Overview
(1) Policy for financial instruments
The Group manages temporary cash surpluses limited through bank deposits including time deposits, capital protected variable rate deposits and negotiable certification of deposits and deposits with Hitachi Group.
Further, the Group raises short-term capital through bank borrowings and deposits with Hitachi Group. The Group uses derivatives limited for the purpose of reducing risk and does not enter into derivatives for speculative or trading purposes.
(2) Types of financial instruments and related risk
Trade receivables —trade notes and accounts receivable—
are exposed to credit risk in relation to customers. In addition, the Group is exposed to foreign currency exchange risk arising from receivables denominated in foreign currencies.
Investment securities are exposed to market risk.
Those securities are composed of mainly shares of common stock of companies with which the Group has business relationships, or affiliated companies.
Substantially all trade payables —trade notes and accounts payable— have payment due dates within six months. Although the Group is exposed to foreign currency exchange risk arising from those payables denominated in foreign currencies.
Borrowings are raised mainly in connection with business activities. The Group is exposed to interest rate fluctuation risk.
Regarding derivatives, the Group enters into forward foreign exchange contracts to reduce the foreign currency exchange risk arising from the receivables and payables denominated in foreign currencies.
Information regarding the method of hedge accounting, hedging instruments and hedged items, hedging policy, and the assessment of the effectiveness of hedging activities is found in Note 2.q.
(3) Risk management for financial instruments.
(a) Monitoring of credit risk (the risk that customers or counterparties may default)
For receivables, the Group sets up internal policies for new customers and credit exposure and monitors due dates and outstanding balances by individual customer. The Group also reviews the financial position of major customers each year.
The Group also believes that the credit risk of derivatives is insignificant as it enters into derivatives transactions only with financial institutions which have a sound credit profile.
(b) Monitoring of market risks (the risks arising from fluctuations in foreign exchange rates, interest rates and others)
For trade receivables and payables denominated in foreign currencies, the Group identifies the net position of each currency and enters into forward foreign exchange contracts to hedge such risk.
Borrowings primarily consist of short-term bank loans with limited interest rate risk.
Investment securities are mainly marketable securities and the Group reviews the fair values of such financial instruments quarterly. For investment securities other than marketable securities, the Group reviews the financial position of the issuers.
In conducting derivative transactions, the division in charge of each derivative transaction
follows the internal policies, which set forth delegation of authority. Reports including actual transaction data are submitted to top management for their review.
(c) Monitoring of liquidity risk (the risk that the Group may not be able to meet its obligations on scheduled due dates)
The Group sets up payment dates for payables and the related division prepares and updates its cash flow plans and maintains the short-term liquidity at certain level.
(4) Supplementary explanation of the estimated fair value of financial instruments
The fair value of financial instruments is based on their quoted market price, if available. When there is no quoted market price available, fair value is reasonably estimated. Since various assumptions and factors are reflected in estimating the fair value, different assumptions and factors could result in different outcomes.
Estimated fair value of financial instruments
Carrying value of financial instruments on the accompanying consolidated balance sheets of March 31, 2012 and estimated fair value are shown in the following table. The following table does not include financial instruments for which it is not practicable to estimate the fair value (Please refer to Note 2 below).
Millions of Yen 2012 Carrying
value
Estimated
Fair Value Difference Assets
Cash and time deposits ……… ¥ 12,001 ¥ 12,001 ¥ —
Deposits with Hitachi Group ……… 32,741 32,741 —
Trade notes and accounts receivables ……… 39,705 39,704 (1) Investment
Held-to-maturity debt securities ……… 16 16 —
Investment securities ……… 1,005 1,005 —
Liabilities
Trade notes and accounts payable ……… (30,980) (30,980) —
Short-term bank loans ……… (554) (554) —
Long-term payables ……… (218) (218) —
Thousands of U.S. Dollars 2012
Carrying value
Estimated
Fair Value Difference Assets
Cash and time deposits ……… $ 146,015 $ 146,015 $ — Deposits with Hitachi Group ……… 398,357 398,357 — Trade notes and accounts receivable ……… 483,089 483,077 (12) Investments
Held-to-maturity debt securities ……… 195 195 — Investment securities ……… 12,228 12,228 — Liabilities
Trade notes and accounts payable ……… (376,932) (376,932) —
Short-term bank loans ……… (6,740) (6,740) —
Long-term payables ……… (2,652) (2,652) —
Millions of Yen 2011 Carrying
value
Estimated
Fair Value Difference Assets
Cash and time deposits ……… ¥ 10,775 ¥ 10,775 ¥ —
Deposits with Hitachi Group ……… 34,140 34,140 —
Trade notes and accounts receivable ……… 40,044 40,040 (4) Investments
Held-to-maturity debt securities ……… 17 16 (1)
Investment securities ……… 1,380 1,380 —
Liabilities
Trade notes and accounts payable ……… (28,813) (28,813) —
Short-term bank loans ……… (815) (815) —
Long-term payables ……… (32) (32) —
The amount in parentheses represents net liability position.
Notes:
1. Methods to determine the estimated fair value of financial instruments and other matters related to securities and derivative transactions
Cash and time deposits and Deposits with Hitachi Group
Since these items are mainly settled in a short period of time, their carrying value approximates fair value.
Trade notes and accounts receivable
The fair value of trade notes and accounts receivable is based on the present value of the total of principal and interest discounted by the interest rate.
Investments
The fair value of investments is based on quoted market prices.
Trade notes and accounts payable and Short-term bank loans
Since these items are settled in a short period of time, their carrying value approximates fair value.
Long-term borrowings
The fair value of long-term payables is based on the present value of the total of principal and interest discounted by the interest rate to be applied if similar new borrowings were entered into.
Derivatives transactions
There were no such transactions.
2. Financial instruments for which it is not practicable to estimate the fair value
Millions of Yen
Thousands of U.S. Dollars
2012 2011 2012
Unlisted stocks ……… ¥327 ¥380 $3,979
Because no quoted market price is available and it is extremely difficult to determine the fair value, the above financial instruments are not included in the above table.
3. Redemption schedule for receivables and marketable securities with maturities at March 31, 2012
Millions of Yen 2012
Due within One Year
Due after One Year Through Five Years
Due after Five Years through Ten Years
Due after Ten Years
Cash and time deposits ……… ¥12,001 ¥ — ¥ — ¥ —
Deposits with Hitachi Group……… 32,741 — — —
Trade notes and accounts receivable ……… 39,173 532 — —
Investment securities
Held-to-maturity debt securities
(government bonds) ……… — 16 — —
Total ……… ¥83,915 ¥548 ¥ — ¥ —
Thousands of U.S. Dollars 2012
Due within One Year
Due after One Year through Five Years
Due after Five Years through Ten Years
Due after Ten Years Cash and time deposits ……… $ 146,015 $ — $ — $ —
Deposits with Hitachi Group……… 398,357 — — —
Trade notes and accounts receivable ……… 476,616 6,473 — —
Investment securities
Held-to-maturity debt securities
(government bonds) ……… — 194 — —
Total ……… $1,020,988 $6,667 $ — $ —
Millions of Yen 2011
Due within One Year
Due after One Year Through Five Years
Due after Five Years through Ten Years
Due after Ten Years
Cash and time deposits ……… ¥10,675 ¥ 100 ¥ — ¥ —
Deposits with Hitachi Group……… 34,140 — — —
Trade notes and accounts receivable ……… 39,022 1,022 — —
Investment securities
Held-to-maturity debt securities
(government bonds) ……… — 17 — —
Total ……… ¥83,837 ¥1,139 ¥ — ¥ —