For the fiscal year ended March 31, 2016 （、2.6Mバイト）

(1)

(2)

（Millions of Yen）（Millions of Yen）

Cautionary Statement with Respect to Forward-looking Statements:

Statements made in this annual report with respect to the Company’s plans and projections as well as other statements that are not historical facts are forward-looking statements, which involve risks and uncertainties. Potential risks and uncertainties include, without limitation, general economic conditions in the Company’s markets, exchange rates and the Company’s ability to continue to win customers’ acceptance of its products, which are

Revenues Total assets

Corporate Name: Head Oﬃce:

Hitachi Kokusai Electric Inc. Akihabara UDX Building 11th loor, 4-14-1 Sotokanda, Chiyoda-ku, Tokyo 101-8980, Japan

Established: Fiscal Year-end: Accounting Auditor: Paid-in Capital: Employees: URL:

November 17, 1949 March 31

Ernst & Young ShinNihon LLC ¥10,058 million

4,980 (consolidated)

http://www.hitachi-kokusai.co.jp/global/

Financial Review ... 14

Consolidated Statements of Financial Position ... 15

Consolidated Statements of Proit and Loss ... 17

Consolidated Statements of Comprehensive Income ... 18

Consolidated Statements of Changes in Equity... 19

Consolidated Statements of Cash Flows ... 21

Notes to Consolidated Financial Statements... 23

Independent Auditor’s Report ... 62

Consolidated Financial Highlights... 1

A Message from the President ... 2

Directors and Executive Oicers ... 4

Corporate Governance ... 5

Review of Operations... 7

Research and Development... 9

Topics... 10

Global Network ... 12

Revenues by Segment

Total

¥180,740 million ¥180,740 millionTotal

Japan ¥91,787 million Note: The revenues are calculated based on the customers’ locations. Other, Adjustments

and eliminations ¥959 million

Eco- and Thin Film Processing ¥90,563 million U.S.A. ¥12,807 million Korea ¥25,344 million Taiwan ¥19,533 million

Europe and others ¥10,710 million Other Asia ¥20,559 million 49.4% _50.8% 11.4% 11.4% 14.0% 10.8% 7.1% 5.9% 5.9% 50.1% 0.5% 0.5%

Revenues by Region Video and Wireless

Network ¥89,218 million

（Millions of Yen）

Corporate Information

Corporate Data

Shareholder Information

Common Share:

Number of Common Shares Number of Shareholders Number of Shares per Unit

105,221,259 shares 7,708

100

Stock Listing:

Transfer Agent for Shares:

Tokyo (1st Section)

Tokyo Securities Transfer Agent Co., Ltd. 3-11, Kanda Nishiki-cho, Chiyoda-ku, （6F Kanda Nishiki-cho 3-chome Building）

Tokyo 101-0054, Japan Phone: +81-3-6833-3907

Stock Data

4,980 4,943

4,976 Number of employees

Major Shareholders: As of March 31, 2016

Breakdown of Shareholders by Category:

Name of Shareholder Hitachi, Ltd.

The Master Trust Bank of Japan, Ltd.(Trust Account)

Japan Trustee Services, Ltd.(Trust Account)

GOLDMAN SACHS INTERNATIONAL

GOLDMAN,SACHS & CO.REG

MSCO CUSTOMER SECURITIES

CBNY-GOVERNMENT OF NORWAY

53,070 4,087 3,754 1,975 1,372 1,280 1,217 850 849 846 51.67 3.97 3.65 1.92 1.33 1.24 1.18 0.82 0.82 0.82 Number of Shares Held (thousands) Percentage of Total (%)

CHASE MANHATTAN BANK GTS CLIENTS ACCOUNT ESCROW

BNP PARIBAS SECURITIES SERVICES LUXEMBOURG/ JASDEC/FIM/LUXEMBOURG FUNDS/UCITS ASSETS

STATE STREET BANK AND TRUST COMPANY 505223

*The above excludes 2,514 thousands of treasury shares (2.38%) held by Hitachi Kokusai Electric Inc.

Financial Institutions 13.64% Securities Companies 1.97% Other Corporations 51.17% Individuals and Others 11.99% Foreign Investors 21.20%

Return on attributable to owners of the parent / Return on Equity (ROE) (％) Ratio of equity attributable to owners of the parent to total assets / Equity Ratio (％) Price earnings ratio (PER) (times)

165,327

185,181 180,740 _17,471

(3)

Years Ended March 31

Consolidated Financial Highlights

（Millions of Yen）（Millions of Yen）

Revenues Total assets

Corporate Name: Head Oﬃce:

Hitachi Kokusai Electric Inc. Akihabara UDX Building 11th loor, 4-14-1 Sotokanda, Chiyoda-ku, Tokyo 101-8980, Japan

Established: Fiscal Year-end: Accounting Auditor: Paid-in Capital: Employees: URL:

November 17, 1949 March 31

Ernst & Young ShinNihon LLC ¥10,058 million

4,980 (consolidated)

http://www.hitachi-kokusai.co.jp/global/

Financial Review ... 14

Consolidated Statements of Financial Position ... 15

Consolidated Statements of Proit and Loss ... 17

Consolidated Statements of Comprehensive Income ... 18

Consolidated Statements of Changes in Equity... 19

Consolidated Statements of Cash Flows ... 21

Notes to Consolidated Financial Statements... 23

Consolidated Financial Highlights... 1

A Message from the President ... 2

Directors and Executive Oicers ... 4

Corporate Governance ... 5

Review of Operations... 7

Research and Development... 9

Topics... 10

Revenues by Segment

Total

¥180,740 million ¥180,740 millionTotal

Japan ¥91,787 million Note: The revenues are calculated based on the customers’ locations. Other, Adjustments

and eliminations ¥959 million

Eco- and Thin Film Processing ¥90,563 million U.S.A. ¥12,807 million Korea ¥25,344 million Taiwan ¥19,533 million

Europe and others ¥10,710 million Other Asia ¥20,559 million 49.4% _50.8% 11.4% 11.4% 14.0% 10.8% 7.1% 5.9% 5.9% 50.1% 0.5% 0.5%

Revenues by Region Video and Wireless

Network ¥89,218 million

Corporate Information

Corporate Data

Shareholder Information

Common Share:

Number of Common Shares Number of Shareholders Number of Shares per Unit

105,221,259 shares 7,708

100

Stock Listing:

Transfer Agent for Shares:

Tokyo (1st Section)

Tokyo Securities Transfer Agent Co., Ltd. 3-11, Kanda Nishiki-cho, Chiyoda-ku, （6F Kanda Nishiki-cho 3-chome Building）

Tokyo 101-0054, Japan Phone: +81-3-6833-3907

Stock Data

4,980 4,943

4,976 Number of employees

Major Shareholders: As of March 31, 2016

Breakdown of Shareholders by Category:

Name of Shareholder Hitachi, Ltd.

The Master Trust Bank of Japan, Ltd.(Trust Account)

Japan Trustee Services, Ltd.(Trust Account)

GOLDMAN SACHS INTERNATIONAL

GOLDMAN,SACHS & CO.REG

MSCO CUSTOMER SECURITIES

CBNY-GOVERNMENT OF NORWAY

53,070 4,087 3,754 1,975 1,372 1,280 1,217 850 849 846 51.67 3.97 3.65 1.92 1.33 1.24 1.18 0.82 0.82 0.82 Number of Shares Held (thousands) Percentage of Total (%)

CHASE MANHATTAN BANK GTS CLIENTS ACCOUNT ESCROW

BNP PARIBAS SECURITIES SERVICES LUXEMBOURG/ JASDEC/FIM/LUXEMBOURG FUNDS/UCITS ASSETS

STATE STREET BANK AND TRUST COMPANY 505223

*The above excludes 2,514 thousands of treasury shares (2.38%) held by Hitachi Kokusai Electric Inc.

Financial Institutions 13.64% Securities Companies 1.97% Other Corporations 51.17% Individuals and Others 11.99% Foreign Investors 21.20%

Return on attributable to owners of the parent / Return on Equity (ROE) (％) Ratio of equity attributable to owners of the parent to total assets / Equity Ratio (％) Price earnings ratio (PER) (times)

165,327

185,181 180,740 _17,471

(4)

A Message from the President

In regards to the market environment surrounding Hitachi Kokusai Electric Group (the “Group”) in iscal 2015, the United States economy remained strong, but there was a slowdown in the Chinese economy and a downturn in the economies of emerging nations like Brazil. This meant that the overall situation continued to remain luid. In addition, while the Japanese economy continued to make a gradual recovery, the situation deteriorated from the beginning of the year due to factors such as a strong yen and low stock prices.

Under such circumstances, the Group has promoted policies aimed at expanding our global business and launching new business. Together with this, we proactively tackled business activities toward acquiring orders in Japan and overseas.

In regards to our current operating situation, there has been a reduction in public work sector investment in Japan and a decrease in DRAM-related investment by semiconductor manufacturers. This led to a year-on-year decrease in orders of 14.6% to 162,626 million yen and a year-on-year decrease in revenues of 2.4% to 180,740 million yen. In addition to a decrease in revenues, the development of unproitable projects led to a year-on-year decrease in operating income of 18.6% to 16,149 million yen and a year-on-year decrease in net income attributable to shareholders of parent company of 25.6% to 12,998 million yen.

trusted by customers and creating new value in the next era in line with our Medium-term Management Plan “HK-AV10” for iscal 2010 to iscal 2015. Therefore, we worked toward a goal of “to become the top global company in Video and Wireless Network System Solutions,” “to become the top global company in Eco- and Thin Film Processing Solutions” and an operating income ratio of 10% as our key performance indicator.

During the period of this plan, we were afected by the Great East Japan Earthquake. However, we were able to create products and systems with a high market share in each segment by promoting business structural reforms. This meant that we were able to achieve an operating income ratio of over 10% for two years in a row in iscal 2013 and iscal 2014.

Nevertheless, although we recorded highest revenues in our Eco- and Thin Film Processing Segment in iscal 2015, we failed to achieve our plan because of a rapid change in the business environment for the Video and Wireless Network Segment.

Looking at the business environment in the future surrounding the Group, it is possible to see strength in the United States in the global economy, but there are fears over the economic trends in China and the long-term slump in resource prices. Therefore, we expect this unpredictable situation to continue. In addition, in the Japanese economy, the relevant markets have entered a lull from all the reconstruction demand regarding the Great East Japan Earthquake. We expect that there will be a further increase in the intensity of competition in Japan and overseas.

Under this business environment, the Group has now formulated a new Medium-term Management Plan. In this plan, in light of the qualitative changes occurring in social infrastructure as well as the innovations in the semiconductor industry brought about by the arrival of

1. Business Results

for the Fiscal Year Ending

March 31, 2016 (Fiscal 2015)

2. Prospects and Policies for the

Fiscal Year Ending March 31, 2017

“Hitachi Kokusai Electric Group strives to realize a society of security, safety and happiness, creates value by applying advanced technologies and pushes the boundaries of tomorrow.” Under this Corporate Statement, we will aim to be a social innovator trusted by customers and creating new value in the next era as a part of Hitachi Group.

For Video and Communication Solutions Segment, we are shifting our focus from system-specific sale to solutions businesses by utilizing our expertise in video and wireless technologies. For Thin Film Process Solutions Segment, we will strive to create cutting-edge thermal processes and investigate product lifecycle businesses.

Kaichiro Sakuma

(5)

we will work toward achieving an adjusted operating income ratio* of 12% in iscal 2018 based on the business policy of each segment and by using the technologies cultivated by the Group, working with the Hitachi Group, and engaging in collaborative-creation projects with our customers.

Looking to the future business direction of the Group, we have changed the names of our segments from iscal 2016. “The Video and Wireless Network” will now be known as “the Video and Communication Solutions.” Meanwhile, “the Eco- and Thin Film Processing” will now be known as “the Thin Film Process Solutions.”

Video and Communication Solutions Segment

We are shifting our focus from system-speciic sale to solutions businesses by utilizing our expertise in video and wireless technologies, with a plan to expand our global businesses while also to establish new businesses. We will also proactively strive to create new business through closer coordination with the Hitachi Group and collaboration with our customers in order to further strengthen our core business of Disaster-preventive Administration Radio Systems as well as Security and Surveillance Systems. We will promote total-solution businesses while working with the Hitachi Group, such as video security solutions and solutions for disaster prevention, disaster risk reduction, and risk management.

Thin Film Process Solutions Segment

We will continue to enhance the batch thermal processing equipment that makes up our core business, in order to create cutting-edge thermal processes, and investigate product lifecycle businesses. We will aim to expand our share of the market for mass production lines aimed at customers’ advanced devices by strengthening our development capabilities for new equipments and ilms for vertical semiconductor manufacturing equipment. In an efort to advance into new ields, we will work on development of treatment equipment for improving the ilm quality of wafers processed at low temperatures, and will soon establish a new business based on our work in this area.

To promote our service businesses growing steadily, we will further increase sophistication by expanding our parts and retroitting businesses, as well as the range of the services to support our customers’ operations, such

processes by using IT.

Strengthening Our Business Structure

We will continue to work on the Hitachi Smart Transformation Project with the aim of reforming to a cost structure that can compete in the tough global competition. For improvement in our cash low, we will review all processes from orders to payment and promote reform with the aim of improving the eiciency and sophistication of indirect business. Through this, we will strive to reform operations to generate cash.

In manufacturing, we will implement structural reforms aimed at strengthening our production structure with the aggregation of production lines in Japan and overseas to promote the optimization of our development and production structure. Together with this, we will continue to strongly promote eforts aimed at reducing design defects and failure costs.

Research and Development

We will strongly promote improvements in our product competitiveness and eforts toward new products/ields with the aim of further growing business in the future. We will continue to proactively work on research and development in ields where there are high hopes for growth in the future.

Implementing Compliance Thoroughly

We reviewed our company structure/business management methods and gave re-training to our workers in response to an on-site inspection by the Japan Fair Trade Commission in 2014. Together with this, we also listened to the opinions of experts outside our company to strengthen our level of compliance. We have now invited lawyers from outside the Company to set up a new Compliance Committee. We will ensure we are thoroughly compliant with the law by periodically undergoing inspections and receiving advice about the Group’s compliance policies and adherence situation. This will include global points of view.

(6)

Directors and Executive Oicers

As of June 24, 2016

Kaichiro Sakuma

President and Chief Executive Oicer Supervising all business activities

Fumiyuki Kanai

Senior Vice President and Executive Oicer General Manager of the Semiconductor Process Engineering Division and General Manager of the Toyama Technology & Manufacturing Center

Satoru Nakamura

Vice President and Executive Oicer

Responsible for the promotion of South America business

Kazuro Iida

General Manager of the MONOZUKURI Management Division and the HiKQ Innovation Promotion Division and General Manager of the Tokyo Works and responsible for information system and procurement

Unryu Ogawa

Executive Oicer

Deputy General Manager of the Semiconductor Process Engineering Division

Akio Ito

Senior Vice President and Executive Oicer Responsible for the video & communication systems business

Kiyoshi Komatsu

General Manager of the Sales Management Division, Video & Communication Systems Division and responsible for sales

Hitoshi Machida

Vice President and Executive Oicer General Manager of the Strategic Planning Management Division and responsible for research & development and corporation moral

Yuji Kamiya

Executive Oicer

General Manager of the Finance & Accounting Division and responsible for the human resources & corporate administration

Yutaka Saito

Chairman and Chairman of the Board Executive Vice President and Executive Oicer, Hitachi, Ltd.

Kaichiro Sakuma

Member of Nominating Committee and Compensation Committee

President and Chief Executive Oicer

Kenshiro Koto

Outside Director

Member of Nominating Committee, Audit Committee and Compensation Committee

Hideto Mitamura

Outside Director

Member of Nominating Committee, Audit Committee and Compensation Committee

Takeo Kawano

Member of Audit Committee 　

Directors

(7)

Corporate Governance

Basic Structure

The Company has adopted a “Company with Three Committees” system under the Companies Act of Japan to ensure timely decision making as well as transparent management. The Board of Directors has the Nominating Committee, the Audit Committee and the Compensation Committee.

While the Board of Directors, whose predominant members are external appointments, determines the Company’s basic management policies and delegates decision-making authority to Executive Oicers to promote eicacy of the Company’s operations, it oversees and supervises the Company’s operations in unison with each Committee. Through this framework, the Company promotes management reform by placing every emphasis on securing the adequacy of its operations. Within the above framework, Outside Directors remain independent from the Company, actively providing their objective opinions. In this regard, Outside Directors fulill an important role and function in further enhancing the transparency and soundness of the Company’s management.

An overview of the Company’s current framework is provided briely as follows.

(1) The Execution of Business

Within the scope of statutory and regulatory requirements, considerable authority is delegated to Executive Oicers with respect to matters related to the decision of management in an efort to accelerate the decision-making process.

While individual Executive Oicers are provided with decision-making authority and execute operations for their particular areas of responsibility, in accordance with the segregation of duties determined by the Board of Directors, Executive Oicers’ Meeting comprising all Executive Oicers is held to deliberate on matters of major importance from multifaceted perspectives, and Executive Oicers make decision on the matter in order to

(2) The Monitoring and Audit Functions

In collaboration with each Committee, which is the internal organization, the Board of Directors monitors the overall management including the execution of business.

In addition, the activities of the Board of Directors and each Committee are supported by the responsible departments. A designated specialist department has been established particularly for the Audit Committee to ensure that audits are conducted in an appropriate and efective manner. Employees within this department are not subject to the directions and instructions of Executive Oicers.

a. The Board of Directors

The Board of Directors monitors the management. Accordingly, the Board of Directors receives reports from each Committee in connection with the status of each Committee’s activities. At the same time, the Board of Directors receives reports directly from each Executive Oicer outlining details of the execution of their duties.

b. The Nominating Committee

The Nominating Committee determines candidates for the position of Director, who are then proposed at the Company’s shareholder meetings for approval. In order to make better managerial judgment, the Nominating Committee selects Director candidates from both inside and outside the Company, based on comprehensive criteria that encompass personality, experience, knowledge, ability and other factors, which are necessary for Directors of the Company who contribute to its management.

c. The Audit Committee

(8)

promotes the sharing of information and other collaborative measures regarding the audits conducted by the Internal Audit Department, Accounting Auditor, and audit members of Group companies.

d. The Compensation Committee

The Compensation Committee formulates the basic policy for determining the compensation to be paid to the Company’s Directors and Executive Oicers. At the same time, the Compensation Committee evaluates the performance of each Director and Executive Oicer and determines the evaluation amount.

Internal Control / Risk

Management

The Company designates responsible Executive Oicers, formulates internal rules and regulations as well as operating standards in responsible departments and implements business audits on a regular basis with respect to all risks associated with the Company’s business activities including compliance, information security, the environment, disaster, quality assurance and exports. Drawing on

Executive Oicer and other meetings, Executive Oicers work diligently to identify potential new risks and formulate preventive measures.

The Company requests Group companies to establish a system which is equivalent to that of the Company depending on the size of each company. Also, the Company has developed a system in which important matters related to Group companies are to be deliberated on at the Companies’ Executive Oicer and other meetings.

In connection with its internal reporting systems, the Company has adopted a structure that is supported by legal counsel. Every efort is also made to secure the fairness of the internal reporting systems in order to allow a wide range of personnel including the Company’s full- and part-time employees as well as the employees of Group companies and business partners to look to the system.

Corporate Governance Structure (as of June 24, 2016)

General Meeting of Shareholders

Nominating Committee (2 Outside Directors among the 3 Directors) Determine the Nomination of Directors

Compensation Committee (2 Outside Directors among the 3 Directors) Determine the Remuneration of Directors and Executive Officers

Audit Committee (2 Outside Directors among the 3 Directors) Audit the Performance

Compensation Committee Board of Directors*

Business Execution Report Assistance Cooperation Assistance Cooperation

Appointment and Dismissal of Executive Officers

Board of Directors (2 Outside Directors among the 5 Directors)

Executive Officers’ Meeting (9 Executive Officers)

Appointment and Dismissal of Accounting Auditor

Audit Committee Appointment and Dismissal of Directors

* The Board of Directors is composed of 6 Directors 4 of whom are Outside Directors including 2 Independent Director. Note: The criteria for Outside and Independent Directors conform with those of the Tokyo Stock Exchange.

Audit Committee Office

General Meeting of Shareholders Decision-making and Supervision

Appointment and Dismissal Appointment and Dismissal

Supervision Audit

Chief Executive Officer Executive Officer

Strategic Planning Management Division

(9)

Video and Wireless Network

Wireless Communication Systems, Information Solutions,

Broadcasting Systems, and Surveillance Cameras and Video Processing Systems

Review of Operations

●Wireless Communication Systems Infrastructure for Mobile Telecommunications Public Protection Disaster-Relieve (PPDR) Systems Radio Communication Systems for Transportation Radio Communication Systems for Fire Departments Land Mobile Radio Communication Products High-speed Wireless Repeaters

Wireless Packet Communication Unit for Cellular Systems Radiophone Equipment for Flight Control

Aircraft Communication Systems and Shipboard Communication Systems

●Information Solutions

CRM System for Securities and Financial Establishments

Contents Delivery Service for Securities Companies and Financial Institutions

Multimedia Information Display Systems

●Broadcasting Systems Tapeless Servers Systems Transmitter Systems

Short Wave Digital Radio Broadcasting Systems Transmission/Receiver Systems

Broadcasting Cameras Area One-seg Systems

V-Low Multimedia Broadcasting Systems CATV System

● Surveillance Cameras and Video Processing Systems Wide-area Network Surveillance Systems

Plant Monitoring Systems Security Surveillance Systems Industrial Video Cameras

Revenues Operating income

2014 2015 2016

89,218 96,313 88,030 5,234 3,181 458 0 25,000 50,000 75,000 100,000 0 2,000 4,000 6,000 8,000

49.4

%

10.6

%

¥89,218

million

Revenues and operating income

Share of revenues Overseas revenues ratio

The market environment underwent signiicant changes in the Video and Wireless Network Segment. There was a return to normal in terms of reconstruction demand from the Great East Japan Earthquake in the Japanese market. There was also a shift to investment in the defense sector and communications infrastructure. In addition, there was a downturn in the economies of emerging nations. This meant that orders received decreased year-on-year by 20.2% to 80,278 million yen, while revenues decreased year-on-year by 7.4% to 89,218 million yen.

Operating income decreased year-on-year by 91.2% to 458 million yen. This was due to the development of unproitable projects and the implementation of business structural reforms in subsidiaries in the Group in Japan and overseas in addition to a decrease in revenues.

(10)

Product Line

Eco- and Thin Film Processing

Semiconductor Manufacturing Systems

●Semiconductor Manufacturing Systems

Batch Thermal Process System

Batch High Temperature Anneal Processing System Bach SiGe/Si Epitaxial Growth System

Single Wafer Plasma Nitridation / Oxidation System Single Wafer Plasma Dry Strip System

In the Eco- and Thin Film Processing Segment, despite a reduction in DRAM-related investment, service business remained steady in addition to our ongoing product orders against a backdrop of bullish capital investment by semiconductor manufacturers in Asia. Therefore, while orders received decreased year-on-year by 8.5% to 81,368 million yen, revenues increased year-on-year by 2.9% to a record high of 90,563 million yen.

Operating income decreased year-on-year by 3.0% to 15,775 million yen. This was due to aggressive upfront investment.

Revenues Operating income

2014 2015 2016

90,563

88,025

76,386 16,260

13,121

15,775

0 25,000 50,000 75,000 100,000

0 5,000 10,000 15,000 20,000

50.1

%

87.8

%

¥90,563

million

Revenues and operating income

(11)

Research and Development

Eco- and Thin Film Processing

In the wireless communication systems sector, we have developed Disaster-preventive Mobile Radio Communication Systems/ diferentiating functions for Disaster-preventive Broadcast Communication Systems, power-saving security wireless terminals, IoT/Machine to Machine (M2M) modules, optical transmitters for railroad to solve dead zone of mobile telephone, high-speed wireless repeaters and miniaturized terrestrial high-speed IP communications equipment. In the broadcasting systems sector, we have developed 1.2/2.3GHz band ultra-compact integrated MWL, High Performance Multi-format Compact HDTV Box Camera and next-generation transposer according to policy of the efective utilization of frequencies from the Ministry of Internal Afairs and Communications. In the surveillance system sector, we have developed generic/in-vehicle network digital recorders (NDRs), outdoor PTZ network dome Full-HD Camera, High-sensitivity All-in-one PTZ Full-HD Camera and security surveillance systems platform. The R&D expenditure for this business is ¥5,947 million.

15,000

12,596

11,158 11,205 11,383 （Millions of Yen）

Video and Wireless Network Eco- and Thin Film Processing Total R&D Costs

Video and Wireless Network

The semiconductor market is expected to grow even further driven by demands for smartphones, tablet PCs and the IoT. Higher performance and aggressive scaling of devices will be required in the near future. In order to meet such demands, the Company is promoting R&D of deposition technologies for high functional ilms formation technology compatible with three-dimensional channel devices and memories (non-volatile high-speed RAM), and development of processes at low temperature and high-quality ilm formation technologies for cutting-edge devices such as new memories. The vertical furnace is our core product and this can deposit ilms on multiple wafers at once. This can provide high functional ilms and conformal ilms for three-dimensional structures at a low cost. However, we are pushing development of technology with the aim of shortening the processing time, enhancing particle performance and improving thickness uniformity. Moreover, with regards to single wafer tool, we are promoting developing various treatment technologies that can improve ilms quality at low temperature using our unique activation technologies such as plasma. Regarding the elemental technologies for new gas supply systems, reaction chambers and exhaust systems, along with using simulation technology, we are proactively collaborating The Group devotes particular emphasis on its

Research and Development (“R&D”) activities methodically in order to contribute to a safe and prosperous society by providing products which serve as a foundation for Internet of Things (“IoT”).

Our R&D activities are managed and conducted in relationship with the following three phases. The irst phase entails the development of new products and technologies in which business divisions and the Group companies are involved. The second phase encompasses the development of the next-generation products and technologies undertaken by business divisions. Finally, the third phase applies to the development of next, next-generation technology which provides eicient application products compatible with state-of-the-art technology, which is conducted in collaboration with such external organizations as the research institutes

of Hitachi, Ltd. and universities. As we engage in this three-phase R&D with a mission of a vision that traverses the present through to the future, we anticipate achieving sustainable growth of the Group. In iscal 2015, the Group undertook R&D expenditures of ¥11,383 million, which accounts for 6.3% of the Group’s total revenues.

(12)

Topics

We jointly developed a compact ultra-high deinition (8K) single-chip camera with the Japan Broadcasting Corporation (NHK) in April 2015. We miniaturized the camera/ optical unit and developed an integrated recording unit to make it even easier to produce video ahead of the arrival of the 8K era. This signiicantly improves mobility and makes it possible to support various operation modes, including outdoor recording. We will consider product deployment in the future with the aim of expanding the 8K market.

We launched a new HDTV Box Camera “DK-H200” in October 2015. This product achieves high sensitivity and a high signal-to-noise ratio (S/N) by employing the latest MOS sensor. This model can be used for high-quality shooting in a variety of settings, such as studios, ixed-point observation and teleconferences.

We established Hitachi Kokusai Electric Asia (Singapore) Pte. Ltd. (“HKAS”) in Singapore and started operations in July 2015 in order to accelerate our global expansion in video and wireless systems. HKAS supervises the business locations in South Korea and China, and creates further business opportunities for our video and wireless network systems in ASEAN countries, South Asia such as India, and Oceania, where signiicant market growth is expected. Together with this, we will continue to promote the sales of products and solutions by a global-network-driven business system, that carrying out manufacturing in the right places in the world and sales under the interregional cooperation.

Name Hitachi Kokusai Electric Asia (Singapore) Pte. Ltd. Managing Director Shinji Nakamura

Head Oice Location Singapore

Description of Business Import and export, sales, maintenance and service of _{broadcasting and video equipment}

Number of Employees 7

Date of Establishment April 1, 2015 Capital Stock 2,000,000 USD

Shareholder Hitachi Kokusai Electric Inc. 100% (Current as of June 30, 2016)

High Performance, Multi-format Compact, HDTV Box Camera: DK-H200

Establishment of a Local Subsidiary in Singapore and the Start of Operations

Joint Development of an 8K Camera System with the Japan

Broadcasting Corporation

Video and Wireless Network

(13)

The Company is establishing a new production facility at its Toyama Technology & Manufacturing Center site. Toyama Technology & Manufacturing Center handles the development and production of semiconductor manufacturing equipment, the main product produced by Hitachi Kokusai Electric's thin-ilm process solution. The new facility is expected to increase Hitachi Kokusai Electric's development capability. Construction of the new production facility started in December 2015, with operation scheduled to start in January 2017.

In March, 2016, the Company has been recognized as Intel Corporation’s Preferred Quality Supplier (PQS) Award for their performance in 2015. The Company has demonstrated industry-leading commitment across all critical focus areas on which they are measured: quality, cost, availability, technology, customer service, labor and ethics systems and environmental sustainability. The Company is recognized for their signiicant contributions providing Intel with Difusion furnaces, deemed essential to Intel’s success.

The Hitachi Kokusai Electric Group is deploying digital transmitters for broadcasting across the world. Our group is working on improving the eiciency and quality of our digital transmitters with a view to supporting the ATSC3.0 next-generation terrestrial television broadcasting standards that are undergoing standardization in the United States. This is in response to the demand for equipment updates due to the frequency restructuring that is planned for the United States and demand from various countries where digital terrestrial broadcasting is expected to spread.

New Production Facility at Toyama Technology & Manufacturing Center

Hitachi Kokusai Electric Receives Intel’s Preferred Quality Supplier Award

Eco- and Thin Film Processing

Newly established

Worldwide Deployment of Digital Transmitters

(14)

　……… 　……… ……… … 　……… ……… 　………… 　………

Global Network

As of June 30, 2016

Toyama Technology & Manufacturing Center

■

Overseas Network

■

Domestic Network

Hitachi Kokusai Electric Comark LLC

Hitachi Kokusai Electric Asia (Singapore) Pte. Ltd. Hitachi Kokusai Electric

Europe GmbH

BCS Teknoloji Yayıncılık ve Haberleşme Sistemleri Sanayi ve Ticaret A.Ş. Hitachi Kokusai Semiconductor Europe GmbH

（Group companies）

(15)

Financial Section

Financial Review 　………14

Consolidated Statements of Financial Position　………15 Consolidated Statements of Profit and Loss ………17 Consolidated Statements of Comprehensive Income …18 Consolidated Statements of Changes in Equity 　………19 Consolidated Statements of Cash Flows ………21 Notes to Consolidated Financial Statements　…………23

(16)

Financial Review

In this iscal year under review, the Group reports revenues of ¥180,740 million. According to analysis by segment, the revenues of the Video and Wireless Network Solutions decreased ¥7,095 million (down 7.4%) from the previous iscal year to ¥89,218 million due to the massive changes to the Japanese business environment caused by factors such as the convergence of reconstruction demand after the Great East Japan Earthquake.

The revenues of Eco- and Thin Film Processing Solutions increased ¥2,538 million (up 2.9%) from the previous iscal year to ¥90,563 million as a result of strong equipment investment by semiconductor manufacturers in Asia.

Cost of sales for this iscal year under review decreased ¥429 million compared with the previous iscal year to ¥128,803 million. The ratio to revenues increased 1.5%.

Meanwhile, selling, general and administrative expenses for this iscal year under review increased ¥1,648 million compared with the previous iscal year to ¥35,796 million, mainly due to an increase in personal expenses. Their ratio to revenues increased 1.4% compared with the previous iscal year.

Financial Position

The total assets as of March 31, 2016, decreased ¥14,714 million compared with the end of the previous iscal year to ¥174,569 million. Current assets decreased ¥14,988 million compared with the end of the previous iscal year to ¥136,639 million. It was mainly attributable to the decrease in trade and other receivables of ¥9,034 million, inventory assets of ¥2,729 million, other inancial assets of ¥2,153 million, other current assets of ¥1,769 million and the increase in cash and cash equivalents of ¥697 million. Non-current assets increased ¥274 million compared with the end of the previous iscal year to ¥37,930 million.

Liabilities as of March 31, 2016, stood at ¥78,482 million, a decrease of ¥15,779 million compared with the end of the previous iscal year. It was mainly

attributable to the decrease in operating and other liabilities of ¥9,489 million, advances received of ¥6,969 million and the increase in liabilities due to retirement and severance beneits of ¥4,085 million. Total equity came in at ¥96,087 million as of March 31, 2016, increased ¥1,065 million compared with the end of the previous iscal year.

Cash Flows

Cash and cash equivalents (“funds”) at the end of this iscal year increased ¥697 million compared with the end of previous iscal year to ¥47,567 million.

The major movements of cash lows on each activity and the major factors for this iscal year are as follows.

Cash Flows from Operating Activities

Funds from operating activities were up ¥11,635 million in this iscal year under review (an increase of ¥7,745 million during the previous iscal year). This was mainly because net income of ¥12,962 million combined with a decrease in trade and other receivables of ¥8,275 million was greater than the decrease in funds resulting from a decrease in trade and other payables of ¥10,848 million.

Cash Flows from Investing Activities

Funds from investing activities were down ¥2,351 million in this iscal year under review (a decrease of ¥6,700 million during the previous iscal year). This was mainly because of the factors such as the acquisition of property, plant and equipment of ¥3,749 million and the sale of property, plant and equipment worth ¥1,926 million.

Cash Flows from Financing Activities

(17)

Years ended March 31, 2016 and 2015

Consolidated Statements of Financial Position

Millions of Yen

Assets

March 31,

2015 March 31, 2016

Current assets:

Cash and cash equivalents (Note 5) ……… 46,870 47,567

Trade and other receivables (Notes 6, 7, 24 and 25) ……… 59,226 50,192

Other inancial assets (Notes 9 and 24) ……… 2,153 —

Inventories (Note 8) ……… 39,849 37,120

Other current assets ……… 3,529 1,760

Total current assets ……… 151,627 136,639 Non-current assets:

Property, plant and equipment (Notes 10 and 12) ……… 21,743 21,503

Intangible assets (Notes 11 and 12) ……… 1,761 2,525

Investments accounted for using the equity method ……… 207 —

Other inancial assets (Notes 9 and 24) ……… 9,895 10,049

Deferred tax assets (Note 14) ……… 2,860 2,784

Other non-current assets (Note 12) ……… 1,190 1,069

Total non-current assets ……… 37,656 37,930 Total assets ……… 189,283 174,569

(18)

Millions of Yen

Liabilities

March 31,

2015 March 31, 2016

Current liabilities:

Short-term debt (Notes 24 and 25) ……… 3,031 733

Trade and other payables (Notes 15 and 24) ……… 46,089 36,600

Accrued expenses ……… 13,030 11,087

Other inancial liabilities (Note 24) ……… 314 222

Income tax payable ……… 1,187 2,032

Advances received (Note 7) ……… 10,196 3,227

Provisions (Notes 7 and 16) ……… 1,829 1,972

Other current liabilities ……… 45 55

Total current liabilities ……… 75,721 55,928

Non-current liabilities:

Long-term debt (Note 24) ……… 92 101

Retirement and severance beneits (Note 17) ……… 17,998 22,083

Provisions (Note 16) ……… 126 94

Other non-current liabilities ……… 324 276

Total non-current liabilities ……… 18,540 22,554

Total liabilities ……… 94,261 78,482

Equity

Equity attributable to owners of the parent:

Common stock (Note 18) ……… 10,058 10,058

Capital surplus (Note 18) ……… 17,661 17,534

Retained earnings (Notes 18 and 19) ……… 59,609 68,088

Other components of equity (Note 18) ……… 10,257 3,022

Treasury stock, at cost (Note 18) ……… (2,700) (2,738)

Total equity attributable to owners of the parent ……… 94,885 95,964 Non-controlling interests ……… 137 123

Total equity ……… 95,022 96,087 Total liabilities and equity ……… 189,283 174,569

(19)

Years Ended March 31, 2016 and 2015

Consolidated Statements of Proit and Loss

Millions of Yen

2015 2016

Revenues (Notes 4 and 7) ……… 185,181 180,740 Cost of sales (Notes 7 and 8) ……… (129,232) (128,803)

Gross proit ……… 55,949 51,937 Selling, general and administrative expenses ……… (34,148) (35,796) Other income (Note 20) ……… 644 1,262 Other expenses(Note 20) ……… (2,616) (1,254)

Operating income ……… 19,829 16,149 Financial income (Note 21) ……… 347 626 Financial expenses (Note 21) ……… (331) (29) Share of proit of investments accounted for using the equity method ……… (40) 0

Income before income taxes ……… 19,805 16,746 Income taxes (Note 14) ……… (2,266) (3,784)

Net income ……… 17,539 12,962 Net income attributable to:

Owners of the parent ……… 17,471 12,998

Non-controlling interests ……… 68 (36)

Yen

2015 2016

Earnings per share attributable to owners of the parent:

Basic (Note 23) ……… 170.05 126.54

Diluted (Note 23) ……… — —

(20)

Consolidated Statements of Comprehensive Income

Millions of Yen

2015 2016

Net income ……… 17,539 12,962

Other comprehensive income (OCI) Items not to be reclassiied into net income

Net changes in inancial assets measured at fair value through OCI (Note 22) ……… 494 248

Remeasurements of deined beneit plans (Note 22) ……… 565 (4,904) Total items not to be reclassiied into net income ……… 1,059 (4,656)

Items that can be reclassiied into net income

Foreign currency translation adjustments (Note 22) ……… 2,254 (2,609)

Share of OCI of investments accounted for using the equity method (Note 22) ……… 39 0 Total items that can be reclassiied into net income ……… 2,293 (2,609)

Other comprehensive income (OCI) ……… 3,352 (7,265) Comprehensive income ……… 20,891 5,697 Comprehensive income attributable to:

Owners of the parent ……… 20,508 5,739

Non-controlling interest ……… 383 (42)

(21)

Consolidated Statements of Changes in Equity

Millions of Yen Equity attributable to owners of the parent

Common stock

Capital surplus

Retained earnings

Other components of equity Net changes

in inancial

assets measured at

fair value through OCI

Foreign currency translation adjustments

Remeasu-rements of

deined beneit plans

Balance at April 1, 2014 10,058 26,202 45,007 3,370 1,106 1,960

Net income 17,471

Other comprehensive income (Note 22) 494 1,977 566

Dividends paid (Note 19) (2,877)

Acquisition (disposal) of non-controlling

interests, net (Note 18) (8,542) 1 793 (3)

Acquisition of treasury stock (Note 18)

Disposal of treasury stock (Note 18) 0

Transfer from other components of equity

to retained earnings 7 (7)

Balance at March 31, 2015 10,058 17,661 59,609 3,858 3,876 2,523

Non-controlling

interests Total equity Total other

components of equity

Treasury stock, at cost

Total

Balance at April 1, 2014 6,436 (2,661) 85,042 5,003 90,045

Net income 17,471 68 17,539

Other comprehensive income (Note 22) 3,037 3,037 315 3,352

Dividends paid (Note 19) (2,877) (478) (3,355)

interests, net (Note 18) 791 (7,751) (4,771) (12,522)

Acquisition of treasury stock (Note 18) (38) (38) (38)

Disposal of treasury stock (Note 18) 0 0 0

to retained earnings (7)

(22)

Common stock

Capital surplus

Retained earnings

Other components of equity Net changes

in inancial

assets measured at

fair value through OCI

Foreign currency translation adjustments

Remeasu-rements of

deined beneit plans

Balance at April 1, 2015 10,058 17,661 59,609 3,858 3,876 2,523

Net income 12,998

Other comprehensive income (Note 22) 248 (2,603) (4,904)

Dividends paid (Note 19) (4,520)

interests, net (Note 18) (127) 24 1

Acquisition of treasury stock (Note 18)

Disposal of treasury stock

to retained earnings 1 (1)

Balance at March 31, 2016 10,058 17,534 68,088 4,105 1,297 (2,380)

Non-controlling

interests Total equity Total other

components of equity

Treasury stock, at cost

Total

Balance at April 1, 2015 10,257 (2,700) 94,885 137 95,022

Net income 12,998 (36) 12,962

Other comprehensive income (Note 22) (7,259) (7,259) (6) (7,265)

Dividends paid (Note 19) (4,520) (23) (4,543)

interests, net (Note 18) 25 (102) 51 (51)

Acquisition of treasury stock (Note 18) (38) (38) (38)

Disposal of treasury stock

to retained earnings (1)

Balance at March 31, 2016 3,022 (2,738) 95,964 123 96,087

(23)

Consolidated Statements of Cash Flows

Millions of Yen

2015 2016

Cash lows from operating activities:

Net income ……… 17,539 12,962

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

Depreciation and amortization ……… 3,403 3,426

Impairment losses ……… 1,435 6

Income tax expense ……… 2,266 3,784

Financial income and expenses ……… (16) (597)

Share of proits of investments accounted for using the equity method ……… 40 0

Decrease (increase) in trade and other receivables ……… (4,115) 8,275

Decrease (increase) in inventories ……… (2,630) 2,445

Increase (decrease) in trade and other payables ……… 2,391 (10,848)

Decrease in retirement and severance beneits and provisions ……… (8,745) (697)

Other ……… (1,527) (4,825)

Subtotal ……… 10,041 13,931

Interest received ……… 254 241

Dividends received ……… 66 83

Interest paid ……… (20) (20)

Income taxes paid ……… (2,596) (2,600)

Net cash provided by operating activities ……… 7,745 11,635

Cash lows from investing activities:

Payments into time deposits ……… (4,235) —

Proceeds from withdrawal of time deposits ……… 2,661 —

Purchase of property, plant and equipment ……… (2,894) (3,749)

Proceeds from sale of property, plant and equipment ……… 216 1,926

Purchase of intangible assets ……… (429) (608)

Purchase of other inancial assets ……… (1) —

Proceeds from sale of other inancial assets ……… 43 209

Acquisition of subsidiaries' stock ……… — (112)

Acquisition of investments accounted for using the equity method ……… (208) —

Payments of long-term loans receivable ……… (1,894) (12)

Other ……… 41 (5)

Net cash used in investing activities ……… (6,700) (2,351)

(24)

Millions of Yen

2015 2016

Cash lows from inancing activities:

Increase (decrease) in short-term debt, net ……… 2,601 (2,276)

Payments on long-term debt ……… (39) (44)

Dividends paid(Note 19) ……… (3,357) (4,515)

Increase in treasury stock ……… (38) (38)

Purchase of shares of consolidated subsidiaries from non-controlling interests ……… (12,522) (210)

Other ……… 77 80

Net cash used in inancing activities ……… (13,278) (7,003)

Efect of exchange rate changes on cash and cash equivalents ……… 1,954 (1,584) Net increase (decrease) in cash and cash equivalents ……… (10,279) 697

Cash and cash equivalents at beginning of the year ……… 57,149 46,870 Cash and cash equivalents at end of the year (Note 5) ……… 46,870 47,567

(25)

Year Ended March 31, 2016

Notes to Consolidated Financial Statements

As the Group meets the requirements of a “Speciied Company Applying Designated International Financial Reporting Standards” pursuant to Article 1-2 of the Ordinance on Terminology, Forms and Preparation Methods of Consolidated Financial Statements (Ordinance of the Ministry of Finance of Japan No. 28 of 1976), the consolidated inancial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), as permitted by the provision of Article 93 of the Ordinance.

Consolidated inancial statements of the Group have been prepared on a historical cost basis, except for derivative assets and liabilities measured at fair value, inancial instruments measured at fair value through proit or loss (FVTPL), inancial instruments at fair value through other comprehensive income (FVTOCI) and assets and liabilities associated with deined beneit plans. The consolidated inancial statements are presented in millions of Japanese yen.

Management of the Company has made a number of judgments, estimates and assumptions relating to the application of accounting policies, reporting of revenues and expenses and assets and liabilities in the preparation of these consolidated inancial statements. Actual results could difer from those estimates.

estimates, if any, is recognized in the reporting period in which the change was made and in future periods.

The information regarding judgments used in applying accounting policies that could have a material efect on consolidated inancial statements of the Company is included in the following notes: ・note 3. (a) Basis of Consolidation

・note 3. (d) Financial Instruments and note 24. Financial Instruments and Related Disclosures

The information regarding uncertainties arising from assumptions and estimates that could result in material adjustments in the subsequent consolidated inancial statements is included in the following notes:

・note 3. (h) Impairment of Non-inancial Assets and note 12. Loss on Impairment

・note 3. (j) Retirement and Severance Beneits and note 17. Employee Beneits

・note 3. (k) Provisions, note 3. (l) Contingencies, note 16. Provisions and note 28. Contingencies ・note 3. (m) Revenue Recognition and note 7.

Construction Contracts

・note 3. (n) Income Taxes and note 14. Deferred Taxes and Income Taxes

Hitachi Kokusai Electric Inc. (the Company) is a corporation domiciled in Japan, whose shares are listed on the Tokyo Stock Exchange. The address of the Company’s registered head oice is 4-14-1 Sotokanda, Chiyoda-ku, Tokyo. The Company’s consolidated inancial statements for the year ended

March 31, 2016, comprise the accounts of the Company and its subsidiaries and the Company’s interests in associates (the Group). The Group has the following two segments: “Video and Wireless Network Solutions” and “Eco-and Thin Film Processing Solutions.”

1. Nature of Operations

(26)

3. Summary of Signiicant Accounting Policies

(a) Basis of Consolidation (ⅰ) Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has risks or rights to variable returns from its involvement with the entity and has the ability to use its power over the entity to afect the amount of the variable returns.

The Group consolidates all subsidiaries from the date on which the Group acquires control until the date on which the Group loses control.

Subsidiaries’ inancial statements are adjusted, if necessary, when their accounting policies difer from those of the Group.

Intercompany balances and transactions are eliminated in consolidation. Unrealized proit and loss included in assets resulting from transactions within the Group is eliminated.

The reporting date for Hitachi Kokusai Electric (Shanghai) Co., Ltd. and Hitachi Kokusai Linear Electronic Equipments S/A is December 31 and the additional inancial reports as of and for the year ended March 31 are prepared, to be used for consolidated accounts. The inancial statements of other subsidiaries are prepared using the same reporting period as the parent company.

Changes in ownership interests in subsidiaries without a loss of control are accounted for as equity transactions. On the other hand, changes in ownership interests in subsidiaries with a loss of control are accounted for by derecognizing assets and liabilities, non-controlling interests, and other components of equity attributable to the subsidiaries.

(ⅱ) Associates (Equity Method)

Associates are entities over which the Group has the ability to exercise signiicant inluence over their operational and inancial policies, but which are not controlled by the Group.

Investments in associates are accounted for using the equity method. The consolidated

inancial statements of the Group include changes in proit or loss and other comprehensive income (OCI) of these associates from the date on which the Group obtains signiicant inluence to the date on which it loses signiicant inluence. The inancial statements of the associates are adjusted, if necessary, when their accounting policies difer from those of the Group.

(b) Cash and Cash Equivalents

Cash and cash equivalents are readily convertible into cash and highly liquid investments with insigniicant risk of changes in value, with original maturities of three months or less from the date of acquisition.

(c) Foreign Currency Translation

The consolidated inancial statements are presented in Japanese yen, which is the Company’s functional currency.

(ⅰ) Foreign Currency Translations

Foreign currency translations are converted into the functional currency of each company using the exchange rate prevailing at the transaction date or a rate that approximates such rate. Monetary assets and liabilities denominated in foreign currencies are converted into the functional currency using the exchange rate at the end of the reporting period. Foreign exchange gains and losses resulting from the currency conversion and settlement are recognized in proit or loss, except where gains and losses on assets or liabilities are recognized in OCI, foreign exchange efects relating to such assets or liabilities are also recognized in OCI, and presented in other components of equity.

(ⅱ) Foreign Operations

(27)

(d) Financial Instruments

The Group has adopted IFRS 9 “Financial Instruments” (IFRS 9) (issued in November 2009, amended in October 2010).

(ⅰ) Non-derivative Financial Assets

The Group initially recognizes trade and other receivables on the date such receivables arise. All other inancial assets are initially recognized at the transaction date, that the agreement becomes efective.

The Group derecognizes inancial assets when contractual rights to cash lows from the inancial assets expire or when the contractual rights to receive cash lows from the inancial assets are transferred in transactions where the risks and economic rewards of owning the inancial assets are substantially transferred.

The classiication and measurement model of non-derivative inancial assets is summarized as follows:

Financial Assets Measured at Amortized Cost

Financial assets are subsequently measured at amortized cost when they meet the following requirements:

・The inancial asset is held in accordance with the Company's business model whose objective is to hold the asset to collect contractual cash lows.

・The contractual terms of the inancial asset provide cash lows on speciied dates that are solely payments of principal and interest on the principal amount outstanding.

Financial assets measured at amortized cost are initially measured at fair value (including direct transaction costs). The carrying amount of inancial assets measured at amortized cost is subsequently measured using the efective interest method. Interest accrued on inancial assets measured at amortized cost is included in

maintaining and strengthening business relations with the investees. These equity instruments are designated by irrevocably as FVTOCI inancial assets at initial recognition. They are initially and subsequently measured at fair value, and the changes in fair value are recognized in OCI. The cumulative amount of OCI is recognized in equity as other components of equity. Dividends on equity instruments designated as FVTOCI are recognized in proit or loss, except where they are considered to be a return of the investment.

FVTPL Financial Assets

Equity instruments not designated as FVTOCI inancial assets at the initial recognition and debt instruments not classiied as inancial assets measured at amortized cost are classiied as FVTPL inancial assets. These instruments are subsequently measured at fair value and the changes in fair value are recognized in proit or loss.

Impairment of Financial Assets Measured at Amortized Cost

On a regular basis, but no less frequently than at the end of each quarterly reporting period, the Group evaluates inancial assets measured at amortized cost for impairment. Impairment is deemed to have occurred when there is an objective evidence of impairment resulting from one or more events occurring after initial recognition and when the estimated future cash lows from the inancial assets or group of assets can be reliably measured. Objective evidence of impairment includes historical credit loss experience, existence of overdue payments, extended payment terms, negative evaluation by third party credit rating agencies, capital deicit, and deteriorated inancial position and operating results.

(28)

potential risks associated with the country in which a debtor conducts business or business environment including special business customs particular to the region.

Impairment losses on debt instruments directly reduce the carrying amount of the assets, while the impairment losses on inancial assets other than debt instruments indirectly reduce the carrying amount through the use of an allowance account. For inancial assets other than debt instruments, account balances are generally written of against the allowance only after all means of collection have been exhausted and the potential for recovery is considered remote.

(ⅱ) Non-derivative Financial Liabilities

The Group initially recognizes debt instruments on the date of issuance. All other inancial liabilities are initially recognized at the transaction date, on which the Group becomes a party to the agreement.

The Group derecognizes inancial liabilities when extinguished, when the obligation in the contract is redeemed or the liability is discharged, cancelled or expires.

Non-derivative inancial liabilities the Group holds include debt, trade payables and other inancial liabilities. They are initially measured at fair value (less direct transaction costs), and they are subsequently measured at amortized cost using the efective interest method.

(ⅲ) Derivatives and Hedge Accounting

The Group uses derivative instruments including forward exchange contracts in order to hedge foreign currency exchange risks. All derivatives are measured at fair value irrespective of the objective and intent of holding them.

The Group accounts for hedging derivatives as follows:

・Fair value hedge: a hedge of the fair value of a recognized asset or liability or of an unrecognized irm commitment. The changes in fair value of the recognized assets or liabilities or unrecognized irm commitments and the related derivatives are both recorded in proit

or loss if the hedge is considered highly efective. ・Cash low hedge: a hedge of a forecast

transaction or of the variability of cash lows to be received or paid related to a recognized asset or liability. The changes in fair value of the derivatives designated as cash low hedges are recorded in OCI if the hedge is considered highly efective. This treatment continues until proit or loss is afected by the variability of cash lows or the unrecognized irm commitment of the designated hedged item, at which point changes in fair value of the derivative are recognized in proit or loss.

The Group follows the documentation requirements as prescribed by International Accounting Standards (IAS) 39 “Financial Instruments: Recognition and Measurement,” which includes the risk management objective and strategy for undertaking various hedge transactions. In addition, a formal assessment is made at the hedge’s inception and subsequently on a periodic basis, as to whether the derivative used in hedging activities is highly efective in ofsetting changes in fair values or cash lows of the hedged items. Hedge accounting is discontinued if a hedge becomes inefective.

(ⅳ) Ofsetting Financial Assets and Liabilities

Financial assets and liabilities are ofset and reported as net amounts in the consolidated statements of inancial position, only when the Group currently has a legally enforceable right to set of the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.

(e) Inventories