OBAYASHI CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Year Ended March 31, 2023
Independent Auditor's Report
The Board of Directors
OBAYASHI CORPORATION
Opinion
We have audited the accompanying consolidated financial statements of OBAYASHI CORPORATION and its consolidated subsidiaries (the Group), which comprise the consolidated balance sheet as at March 31, 2023, and the consolidated statements of income, comprehensive income, changes in net assets, and cash flows for the year then ended, and notes to the consolidated financial statements.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at March 31, 2023, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with accounting principles generally accepted in Japan.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in Japan. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Japan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a whole, and in forming the auditor's opinion thereon, and we do not provide a separate opinion on these matters.
Estimation of total construction revenue and total construction costs in applying the method to recognize revenue by satisfying performance obligations over a certain period of time
Description of Key Audit Matter | Auditor's Response | |||
As described in "(1) Application of the method | We mainly performed the following procedures | |||
to recognize revenue by satisfying performance | to evaluate the estimates of total construction | |||
obligations over a certain period of time" under "4. | revenue and total construction costs in applying the | |||
Significant Accounting Estimates" in the notes to | method to recognize revenue by satisfying | |||
the | consolidated | financial | statements, | performance obligations over a certain period of |
OBAYASHI CORPORATION (the | Company) | time.(1) Evaluation of internal control | ||
and its consolidated subsidiaries (the Group) apply | We evaluated the design and operation of the | |||
the | method to recognize revenue by satisfying | following internal controls relating to estimates of |
Ernst & Young ShinNihon LLC
performance obligations over a certain period of | total construction revenue and total construction | ||||||
time for construction contracts based on estimates | costs. | ||||||
of total construction revenue, total construction | ・ We evaluated controls to ensure reliability by | ||||||
costs, and progress towards satisfying performance | requiring that operating budgets on which | ||||||
obligations, with the exception of construction | estimates of total construction costs are based | ||||||
contracts having very short construction periods. | are prepared by persons in charge of | ||||||
The method of estimating the degree of progress in | construction work who have specialized | ||||||
satisfying performance obligations is calculated as | knowledge, and that the necessary approval for | ||||||
the ratio of the cost incurred to the estimated total | such operating budgets is obtained from | ||||||
cost of construction (input method). If it is likely | construction and other such departments that | ||||||
that total construction costs associated with | perform functions such as construction | ||||||
construction contracts will exceed total | management, progress management, and | ||||||
construction revenue and if the amount of the | logistics support. | ||||||
excess can be reasonably estimated, then the | ・ We evaluated controls to confirm that each of | ||||||
amount resulting from deducting the profit or loss | the elements of total construction costs is | ||||||
already recorded for such construction contracts | accumulated and calculated in detail based on | ||||||
from the expected amount of the excess of costs | objective prices such as internally-approved | ||||||
over revenue ("Loss on construction contracts") is | standard unit prices and third party quotations. | ||||||
accounted for as loss in the period in which Loss | ・ We evaluated controls for revising estimates of | ||||||
on construction contracts is expected, and a | total construction costs in a timely manner in | ||||||
provision for Loss on construction contracts is | accordance with factors such as the status of | ||||||
recorded. The Company recognized revenues from | construction and the amount of costs actually | ||||||
construction contracts using the method to | incurred, or changes in specifications | ||||||
recognize revenue by satisfying performance | instructed by customers, and controls to | ||||||
obligations over a certain period of time of | confirm that revisions are made in a timely and | ||||||
1,242,167 million yen, accounting for 67.2% of | appropriate manner. | ||||||
consolidated revenues from construction contracts | ・ We evaluated controls to ensure reliability by | ||||||
of 1,847,688 million yen for the fiscal year ended | requiring that estimates of total construction | ||||||
March 31, 2023. The provision for Loss on | revenue are calculated by accumulating | ||||||
construction contracts was 43,205 million yen for | information from materials such as | ||||||
the fiscal year ended March 31, 2023 (53,146 | construction instructions and quotations, and | ||||||
million yen for the fiscal year ended March 31, | that the necessary approval for such | ||||||
2022). | calculations is obtained. | ||||||
In applying the method to recognize revenue by | ・ We evaluated controls for revising estimates of | ||||||
satisfying performance obligations over a certain | total construction revenue in a timely manner | ||||||
period | of | time, revenues | from | construction | |||
in accordance with factors such as the status of | |||||||
contracts are determined by | multiplying total | ||||||
discussions with ordering parties, and controls | |||||||
construction | revenue by | progress | towards | ||||
to confirm that revisions are made in a timely | |||||||
satisfaction of performance obligations, which is | |||||||
and appropriate manner. | |||||||
based on total construction costs and corresponds | |||||||
to costs actually incurred up until the end of the | (2) Evaluation of estimates of total construction | ||||||
fiscal | year. | Accordingly, | it | is | necessary to | revenue | |
reasonably estimate total construction | revenue, | ||||||
We identified construction contracts in which | |||||||
total construction costs, and progress towards | |||||||
there was either material or qualitative uncertainty | |||||||
satisfaction of performance obligations as of the | over the estimate of total construction revenue in | ||||||
end of the fiscal year. In addition to the | light of factors such as construction contract | ||||||
construction contracts undertaken by the Group | amount, profit (loss) on construction, construction | ||||||
being individual in nature as they involve | details, and the status of construction, and | ||||||
specifications and construction periods that vary | performed the following procedures. We also | ||||||
by project, many such contracts span long | identified construction contracts subject to | ||||||
construction periods, making it likely that total | consideration that meet certain conditions set by us | ||||||
construction revenue and total construction costs | (including construction profit margin levels and | ||||||
will change during the course of construction due | fluctuations). In addition, to complement the | ||||||
to additions | and changes to | construction details | identification of the aforementioned construction |
Ernst & Young ShinNihon LLC
instructed by ordering parties, and changes to | contracts, we also used Project Progress Anomaly | |
construction details caused by certain facts coming | Detector (the tool that detects unusual progress in | |
to light and conditions at construction sites | construction contracts in which the method to | |
changing after the start of construction. | recognize revenue by satisfying performance | |
(Total construction revenue) | obligations over a certain period of time is applied | |
Although total construction revenue, which | based on forecasts of progress towards completion | |
serves as a basis for revenue recognition, is based | of construction using machine learning, as well as | |
on construction contract amounts, construction | makes forecasts of construction contracts in which | |
details and contracts tend to be modified while | total construction costs exceed total construction | |
construction | is still in progress due to new | revenue). (The same applies to (3) below). |
agreements | between counterparties, making | ・ We compared the construction contract |
estimates of additional contract amounts arising | amounts, which are incorporated into | |
from changes in construction details uncertain | estimates of total construction revenue, to | |
until a final agreement is reached with the ordering | construction contracts. | |
party. | ・ Of additional construction contract amounts | |
(Total construction costs) | that are incorporated into estimates of total | |
Although total construction costs are based on | construction revenue, we compared the portion | |
operating budgets for each construction contract | in existing contracts in effect to construction | |
and estimated in line with revisions in operating | contracts, and compared the portion in | |
budgets resulting from changes in construction | contracts not in effect to basis materials such | |
details and fluctuations in building material and | as construction instructions and quotations | |
labor prices, total construction costs are also based | submitted to ordering parties after making | |
on certain assumptions or the judgment of persons | inquiries of persons such as on-site | |
directly or indirectly responsible for cost | construction managers regarding the details | |
management or progress management over | and basis for such amounts and inspecting | |
construction contracts since there is no uniform | minutes of discussions with ordering parties. | |
rule for making determinations applicable to all | ||
construction contracts for estimates of work | (3) Evaluation of estimates of total construction | |
details, working hours, and building material and | costs | |
labor costs necessary to complete construction or | We identified construction contracts in which | |
for the feasibility of cost reduction activities, and | there was either material or qualitative uncertainty | |
since many such contracts span long construction | over the estimate of total construction costs in light | |
periods. | of factors such as construction contract amount, | |
During the fiscal year ended March 31, 2023, | profit (loss) on construction, construction details, | |
raw materials and energy prices remained high due | and the status of construction, and performed the | |
to the impact of global supply chain disruptions | following procedures. | |
caused by the invasion of Ukraine by Russia and | ・ We compared estimates of total construction | |
yen depreciation, as well as construction prices | costs to operating budgets, which serve as the | |
rose significantly. As a result, it became difficult | basis for calculating such estimates, and | |
in the domestic building construction segment to | considered whether the details of estimated | |
take measures to absorb all of these effects at the | costs were consistent with construction | |
purchasing stage and in negotiations with ordering | deliverables, whether estimated costs were | |
parties. Consequently, total construction costs and | calculated by aggregating amounts by type of | |
total construction revenue were revised during the | construction, and whether operating budgets | |
fiscal year, resulting in many construction projects | contained significant cost reduction initiatives. | |
in which profit (loss) on construction levels were | ・ We compared the most recent estimates of | |
lower than initially expected. | total construction costs for each quarter with | |
Based on the above, we have determined that | the corresponding estimates of total | |
estimates of total construction revenue and total | construction costs for the preceding quarter | |
construction costs as it relates to application of the | and evaluated whether the details of material | |
method to recognize revenue by satisfying | quarter-to-quarter changes were reflected in | |
performance obligations over a certain period of | such estimates in a timely manner by making | |
time are of particular significance for the fiscal | inquiries of on-site construction managers | |
year ended March 31, 2023 and, accordingly, that | regarding these changes and reconciling these |
Ernst & Young ShinNihon LLC
this is a key audit matter. | changes to revised basis materials prepared by | |
on-site construction personnel. | ||
・ We inspected operating budgets and compared | ||
the estimated costs for each type of work to | ||
basis materials, such as quotations, from which | ||
costs are accumulated to serve as the basis for | ||
such estimated costs. | Additionally, we | |
compared the costs actually incurred relative | ||
to the estimated costs for each type of work | ||
and considered if actual costs have not | ||
exceeded estimated costs while also | ||
considering consistency | with construction | |
progress. In order to evaluate the feasibility of | ||
the significant cost reduction initiatives | ||
included in operating budgets, we considered | ||
the consistency between the cost reduction | ||
initiatives with construction progress by | ||
holding discussions with on-site construction | ||
managers regarding scenarios in which the | ||
initiatives could be implemented. | ||
・ We performed on-site observations for a | ||
portion of construction projects to consider if | ||
the status of construction is consistent with | ||
construction progress that we heard about in | ||
advance from construction departments or on- | ||
site construction managers, as well as with | ||
details of estimates of total construction costs. |
Assessment of indicators of impairment of investment and rental properties
Description of Key Audit Matter | Auditor's Response |
As described in "(2) Impairment of investment | We mainly performed the following procedures |
and rental properties" under "4. Significant | to evaluate the assessment of indicators of |
Accounting Estimates" in the notes to the | impairment of investment and rental properties. |
consolidated financial statements, the Group | (1) Evaluation of internal control |
recorded an impairment loss of 29 million yen on | We evaluated the design and operating |
investment and rental properties of 475,971 | effectiveness of internal controls relating to the |
million yen for the fiscal year ended March 31, | recognition of impairment loss on noncurrent |
2023 due to decreased profitability or property | assets, including investment and rental properties. |
prices resulting from changes in the business | |
environment. The Group's investment and rental | (2) Evaluation of determinations of whether there |
properties are used for various purposes, such as | are indicators of impairment |
office buildings and logistics facilities, and are | ・ We obtained materials prepared by the Group |
geographically diverse since they are also located | for considering whether assets are impaired |
overseas, such as in the UK and Thailand. | and evaluated the assessment of indicators of |
In assessing indicators of impairment of | impairment for properties that we selected |
investment and rental properties, estimates of net | based on materiality by, for example, agreeing |
operating income and the capitalization rate for | profit (loss) and carrying value by property to |
each individual investment and rental property that | the Group's accounting books. |
are used to determine market value are subject to | ・ We evaluated estimates of net operating |
uncertainty since they are greatly affected by | income, which is used to determine fair value, |
factors such as the economic environment, changes | for properties that we selected based on |
in interest rates, and competition in the real estate | materiality by comparing estimates of net |
market. | operating income for each property with actual |
Ernst & Young ShinNihon LLC
Attachments
- Original Link
- Original Document
- Permalink
Disclaimer
Obayashi Corporation published this content on 08 August 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 08 August 2023 08:26:00 UTC.