NEC Corporation

1. Significant Accounting Policies

The parent company and its Japanese subsidiaries maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan, and its foreign subsidiaries in conformity with those of the countries of their domicile. Certain adjustments and reclassifications, including those relating to the tax effects of temporary/timing differences, the appropriation for special allowances, the accrual of certain expenses and the accounting for foreign currency translation and common stock warrants have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America. These adjustments were not recorded in the statutory books of account.
Significant accounting policies, after reflecting adjustments for the above, are as follows:

Basis of consolidation and investments in affiliated companies

The consolidated financial statements include those of the parent company and, with minor exceptions, those of its majority-owned subsidiaries. All significant intercompany transactions and accounts are eliminated.
Investments in 20 percent to 50 percent owned companies (in which the ability to exercise significant influence exists) are stated, with minor exceptions, at cost plus equity in undistributed earnings; consolidated net income includes the company's equity in the current net earnings or losses of such companies, after elimination of unrealized intercompany profits.
The excess of the cost over the underlying net equity of investments in consolidated companies and other companies accounted for on an equity basis, as recognized as goodwill, is amortized on a straight-line basis over a period of five years with the exception of minor amounts which are charged to income in the period of acquisition.

Cash equivalents

All highly liquid investments, including time deposits, with original maturities of three months or less are considered to be cash equivalents.

Foreign currency translation

Asset and liability accounts of foreign consolidated subsidiaries are translated into yen at appropriate year-end current rates and all revenue and expense accounts are translated at average rates of exchange during the year. The resulting translation adjustments are accumulated and reported as a component of shareholders' equity.

Marketable securities and other investments

The current and noncurrent portfolios of marketable equity securities are each carried at the lower of aggregate cost or market. Other marketable securities are carried at the lower of cost or market. Other investment securities are stated at cost or less. Realized gains or losses on the sale of marketable equity securities are based on the average cost of all of the shares of a particular security held at the time of sale (see Note 4 to the consolidated financial statements).


Inventories are stated at the lower of cost or market.
Finished products made to customer specifications are costed on the basis of accumulated production costs. Finished products of electron tubes and semiconductor devices are costed on a first-in, first-out basis. Other finished products are principally costed on a last-in, first-out basis.
Work in process made to customer specifications represents accumulated production costs of job orders. Work in process of mass-produced standard products is stated on an average cost method.
The cost of semifinished components is determined on a last-in, first-out basis.
Raw materials and purchased components are stated on a last-in, first-out basis and, for certain subsidiaries, on an average cost method.

Property, plant and equipment and depreciation

Property, plant and equipment is stated at cost. Depreciation is computed primarily on a declining-balance method and, for certain subsidiaries, on a straight-line method at rates based on estimated useful lives of the assets. Maintenance and repairs, including minor renewals and betterments, are charged to income as incurred.

Income taxes and retained earnings appropriated for special allowances

In the fiscal year ended March 31, 1994, the company adopted, effective April 1, 1993, Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to accounting for income taxes. Under that approach, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
In the fiscal years prior to April 1, 1993, deferred income taxes were provided in accordance with Accounting Principles Board ("APB") Opinion No. 11, "Accounting for Income Taxes," which required use of the deferred method. Under that method, the provision for deferred income taxes represents the tax effect of differences in the timing of income and expense recognition for tax and financial reporting purposes.
The company is permitted to deduct for income tax purposes certain special allowances if they are recorded as charges to income or as appropriations of retained earnings on the statutory books of account. The company has recognized a deferred tax liability for those special allowances, and the remaining portion of such allowances is set forth in the accompanying consolidated financial statements as retained earnings appropriated for special allowances.

Additional paid-in capital and free distributions of common stock

Under the Japanese Commercial Code, the entire amount of the issue price of shares is required to be accounted for in the common stock account although a company may, by a resolution of its board of directors, account for an amount not exceeding one-half of the issue price of the shares as additional paid-in capital.
The company has made, based on the resolution of the board of directors, a free distribution of shares to shareholders, which is clearly distinguished from a "stock dividend" paid out of profits that, under the Commercial Code, must be approved by the shareholders. In accounting for the free distribution of shares, the Commercial Code permitted the board of directors to authorize either (1) a transfer from additional paid-in capital to the common stock account, or (2) no entry if free shares were distributed from the portion of previously issued shares accounted for as excess of par value in the common stock account. Companies in the United States of America issuing shares in amounts comparable to those of the free share distributions of the company would be required to account for them as stock dividends and the fair value of the shares would be transferred from retained earnings to appropriate capital accounts. Such transfer, however, has no effect on total shareholders' equity.
The Japanese Commercial Code, which took effect on April 1, 1991, amended the provisions of a free distribution of shares, and stipulates that the board of directors is authorized to issue shares based on a stock split under the conditions specified in the Commercial Code and to transfer additional paid-in capital to the common stock account, respectively.

Net income or loss per share

Net income or loss per share is computed based on the average number of shares of common stock outstanding during each year and the number of shares issuable upon conversion of common stock equivalents, exclusive of treasury stock, appropriately adjusted for free distributions of common stock. The effect of convertible debt, other than common stock equivalents, on the computation of fully diluted net income or loss per share is insignificant.

Accounting for sales

Generally, sales of computers and certain types of major equipment are recorded when the units are installed and accepted by the customers, while sales of other equipment, components and appliances are recorded when completed units are delivered. The estimated accrued losses arising from future returns of computers, and the related future tax benefit, are recorded as noncurrent items in the balance sheet.

Accounting for impairment of a loan

In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," partly amended by SFAS No. 118 issued in October 1994, which requires that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. In the case of the company, SFAS No. 114 and No. 118 are effective from the fiscal year beginning April 1, 1995. Management does not believe that the new standards will have a material effect on the consolidated financial statements of the company.

Accounting for impairment of long-lived assets and for long-lived assets to be disposed of

In March 1995, the FASB issued SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and those items to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. In the case of the company, SFAS No.121 is effective from the fiscal year beginning April 1, 1996. Management does not believe that the new standard will have a material effect on the consolidated financial statements of the company.

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