NEC Corporation

2. 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 differences, 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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, however, management believes that no material differences will result in the near term.

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 those of its majority-owned subsidiaries. All significant intercompany transactions and accounts are eliminated.

Investments in 50 percent or less owned companies over which the company does not have control, but has the ability to exercise significant influence, are accounted for by the equity method.

The excess of the cost over the underlying net equity of investments which have been revalued to fair value of assets and liabilities in consolidated companies and investments accounted for by the equity method is recognized as goodwill and is amortized on a straight-line basis over the period of expected benefit which does not exceed 10 years.

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 and equity investments are translated into yen at appropriate year-end rates of exchange and all revenue and expense accounts are translated at average rates of exchange prevailing 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 5 to the consolidated financial statements for an explanation of the effects of not adopting the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115.)


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 basis. 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 the declining- balance method and, for certain subsidiaries, on the straight-line method, at rates based on the following estimated useful lives of the assets: buildings, two to 65 years, machinery and equipment, two to 22 years. Maintenance and repairs, including minor renewals and betterments, are charged to income as incurred.

Income taxes

The provision for income taxes is based on the pretax income included in the consolidated statements of income and retained earnings and is computed under the asset and liability approach. Under this 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.

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 in Japan 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 in Japan 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 parent 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.

Earnings per share

Earnings per share ("EPS") pursuant to APB No. 15 is computed based on the weighted-average number of shares of common stock outstanding during each year, including shares issued under free distributions of common stock, and the number of shares issuable upon conversion of common stock equivalents, exclusive of treasury stock ("primary EPS"). The effect of convertible debt, other than common stock equivalents, on the computation of fully diluted net income per share is insignificant.

In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share" which replaces the presentation of primary EPS with a presentation of basic EPS, and also requires dual presentation of basic EPS and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS assumes the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock. In the case of the company, SFAS No. 128 is effective for the fiscal year beginning April 1, 1997. If the company had adopted the new standard, basic EPS for the years ended March 31, 1995, 1996 and 1997 would have been Y22.92, Y49.98 and Y59.05 ($0.476), respectively, and diluted EPS for the same periods would have been Y22.36, Y45.14 and Y51.38 ($0.414), respectively.


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 shipped. The estimated accrued losses arising from future returns of leased computers, and the related future tax benefit, are recorded in the balance sheets.

Financial instruments

The forward exchange contracts have been entered into as hedges against the adverse impact of foreign currency fluctuations on monetary assets and liabilities arising from the company's operations. Gains and losses on these contract hedges are deferred and included in the measurement of the related foreign currency transactions so that foreign exchange gains or losses on the underlying assets and liabilities could be effectively offset. Agreements that are, in substance, essentially the same as forward exchange contracts, such as currency swaps, are accounted for in a manner similar to the accounting for forward exchange contracts. The interest rate swap agreements are fully integrated with underlying debt obligations and designed to convert fixed rate debt into floating rate debt, or vice versa, and interest rate option agreements are also arranged so that exposures to losses resulting from fluctuations in interest rates are managed. The differentials to be paid or received related to interest rate swap agreements are recognized in interest expense over the lives of the agreements.


Certain accounts in the consolidated financial statements for the years ended March 31, 1995 and 1996 have been reclassified to conform to the 1997 presentation.

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