Mitsui Chemicals : Detailed Consolidated Financial Statements

Detailed Consolidated Financial Statements

Years ended March 31, 2024 and 2023

Consolidated Statements of Financial Position

As of March 31, 2024 and 2023
				Thousands of
	Millions of yen		U.S. dollars
	As of	As of		As of
	March 31, 2024	March 31, 2023		March 31, 2024
ASSETS
Current assets	¥   210,292			$  1,388,891
Cash and cash equivalents (Note 8)	¥   186,310
Trade receivables (Note 9)	365,896	352,181	2,416,591
Inventories (Note 10)	451,075	441,949	2,979,163
Other financial assets (Notes 11 and 37)	39,218	76,409	259,019
Other current assets (Note 12)	37,230	37,437	245,888
Subtotal	1,103,711	1,094,286	7,289,552
Assets held for sale (Note 13)	46,868	-	309,543
Total current assets	1,150,579	1,094,286	7,599,095
Non-current assets	605,789		4,000,984
Property, plant and equipment (Note 14)	553,332
Right-of-use assets (Note 15)	46,309	47,555	305,852
Goodwill (Note 16)	21,169	19,338	139,812
Intangible assets (Note 16)	55,241	48,137	364,844
Investment property (Note 17)	21,667	21,713	143,102
Investments accounted for using equity method (Note 19)	155,924	148,892	1,029,813
Other financial assets (Notes 11 and 37)	61,669	58,518	407,298
Retirement benefit assets (Note 24)	82,777	61,036	546,708
Deferred tax assets (Note 35)	5,039	10,270	33,280
Other non-current assets (Note 12)	9,656	5,126	63,772
Total non-current assets	1,065,240	973,917	7,035,465
Total assets	¥2,215,819	¥2,068,203	$14,634,560

The accompanying notes are an integral part of these consolidated financial statements.

1

				Thousands of
	Millions of yen		U.S. dollars
	As of	As of		As of
	March 31, 2024	March 31, 2023		March 31, 2024
LIABILITIES AND EQUITY
Liabilities
Current liabilities	¥   179,947			$  1,188,475
Trade payables (Note 20)	¥   164,267
Bonds and borrowings (Note 21)	324,088	368,463	2,140,466
Income taxes payable	4,038	7,416	26,669
Other financial liabilities (Notes 22 and 37)	109,774	112,933	725,012
Provisions (Note 25)	1,267	2,349	8,368
Other current liabilities (Note 26)	42,103	40,016	278,073
Subtotal	661,217	695,444	4,367,063
Liabilities directly associated with assets held for sale (Note 13)	15,362	-	101,460
Total current liabilities	676,579	695,444	4,468,523
Non-current liabilities	432,670		2,857,605
Bonds and borrowings (Note 21)	369,786
Other financial liabilities (Notes 22 and 37)	54,149	57,174	357,632
Retirement benefit liabilities (Note 24)	17,882	20,242	118,103
Provisions (Note 25)	6,845	6,101	45,208
Deferred tax liabilities (Note 35)	42,136	35,162	278,291
Other non-current liabilities (Note 26)	752	991	4,966
Total non-current liabilities	554,434	489,456	3,661,805
Total liabilities	1,231,013	1,184,900	8,130,328
Equity	125,738		830,447
Share capital (Note 27)	125,572
Capital surplus (Note 27)	55,027	57,778	363,431
Treasury stock (Note 27)	(32,751)	(32,704)	(216,307)
Retained earnings (Note 27)	617,400	575,125	4,077,670
Other components of equity (Note 27)	97,437	61,056	643,529
Total equity attributable to owners of the parent	862,851	786,827	5,698,770
Non-controlling interests	121,955	96,476	805,462
Total equity	984,806	883,303	6,504,232
Total liabilities and equity	¥2,215,819	¥2,068,203	$14,634,560

2

Consolidated Statements of Income

For the years ended March 31, 2024 and 2023
					Thousands of
		Millions of yen		U.S. dollars
	Year ended	Year ended		Year ended
	March 31, 2024	March 31, 2023		March 31, 2024
Sales revenue (Note 29)	¥ 1,749,743	¥ 1,879,547		$11,556,324
Cost of sales		(1,378,946)	(1,498,054)	(9,107,364)
Gross profit		370,797	381,493	2,448,960
Selling, general and administrative expenses (Notes 7, 30 and 32)		(282,657)	(284,589)	(1,866,832)
Other operating income (Note 7 and 33)		6,422	28,325	42,415
Other operating expenses (Note 33)		(32,740)	(17,924)	(216,235)
Share of profit of investments accounted for using equity method		12,302		81,250
(Note 19)		21,693
Operating income		74,124	128,998	489,558
Financial income (Note 34)		13,870	5,678	91,606
Financial expenses (Note 34)		(14,663)	(17,398)	(96,843)
Income before income taxes		73,331	117,278	484,321
Income tax expense (Note 35)		(19,556)	(27,140)	(129,160)
Net income		53,775	90,138	355,161
Net income attributable to:
Owners of the parent		49,999	82,936	330,223
Non-controlling interests		3,776	7,202	24,938
Net income	¥	53,775	¥ 90,138		$     355,161
		Yen			U.S. dollars
Earnings per share
Basic earnings per share (Yen) (Note 36)		¥262.99	¥431.17	$1.737

The accompanying notes are an integral part of these consolidated financial statements.

3

Consolidated Statements of Comprehensive Income

For the years ended March 31, 2024 and 2023
				Thousands of
	Millions of yen		U.S. dollars
	Year ended	Year ended		Year ended
	March 31, 2024	March 31, 2023		March 31, 2024
Net income	¥  53,775	¥  90,138		$355,161
Other comprehensive income
Items that will not be reclassified to profit or loss
Financial assets measured at fair value through	5,199		34,337
other comprehensive income (Note 27)	4,186
Remeasurements of defined benefit plans (Note 27)	17,421	901	115,058
Share of other comprehensive income of investments accounted	500		3,303
for using equity method (Notes 19 and 27)	14
Total of items that will not be reclassified to profit or loss	23,120	5,101	152,698
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations (Note 27)	30,492	17,879	201,387
Effective portion of net change in fair value of cash flow hedges	70		462
(Note 27)	160
Share of other comprehensive income of investments accounted	3,974		26,246
for using equity method (Notes 19 and 27)	4,790
Total of items that may be reclassified to profit or loss	34,536	22,829	228,095
Total other comprehensive income, net of tax	57,656	27,930	380,793
Comprehensive income	¥111,431	¥118,068	$735,954
Comprehensive income attributable to:
Owners of the parent	103,370	108,036	682,714
Non-controlling interests	8,061	10,032	53,240
Comprehensive income	¥111,431	¥118,068	$735,954

The accompanying notes are an integral part of these consolidated financial statements.

4

Consolidated Statements of Changes in Equity

For the year ended March 31, 2024

							Millions of yen
				Equity attributable to owners of the parent
							Other components of equity
					Financial assets				Effective
					measured at			Exchange	portion of
					fair value	Remeasure-	differences on	net change in		Total equity
					through other	ments of	translation of	fair value of		attributable	Non-
	Share	Capital	Treasury	Retained	comprehensive	defined	foreign	cash flow		to owners of	controlling
	capital	surplus	stock	earnings	income	benefit plans	operations	hedges	Total	the parent	interests	Total equity
Balance as of April 1, 2023	¥125,572	¥57,778	¥(32,704)	¥575,125	¥19,416	¥	-	¥41,721	¥(81)	¥ 61,056	¥786,827	¥  96,476	¥883,303
Net income	-	-	-	49,999	-		-	-	-	-	49,999	3,776	53,775
Other comprehensive income	-	-	-	-	5,869		17,090	30,331	81	53,371	53,371	4,285	57,656
Total comprehensive income	-	-	-	49,999	5,869		17,090	30,331	81	53,371	103,370	8,061	111,431
Purchase of treasury stock	-	-	(49)	-	-		-	-	-	-	(49)	-	(49)
(Note 27)
Disposal of treasury stock	-	1	2	-	-		-	-	-	-	3	-	3
(Note 27)
Cancellation of treasury stock	-	-	-	-	-		-	-	-	-	-	-	-
Dividends (Note 28)	-	-	-	(24,714)	-		-	-	-	-	(24,714)	(6,200)	(30,914)
Share-based payment	166	166	-	-	-		-	-	-	-	332	-	332
transactions (Note 31)
Change in scope	-	-	-	-	-		-	-	-	-	-	19,990	19,990
of consolidation
Transactions with
non-controlling interests	-	(2,918)	-	-	-		-	-	-	-	(2,918)	3,628	710
(Note 38)
Transfer from other components	-	-	-	16,990	100		(17,090)	-	-	(16,990)	-	-	-
of equity to retained earnings
Total transactions with owners	166	(2,751)	(47)	(7,724)	100		(17,090)	-	-	(16,990)	(27,346)	17,418	(9,928)
Balance as of March 31, 2024	¥125,738	¥55,027	¥(32,751)	¥617,400	¥25,385	¥	-	¥72,052	¥ (0)	¥ 97,437	¥862,851	¥121,955	¥984,806
						Thousands of U.S. dollars
				Equity attributable to owners of the parent
							Other components of equity
					Financial assets				Effective
					measured at			Exchange	portion of
					fair value	Remeasure-	differences on	net change in		Total equity
					through other	ments of	translation of	fair value of		attributable	Non-
	Share	Capital	Treasury	Retained	comprehensive	defined	foreign	cash flow		to owners of	controlling
	capital	surplus	stock	earnings	income	benefit plans	operations	hedges	Total	the parent	interests	Total equity
Balance as of April 1, 2023	$829,351	$381,599	$(215,996)	$3,798,461	$128,235	$	-	$275,550	$(535)	$ 403,250	$5,196,665	$637,183	$5,833,848
Net income	-	-	-	330,223	-		-	-	-	-	330,223	24,938	355,161
Other comprehensive income	-	-	-	-	38,762	112,872	200,322	535	352,491	352,491	28,302	380,793
Total comprehensive income	-	-	-	330,223	38,762	112,872	200,322	535	352,491	682,714	53,240	735,954
Purchase of treasury stock	-	-	(324)	-	-		-	-	-	-	(324)	-	(324)
(Note 27)
Disposal of treasury stock	-	7	13	-	-		-	-	-	-	20	-	20
(Note 27)
Cancellation of treasury stock	-	-	-	-	-		-	-	-	-	-	-	-
Dividends (Note 28)	-	-	-	(163,226)	-		-	-	-	-	(163,226)	(40,948)	(204,174)
Share-based payment	1,096	1,097	-	-	-		-	-	-	-	2,193	-	2,193
transactions (Note 31)
Change in scope	-	-	-	-	-		-	-	-	-	-	132,026	132,026
of consolidation
Transactions with
non-controlling interests	-	(19,272)	-	-	-		-	-	-	-	(19,272)	23,961	4,689
(Note 38)
Transfer from other components	-	-	-	112,212	660	(112,872)	-	-	(112,212)	-	-	-
of equity to retained earnings
Total transactions with owners	1,096	(18,168)	(311)	(51,014)	660	(112,872)	-	-	(112,212)	(180,609)	115,039	(65,570)
Balance as of March 31, 2024	$830,447	$363,431	$(216,307)	$4,077,670	$167,657	$	-	$475,872	$ 0	$ 643,529	$5,698,770	$805,462	$6,504,232

For the year ended March 31, 2023					Millions of yen
				Equity attributable to owners of the parent
							Other components of equity
					Financial assets				Effective
					measured at			Exchange	portion of
					fair value	Remeasure-	differences on	net change in		Total equity
					through other	ments of	translation of	fair value of		attributable	Non-
	Share	Capital	Treasury	Retained	comprehensive	defined	foreign	cash flow		to owners of	controlling
	capital	surplus	stock	earnings	income	benefit plans	operations	hedges	Total	the parent	interests	Total equity
Balance as of April 1, 2022	¥125,414	¥ 69,866	¥(34,932)	¥516,098	¥14,558	¥	-	¥21,911	¥	(261)	¥36,208	¥712,654	¥94,468	¥807,122
Net income	-	-	-	82,936	-		-	-		-	-	82,936	7,202	90,138
Other comprehensive income	-	-	-	-	4,172		938	19,810		180	25,100	25,100	2,830	27,930
Total comprehensive income	-	-	-	82,936	4,172		938	19,810		180	25,100	108,036	10,032	118,068
Purchase of treasury stock
(Note 27)	-	-	(10,023)	-	-		-	-		-	-	(10,023)	-	(10,023)
Disposal of treasury stock
(Note 27)	-	(0)	5	-	-		-	-		-	-	5	-	5
Cancellation of treasury stock	-	(12,246)	12,246	-	-		-	-		-	-	-	-	-
Dividends (Note 28)	-	-	-	(24,161)	-		-	-		-	-	(24,161)	(7,168)	(31,329)
Share-based payment
transactions (Note 31)	158	158	-	-	-		-	-		-	-	316	-	316
Change in scope
of consolidation	-	-	-	-	-		-	-		-	-	-	(856)	(856)
Transactions with
non-controlling interests
(Note 38)	-	-	-	-	-		-	-		-	-	-	-	-
Transfer from other components
of equity to retained earnings	-	-	-	252	686		(938)	-		-	(252)	-	-	-
Total transactions with owners	158	(12,088)	2,228	(23,909)	686		(938)	-		-	(252)	(33,863)	(8,024)	(41,887)
Balance as of March 31, 2023	¥125,572	¥ 57,778	¥(32,704)	¥575,125	¥19,416	¥	-	¥41,721	¥	(81)	¥61,056	¥786,827	¥96,476	¥883,303

5 The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Cash Flows

For the years ended March 31, 2024 and 2023
					Thousands of
		Millions of yen		U.S. dollars
	Year ended	Year ended		Year ended
	March 31, 2024	March 31, 2023		March 31, 2024
Cash flows from operating activities	¥	73,331			$   484,321
Income before income taxes	¥ 117,278
Depreciation and amortization		95,249	92,080	629,080
Impairment loss (Note 18)		24,156	7,455	159,540
Gain on negative goodwill (Note 7)		(939)	-	(6,202)
Insurance income		(798)	(2,083)	(5,270)
Interest and dividend income		(6,312)	(5,011)	(41,688)
Interest expenses		7,259	5,813	47,943
Share of loss (profit) of investments accounted for		(12,302)		(81,250)
using equity method		(21,693)
Decrease (increase) in trade receivables		(19,224)	21,409	(126,967)
Decrease (increase) in inventories		(730)	(68,718)	(4,821)
Increase (decrease) in trade payables		10,404	(11,019)	68,714
Others		4,217	(10,000)	27,852
Subtotal		174,311	125,511	1,151,252
Interest and dividends received		16,983	13,930	112,166
Proceeds from insurance income		798	2,083	5,270
Interest paid		(7,454)	(5,889)	(49,231)
Income taxes refund (paid)		(23,299)	(34,394)	(153,880)
Net cash provided by (used in) operating activities		161,339	101,241	1,065,577
Cash flows from investing activities		(144,068)		(951,509)
Purchase of property, plant and equipment		(132,347)
Proceeds from sale of property, plant and equipment		526	490	3,474
Purchase of intangible assets		(9,923)	(5,514)	(65,537)
Proceeds from sale of intangible assets		14	8	92
Purchase of investment securities		(2,091)	(2,378)	(13,810)
Proceeds from sale and redemption of investment securities		1,053	1,149	6,955
Proceeds from a paid-in capital reduction of investment securities		-	37,320		-
Payments for acquisition of subsidiaries		(342)	(3,706)	(2,259)
Proceeds from acquisition of subsidiaries (Note 7)		2,416	-	15,957
Payments for sale of subsidiaries		-	(6,311)		-
Proceeds from sale of subsidiaries		38,732	-	255,809
Payments for acquisition of businesses		(7,364)	-	(48,636)
Purchase of equity accounted investments		(1)	(12)	(7)
Proceeds from sale of equity accounted investments		-	4,426		-
Others		(2,891)	535	(19,094)
Net cash provided by (used in) investing activities		(123,939)	(106,340)	(818,565)
Cash flows from financing activities		(41,678)		(275,266)
Increase (decrease) in short-term borrowings (Note 23)		4,064
Increase (decrease) in commercial papers (Note 23)		3,000	20,000	19,814
Proceeds from long-term borrowings (Note 23)		70,830	79,352	467,803
Repayments of long-term borrowings (Note 23)		(44,188)	(48,759)	(291,843)
Proceeds from issuance of bonds (Note 23)		26,000	15,000	171,719
Redemption of bonds (Note 23)		(296)	(284)	(1,955)
Repayments of lease liabilities (Note 23)		(8,961)	(9,810)	(59,184)
Proceeds from sale of treasury stock		3	5	20
Purchase of treasury stock		(49)	(10,023)	(324)
Dividends paid (Note 28)		(24,714)	(24,161)	(163,226)
Capital contribution from non-controlling interests		10	10	66
Dividends paid to non-controlling interests		(5,973)	(7,253)	(39,449)
Payments for acquisition of interests in subsidiaries from		-			-
non-controlling interests		(15,599)
Net cash provided by (used in) financing activities		(26,016)	2,542	(171,825)
Effect of exchange rate changes on cash and cash equivalents		12,598	7,715	83,204
Net increase (decrease) in cash and cash equivalents		23,982	5,158	158,391
Cash and cash equivalents at the beginning of period (Note 8)		186,310	181,152	1,230,500
Cash and cash equivalents at end of period (Note 8)	¥	210,292	¥ 186,310	$1,388,891

The accompanying notes are an integral part of these consolidated financial statements.

6

Notes to Consolidated Financial Statements

1. Reporting Entity

Mitsui Chemicals, Inc. (hereinafter the "Company") is a company incorporated in Japan and is listed on the Prime Section of the Tokyo Stock Exchange. The address of its registered head office is disclosed on the Company's website (https://jp.mitsuichemicals.com/en/).

The consolidated financial statements of the Company and its subsidiaries (hereinafter collectively the "Group") with a closing date as of March 31 comprise the Group and the Group's interests in associates and joint arrangements.

The Group is primarily engaged in business activities related to the manufacture and sale of goods or services in the Life & Healthcare Solutions, Mobility Solutions, ICT Solutions, and Basic & Green Materials segments.

The details of businesses and principal business activities of the Group are stated in Note 6 "Segment Information (1) Overview of reportable segments."

2. Basis of Preparation

(1) Compliance with IFRS

The consolidated financial statements of the Group have been prepared in compliance with IFRS published by the International Accounting Standards Board. In addition, since the Company qualifies as a "specified company complying with designated international accounting standards" prescribed in Article 1-2 of the Regulation on Consolidated Financial Statements, the provisions of Article 93 of that Regulation are applied.

The Group's consolidated financial statements were approved on June 25, 2024 by Osamu Hashimoto, Representative Director, Member of the Board, President & CEO, and Hajime Nakajima, Member of the Board, Representative Director, Managing Executive Officer & CFO.

(2) Functional currency and presentation currency

The consolidated financial statements of the Group are presented in Japanese yen, which is the Company's functional currency, and figures are rounded to the nearest million yen. The translation of yen amounts into U.S. dollar amounts is included solely for the convenience of readers, using ¥151.41=US$1.00, the approximate rate of exchange in effect on March 31, 2024. The translation should not be construed as a representation that yen amounts have been, or could in the future be, converted into U.S. dollars at the above or any other rate.

3. Material Accounting Policies

1. Basis of consolidation
   (i) Subsidiaries
   Subsidiaries are entities that are controlled by the Group. Control is deemed to be achieved when the Group is exposed or has rights to variable returns from its involvement with an entity and has the ability to affect those returns through its power over the entity.
   The financial statements of subsidiaries are included in the consolidated financial statements of the Group from the date when control is obtained until the date when it is lost.
   Changes in ownership interests in subsidiaries that do not result in loss of control are accounted for as equity transactions. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity attributable to owners of the parent. Upon loss of control over a subsidiary, the Group remeasures any retained investment in the subsidiary at fair value at the date of loss of control and recognizes gains or losses resulting from the loss of control in profit or loss.

(ii) Associates and joint arrangements

Associates are entities in which the Group has significant influence over the financial and operating policies but does not have control or jointly control. The Group is presumed to have significant influence over another entity when it holds at least 20% but 50% or less of the voting rights of the entity.

Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Investments in joint arrangements are classified as joint operations or joint ventures depending on the rights and obligations of the parties to the arrangement.

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

If the Group has an interest in a joint operation, the Group only recognizes an amount equivalent to its share of the assets, liabilities, revenues and expenses generated from the joint operation.

7

The balances of receivables and payables and transactions among the Group and its joint operations, as well as unrealized gains or losses arising from these transactions are eliminated in preparing the consolidated financial statements.

When an entity ceases to be an associate or joint venture and is no longer accounted for using the equity method, the Group remeasures any retained investment in the entity at fair value at the date of discontinuing the use of the equity method and recognizes gains or losses resulting from the discontinued use of the equity method in profit or loss, except when the entity becomes a consolidated subsidiary.

(2) Business combinations

Business combinations are accounted for using the acquisition method. Identifiable assets and liabilities assumed of an acquiree are, in principle, measured at their acquisition-date fair value.

Goodwill is recognized as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree; over the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed. Conversely, any negative goodwill is immediately recognized in profit or loss.

The consideration transferred is measured as the sum of the fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer.

The Group elects to measure non-controlling interest in the acquiree for each business combination at either fair value or at the proportionate share of the recognized amounts of identifiable net assets.

If initial accounting for a business combination is incomplete by the end of the period in which the combination occurs, the items for which the accounting is incomplete are measured at provisional amounts. Those provisional amounts recognized at the acquisition date are retrospectively adjusted if new information obtained within one year from the acquisition date, i.e., measurement period, would have affected the measurement of the amounts recognized at the acquisition date.

If a business combination is achieved in stages, the Group remeasures its previously held equity interests in the acquiree at its acquisition-date fair value, and recognizes the resulting gains or losses, if any, in profit or loss or other comprehensive income.

Additional acquisition of non-controlling interests is accounted for as an equity transaction, and therefore goodwill is not recognized with respect to such a transaction.

1. Foreign currency translation
   (i) Foreign currency transactions
   Foreign currency transactions are translated into respective functional currencies of the Company and its subsidiaries at the spot exchange rate at the date of the transaction or at the exchange rate that approximates the spot exchange rate at the date of the transaction.
   Monetary assets and liabilities denominated in foreign currencies at the fiscal year-end are translated into each functional currency at the exchange rate at the fiscal year-end.Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the functional currencies at the exchange rate prevailing at the date that the fair value was determined.
   Exchange differences arising from such translations and settlements are recognized in profit or loss. However, exchange differences arising from equity instruments measured through other comprehensive income and cash flow hedges are recognized in other comprehensive income.

(ii) Translation of foreign operations

Assets and liabilities of foreign operations are translated into Japanese yen at the prevailing exchange rate at the fiscal year-end. Revenues and expenses are translated into Japanese yen at the average exchange rate during the period, except when the exchange rate fluctuates significantly. Exchange differences arising from such translations are recognized in other comprehensive income.

On the disposal of the entire interest in a foreign operation, or on the partial disposal of an interest in a foreign operation that involves the loss of control of a subsidiary or loss of significant influence over an associate, the cumulative amount of the exchange differences relating to that foreign operation is recognized in profit or loss at the time of disposal.

(4) Financial instruments

1. Financial assets (excluding derivatives)
2. 1. Initial recognition and measurement

Under IFRS 15 "Revenue from Contracts with Customers," the Group initially recognizes trade receivables when it satisfies its performance obligations and acquires unconditional rights to consideration. All other financial assets are initially recognized on the transaction date when the Group becomes a party to the contractual provisions of the assets.

At initial recognition, the Group classifies financial assets into those measured at amortized cost, those measured at fair value through profit or loss and those measured at fair value through other comprehensive income.

Financial assets are classified as financial assets measured at amortized cost if both of the following conditions are met:

• the financial assets are held based on a business model whose objective is to hold assets in order to collect contractual cash flows; and
• the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

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Notes to Consolidated Financial Statements

Debt instruments are classified as financial assets measured at fair value through other comprehensive income if both of the following conditions are met. All other debt instruments are classified as financial assets measured at fair value through profit or loss.

• the financial assets are held based on a business model whose objective is achieved by both collecting contractual cash flows and selling assets and;
• the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
  Equity instruments, excluding those held for trading purposes, are classified as financial assets measured at fair value through

profit or loss. However, except for those held for trading purpose, each equity instrument is designated as measured at fair value through profit or loss or as measured at fair value through other comprehensive income. Such designations are applied consistently.

Financial assets are initially measured at fair value plus transaction costs that are directly attributable to the financial assets. However, transaction costs attributable to financial assets measured at fair value through profit or loss are recognized in profit or

loss as incurred.

ii) Subsequent measurement

After their initial recognition, financial assets are measured according to their classification as follows:

(a) Financial assets measured at amortized cost

Financial assets measured at amortized cost are measured at amortized cost using the effective interest method.

(b) Financial assets measured at fair value

Financial assets other than those measured at amortized cost are measured at fair value.

Changes in fair value of financial assets measured at fair value are recognized in profit or loss or other comprehensive income. For equity instruments that are designated as measured at fair value through other comprehensive income, changes in fair value

are recognized in other comprehensive income and reclassified to retained earnings in case of derecognition or significant decrease in fair value.

iii) Derecognition

The Group derecognizes financial assets when contractual rights to cash flows from the financial assets expire or when the contractual rights to receive cash flows from the financial assets are transferred and substantially all the risks and rewards of ownership of the financial asset are thereby transferred.

iv) Impairment

At each fiscal year-end, the Group assesses whether the credit risk on a financial asset measured at amortized cost or a financial guarantee contract has increased significantly since initial recognition.

The Group measures allowance for doubtful accounts for financial assets at an amount equal to the lifetime expected credit losses if the credit risk on those financial assets has increased significantly since initial recognition.

If the credit risk on the financial assets has not significantly increased since its initial recognition, the Group measures allowance for doubtful accounts for financial assets at an amount equal to 12-month expected credit losses.

However, the Group always measures allowance for doubtful accounts at an amount equal to lifetime expected credit losses for trade receivables and lease receivables.

When determining whether the credit risk of a financial asset has increased significantly since its initial recognition, the Group evaluates by comparing the risk of a default occurring on the financial assets at each fiscal year-end with the risk of a default occurring on the financial assets at the date of initial recognition. The Group considers reasonable and supportable information about past events, current conditions and forecasts of future economic conditions that are available without excessive cost or effort (e.g., internal credit rating, external credit rating, etc.), as well as past due information.

Any financial assets are treated as credit-impaired financial assets if there is a request for changing terms and conditions for repayment from a debtor, serious financial difficulties of the debtor, or commencement of legal liquidation procedures due to bankruptcy and others of the debtor, etc. For any amount that cannot reasonably be expected to be recovered in the future, the carrying amount of financial assets is directly reduced, and the amount of corresponding allowance for doubtful accounts is also reduced.

Expected credit losses on financial instruments are measured as the present value of the difference between the contractual cash flows that are due to the Group and the cash flows that the Group expects to receive, and are recognized in profit or loss.

1. Financial liabilities (excluding derivatives)
2. 1. Initial recognition and measurement

At initial recognition, financial liabilities are classified as financial liabilities measured at amortized cost and financial liabilities measured at fair value through profit or loss. All financial liabilities are measured at fair value at initial recognition. However, financial liabilities measured at amortized cost are measured at fair value less directly attributable transaction costs.

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