,554    —      1,181,554    1,074,386 
Total assets   —      1,181,554    —      1,181,554    1,074,386 
Liabilities:                         
Long-term debt including the current portion   —      878,609    —      878,609    871,604 
Investment contracts included in policyholders’ account in the life insurance business   —      586,331    —      586,331    591,951 
Total liabilities   —      1,464,940    —      1,464,940    1,463,555 

 

   Yen in millions
   March 31, 2016
   Estimated fair value  Carrying
amount
   Level 1  Level 2  Level 3  Total  Total
Assets:               
Housing loans in the banking business   —      1,369,157    —      1,369,157    1,235,311 
Total assets   —      1,369,157    —      1,369,157    1,235,311 
Liabilities:                         
Long-term debt including the current portion   —      755,631    —      755,631    744,273 
Investment contracts included in policyholders’ account in the life insurance business   —      677,375    —      677,375    638,737 
Total liabilities   —      1,433,006    —      1,433,006    1,383,010 

 

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.

 

 

45 
 

 

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 fiscal years ended March 31, 2014, 2015 and 2016, 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 years ended March 31, 2014 and 2016, the ineffective portions of the hedging relationships were not significant. In addition, there were no amounts excluded from the assessment of hedge effectiveness for cash flow hedges. As of and for the fiscal year ended March 31, 2015, there were no cash flow hedge derivatives.

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 by anticipated intercompany transactions and intercompany 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 during the fiscal year ended March 31, 2016 which effectively fixed the cash flows from 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 service revenue.

 

 

46 
 

 

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.

 

Sony also had certain interest rate swap agreements during the fiscal year ended March 31, 2014 for the purpose of reducing the risk arising from the changes in anticipated cash flows of variable rate debt and foreign currency denominated debt. These interest rate swap agreements, which effectively swapped foreign currency denominated variable rate debt for functional currency denominated fixed rate debt, were considered a hedge against changes in the anticipated cash flows of Sony’s foreign denominated variable rate obligations. Accordingly, these derivatives were designated as cash flow 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 revenue.

 

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.

 

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

 

   Yen in millions
Derivatives designated as hedging instruments  Balance sheet location  Fair value   Balance sheet location  Fair value
      March 31     March 31
   Asset derivatives  2015  2016  Liability derivatives  2015  2016
Interest rate contracts  Prepaid expenses and other current assets   11    16   Current liabilities: Other   954    665 
Interest rate contracts  Other assets: Other   207    33   Liabilities: Other   23,899    22,605 
Foreign exchange contracts  Prepaid expenses and other current assets   40    1              
       258    50       24,853    23,270 

 

   Yen in millions
Derivatives not designated as hedging instruments  Balance sheet location  Fair value   Balance sheet location  Fair value
      March 31    March 31
   Asset derivatives  2015  2016  Liability derivatives  2015  2016
Interest rate contracts               Current liabilities: Other   —      38 
Interest rate contracts  Other assets: Other   222    538   Liabilities: Other   1,178    5,850 
Foreign exchange contracts  Prepaid expenses and other current assets   29,899    16,803    Current liabilities: Other   21,526    19,309 
Foreign exchange contracts  Other assets: Other   28    —     Liabilities: Other   155    —   
Equity contracts  Prepaid expenses and other current assets   —      437    Current liabilities: Other   612    668 
       30,149    17,778       23,471    25,865 
Total derivatives      30,407    17,828       48,324    49,135 

 

 

47 
 

 

Presented below are the effects of derivative instruments on the consolidated statements of income for the fiscal years ended March 31, 2014, 2015 and 2016.

 

   Yen in millions
Derivatives under fair value hedging relationships  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
      2014  2015  2016
Interest rate contracts  Financial services revenue   131   (8,271)  (8,300)
Foreign exchange contracts  Foreign exchange loss, net   (1)  (9)  3 
Total      130   (8,280)  (8,297)

 

   Yen in millions
Derivatives under cash flow hedging relationships  Location of gain or (loss) recognized in income
on derivative
  Fiscal year ended March 31
      2014  2015  2016
Amount of gain or (loss) recognized in OCI on derivative            
Interest rate contracts  -   167    —      —   
Foreign exchange contracts  -   —      —      1,914 
Total      167    —      1,914 
                   
Amount of gain or (loss)
reclassified from
accumulated OCI into
income (effective portion)
                  
Interest rate contracts  Interest expense   471    —      —   
Foreign exchange contracts  Foreign exchange loss, net   348    —      (8)
Foreign exchange contracts  Cost of sales   —      —      (3,104)
Total      819    —      (3,112)

 

   Yen in millions
Derivatives not designated as hedging instruments  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
      2014  2015  2016
Interest rate contracts  Financial services revenue   (167)  (3,579)   (5,499)
Interest rate contracts  Foreign exchange loss, net   —     883   —   
Foreign exchange contracts  Financial services revenue   1,198   (1,942)   4,166 
Foreign exchange contracts  Foreign exchange loss, net   2,703   13,375   (14,501)
Equity contracts  Financial services revenue   —     (2,725)   3,267 
Total      3,734   6,012   (12,567)

 

 

 

48 
 

 

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

 

   Yen in millions
   March 31, 2015  March 31, 2016
   Notional
amount
  Fair value  Notional
amount
  Fair value
Foreign exchange contracts:            
Foreign exchange forward contracts   1,335,811    11,654    1,030,020    (5,118)
Currency option contracts purchased   9,920    202    211    2 
Currency option contracts written   568    (3)   210    (2)
Currency swap agreements   754,056    (3,872)   729,632    (99)
Other currency contracts   83,980    305    75,157    2,712 
Interest rate contracts:                    
Interest rate swap agreements   402,049    (25,591)   436,739    (28,571)
Equity contracts:                    
Equity future contracts   21,903    (612)   72,794    (231)

 

 

49 
 

 

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, 2015 and 2016.

 

   Yen in millions
   As of March 31, 2015
   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   26,032    10,387    —      15,645 
Derivative assets not subject to master netting agreements   4,375              4,375 
Total assets   30,407    10,387    —      20,020 
Derivative liabilities subject to master netting agreements   43,791    37,820    612    5,359 
Derivative liabilities not subject to master netting agreements   4,533              4,533 
Total liabilities   48,324    37,820    612    9,892 

 

   Yen in millions
   As of March 31, 2016
   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   10,251    6,990    312    2,949 
Derivative assets not subject to master netting agreements   7,577              7,577 
Total assets   17,828    6,990    312    10,526 
Derivative liabilities subject to master netting agreements   46,328    28,527    8,269    9,532 
Derivative liabilities not subject to master netting agreements   2,807              2,807 
Repurchase, securities lending and similar arrangements   62,805    61,864    —      941 
Total liabilities   111,940    90,391    8,269    13,280 

 

 

50 
 

 

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, 2014, 2015 and 2016 were as follows:

 

Japanese plans:

 

   Yen in millions
   Fiscal year ended March 31
   2014  2015  2016
Service cost   24,827    24,350    24,668 
Interest cost   12,152    11,583    8,689 
Expected return on plan assets   (17,822)   (19,252)   (20,851)
Recognized actuarial loss   11,480    9,867    8,588 
Amortization of prior service costs   (10,176)   (9,614)   (9,489)
Net periodic benefit costs   20,461    16,934    11,605 

 

Foreign plans:

 

   Yen in millions
   Fiscal year ended March 31
   2014  2015  2016
Service cost   3,032    3,188    3,504 
Interest cost   12,068    13,040    12,096 
Expected return on plan assets   (11,480)   (12,993)   (14,117)
Amortization of net transition asset   12    10    10 
Recognized actuarial loss   3,693    2,991    4,236 
Amortization of prior service costs   (643)   (639)   (478)
Losses on curtailments and settlements   1,074    31    354 
Net periodic benefit costs   7,756    5,628    5,605 

The estimated net actuarial loss, prior service cost and obligation (asset) existing at transition 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 23,195 million yen, 9,974 million yen and 5 million yen, respectively.

 

51 
 

 

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
   2015  2016  2015  2016
Change in benefit obligation:            
Benefit obligation at beginning of the fiscal year   847,446    890,415    313,698    394,704 
Service cost   24,350    24,670    3,188    3,504 
Interest cost   11,583    8,689    13,040    12,096 
Plan participants’ contributions   —      —      752    676 
Amendments   —      —      (283)   —   
Actuarial (gain) loss *   48,061    144,416    74,801    (21,868)
Foreign currency exchange rate changes   —      —      7,214    (16,893)
Curtailments and settlements   —      —      (3,932)   (1,246)
Effect of changes in consolidated subsidiaries   (4)   —      —      —   
Other   (2,696)   (14)   —      —   
Benefits paid   (38,325)   (33,892)   (13,774)   (14,098)
Benefit obligation at end of the fiscal year   890,415    1,034,284    394,704    356,875 
Change in plan assets:                    
Fair value of plan assets at beginning of the fiscal year   654,792    710,602    225,024    280,216 
Actual return on plan assets   74,447    (9,030)   54,928    (6,035)
Foreign currency exchange rate changes   —      —      5,752    (13,095)
Employer contribution   7,978    1,951    9,434    7,905 
Plan participants’ contributions   —      —      752    676 
Curtailments and settlements   —      —      (2,989)   (504)
Other   (1,934)   —      —      —   
Benefits paid   (24,681)   (24,091)   (12,685)   (12,822)
Fair value of plan assets at end of the fiscal year   710,602    679,432    280,216    256,341 
Funded status at end of the fiscal year   (179,813)   (354,852)   (114,488)   (100,534)

* Actuarial loss in Japanese plans for the fiscal year ended March 31, 2016 principally relates to changes in the assumptions for discount and mortality rates.

Amounts recognized in the consolidated balance sheets consist of:

 

   Japanese plans  Foreign plans
   Yen in millions  Yen in millions
   March 31  March 31
   2015  2016  2015  2016
Noncurrent assets   3,005    2,217    4,027    7,102 
Current liabilities   —      —      (4,500)   (2,892)
Noncurrent liabilities   (182,818)   (357,069)   (114,015)   (104,744)
Ending balance   (179,813)   (354,852)   (114,488)   (100,534)

 

 

52 
 

 

Amounts recognized in accumulated other comprehensive income, excluding tax effects, consist of:

 

   Japanese plans  Foreign plans
   Yen in millions  Yen in millions
   March 31  March 31
   2015  2016  2015  2016
Prior service cost (credit)   (44,394)   (34,905)   (2,161)   (1,443)
Net actuarial loss   218,462    389,302    94,480    82,850 
Obligation existing at transition   —      —      15    7 
Ending balance   174,068    354,397    92,334    81,414 

 

The accumulated benefit obligations for all defined benefit pension plans were as follows:

 

   Japanese plans  Foreign plans
   Yen in millions  Yen in millions
   March 31  March 31
   2015  2016  2015  2016
Accumulated benefit obligations   885,479    1,028,690    364,094    331,975 

 

The projected benefit obligations, the accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows:

 

   Japanese plans  Foreign plans
   Yen in millions  Yen in millions
   March 31  March 31
   2015  2016  2015  2016
Projected benefit obligations   879,995    1,022,373    330,478    292,171 
Accumulated benefit obligations   876,282    1,018,228    323,221    286,705 
Fair value of plan assets   698,400    666,753    235,343    202,913 

 

Weighted-average assumptions used to determine benefit obligations as of March 31, 2015 and 2016 were as follows:

 

   Japanese plans  Foreign plans
   March 31  March 31
   2015  2016  2015  2016
Discount rate   1.0%   0.6%   3.1%   3.2%
Rate of compensation increase   *    *    2.9    2.1 

* Substantially all of Sony’s Japanese pension plans were point-based. Point-based plans do not incorporate a measure of compensation rate increases.

 

53 
 

 

Weighted-average assumptions used to determine the net periodic benefit costs for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

   Japanese plans  Foreign plans
   Fiscal year ended March 31  Fiscal year ended March 31
   2014  2015  2016  2014  2015  2016
Discount rate   1.5%   1.4%   1.0%   4.1%   4.1%   3.1%
Expected return on plan assets   3.0    3.0    3.0    5.8    5.6    4.8 
Rate of compensation increase   *    *    *    3.1    3.1    2.9 

* Substantially all of Sony’s Japanese pension plans were point-based. Point-based plans do not incorporate a measure of compensation rate increases.

Sony reviews these assumptions for changes in circumstances.

 

The weighted-average rate of compensation increase is calculated based only on the pay-related plans. The point-based plans discussed above are excluded from the calculation because payments made under the plan are not based on employee compensation.

 

The mortality rate assumptions are based on life expectancy and death rates for different types of participants. In the fiscal year ended March 31, 2016, Sony updated mortality rate assumptions to consider the latest mortality tables and in certain instances to utilize mortality tables based on gender.

 

To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as the historical and expected long-term rates of returns on various categories of plan assets. Sony’s pension investment policy recognizes the expected growth and the variability risk associated with the long-term nature of pension liabilities, the returns and risks of diversification across asset classes, and the correlation among assets. The asset allocations are designed to maximize returns consistent with levels of liquidity and investment risk that are considered prudent and reasonable. While the pension investment policy gives appropriate consideration to recent market performance and historical returns, the investment assumptions utilized by Sony are designed to achieve a long-term return consistent with the long-term nature of the corresponding pension liabilities.

 

The investment objectives of Sony’s plan assets are designed to generate returns that will enable the plans to meet their future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current economic environment and other pertinent factors. Sony’s investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could negatively impact the funding level of the plans, thereby increasing its dependence on contributions from Sony. To mitigate any potential concentration risk, thorough consideration is given to balancing the portfolio among industry sectors and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. The target allocations as of March 31, 2016, are, as a result of Sony’s asset liability management, 29% of equity securities, 53% of fixed income securities and 18% of other investments for the pension plans of Sony Corporation and most of its subsidiaries in Japan, and, on a weighted average basis, 33% of equity securities, 49% of fixed income securities and 18% of other investments for the pension plans of foreign subsidiaries.

 

54 
 

 

The fair values of the assets held by Japanese and foreign plans, which are classified in accordance with the fair value hierarchy described in Note 2, are as follows:

   Japanese plans
   Yen in millions
 

Fair value
at March 31,

 

Fair value measurements
using inputs considered as

Asset class  2015  Level 1  Level 2  Level 3
Cash and cash equivalents   5,789    5,789    —      —   
Equity:                    
Equity securities*1   166,164    161,530    4,634    —   
Fixed income:                    
Government bonds*2   217,359    —      217,359    —   
Corporate bonds*3   54,639    —      54,639    —   
Asset-backed securities*4   650    —      650    —   
Commingled funds*5   122,798    —      122,798    —   
Commodity funds*6   24,621    —      24,621    —   
Private equity*7   32,584    —      —      32,584 
Hedge funds*8   80,037    —      —      80,037 
Real estate   5,961    —      —      5,961 
Total   710,602    167,319    424,701    118,582 

 

   Japanese plans
   Yen in millions
  

Fair value
at March 31,

 

Fair value measurements
using inputs considered as

Asset class  2016  Level 1  Level 2  Level 3
Cash and cash equivalents   17,985    17,985    —      —   
Equity:                    
Equity securities*1   148,658    144,597    4,061    —   
Fixed income:                    
Government bonds*2   218,851    —      218,851    —   
Corporate bonds*3   56,779    —      56,779    —   
Asset-backed securities*4   1,148    —      1,148    —   
Commingled funds*5   115,902    —      115,902    —   
Commodity funds*6   20,547    —      20,547    —   
Private equity*7   31,852    —      —      31,852 
Hedge funds*8   60,395    —      —      60,395 
Real estate   7,315    —      —      7,315 
Total   679,432    162,582    417,288    99,562 

*1   Includes approximately 53 percent and 48 percent of Japanese equity securities, and 47 percent and 52 percent of foreign equity securities for the fiscal years ended March 31, 2015 and 2016, respectively.

*2   Includes approximately 48 percent and 51 percent of debt securities issued by Japanese national and local governments, and 52 percent and 49 percent of debt securities issued by foreign national and local governments for the fiscal years ended March 31, 2015 and 2016, respectively.

*3   Includes debt securities issued by Japanese and foreign corporation and government related agencies.

*4   Includes primarily mortgage-backed securities.

*5   Commingled funds represent pooled institutional investments, including primarily investment trusts. They include approximately 46 percent and 44 percent of investments in equity, 52 percent and 54 percent of investments in fixed income, and 3 percent and 1 percent of investments in other for the fiscal years ended March 31, 2015 and 2016, respectively.

*6   Represents commodity futures funds.

 

55 
 

 

*7  Includes multiple private equity funds of funds that primarily invest in venture, buyout, and distressed markets in the U.S. and Europe.

*8  Includes primarily funds that invest in a portfolio of a broad range of hedge funds to diversify the risks and reduce the volatilities associated with a single hedge fund.

   Foreign plans
   Yen in millions
  

Fair value
at March 31,

 

Fair value measurements
using inputs considered as

Asset class  2015  Level 1  Level 2  Level 3
Cash and cash equivalents   8,665    8,665    —      —   
Equity:                    
Equity securities*1   44,276    41,194    3,082    —   
Fixed income:                    
Government bonds*2   69,882    —      69,882    —   
Corporate bonds*3   33,290    —      25,906    7,384 
Asset-backed securities   328    —      328    —   
Insurance contracts*4   1,936    —      1,936    —   
Commingled funds*5   86,931    —      86,931    —   
Real estate and other*6   34,908    —      19,386    15,522 
Total   280,216    49,859    207,451    22,906 

 

   Foreign plans
   Yen in millions
  

Fair value
at March 31,

 

Fair value measurements
using inputs considered as

Asset class  2016  Level 1  Level 2  Level 3
Cash and cash equivalents   4,078    4,078    —      —   
Equity:                    
Equity securities*1   37,769    35,818    1,951    —   
Fixed income:                    
Government bonds*2   60,835    —      60,835    —   
Corporate bonds*3   30,425    —      23,425    7,000 
Asset-backed securities   321    —      321    —   
Insurance contracts*4   4,293    —      4,293    —   
Commingled funds*5   77,456    —      77,456    —   
Real estate and other*6   41,164    —      17,040    24,124 
Total   256,341    39,896    185,321    31,124 

*1   Includes primarily foreign equity securities.

*2   Includes primarily foreign government debt securities. 

*3   Includes primarily foreign corporate debt securities. 

*4   Represents annuity contracts with or without profit sharing.

*5   Commingled funds represent pooled institutional investments including mutual funds, common trust funds, and collective investment funds. They are primarily comprised of foreign equities and fixed income investments.

*6   Includes primarily private real estate investment trusts.

Each level in the fair value hierarchy in which each plan asset is classified is determined based on inputs used to measure the fair values of the asset, and does not necessarily indicate the risks or rating of the asset.

 

The following is a description of the valuation techniques used to measure Japanese and foreign plan assets at fair value. The valuation techniques are applied consistently from period to period.

 

 

56 
 

 

Equity securities are valued at the closing price reported in the active market in which the individual securities are traded. These assets are generally classified as level 1.

 

The fair value of fixed income securities is typically estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are generally classified as level 2.

 

Commingled funds are typically valued using the net asset value provided by the administrator of the fund and reviewed by Sony. The net asset value is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. These assets are classified as level 1, level 2 or level 3 depending on availability of quoted market prices.

 

Commodity funds are valued using inputs that are derived principally from or corroborated by observable market data. These assets are generally classified as level 2.

 

Private equity and private real estate investment trust valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant market data to determine if the carrying value of these assets should be adjusted. These investments are classified as level 3.

 

Hedge funds are valued using the net asset value as determined by the administrator or custodian of the fund. These investments are classified as level 3.

 

 

57 
 

 

The following table sets forth a summary of changes in the fair values of Japanese and foreign plans’ level 3 assets for the fiscal years ended March 31, 2015 and 2016:

 

   Japanese plans
   Yen in millions
   Fair value measurement using significant unobservable inputs
(Level 3)
   Private equity  Hedge funds  Real estate  Total
Beginning balance at April 1, 2014   26,942    41,108    1,689    69,739 
Return on assets held at end of year   5,642    5,796    (101)   11,337 
Purchases, sales, and settlements, net   —      33,133    4,373    37,506 
Ending balance at March 31, 2015   32,584    80,037    5,961    118,582 
Return on assets held at end of year   157    (3,593)   315    (3,121)
Purchases, sales, and settlements, net   (889)   (16,049)   1,039    (15,899)
Ending balance at March 31, 2016   31,852    60,395    7,315    99,562 

 

   Foreign plans
   Yen in millions
   Fair value measurement using significant
unobservable inputs (Level 3)
  

Corporate

bonds

 

Real estate

and other

  Total
Beginning balance at April 1, 2014   6,255    8,932    15,187 
Return on assets held at end of year   81    (408)   (327)
Purchases, sales, and settlements, net   —      210    210 
Other*   1,048    6,788    7,836 
Ending balance at March 31, 2015   7,384    15,522    22,906 
Return on assets held at end of year   76    (104)   (28)
Return on assets sold during the year   —      19    19 
Purchases, sales, and settlements, net   —      3,933    3,933 
Transfers, net   —      2,692    2,692 
Other*   (460)   2,062    1,602 
Ending balance at March 31, 2016   7,000    24,124    31,124 

* Primarily consists of translation adjustments.

 

Sony makes contributions to its defined benefit pension plans as deemed appropriate by management after considering the fair value of plan assets, expected return on plan assets and the present value of benefit obligations. Sony expects to contribute approximately 11 billion yen to the Japanese plans and approximately 6 billion yen to the foreign plans during the fiscal year ending March 31, 2017.

 

58 
 

 

The expected future benefit payments are as follows:

 

   Japanese plans  Foreign plans
Fiscal year ending March 31  Yen in millions  Yen in millions
2017   34,129    13,316 
2018   34,595    13,742 
2019   37,755    14,192 
2020   39,943    14,988 
2021   40,867    15,720 
2022 – 2026   224,026    89,353 

(2)

Defined contribution plans

Total defined contribution expenses for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

   Yen in millions
   Fiscal year ended March 31
   2014  2015  2016
Japanese plans   3,602    3,199    3,155 
Foreign plans   12,703    13,857    12,419 

 

16.

Stockholders’ equity

(1)

Common stock

Changes in the number of shares of common stock issued and outstanding during the fiscal years ended March 31, 2014, 2015 and 2016 have resulted from the following:

 

   Number of shares
Balance at March 31, 2013   1,011,950,206 
Exercise of stock acquisition rights   134,800 
Conversion of zero coupon convertible bonds   32,622,761 
Balance at March 31, 2014   1,044,707,767 
Exercise of stock acquisition rights   948,500 
Conversion of zero coupon convertible bonds   124,116,993 
Balance at March 31, 2015   1,169,773,260 
Issuance of new shares   92,000,000 
Exercise of stock acquisition rights   720,500 
Balance at March 31, 2016   1,262,493,760 

 

At March 31, 2016, 39,739,861 shares of common stock would be issued upon the conversion or exercise of all convertible bonds and stock acquisition rights outstanding.

 

Conversions of convertible bonds into common stock are accounted for in accordance with the provisions of the Companies Act of Japan (Kaishaho) and related regulations (collectively the “Companies Act”) by crediting approximately one-half of the conversion proceeds to the common stock account and the remainder to the additional paid-in capital account.

 

Sony Corporation may purchase its own shares at any time by a resolution of the Board of Directors up to the retained earnings available for dividends to shareholders, in accordance with the Companies Act. No common stock had been acquired by the resolution of the Board of Directors during the fiscal years ended March 31, 2014, 2015 and 2016.

 

 

59 
 

 

(2) Retained earnings

 

 

The amount of statutory retained earnings of Sony Corporation available for dividends to shareholders as of March 31, 2016 was 467,311 million yen. The appropriation of retained earnings for the fiscal year ended March 31, 2016, including cash dividends for the six-month period ended March 31, 2016, has been incorporated in the consolidated financial statements. This appropriation of retained earnings was approved at the meeting of the Board of Directors of Sony Corporation held on April 28, 2016 and was then recorded in the statutory books of account, in accordance with the Companies Act.

 

Retained earnings include Sony’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of 20,986 million yen and 29,061 million yen at March 31, 2015 and 2016, respectively.

(3) Other comprehensive income

 

 

Changes in accumulated other comprehensive income, net of tax, by component for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

   Yen in millions
   Unrealized gains (losses) on securities  Unrealized gains (losses) on derivative instruments  Pension liability adjustment  Foreign currency translation adjustments  Total
Balance at March 31, 2013   109,079    (742)   (191,816)   (556,016)   (639,495)
Other comprehensive income before reclassifications   24,388    103    6,896    158,884    190,271 
Amounts reclassified out of accumulated other
comprehensive income
   (5,078)   639    4,987    —      548 
Net current-period other comprehensive income   19,310    742    11,883    158,884    190,819 
Less: Other comprehensive income attributable to
noncontrolling interests
   880    —      106    1,923    2,909 
Balance at March 31, 2014   127,509    —      (180,039)   (399,055)   (451,585)

 

   Yen in millions
   Unrealized gains (losses) on securities  Pension liability adjustment  Foreign currency translation adjustments  Total
Balance at March 31, 2014   127,509    (180,039)   (399,055)   (451,585)
Other comprehensive income before reclassifications   53,069    (22,552)   67,334    97,851 

Amounts reclassified out of accumulated other

comprehensive income*1

   (14,351)   1,365    (1,544)   (14,530)
Net current-period other comprehensive income