ANNUAL REPORT 2011 for the year ended March 31, 2011

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Saison Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2012 and 2011

15. DEFERRED TAX ASSETS AND LIABILITIES

The Company and consolidated subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in a normal effective statutory tax rate of approximately 40.7% for the years ended March 31, 2012 and 2011.

(A) EFFECTIVE TAX RATE

A reconciliation between the normal effective statutory tax rate reflected in the accompanying consolidated statement of income for the year ended March 31, 2012 is as follows.


  2012
Statutory tax rate 40.70%
Reconciliation:  
Expenses not deductible for tax purposes (1.23)
Non-taxable dividend income 0.71
Inhabitants taxes per capita (1.74)
Amortization of negative goodwill 1.43
Equity in net earnings of affiliated companies 14.42
Increase of valuation allowance (277.62)
Decrease in deferred tax assets due to tax rate changes (94.05)
Tax effect on investments in subsidiaries to be liquidated 510.44
Other (1.53)
Effective tax rate 191.53%

A reconciliation for the year ended March 31, 2011 is not provided because the deference between the effective income tax rate of the Companies and the statutory tax rate is less than 5%.

(B) DEFERRED TAX ASSETS

The tax effects of significant temporary differences and loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2012 and 2011 are as follows:


  Millions of yen   Thousands of
U.S. dollars
2012 2011   2012
Deferred tax assets:        
Inventories ¥ 35,081 ¥ 16,807   $ 427,092
Accumulated impairment losses 2,360 2,077   28,736
Accumulated depreciation expense 1,191 1,476   14,500
Asset retirement obligations 579 601   7,047
Investment securities 5,833 3,416   71,013
Allowance for doubtful accounts 20,429 28,504   248,712
Allowance for losses on interest repayments 9,478 14,319   115,390
Accrued expenses 380 313   4,622
Accrued enterprise taxes 752 157   9,151
Accrued pension and severance costs 1,069  
Allowance for losses on point program 26,011 26,813   316,669
Allowance for losses on guarantees 1,528 2,223   18,597
Other allowance 906 965   11,036
Long-term unearned revenue 426 228   5,184
Tax effect on investments in subsidiaries to be liquidated 47,892   583,057
Tax loss carryforwards 24,951 19,473   303,767
Unrealized losses on available-for-sale securities 43 43   524
Deferred losses on derivatives under hedge accounting 855 1,104   10,413
Other 3,797 4,172   46,214
Subtotal 182,492 123,760   2,221,724
Less valuation allowance (86,708) (61,325)   (1,055,608)
Total deferred tax assets 95,784 62,435   1,166,116
Deferred tax liabilities:        
Capital gains deferred for tax purposes (185) (212)   (2,257)
Unrealized gains on available-for-sale securities (3,283) (2,682)   (39,968)
Deferred gains on derivatives under hedge accounting (5)   (59)
Adjustment account of retirement debt (347) (162)   (4,228)
Adjustment account of debt (56) (407)   (676)
Other (3,267) (2,962)   (39,777)
Total deferred tax liabilities (7,143) (6,425)   (86,965)
Net deferred tax assets ¥88,641 ¥56,010   $ 1,079,151

Net deferred tax assets are presented on the consolidated balance sheets as of March 31, 2012 and 2011 as follows:


  Millions of yen   Thousands of
U.S. dollars
2012 2011   2012
Current assets ¥12,468 ¥23,558   $151,787
Investment and other assets 76,174 32,454 927,373
Current liabilities-other
Long-term liabilities-other 1 2 9

(C) NEW TAX REFORM LAWS

On December 2, 2011, new tax reform laws were enacted in Japan which changed the normal effective statutory tax rate from approximately 40.70% to 38.01% effective for the fiscal years beginning on or after April 1, 2012 through March 31, 2015, and to 35.64% afterwards. The effect of this change was to decrease deferred taxes in the consolidated balance sheet as of March 31, 2012 by ¥9,854 million (US$119,962 thousand) and to increase income taxes—deferred in the consolidated statement of income for the year then ended by ¥10,194 million ($124,105 thousand).

16. GAIN ON REVERSAL OF ALLOWANCE FOR LOSSES FROM A NATURAL DISASTER

For the year ended March 31, 2012, gain on reversal of allowance for losses from a natural disaster consisted of the following:


  Millions of yen   Thousands of
U.S. dollars
2012   2012
Gain on reversal of allowance for doubtful accounts ¥4,075   $ 49,612
Gain on reversal of allowance for losses on guarantees 1,417 17,251
Total ¥5,492   $66,863

17. LOSS ON BUSINESS RESTRUCTURING OF SUBSIDIARIES

During the board meeting held on February 29, 2012, for the purpose of business restructuring of the Companies' real estate related business, the Company made a decision to conduct a corporate reorganization (corporate split, etc.) (hereinafter referred to as the "Business Restructuring") of consolidated subsidiary, Atrium Co., Ltd. (hereinafter referred to as "Atrium").

In the Business Restructuring, the Company substantially revised the real estate development policy enforced regarding real estate (mainly consisting of development projects) owned by Atrium in relation to its business, and after drawing a much clearer line between the projects among the businesses of Atrium to be continued, and those to withdraw from, sub-classified the property portfolio by corporate split.

In connection with this business restructuring, a loss on business restructuring was recorded for the fiscal year ended March 31, 2012. The following is a breakdown of the loss on business restructuring:


  Millions of yen   Thousands of
U.S. dollars
2012   2012
Loss on valuation of inventories ¥45,202   $550,301
Provision for allowance for doubtful accounts 11,968 145,706
Other 2,626 31,964
Total ¥59,796   $727,971

18. LOSSES FROM A NATURAL DISASTER

For the years ended March 31, 2012 and 2011, losses from a natural disaster recorded as a result of the Great East Japan

Earthquake in March 2011 consisted of the following:


  Millions of yen   Thousands of
U.S. dollars
2012 2011   2012
Provision for allowance for doubtful accounts ¥- ¥ 8,156   $-
Provision for allowance for losses on guarantees 1,417
Restoration costs 401
Other 210 12 2,562
Total ¥210 ¥9,986 $2,562

19. OPERATING REVENUES

Operating revenues for the years ended March 31, 2012 and 2011 were comprised of the following revenues and expenses:


  Millions of yen   Thousands of
U.S. dollars
2012 2011   2012
Income from the credit service business ¥197,494 ¥229,536   $2,404,362
Income from the lease business 14,645 14,437   178,297
Income from the finance business 15,446 15,261   188,040
Real estate related business:      
Sales 49,814 44,469   606,453
Costs of sales* 46,847 32,351   570,338
Income from the real estate related business 2,967 12,118   36,115
Entertainment business:        
Sales 76,604 79,674   932,600
Costs of sales 63,614 65,746   774,450
Income from the entertainment business 12,990 13,928   158,150
Financial income 467 433   5,685
Total operating revenues ¥244,009 ¥285,713   $2,970,649

* Cost of sales included write-downs of inventories amounting to ¥10,702 million (US$130,286 thousand) as of March 31, 2012 and ¥1,832 million as of March 31, 2011.

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