Form 6-K SONY CORP For: May 20

 

 

 

 

 

 

 

 

 

 

 

Consolidated Financial Statements

For the fiscal year ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sony Corporation

TOKYO, JAPAN

 

 

 

Contents

 

Management’s Annual Report on Internal Control over Financial Reporting	2
Report of Independent Registered Public Accounting Firm	3
Consolidated Balance Sheets	4
Consolidated Statements of Income	6
Consolidated Statements of Comprehensive Income	8
Consolidated Statements of Cash Flows	9
Consolidated Statements of Changes in Stockholders’ Equity	11
Index to Notes to Consolidated Financial Statements	13
Notes to Consolidated Financial Statements	14

 

 

 

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Sony’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Sony’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Sony’s internal control over financial reporting includes those policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Sony;

 

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Sony are being made only in accordance with authorizations of management and directors; and

 

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Sony’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Sony’s management evaluated the effectiveness of Sony’s internal control over financial reporting as of March 31, 2016 based on the criteria established in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the evaluation, management has concluded that Sony maintained effective internal control over financial reporting as of March 31, 2016.

  

Sony’s independent registered public accounting firm, PricewaterhouseCoopers Aarata, has issued an audit report on Sony’s internal control over financial reporting as of March 31, 2016, presented on page 3.

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of Sony Corporation (Sony Kabushiki Kaisha)

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, cash flows and stockholders’ equity present fairly, in all material respects, the financial position of Sony Corporation and its subsidiaries (the “Company”) at March 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ PricewaterhouseCoopers Aarata

Tokyo, Japan

May 20, 2016

 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Balance Sheets

March 31

 

	Yen in millions
	2015			2016
ASSETS
Current assets:
Cash and cash equivalents		949,413			983,612
Marketable securities		936,731			946,397
Notes and accounts receivable, trade		986,500			926,375
Allowance for doubtful accounts and sales returns		(86,598	)		(72,783	)
Inventories		665,432			683,146
Other receivables		231,947			206,058
Deferred income taxes		47,788			40,940
Prepaid expenses and other current assets		466,688			482,982
Total current assets		4,197,901			4,196,727
Film costs		305,232			301,228
Investments and advances:
Affiliated companies		171,063			164,874
Securities investments and other		8,360,290			9,069,209
		8,531,353			9,234,083
Property, plant and equipment:
Land		123,629			121,707
Buildings		679,125			655,379
Machinery and equipment		1,764,241			1,795,991
Construction in progress		35,786			69,286
		2,602,781			2,642,363
Less – Accumulated depreciation		1,863,496			1,821,545
		739,285			820,818
Other assets:
Intangibles, net		642,361			615,754
Goodwill		561,255			606,290
Deferred insurance acquisition costs		520,571			511,834
Deferred income taxes		89,637			97,639
Other		246,736			289,017
		2,060,560			2,120,534
Total assets		15,834,331			16,673,390

 

 

 

(Continued on following page.)

 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Balance Sheets (Continued)

	Yen in millions
	2015			2016
LIABILITIES
Current liabilities:
Short-term borrowings		62,008			149,272
Current portion of long-term debt		159,517			187,668
Notes and accounts payable, trade		622,215			550,964
Accounts payable, other and accrued expenses		1,374,099			1,367,115
Accrued income and other taxes		98,414			88,865
Deposits from customers in the banking business		1,872,965			1,912,673
Other		556,372			574,193
Total current liabilities		4,745,590			4,830,750
Long-term debt		712,087			556,605
Accrued pension and severance costs		298,753			462,384
Deferred income taxes		445,876			450,926
Future insurance policy benefits and other		4,122,372			4,509,215
Policyholders’ account in the life insurance business		2,259,514			2,401,320
Other		316,422			330,302
Total liabilities		12,900,614			13,541,502
Redeemable noncontrolling interest		5,248			7,478
Commitments and contingent liabilities
EQUITY
Sony Corporation’s stockholders’ equity:
Common stock, no par value –
2015 – Shares authorized: 3,600,000,000; shares issued: 1,169,773,260		707,038
2016 – Shares authorized: 3,600,000,000; shares issued: 1,262,493,760					858,867
Additional paid-in capital		1,185,777			1,325,719
Retained earnings		813,765			936,331
Accumulated other comprehensive income –
Unrealized gains on securities, net		154,153			140,736
Unrealized losses on derivative instruments, net		—			(1,198	)
Pension liability adjustment		(201,131	)		(371,739	)
Foreign currency translation adjustments		(338,305	)		(421,117	)
		(385,283	)		(653,318	)
Treasury stock, at cost
Common stock
2015 – 1,031,323 shares		(4,220	)
2016 – 1,047,745 shares					(4,259	)
		2,317,077			2,463,340
Noncontrolling interests		611,392			661,070
Total equity		2,928,469			3,124,410
Total liabilities and equity		15,834,331			16,673,390

The accompanying notes are an integral part of these statements.

 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Income

Fiscal year ended March 31

 

	Yen in millions
	2014			2015			2016
Sales and operating revenue:
Net sales		6,682,274			7,035,537			6,949,357
Financial services revenue		988,944			1,077,604			1,066,319
Other operating revenue		96,048			102,739			90,036
		7,767,266			8,215,880			8,105,712
Costs and expenses:
Cost of sales		5,140,053			5,275,144			5,166,894
Selling, general and administrative		1,728,520			1,811,461			1,691,930
Financial services expenses		816,158			882,990			907,758
Other operating expense, net		48,666			181,658			47,171
		7,733,397			8,151,253			7,813,753
Equity in net income (loss) of affiliated companies		(7,374	)		3,921			2,238
Operating income		26,495			68,548			294,197
Other income:
Interest and dividends		16,652			12,887			12,455
Gain on sale of securities investments, net		12,049			8,714			52,068
Other		13,752			3,475			2,326
		42,453			25,076			66,849
Other expenses:
Interest		23,460			23,600			25,286
Loss on devaluation of securities investments		1,648			852			3,309
Foreign exchange loss, net		9,224			20,533			20,565
Other		8,875			8,910			7,382
		43,207			53,895			56,542
Income before income taxes		25,741			39,729			304,504
Income taxes:
Current		101,243			80,751			94,578
Deferred		(6,661)			7,982			211
		94,582			88,733			94,789
Net income (loss)		(68,841)			(49,004	)		209,715
Less - Net income attributable to noncontrolling interests		59,528			76,976			61,924
Net income (loss) attributable to Sony Corporation’s stockholders		(128,369)			(125,980	)		147,791

  

 

 

(Continued on following page.)

 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Income (Continued)

 

	Yen
	2014			2015			2016
Per share data:
Common stock
Net income (loss) attributable to Sony Corporation’s stockholders
– Basic		(124.99	)		(113.04	)		119.40
– Diluted		(124.99	)		(113.04	)		117.49
Cash dividends		25.00			—			20.00

The accompanying notes are an integral part of these statements.

 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Fiscal year ended March 31

 

	Yen in millions
	2014			2015			2016
Net income (loss)		(68,841	)		(49,004	)		209,715
Other comprehensive income, net of tax ―
Unrealized gains on securities		19,310			38,718			2,220
Unrealized gains (losses) on derivative instruments		742			—			(1,198	)
Pension liability adjustment		11,883			(21,187	)		(171,753	)
Foreign currency translation adjustments		158,884			65,790			(83,899	)
Total comprehensive income (loss)		121,978			34,317			(44,915	)
Less – Comprehensive income attributable to noncontrolling interests		62,437			93,995			75,329
Comprehensive income (loss) attributable to Sony Corporation’s stockholders		59,541			(59,678	)		(120,244	)

The accompanying notes are an integral part of these statements.

 

 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows

Fiscal year ended March 31

 

	Yen in millions
	2014			2015			2016
Cash flows from operating activities:
Net income (loss)		(68,841	)		(49,004	)		209,715
Adjustments to reconcile net income (loss) to net cash provided by operating activities –
Depreciation and amortization, including amortization of deferred insurance acquisition costs		376,695			354,624			397,091
Amortization of film costs		285,673			272,941			299,587
Accrual for pension and severance costs, less payments		(38,131	)		9,638			(6,383	)
Other operating expense, net		48,666			181,658			47,171
Gain on sale or devaluation of securities investments, net		(10,401	)		(7,916	)		(48,857	)
(Gain) loss on revaluation of marketable securities held in the financial services business for trading purposes, net		(58,608	)		(100,729	)		44,821
(Gain) loss on revaluation or impairment of securities investments held  in the financial services business, net		(3,688	)		(1,397	)		2,653
Deferred income taxes		(6,661	)		7,982			211
Equity in net income of affiliated companies, net of dividends		10,022			2,269			5,045
Changes in assets and liabilities:
(Increase) decrease in notes and accounts receivable, trade		(29,027	)		33,843			(5,828	)
(Increase) decrease in inventories		20,248			113,485			(57,804	)
Increase in film costs		(266,870	)		(252,403	)		(318,391	)
Increase (decrease) in notes and accounts payable, trade		103,379			(118,577	)		(49,525	)
Decrease in accrued income and other taxes		(3,110	)		(11,033	)		(23,607	)
Increase in future insurance policy benefits and other		391,541			460,336			403,392
Increase in deferred insurance acquisition costs		(77,656	)		(79,861	)		(83,774	)
Increase in marketable securities held in the financial services business for trading purposes		(33,803	)		(51,565	)		(107,433	)
(Increase) decrease in other current assets		(48,115	)		16,276			21,299
Increase (decrease) in other current liabilities		58,656			86,718			(25,751	)
Other		14,147			(112,645	)		45,457
Net cash provided by operating activities		664,116			754,640			749,089

  

 

 

(Continued on following page.)

 

 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

 

	Yen in millions
	2014			2015			2016
Cash flows from investing activities:
Payments for purchases of fixed assets		(283,457	)		(215,916	)		(375,411	)
Proceeds from sales of fixed assets		99,694			36,777			26,472
Payments for investments and advances by financial services business		(1,032,594	)		(960,045	)		(1,221,093	)
Payments for investments and advances (other than financial services business)		(14,892	)		(20,029	)		(20,830	)
Proceeds from sales or return of investments and collections of advances by financial services business		426,621			482,537			534,072
Proceeds from sales or return of investments and collections of advances (other than financial services business)		75,417			49,479			81,535
Proceeds from sales of businesses		15,016			93			17,790
Other		3,693			(12,532	)		(72,938	)
Net cash used in investing activities		(710,502	)		(639,636	)		(1,030,403	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		178,935			18,507			19,076
Payments of long-term debt		(164,540	)		(258,102	)		(270,669	)
Increase (decrease) in short-term borrowings, net		25,183			(51,013	)		98,153
Increase in deposits from customers in the financial services business, net		238,828			57,464			165,169
Proceeds from issuance of convertible bonds		—			—			120,000
Proceeds from issuance of new shares of common stock		—			—			301,708
Dividends paid		(25,643	)		(13,160	)		(12,751	)
Other		(44,886	)		(16,891	)		(40,564	)
Net cash provided by (used in) financing activities		207,877			(263,195	)		380,122
Effect of exchange rate changes on cash and cash equivalents		58,614			51,138			(64,609	)
Net increase (decrease) in cash and cash equivalents		220,105			(97,053	)		34,199
Cash and cash equivalents at beginning of the fiscal year		826,361			1,046,466			949,413
Cash and cash equivalents at end of the fiscal year		1,046,466			949,413			983,612
Supplemental data:
Cash paid during the fiscal year for –
Income taxes		101,091			97,775			138,770
Interest		23,819			21,982			26,166
Non-cash investing and financing activities –
Conversion of convertible bonds		31,220			118,780			—
Obtaining assets by entering into capital leases		82,260			10,714			14,759
Collections of deferred proceeds from sales of receivables –		35,196			22,512			2,298

The accompanying notes are an integral part of these statements.

 

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

 

	Yen in millions
	Common stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive income			Treasury stock, at cost			Sony Corporation’s stockholders’ equity			Noncontrolling interests			Total equity
Balance at March 31, 2013		630,923			1,110,531			1,094,775			(639,495	)		(4,472	)		2,192,262			479,742			2,672,004
Exercise of stock acquisition rights		121			121												242						242
Conversion of zero coupon convertible bonds		15,610			15,610												31,220						31,220
Stock-based compensation					906												906						906
Comprehensive income:
Net income (loss)								(128,369	)								(128,369	)		59,528			(68,841	)
Other comprehensive income, net of tax –
Unrealized gains on securities											18,430						18,430			880			19,310
Unrealized gains on derivative instruments											742						742						742
Pension liability adjustment											11,777						11,777			106			11,883
Foreign currency translation adjustments											156,961						156,961			1,923			158,884
Total comprehensive income																	59,541			62,437			121,978
Stock issue costs, net of tax								(127	)								(127	)					(127	)
Dividends declared								(26,017	)								(26,017	)		(15,430	)		(41,447	)
Purchase of treasury stock														(76	)		(76	)					(76	)
Reissuance of treasury stock					(140	)								264			124						124
Transactions with noncontrolling interests shareholders and other					62												62			(1,745	)		(1,683	)
Balance at March 31, 2014		646,654			1,127,090			940,262			(451,585	)		(4,284	)		2,258,137			525,004			2,783,141

 

 

 

(Continued on following page.)

  

 

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Continued)

 

	Yen in millions
	Common stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive income			Treasury stock, at cost			Sony Corporation’s stockholders’ equity			Noncontrolling interests			Total equity
Balance at March 31, 2014		646,654			1,127,090			940,262			(451,585	)		(4,284	)		2,258,137			525,004			2,783,141
Exercise of stock acquisition rights		994			994												1,988						1,988
Conversion of zero coupon convertible bonds		59,390			59,390												118,780						118,780
Stock-based compensation					873												873						873
Comprehensive income:
Net income (loss)								(125,980	)								(125,980	)		76,976			(49,004	)
Other comprehensive income, net of tax –
Unrealized gains on securities											26,644						26,644			12,074			38,718
Pension liability adjustment											(21,092	)					(21,092	)		(95	)		(21,187	)
Foreign currency translation adjustments											60,750						60,750			5,040			65,790
Total comprehensive income (loss)																	(59,678	)		93,995			34,317
Stock issue costs, net of tax								(517	)								(517	)					(517	)
Dividends declared								—									—			(14,108	)		(14,108	)
Purchase of treasury stock														(101	)		(101	)					(101	)
Reissuance of treasury stock					(99	)								165			66						66
Transactions with noncontrolling interests shareholders and other					(2,471	)											(2,471	)		6,501			4,030
Balance at March 31, 2015		707,038			1,185,777			813,765			(385,283	)		(4,220	)		2,317,077			611,392			2,928,469

 

	Yen in millions
	Common stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive income			Treasury stock, at cost			Sony Corporation’s stockholders’ equity			Noncontrolling interests			Total equity
Balance at March 31, 2015		707,038			1,185,777			813,765			(385,283	)		(4,220	)		2,317,077			611,392			2,928,469
Issuance of new shares		150,854			150,854												301,708						301,708
Exercise of stock acquisition rights		975			975												1,950						1,950
Stock-based compensation					1,516												1,516						1,516
Comprehensive income:
Net income								147,791									147,791			61,924			209,715
Other comprehensive income, net of tax –
Unrealized gains (losses) on securities											(13,417	)					(13,417	)		15,637			2,220
Unrealized losses on derivative instruments											(1,198	)					(1,198	)					(1,198	)
Pension liability adjustment											(170,608	)					(170,608	)		(1,145	)		(171,753	)
Foreign currency translation adjustments											(82,812	)					(82,812	)		(1,087	)		(83,899	)
Total comprehensive income (loss)																	(120,244	)		75,329			(44,915	)
Stock issue costs, net of tax					(1,478	)											(1,478	)					(1,478	)
Dividends declared								(25,225	)								(25,225	)		(20,868	)		(46,093	)
Purchase of treasury stock														(110	)		(110	)					(110	)
Reissuance of treasury stock					(12	)								71			59						59
Transactions with noncontrolling interests shareholders and other					(11,913	)											(11,913	)		(4,783	)		(16,696	)
Balance at March 31, 2016		858,867			1,325,719			936,331			(653,318	)		(4,259	)		2,463,340			661,070			3,124,410

The accompanying notes are an integral part of these statements.

 

 

 

Index to Notes to Consolidated Financial Statements

Sony Corporation and Consolidated Subsidiaries

 

Notes to Consolidated Financial Statements				Page
	1.		Nature of operations	14
	2.		Summary of significant accounting policies	14
	3.		Inventories	25
	4.		Film costs	25
	5.		Investments in affiliated companies	26
	6.		Transfer of financial assets	28
	7.		Marketable securities and securities investments	29
	8.		Leases	32
	9.		Goodwill and intangible assets	33
	10.		Insurance-related accounts	36
	11.		Short-term borrowings and long-term debt	37
	12.		Housing loans and deposits from customers in the banking business	39
	13.		Fair value measurements	40
	14.		Derivative instruments and hedging activities	47
	15.		Pension and severance plans	52
	16.		Stockholders’ equity	60
	17.		Stock-based compensation plans	63
	18.		Thai Floods	64
	19.		Restructuring charges	65
	20.		Supplemental consolidated statements of income information	68
	21.		Income taxes	69
	22.		Reconciliation of the differences between basic and diluted EPS	74
	23.		Variable interest entities	74
	24.		Acquisitions	76
	25.		Divestitures	77
	26.		Collaborative arrangements	78
	27.		Commitments, contingent liabilities and other	78
	28.		Business segment information	81
	29.		Subsequent events	87

 

 

 

Notes to Consolidated Financial Statements

Sony Corporation and Consolidated Subsidiaries

1.

Nature of operations

Sony Corporation and its consolidated subsidiaries (hereinafter collectively referred to as “Sony”) are engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer, professional and industrial markets as well as game consoles and software. Sony’s primary manufacturing facilities are located in Asia including Japan. Sony also utilizes third-party contract manufacturers for certain products. Sony’s products are marketed throughout the world by sales subsidiaries and unaffiliated distributors as well as direct sales via the Internet. Sony is engaged in the production, acquisition and distribution of motion pictures and television programming and the operation of television and digital networks. Sony is also engaged in the development, production, manufacture, and distribution of recorded music and the management and licensing of the words and music of songs. Further, Sony is also engaged in various financial services businesses, including life and non-life insurance operations through its Japanese insurance subsidiaries and banking operations through a Japanese Internet-based banking subsidiary. In addition to the above, Sony is engaged in a network services business and an advertising agency business in Japan.

2.

Summary of significant accounting policies

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with U.S. GAAP. These adjustments were not recorded in the statutory books and records as Sony Corporation and its subsidiaries in Japan maintain their records and prepare their statutory financial statements in accordance with accounting principles generally accepted in Japan, while its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the countries of their domicile.

(1)

Significant accounting policies

Basis of consolidation and accounting for investments in affiliated companies -

The consolidated financial statements include the accounts of Sony Corporation and its majority-owned subsidiary companies, general partnerships and other entities in which Sony has a controlling interest, and variable interest entities for which Sony is the primary beneficiary. All intercompany transactions and accounts are eliminated. Investments in business entities in which Sony does not have control, but has the ability to exercise significant influence over operating and financial policies, generally through 20-50% ownership, are accounted for under the equity method. In addition, investments in general partnerships in which Sony does not have a controlling interest and limited partnerships are also accounted for under the equity method if more than minor influence over the operation of the investee exists (generally through more than 3-5% ownership). When the interest in the partnership is so minor that Sony has no significant influence over the operation of the investee, the cost method is used. Under the equity method, investments are stated at cost plus/minus Sony’s portion of equity in undistributed earnings or losses. Sony’s equity in current earnings or losses of such entities is reported net of income taxes and is included in operating income (loss) after the elimination of unrealized intercompany profits. If the value of an investment has declined and is judged to be other-than-temporary, the investment is written down to its estimated fair value.

 

On occasion, a consolidated subsidiary or an affiliated company accounted for by the equity method may issue its shares to third parties in either a public or private offering or upon conversion of convertible debt to common stock at amounts per share in excess of or less than Sony’s average per share carrying value. With respect to such transactions, the resulting gains or losses arising from the change in ownership interest are recorded in earnings within the fiscal year in which the change in interest transactions occur.

 

Gains or losses that result from a loss of a controlling financial interest in a subsidiary are recorded in earnings along with fair value remeasurement gains or losses on any retained investment in the entity, while a change in interest of a consolidated subsidiary that does not result in a change in control is accounted for as a capital transaction and no gains or losses are recorded in earnings.

 

The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable tangible and intangible assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over Sony’s underlying net equity is recognized as goodwill as a component of the investment balance.

 

 

Use of estimates -

The preparation of the consolidated financial statements in conformity with U.S. GAAP 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. The most significant estimates include those used in determining the valuation of investment securities, valuation of inventories, fair values of long-lived assets, fair values of goodwill, intangible assets and assets and liabilities assumed in business combinations, product warranty liability, pension and severance plans, valuation of deferred tax assets, uncertain tax positions, film costs, and insurance related liabilities. Actual results could significantly differ from those estimates.

Translation of foreign currencies -

All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate fiscal year end exchange rates and all income and expense accounts are translated at exchange rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of accumulated other comprehensive income. Upon remeasurement of a previously held equity interest in accordance with the accounting guidance for business combinations achieved in stages, accumulated translation adjustments, if any, are included in earnings.

 

Receivables and payables denominated in foreign currencies are translated at appropriate fiscal year end exchange rates and the resulting translation gains or losses are recognized into income.

Cash and cash equivalents -

Cash and cash equivalents include all highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.

Marketable debt and equity securities -

Debt and equity securities designated as available-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of accumulated other comprehensive income, net of applicable taxes. Debt and equity securities classified as trading securities are carried at fair value with unrealized gains or losses included in income. Debt securities that are expected to be held-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to fair value by a charge to income when an other-than-temporary impairment is recognized. Realized gains and losses are determined on the average cost method and are reflected in income.

 

Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of the credit condition of the issuer, sovereign risk, and whether or not Sony is able to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.

 

In evaluating the factors for available-for-sale securities whose fair values are readily determinable, Sony presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally for a period of up to six months). This criterion is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate that the decline in the fair value is other-than-temporary.

 

 

When an other-than-temporary impairment of a held-to-maturity debt security has occurred, the amount of the other-than-temporary impairment recognized in income depends on whether Sony intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost. If the debt security meets either of these two criteria, the other-than-temporary impairment is recognized in income, measured as the entire difference between the security’s amortized cost and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these two criteria, the net amount recognized in income is a credit loss equal to the difference between the amortized cost of the debt security and its net present value calculated by discounting Sony’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in accumulated other comprehensive income. Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in income are presented as a separate component of accumulated other comprehensive income.

Equity securities in non-public companies -

Equity securities in non-public companies are primarily carried at cost if fair value is not readily determinable. If the carrying value of a non-public equity investment is estimated to have declined and such decline is judged to be other-than-temporary, Sony recognizes the impairment of the investment and the carrying value is reduced to its fair value. Determination of impairment is based on the consideration of several factors, including operating results, business plans and estimated future cash flows. Fair value is determined through the use of various methodologies such as discounted cash flows, valuation of recent financings and comparable valuations of similar companies.

Allowance for doubtful accounts -

Sony maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. Sony reviews accounts receivable by amounts due from customers which are past due to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, Sony makes judgments about the creditworthiness of customers based on past collection experience and ongoing credit risk evaluations.

Inventories -

Inventories in the Mobile Communications (“MC”), Game & Network Services (“G&NS”), Imaging Products & Solutions (“IP&S”), Home Entertainment & Sound (“HE&S”), Devices and Music segments as well as non-film inventories for the Pictures segment are valued at cost, not in excess of market, cost being determined on the “average cost” basis except for the cost of finished products carried by certain subsidiary companies which is determined on the “first-in, first-out” basis. The market value of inventory is determined as the net realizable value – i.e., estimated selling price in the ordinary course of business less predictable costs of completion and disposal. Sony does not consider a normal profit margin when calculating the net realizable value.

Other receivables -

Other receivables include receivables which relate to arrangements with certain component manufacturers whereby Sony procures goods, including product components, for these component manufacturers and is reimbursed for the related purchases. No revenue or profit is recognized on these transfers. Sony will repurchase the inventory at a later date from the component manufacturers as either finished goods inventory or as partially assembled product.

Film costs -

Film costs include direct production costs, production overhead and acquisition costs for both motion picture and television productions and are stated at the lower of unamortized cost or estimated fair value and classified as noncurrent assets. Film costs are amortized and the estimated liabilities for residuals and participations are accrued using an individual-film-forecast method based on the ratio of current period actual revenues to the estimated remaining total revenues. Film costs also include broadcasting rights, which are recognized when the license period begins and the program is available for use, and consist of acquired programming to be aired on Sony’s worldwide channel network. Broadcasting rights are stated at the lower of unamortized cost or net realizable value, classified as either current or noncurrent assets based on timing of expected use, and amortized based on estimated usage or on a straight-line basis over the useful life, as appropriate. Estimates used in calculating the fair value of the film costs and the net realizable value of the broadcasting rights are based upon assumptions about future demand and market conditions and are reviewed on a periodic basis.

Property, plant and equipment and depreciation -

Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method. Useful lives for depreciation range from two to 50 years for buildings and from two to 10 years for machinery and equipment. Significant renewals and additions are capitalized at cost. Maintenance and repairs, and minor renewals and betterments are charged to income as incurred.

 

Goodwill and other intangible assets -

Goodwill and indefinite lived intangible assets are tested annually for impairment during the fourth quarter of the fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Such an event or change in circumstances would include unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, which are periodically reviewed by Sony’s management.

 

In the fiscal year ended March 31, 2016, Sony elected not to perform an optional qualitative assessment of goodwill and instead proceeded directly to a two-step quantitative impairment process which involves a comparison of the estimated fair value of a reporting unit to its carrying amount to identify potential impairment. Reporting units are Sony’s operating segments or one level below the operating segments. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is not performed. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Indefinite lived intangible assets are tested for impairment by comparing the fair value of the intangible asset with its carrying value and if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

 

The fair value of a reporting unit or indefinite lived intangible asset is generally determined using a discounted cash flow analysis. This approach uses significant estimates and assumptions, including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, earnings multiples, the determination of appropriate comparable entities and the determination of whether a premium or discount should be applied to comparables. Consideration is also given to Sony’s market capitalization in relation to the sum of the calculated fair values of the reporting units, including reporting units with no goodwill, and taking into account corporate level assets and liabilities not assigned to individual reporting units as well as a reasonable control premium.

 

The assumptions used for projected future cash flows and the timing of such cash flows are based on the forecast and mid-range plan (“MRP”) of each reporting unit and take into account such factors as historical experience, market and industry information, and current and forecasted economic conditions. Perpetual growth rates are utilized to determine a terminal cash flow value and are generally set after the three-year forecasted period for the MRP. Certain reporting units, such as those in the Pictures segment, utilize longer forecast periods and base the terminal value on an exit price using an earnings multiple with a control premium applied to the final year of the projected cash flows. Discount rates are derived from the weighted average cost of capital of market participants in similar businesses.

 

When a business within a reporting unit is disposed of, goodwill is allocated to the disposed business using the relative fair value method.

 

Intangible assets with finite useful lives mainly consist of patent rights, know-how, license agreements, customer relationships, trademarks, software to be sold, leased or otherwise marketed, internal-use software, music catalogs, artist contracts, and television carriage contracts (broadcasting agreements). Patent rights, know-how, license agreements, trademarks, software to be sold, leased or otherwise marketed, and internal-use software are generally amortized on a straight-line basis over three to 10 years. Customer relationships, music catalogs, artist contracts and television carriage contracts (broadcasting agreements) are amortized on a straight-line basis, generally, over 10 to 40 years.

Capitalized software -

The costs related to establishing the technological feasibility of software to be sold, leased, or otherwise marketed are expensed as incurred as a part of research and development in cost of sales. Costs that are incurred to produce the finished product after technological feasibility is established are capitalized and amortized to cost of sales over the estimated economic life, which is generally three years. The technological feasibility of game software is established when the product master is completed. Consideration to capitalize game software development costs before this point is limited to the development costs of games for which technological feasibility can be proven at an earlier stage. At each balance sheet date, Sony performs reviews to ensure that unamortized capitalized software costs remain recoverable from future profits of the related software products.

 

 

 

The costs incurred for internal-use software during the application development stage are capitalized and amortized, mainly to selling, general and administrative expenses, on a straight-line basis over the estimated useful life. Costs related to the preliminary project stage and post implementation activities are expensed as incurred.

Deferred insurance acquisition costs -

Costs that vary with and are directly related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs include such items as commissions, medical examination costs and inspection report fees, and are subject to recoverability testing at least annually to ensure that the capitalized amounts do not exceed the present value of anticipated gross profits or premiums less benefits and maintenance expenses, as applicable. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits.

Product warranty -

Sony provides for the estimated cost of product warranties at the time revenue is recognized. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.

 

Certain subsidiaries in the MC, G&NS, IP&S and HE&S segments offer extended warranty programs. The consideration received for extended warranty service is deferred and recognized as revenue on a straight-line basis over the term of the extended warranty.

Future insurance policy benefits -

Liabilities for future insurance policy benefits are primarily comprised of the present value of estimated future payments to policyholders. These liabilities are computed by the net level premium method based upon the assumptions as to future investment yield, morbidity, mortality, withdrawals and other factors. These assumptions are reviewed on a periodic basis. Liabilities for future insurance policy benefits also include liabilities for guaranteed benefits related to certain non-traditional life and annuity contracts.

Policyholders’ account in the life insurance business -

Liabilities for policyholders’ account in the life insurance business represent the contract value that has accrued to the benefit of the policyholders as of the balance sheet date. This liability is generally equal to the accumulated account deposits, plus interest credited, less policyholder withdrawals and other charges assessed against the account balances.

Impairment of long-lived assets -

Sony reviews the recoverability of the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of, whenever events or changes in circumstances indicate that the individual carrying amount of an asset or asset group may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the cash flows are determined to be less than the carrying value of the asset or asset group, an impairment loss would be recognized during the period for the amount by which the carrying value of the asset or asset group exceeds estimated fair value. Long-lived assets that are to be disposed of other than by sale are considered held and used until they are disposed of. Long-lived assets that are to be disposed of by sale are reported at the lower of their carrying value or fair value less cost to sell and are not depreciated. Fair value is determined using the present value of estimated net cash flows or comparable market values. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates applied to determine terminal values, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables.

 

 

 

Fair value measurement -

Sony measures fair value as an exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

 

The accounting guidance for fair value measurements specifies a hierarchy of inputs to valuation techniques based on the extent to which inputs used in measuring fair value are observable in the market. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Sony’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Observable market data is used if such data is available without undue cost and effort. Each fair value measurement is reported in one of three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1 —

Inputs are unadjusted quoted prices for identical assets and liabilities in active markets.

Level 2 —

Inputs are based on observable inputs other than level 1 prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

Level 3 —

One or more significant inputs are unobservable.

 

When available, Sony uses unadjusted quoted market prices in active markets to measure fair value and classifies such items within level 1. If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates and option volatilities. Items valued using internally generated models are classified according to the lowest level input that is significant to the valuation. For certain financial assets and liabilities, Sony determines fair value using third-party information such as indicative quotes from dealers and quantitative input from investment advisors following Sony’s established valuation procedures including validation against internally developed prices. Additionally, Sony considers both counterparty credit risk and Sony’s own creditworthiness in determining fair value. Sony attempts to mitigate credit risk to third parties by entering into netting agreements and actively monitoring the creditworthiness of counterparties and its exposure to credit risk through the use of credit limits and by selecting major international banks and financial institutions as counterparties.

 

Transfers between levels are deemed to have occurred at the beginning of the interim period in which the transfers occur.

Derivative financial instruments -

All derivatives are recognized as either assets or liabilities in the consolidated balance sheets at fair value on a gross basis. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on whether the derivative financial instrument qualifies as a hedge and the derivative is being used to hedge changes in fair value or cash flows.

 

The accounting guidance for hybrid financial instruments permits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under accounting guidance for derivative instruments and hedging activities. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. Certain subsidiaries in the Financial Services segment had hybrid financial instruments, disclosed in Note 7 as debt securities, that contain embedded derivatives where the entire instrument was carried at fair value.

 

In accordance with accounting guidance for derivative instruments and hedging activities, various derivative financial instruments held by Sony are classified and accounted for as described below.

Fair value hedges

Changes in the fair value of derivatives designated and effective as fair value hedges for recognized assets or liabilities or unrecognized firm commitments are recognized in earnings as offsets to changes in the fair value of the related hedged assets or liabilities.

 

 

Cash flow hedges

Changes in the fair value of derivatives designated and effective as cash flow hedges for forecasted transactions or exposures associated with recognized assets or liabilities are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of the ineffective portion are recognized immediately in earnings.

Derivatives not designated as hedges

Changes in the fair value of derivatives that are not designated as hedges are recognized immediately in earnings.

Assessment of hedges

When applying hedge accounting, Sony formally documents all hedging relationships between the derivatives designated as hedges and the hedged items, as well as its risk management objectives and strategies for undertaking various hedging activities. Sony links all hedges that are designated as fair value or cash flow hedges to specific assets or liabilities on the consolidated balance sheets or to the specific forecasted transactions. Sony also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are designated as hedges are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, Sony discontinues hedge accounting. Hedge ineffectiveness, if any, is included immediately in earnings.

Stock-based compensation -

Sony accounts for stock-based compensation using the fair value based method, measured on the date of grant using the Black-Scholes option-pricing model. The expense is mainly included in selling, general and administrative expenses. Stock-based compensation is recognized, net of an estimated forfeiture rate, over the requisite service period using the accelerated method of amortization for grants with graded vesting. The estimated forfeiture rate is based on Sony’s historical experience in the stock acquisition rights plans where the majority of the vesting terms have been satisfied.

Revenue recognition -

Revenues from sales in the MC, G&NS, IP&S, HE&S, Devices and Music segments are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when the customer has taken title to the product and the risks and rewards of ownership have been substantively transferred. If the sales contract contains a customer acceptance provision, then sales are recognized after customer acceptance occurs or the acceptance provisions lapse. Revenues are recognized net of anticipated returns and sales incentives. Revenues from prepaid subscription fees, such as within the G&NS segment, are recognized ratably over the subscription term.

 

Revenue arrangements with customers may include multiple elements, including any combination of products, services and software. An example includes sales of electronics products with rights to receive promotional goods. For Sony’s multiple element arrangements where at least one of the elements is not subject to existing software or film revenue recognition guidance, elements are separated into more than one unit of accounting when the delivered element(s) have value to the customer on a standalone basis, and delivery of the undelivered element(s) is probable and substantially in the control of Sony. Revenue is then allocated to each unit of accounting based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence of selling price (“VSOE”) if it exists, based next on third-party evidence of selling price (“TPE”) if VSOE does not exist, and, finally, if both VSOE and TPE do not exist, based on estimated selling prices (“ESP”). VSOE is limited to either the price charged for an element when it is sold separately or, for an element not yet being sold separately, the price established by management having the relevant authority; it must be probable that the price, once established, will not change before the separate introduction of the element into the market place. TPE is the price of Sony’s or any competitor’s largely interchangeable products or services in standalone sales to similarly situated customers. ESP is the price at which Sony would transact if the element were sold by Sony regularly on a standalone basis.  When determining ESP, Sony considers all relevant inputs, including sales, cost and margin analysis of the product, targeted rate of return of the product, competitors’ and Sony’s pricing practices and customer perspectives.

 

Certain software products published by Sony provide limited on-line features at no additional cost to the customer. Generally, such features are considered to be incidental to the overall software product and an inconsequential deliverable. Accordingly, revenue related to software products containing these limited on-line features is not deferred.

 

 

 

Revenues from sales in the Pictures segment are recognized when persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectability is reasonably assured. Revenues from the theatrical exhibition of motion pictures are recognized as the customer exhibits the film. Revenues from the licensing of motion picture and television product for pay and free television exhibition and other markets are recognized when the product is available for exploitation by the licensee and when any restrictions regarding the use of the product lapse. For home entertainment distribution, revenues from the sale of DVDs and Blu-ray Disc^TM, net of anticipated returns and sales incentives, are recognized when the product is available for sale to the public, and revenues from electronic sell-through and video-on-demand are recognized when the product is made available for viewing via digital distribution platforms. Certain motion picture and television product licensing arrangements involve an allocation to multiple elements, for example a fee for multiple territories and availability dates, that is based on relative fair value using management’s best estimate. Revenues from the sale of broadcast advertising are recognized when the advertisement is aired. Revenues from subscription fees received by television networks are recognized when the service is provided.

 

Traditional life insurance policies that the life insurance subsidiary underwrites, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. Premiums from these policies are reported as revenue when due from policyholders.

 

Amounts received as payment for non-traditional contracts such as interest sensitive whole life contracts, individual annuity contracts and other contracts without life contingencies are recognized in policyholders’ account in the life insurance business. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized over the period of the contracts, and included in financial services revenue.

 

Property and casualty insurance policies that the non-life insurance subsidiary underwrites are primarily automotive insurance contracts which are categorized as short-duration contracts. Premiums from these policies are reported as revenue over the period of the contract in proportion to the amount of insurance protection provided.

 

Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

Consideration given to a customer or a reseller -

Sales incentives or other cash consideration given to a customer or a reseller, including payments for buydowns, slotting fees and cooperative advertising programs, are accounted for as a reduction of revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, the fair value of the benefit is reasonably estimated and documentation from the reseller is received to support the amounts paid to the reseller. Payments meeting these criteria are recorded as selling, general and administrative expenses. For the fiscal years ended March 31, 2014, 2015 and 2016, consideration given to a reseller, primarily for free promotional shipping and cooperative advertising programs included in selling, general and administrative expenses, totaled 12,112 million yen, 10,503 million yen and 13,178 million yen, respectively.

Cost of sales -

Costs classified as cost of sales relate to the producing and manufacturing of products and include items such as material cost, subcontractor cost, depreciation of fixed assets, amortization of intangible assets, personnel expenses, research and development costs, and amortization of film costs related to motion picture and television productions.

Research and development costs -

Research and development costs, included in cost of sales, include items such as salaries, personnel expenses and other direct and indirect expenses associated with research and product development. Research and development costs are expensed as incurred.

Selling, general and administrative -

Costs classified as selling expense relate to promoting and selling products and include items such as advertising, promotion, shipping, and warranty expenses. General and administrative expenses include operating items such as officers’ salaries, personnel expenses, depreciation of fixed assets, office rental for sales, marketing and administrative divisions, a provision for doubtful accounts and amortization of intangible assets.

Financial services expenses -

Financial services expenses include a provision for policy reserves and amortization of deferred insurance acquisition costs, and all other operating costs, such as personnel expenses, depreciation of fixed assets, and office rental of subsidiaries, in the Financial Services segment.

 

 

 

Advertising costs -

Advertising costs are expensed when the advertisement or commercial appears in the selected media.

Shipping and handling costs -

The majority of shipping and handling, warehousing and internal transfer costs for finished goods are included in selling, general and administrative expenses. An exception to this is in the Pictures segment where such costs are charged to cost of sales as they are an integral part of producing and distributing motion pictures and television programming. All other costs related to Sony’s distribution network are included in cost of sales, including inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs for raw materials and in-process inventory. Amounts paid by customers for shipping and handling costs are included in net sales.

Income taxes -

The provision for income taxes is computed based on the pretax income included in the consolidated statements of income, and the tax liability attributed to undistributed earnings of subsidiaries and affiliated companies accounted for by the equity method expected to be remitted in the foreseeable future. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.

 

Carrying amounts of deferred tax assets require a reduction by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically with appropriate consideration given to all positive and negative evidence related to the realization of the deferred tax assets. Management’s judgments related to this assessment consider, among other matters, the nature, frequency and severity of current and cumulative losses on an individual tax jurisdiction basis, forecasts of future profitability after consideration of uncertain tax positions, excess of appreciated asset value over the tax basis of net assets, the duration of statutory carryforward periods, the past utilization of net operating loss carryforwards prior to expiration, as well as prudent and feasible tax planning strategies which would be employed by Sony to prevent net operating loss and tax credit carryforwards from expiring unutilized.

 

Sony records assets and liabilities for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Sony continues to recognize interest and penalties, if any, with respect to income taxes, including unrecognized tax benefits, as interest expense and as income tax expense, respectively, in the consolidated statements of income. The amount of income taxes Sony pays is subject to ongoing audits by various taxing authorities, which may result in proposed assessments. In addition, several significant items related to intercompany transfer pricing are currently the subject of negotiations between taxing authorities in different jurisdictions as a result of pending advance pricing agreement applications and competent authority requests. Sony’s estimate for the potential outcome for any uncertain tax issues is judgmental and requires significant estimates. Sony assesses its income tax positions and records tax benefits for all years subject to examinations based upon the evaluation of the facts, circumstances and information available at that reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, Sony records the amount that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If Sony does not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, Sony’s future results may include favorable or unfavorable adjustments to Sony’s estimated tax liabilities due to closure of income tax examinations, the outcome of negotiations between taxing authorities in different jurisdictions, new regulatory or judicial pronouncements or other relevant events. As a result, the amount of unrecognized tax benefits, and the effective tax rate, may fluctuate significantly.

Net income (loss) attributable to Sony Corporation’s stockholders per share (“EPS”) -

Basic EPS is computed based on the weighted-average number of shares of common stock outstanding during each period. The computation of diluted EPS reflects the maximum possible dilution from conversion, exercise, or contingent issuance of securities. All potentially dilutive securities are excluded from the calculation in a situation where there is a net loss attributable to Sony Corporation’s stockholders.

 

 

(2)

Recently adopted accounting pronouncements

Reporting discontinued operations and disclosures of disposals of components of an entity -

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 that changes the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the ASU, only disposals representing a strategic shift in operations that has, or will have, a major effect on the entity’s operations and financial results should be presented as discontinued operations. Additionally, the ASU requires additional disclosures for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. This ASU is effective for Sony as of April 1, 2015. The effect of this ASU did not have a material impact on Sony’s results of operations and financial position.

(3)

Recent accounting pronouncements not yet adopted

Revenue from contracts with customers -

In May 2014, the FASB issued ASU 2014-09 addressing revenue recognition which will supersede the current revenue recognition requirements, including most industry-specific guidance. The guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for one year and permits early adoption as of the original effective date of ASU 2014-09. This guidance will be effective for the first quarter of Sony’s fiscal year beginning April 1, 2018 (with early adoption permitted for the first quarter of the fiscal year beginning April 1, 2017).　The guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Sony is currently evaluating the transition method, the timing of its adoption and the impact this ASU will have on Sony’s results of operations and financial position.

Amendments to the consolidation analysis -

In February 2015, the FASB issued ASU 2015-02 that changes how companies evaluate entities for consolidation. The changes primarily relate to (i) the identification of variable interests related to fees paid to decision makers or service providers, (ii) how entities determine whether limited partnerships or similar entities are variable interest entities, (iii) how related parties and de facto agents are considered in the primary beneficiary determination, and (iv) the elimination of the presumption that a general partner controls a limited partnership. This ASU is effective for Sony as of April 1, 2016. The adoption of this ASU is not expected to have a material impact on Sony’s results of operations and financial position.

Customer’s accounting for fees paid in a cloud computing arrangement -

In April 2015, the FASB issued ASU 2015-05 for fees paid in a cloud computing arrangement. The ASU requires entities to account for a cloud computing arrangement that includes a software license element in a manner consistent with the acquisition of other software licenses. A cloud computing arrangement without a software license element is to be accounted for as a service contract. This ASU does not affect the accounting for service contracts by a customer. This ASU is effective for Sony as of April 1, 2016. The adoption of this ASU is not expected to have a material impact on Sony’s results of operations and financial position.

Disclosures for short-duration insurance contracts -

In May 2015, the FASB issued ASU 2015-09 for disclosures relating to short-duration insurance contracts.  This ASU requires additional information to be disclosed related to the liability for unpaid claims and claim adjustment expenses and significant changes in methodologies and assumptions used for annual reporting periods.  This ASU is effective for Sony as of April 1, 2016.  Since this ASU will only impact disclosures, the adoption will have no impact on Sony’s results of operations and financial position.

Balance sheet classification of deferred taxes -

In November 2015, the FASB issued ASU 2015-17 amending the presentation of deferred income taxes and requiring that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. This ASU will be effective for Sony as of April 1, 2017 and early adoption is permitted as of the beginning of an interim or annual reporting period. The ASU may be adopted either prospectively or retrospectively. Sony is currently assessing the method of adoption and the impact that this ASU may have on Sony’s financial position and disclosures.

 

 

Recognition and measurement of financial assets and financial liabilities -

In January 2016, the FASB issued ASU 2016-01 amending the existing requirements for the recognition and measurement of financial assets and financial liabilities. The changes primarily relate to (i) the requirement to measure equity investments in unconsolidated subsidiaries, other than those accounted for under the equity method of accounting, at fair value with changes in fair value recognized in earnings, (ii) an alternative approach for the measurement of equity investments that do not have a readily determinable fair value, (iii) the elimination of the other-than-temporary impairment model for equity investments and its replacement with a requirement to perform a qualitative assessment to identify impairment, and a requirement to recognize impairment losses in earnings based on the difference between fair value and the carrying value of the equity investment, (iv) the elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, (v) the addition of a requirement to use the exit price concept when measuring the fair value of financial instruments for disclosure purposes, and (vi) the addition of a requirement to present financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or market) and form of financial asset (e.g., loans, securities). This ASU will be effective for Sony as of April 1, 2018. The effect of this ASU is being evaluated for the impact it will have on Sony’s results of operations and financial position.

Leases -

In February 2016, the FASB issued ASU 2016-02, which amends current leasing guidance. The ASU requires substantially all leases to be recognized on the balance sheet. The guidance is to be applied using a modified retrospective approach from the earliest period presented and includes optional practical expedients. This ASU will be effective for Sony as of the fiscal year beginning April 1, 2019, and early adoption is permitted. The effect of this ASU is being evaluated for the impact it will have on Sony’s results of operations and financial position.

(4)

Reclassifications

Certain reclassifications of the financial statements and accompanying footnotes for the fiscal years ended March 31, 2014 and 2015 have been made to conform to the presentation for the fiscal year ended March 31, 2016.

(5)

Out-of-period adjustments

For the fiscal year ended March 31, 2015, Sony recorded an out-of-period adjustment to correct an error in the amounts of revenue and certain capitalizable assets being recorded at a subsidiary. The error began in the fiscal year ended March 31, 2012 and continued until it was identified by Sony during the fiscal year ended March 31, 2015. The adjustment, which related entirely to All Other, impacted net sales, cost of sales, and selling, general and administrative expenses, and decreased income before income taxes in the consolidated statements of income by 5,104 million yen in the aggregate for the fiscal year ended March 31, 2015. Sony determined that the adjustment was not material to the consolidated financial statements for the year ended March 31, 2015 or any prior periods.

 

For the fiscal year ended March 31, 2016, Sony recorded an out-of-period adjustment to correct an error in the amount of accruals for certain sales incentives being recorded at a subsidiary. The error began in the fiscal year ended March 31, 2009 and continued until it was identified by Sony during the fiscal year ended March 31, 2016. The adjustment, which related to the HE&S segment, impacted net sales and increased income before income taxes in the consolidated statements of income by 8,447 million yen for the fiscal year ended March 31, 2016. Sony determined that the adjustment was not material to the consolidated financial statements for the fiscal year ended March 31, 2016 or any prior periods.

 

 

 

3.

Inventories

Inventories are comprised of the following:

 

		Yen in millions
		March 31
		2015				2016
Finished products			468,408				448,273
Work in process			96,700				130,383
Raw materials, purchased components and supplies			100,324				104,490
Inventories			665,432				683,146

4.

Film costs

Film costs are comprised of the following:

 

		Yen in millions
		March 31
		2015				2016
Motion picture productions:
Released			89,993				75,218
Completed and not released			4,498				2,304
In production and development			106,240				95,268
Television productions:
Released			78,510				88,538
In production and development			2,952				14,410
Broadcasting rights			69,223				62,589
Less: current portion of broadcasting rights included in inventories			(46,184	)			(37,099	)
Film costs			305,232				301,228

 

Sony estimates that approximately 92% of the unamortized film costs of released motion picture and television productions at March 31, 2016 will be amortized within the next three years. Approximately 117 billion yen of completed film costs are expected to be amortized during the next twelve months. Approximately 145 billion yen of accrued participation liabilities included in accounts payable, other and accrued expenses are expected to be paid during the next twelve months.

 

 

 

5.

Investments in affiliated companies

The summarized combined financial information that is based on information provided by the equity investees including information for significant equity affiliates and the reconciliation of such information to the consolidated financial statements is shown below:

Balance Sheets

		Yen in millions March 31
		2015				2016
Current assets			280,485				367,465
Noncurrent assets			770,847				773,126
Current liabilities			208,271				245,731
Noncurrent liabilities and noncontrolling interests			657,865				709,134
Percentage of ownership in equity investees			20%-50	%			20%-50	%

 

Statements of Income

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Net revenues			306,383				308,399				358,256
Operating income (loss)			(1,064	)			34,962				32,884
Net income (loss) attributable to controlling interests			(15,195	)			(5,461	)			8,388
Percentage of ownership in equity investees			20%-50	%			20%-50	%			20%-50	%

 

On June 29, 2012, an investor group which included a wholly-owned subsidiary of Sony Corporation completed its acquisition of EMI Music Publishing. To effect the acquisition, the investor group formed DH Publishing, L.P. (“DHP”), which acquired EMI Music Publishing for total consideration of 2.2 billion U.S. dollars. Sony invested 320 million U.S. dollars in DHP, through Nile Acquisition LLC, for a 39.8% equity interest. Nile Acquisition LLC is a joint venture with the third-party investor of Sony’s U.S.- based music publishing subsidiary in which Sony holds a 74.9% ownership interest. Sony accounts for its interest in DHP under the equity method. In addition, DHP entered into an agreement with Sony’s U.S.-based music publishing subsidiary in which the subsidiary provides administration services to DHP. DHP was determined to be a variable interest entity (“VIE”) as described in Note 23.

 

On February 25, 2013, Sony sold 95,000 shares of its 886,908 shares in its consolidated subsidiary M3, Inc. (“M3”) to a third party for cash consideration of 14,236 million yen. In connection with the sale, Sony deconsolidated M3 as its share ownership fell to 49.8% of the issued and outstanding shares of M3. On September 17, 2013, Sony sold an additional 155,000 shares of M3 (9.75% of the issued and outstanding shares of M3) to a third party for cash consideration of 37,799 million yen, which is included within other in the investing activities section of the consolidated statements of cash flows. In connection with the sale, Sony recorded a gain of 12,793 million yen in other operating expense, net in the consolidated statements of income for the fiscal year ended March 31, 2014. Although Sony’s ownership has decreased to 39.36% due to the above-mentioned sales and M3’s subsequent issuance of additional common stock, Sony remains a major shareholder of M3 and will continue to pursue opportunities to collaborate with M3 in certain business areas, including medical. Sony accounts for its remaining interest in M3 under the equity method.

 

The carrying value of Sony’s investment in M3 exceeded its proportionate share in the underlying net assets of M3 by 85,519 million yen at March 31, 2016. The excess is substantially attributable to the remeasurement to fair value of the remaining shares of M3, and allocated to identifiable tangible and intangible assets. The intangible assets relate primarily to M3’s medical web-portal. The unassigned residual value of the excess is recognized as goodwill as a component of the investment balance. The amounts allocated to intangible assets are amortized net of the related tax effects to equity in net income (loss) of affiliated companies over their respective estimated useful lives, principally 10 years, using the straight-line method.

 

With the exception of M3 as described above, there was no significant difference between Sony’s proportionate share in the underlying net assets of the investees and the carrying value of investments in affiliated companies at March 31, 2015 and 2016.

 

 

 

Several affiliated companies are quoted on the Tokyo Stock Exchange and Sony’s investments in these companies have an aggregate carrying value and fair value of 108,421 million yen and 365,160 million yen, respectively, as of March 31, 2016.

 

The number of affiliated companies accounted for under the equity method as of March 31, 2015 and 2016 were 98 and 102, respectively.

 

Account balances and transactions with affiliated companies accounted for under the equity method are presented below. There are no other material transactions or account balances with any other related parties.

 

		Yen in millions
		March 31
		2015				2016
Accounts receivable, trade			8,350				9,740
Accounts payable, trade			1,887				2,044
Capital lease obligations			50,001				21,025

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Sales			23,647				29,393				33,569
Purchases			1,533				1,498				2,259
Lease payments			38,919				36,642				32,291

 

Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFI Leasing Company, Limited (“SFIL”), a leasing company in Japan, in the fiscal years ended March 31, 2014, 2015 and 2016. SFIL is accounted for under the equity method and is 34% owned by Sony. Refer to Note 8.

 

Sony Supply Chain Solutions, Inc. is accounted for under the equity method and is 34% owned by Sony as a result of the sale of the logistics business on April 1, 2015. After the sale, Sony Supply Chain Solutions, Inc. changed the company name to MITSUI-SOKO Supply Chain Solutions, Inc. As of and for the fiscal year ended March 31, 2016, account balances and transactions with MITSUI-SOKO Supply Chain Solutions, Inc. and its subsidiaries were 4,741 million yen and 22,576 million yen, which are mainly included in accrued expenses and general and administrative expenses, respectively.

 

Dividends from affiliated companies accounted for under the equity method for the fiscal years ended March 31, 2014, 2015 and 2016 were 2,840 million yen, 6,149 million yen and 7,282 million yen, respectively.

 

 

 

6.

Transfer of financial assets

Sony has established several accounts receivable sales programs mainly within the Electronics business. Through these programs, Sony can sell receivables to a commercial bank or a special purpose entity associated with a sponsor bank. Total receivables sold during the fiscal years ended March 31, 2014, 2015 and 2016 were 763,947 million yen, 633,190 million yen and 53,267 million yen, respectively. These transactions are accounted for as sales in accordance with the accounting guidance for transfers of financial assets, because Sony has relinquished control of the receivables. Gains and losses from these transactions, other than as described below, were insignificant, and although Sony continues servicing the receivables subsequent to being sold or contributed, no servicing liabilities are recorded as the costs of collection of the sold receivables are insignificant. Other than the cash proceeds from the sales below, net cash flows related to these transactions, including servicing fees, for the fiscal years ended March 31, 2014, 2015 and 2016 were insignificant.

 

Certain programs require that a portion of the sales proceeds be held back and deferred until collection of the related receivables by the purchaser. The portion of the sales proceeds held back and deferred are initially recorded at estimated fair value using a discounted cash flow model and are included in other current assets and other long-term assets. The significant assumptions used in valuing the deferred proceeds are the discount rate, the timing and amount of the cash flows. Sony includes collections on deferred proceeds as cash flows within operating activities in the consolidated statements of cash flows when the receivables are the result of operating activities and the associated interest rate risk is insignificant due to their short-term nature. When the interest rate risk associated with the deferred proceeds is greater than insignificant or the receivables are long-term in nature, as is the case for the program in the Pictures segment, Sony includes collections on deferred proceeds as cash flows within investing activities in the consolidated statements of cash flows.

 

In August 2014, Sony terminated an accounts receivable sales program within the Electronics business in the United States. The program required that a portion of the sales proceeds be held back and deferred until collection of the related receivables by the purchaser. As of March 31, 2014, deferred proceeds totaled 6,405 million yen. Total trade receivables sold, deferred proceeds from those sales and collections of deferred proceeds during the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Total trade receivables sold			247,863				50,400				—
Deferred proceeds			36,678				16,150				—
Collections of deferred proceeds			35,196				22,512				—

 

During the fiscal year ended March 31, 2014, Sony established an accounts receivable sales program within the Pictures segment in the United States. Sony recognized a gain within other income from sales of accounts receivable under this program for the fiscal year ended March 31, 2014 of 1,394 million yen. The program requires that a portion of the sales proceeds be held back and deferred until collection of the related receivables by the purchaser, and the deferred proceeds totaled 22,188 million yen, 30,893 million yen and 30,291 million yen as of March 31, 2014, 2015 and 2016, respectively. Total trade receivables sold, deferred proceeds from those sales and collections of deferred proceeds during the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Total trade receivables sold			53,720				4,237				2,918
Deferred proceeds			22,188				4,237				2,918
Collections of deferred proceeds			—				—				2,298

 

Certain of the accounts receivable sales programs above also involve VIEs. Refer to Note 23.

 

 

7.

Marketable securities and securities investments

Marketable securities and securities investments, primarily included in the Financial Services segment, are comprised of debt and equity securities for which the aggregate cost, gross unrealized gains and losses and fair value pertaining to available-for-sale securities and held-to-maturity securities are as follows:

 

		Yen in millions
		March 31, 2015																March 31, 2016
		Cost				Gross unrealized gains				Gross unrealized losses				Fair value				Cost				Gross unrealized gains				Gross unrealized losses				Fair value
Available-for-sale:
Debt securities:
Japanese national government bonds			1,074,900				147,274				(80	)			1,222,094				1,136,478				218,863				(6	)			1,355,335
Japanese local government bonds			66,442				465				(16	)			66,891				60,707				86				(254	)			60,539
Japanese corporate bonds			108,109				767				(7	)			108,869				132,739				11,472				(230	)			143,981
Foreign government bonds			34,168				7,397				(111	)			41,454				35,896				5,724				(160	)			41,460
Foreign corporate bonds			452,145				13,645				(942	)			464,848				415,994				5,738				(3,185	)			418,547
Other			—				—				—				—				884				0				—				884
			1,735,764				169,548				(1,156	)			1,904,156				1,782,698				241,883				(3,835	)			2,020,746
Equity securities			73,411				127,322				(741	)			199,992				44,752				70,590				(21	)			115,321
Held-to-maturity securities:
Japanese national government bonds			4,846,986				819,386				(103	)			5,666,269				5,353,080				2,020,621				—				7,373,701
Japanese local government bonds			4,996				428				—				5,424				4,480				522				—				5,002
Japanese corporate bonds			26,848				4,501				—				31,349				61,811				17,382				—				79,193
Foreign government bonds			32,682				11,534				—				44,216				42,934				10,631				—				53,565
Foreign corporate bonds			57,783				25				—				57,808				198				24				—				222
			4,969,295				835,874				(103	)			5,805,066				5,462,503				2,049,180				—				7,511,683
Total			6,778,470				1,132,744				(2,000	)			7,909,214				7,289,953				2,361,653				(3,856	)			9,647,750

 

 

 

 

The following table presents the cost and fair value of debt securities classified as available-for-sale securities and held-to-maturity securities by contractual maturity:

 

		Yen in millions
		March 31, 2016
		Available-for-sale securities								Held-to-maturity securities
		Cost				Fair value				Cost				Fair value
Due in one year or less			172,912				164,603				2,841				2,879
Due after one year through five years			375,988				385,222				22,738				23,583
Due after five years through ten years			304,275				341,233				237,263				279,200
Due after ten years			929,523				1,129,688				5,199,661				7,206,021
Total			1,782,698				2,020,746				5,462,503				7,511,683

Proceeds from sales of available-for-sale securities were 207,574 million yen, 217,651 million yen and 315,043 million yen for the fiscal years ended March 31, 2014, 2015 and 2016, respectively. On these sales, gross realized gains were 9,015 million yen, 15,656 million yen and 67,205 million yen and gross realized losses were 703 million yen, 32 million yen and 186 million yen, respectively, for the fiscal years ended March 31, 2014, 2015 and 2016. Included in the gross realized gains of available-for-sale securities is 46,757 million yen from the sale of Olympus shares in the fiscal year ended March 31, 2016.

 

Marketable securities classified as trading securities, which consist of debt and equity securities held primarily in the Financial Services segment, totaled 764,473 million yen and 799,241 million yen as of March 31, 2015 and 2016, respectively. Sony recorded net unrealized gains of 59,137 million yen, 100,312 million yen for the fiscal years ended March 31, 2014 and 2015 and net unrealized losses of 45,841 million yen for the fiscal year ended March 31, 2016. Changes in the fair value of trading securities are primarily recognized in financial services revenue in the consolidated statements of income.

 

In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other, issued by a number of non-public companies. The aggregate carrying amounts of the investments in non-public companies as of March 31, 2015 and 2016 totaled 64,963 million yen and 71,750 million yen, respectively. Non-public equity investments are primarily valued at cost as fair value is not readily determinable.

 

 

 

 

 

The following tables present the gross unrealized losses on, and fair value of, Sony’s investment securities with unrealized losses, aggregated by investment category and the length of time that individual investment securities have been in a continuous unrealized loss position, at March 31, 2015 and 2016.

 

		Yen in millions
		March 31, 2015
		Less than 12 months								12 months or more								Total
		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
Available-for-sale:
Debt securities:
Japanese national government bonds			24,699				(80	)			372				—				25,071				(80	)
Japanese local government bonds			3,772				(5	)			1,702				(11	)			5,474				(16	)
Japanese corporate bonds			8,222				(7	)			—				—				8,222				(7	)
Foreign government bonds			4,607				(111	)			—				—				4,607				(111	)
Foreign corporate bonds			115,523				(887	)			6,653				(55	)			122,176				(942	)
			156,823				(1,090	)			8,727				(66	)			165,550				(1,156	)
Equity securities			4,636				(730	)			9				(11	)			4,645				(741	)
Held-to-maturity securities:
Japanese national government bonds			19,986				(103	)			—				—				19,986				(103	)
Total			181,445				(1,923	)			8,736				(77	)			190,181				(2,000	)

 

		Yen in millions
		March 31, 2016
		Less than 12 months								12 months or more								Total
		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
Available-for-sale:
Debt securities:
Japanese national government bonds			2,056				(6	)			—				—				2,056				(6	)
Japanese local government bonds			38,383				(223	)			2,929				(31	)			41,312				(254	)
Japanese corporate bonds			41,206				(201	)			3,125				(29	)			44,331				(230	)
Foreign government bonds			5,882				(147	)			1,140				(13	)			7,022				(160	)
Foreign corporate bonds			127,369				(2,535	)			30,919				(650	)			158,288				(3,185	)
			214,896				(3,112	)			38,113				(723	)			253,009				(3,835	)
Equity securities			166				(10	)			10				(11	)			176				(21	)
Total			215,062				(3,122	)			38,123				(734	)			253,185				(3,856	)

 

For the fiscal years ended March 31, 2014, 2015 and 2016, total realized impairment losses were 1,806 million yen, 949 million yen and 3,566 million yen, respectively.

 

At March 31, 2016, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature.

 

 

 

8.

Leases

Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees’ residential facilities and other assets. Certain of these leases have renewal and purchase options. Sony has also entered into capital lease arrangements with third parties to finance certain of its motion picture productions, as well as sale and leaseback transactions for office buildings, machinery and equipment.

(1)

Capital leases

Leased assets under capital leases are comprised of the following:

 

		Yen in millions
		March 31
Class of property		2015				2016
Machinery, equipment and others			129,432				123,816
Film costs			8,647				6,696
Accumulated amortization			(89,470	)			(96,270	)
			48,609				34,242

 

The following is a schedule by fiscal year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2016:

 

Fiscal year ending March 31		Yen in millions
2017			13,768
2018			6,863
2019			5,933
2020			5,043
2021			4,017
Later fiscal years			4,578
Total minimum lease payments			40,202
Less - Amount representing interest			2,529
Present value of net minimum lease payments			37,673
Less - Current obligations			13,238
Long-term capital lease obligations			24,435

(2)

Operating leases

The minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 2016 are as follows:

 

Fiscal year ending March 31		Yen in millions
2017			59,236
2018			46,690
2019			32,252
2020			44,455
2021			20,119
Later fiscal years			104,020
Total minimum future rentals			306,772

 

Rental expenses under operating leases for the fiscal years ended March 31, 2014, 2015 and 2016 were 101,410 million yen, 92,828 million yen and 94,000 million yen, respectively. Sublease rentals received under operating leases for the fiscal years ended March 31, 2014, 2015 and 2016 were 1,119 million yen, 1,180 million yen and 1,138 million yen, respectively. The total minimum rentals to be received in the future under noncancelable subleases for operating leases as of March 31, 2016 were 2,233 million yen.

 

 

(3)

Sale and leaseback transactions

Sale and leaseback transactions with SFIL -

In the fiscal year ended March 31, 2014, Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFIL. Transactions with total proceeds of 6,810 million yen and terms which averaged two years, have been accounted for as financings and are included within proceeds from issuance of long-term debt in the financing activities section of the consolidated statements of cash flows. Additionally, a transaction with leasing companies including SFIL, with proceeds of 76,566 million yen, and terms which averaged three years, have been accounted for as a capital lease and are included within proceeds from sales of fixed assets in the investing activities section of the consolidated statements of cash flows. There was no gain or loss recorded in the sale and leaseback transactions.

 

In the fiscal year ended March 31, 2015, Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFIL. Transactions with total proceeds of 8,391 million yen and terms which averaged two years, have been accounted for as financings and are included within proceeds from issuance of long-term debt in the financing activities section of the consolidated statements of cash flows.

 

In the fiscal year ended March 31, 2016, Sony entered into sale and leaseback transactions regarding certain machinery and equipment with SFIL. Transactions with total proceeds of 1,856 million yen and terms which averaged two years, have been accounted for as financings and are included within proceeds from issuance of long-term debt in the financing activities section of the consolidated statements of cash flows.

9.

Goodwill and intangible assets

Intangible assets acquired during the fiscal year ended March 31, 2016 totaled 123,327 million yen, of which 123,300 million yen is subject to amortization and are comprised of the following:

 

 

		Intangible assets acquired during the fiscal year				Weighted-average amortization period
		Yen in millions				Years
Patent rights, know-how and license agreements			29,175				7
Software to be sold, leased or otherwise marketed			18,182				3
Internal-use software			52,067				5
Other			23,876				9

 

In the fiscal year ended March 31, 2016, additions to internal-use software primarily related to the capitalization of new software across several business platforms.

 

 

 

 

Intangible assets subject to amortization are comprised of the following:

 

	Yen in millions
	March 31, 2015								March 31, 2016
	Gross carrying amount				Accumulated amortization				Gross carrying amount				Accumulated amortization
Patent rights, know-how and license agreements			304,686				(190,151	)			337,675				(223,738	)
Customer relationships			29,401				(6,677	)			36,925				(12,531	)
Trademarks			31,903				(13,054	)			29,825				(12,979	)
Software to be sold, leased or otherwise marketed			114,333				(84,640	)			126,743				(94,009	)
Internal-use software			451,738				(295,854	)			448,109				(297,057	)
Music catalogs			225,623				(88,816	)			217,056				(91,303	)
Artist contracts			32,387				(27,174	)			31,923				(28,857	)
Television carriage contracts (broadcasting agreements)			60,036				(11,272	)			59,607				(15,563	)
Other			68,897				(52,067	)			59,218				(47,475	)
Total			1,319,004				(769,705	)			1,347,081				(823,512	)

 

The aggregate amortization expense for intangible assets for the fiscal years ended March 31, 2014, 2015 and 2016 was 135,664 million yen, 132,228 million yen and 125,616 million yen, respectively. The estimated aggregate amortization expense for intangible assets for the next five fiscal years is as follows:

 

Fiscal year ending March 31		Yen in millions
2017			103,098
2018			85,327
2019			55,786
2020			42,212
2021			31,455

 

Total carrying amount of intangible assets having an indefinite life are comprised of the following:

 

		Yen in millions
		March 31
		2015				2016
Trademarks			70,938				70,081
Distribution agreements			18,834				18,834
Other			3,290				3,270
Total			93,062				92,185

 

 

 

 

The changes in the carrying amount of goodwill by segment for the fiscal years ended March 31, 2015 and 2016 are as follows:

 

		Yen in millions
		Mobile Communications				Game & Network Services				Imaging Products & Solutions				Home Entertainment & Sound				Devices				Pictures				Music				Financial Services				All Other				Total
Balance, March 31, 2014:
Goodwill - gross			183,464				150,572				7,202				5,320				37,400				187,307				123,086				3,020				24,360				721,731
Accumulated impairments			—				—				(300	)			(5,320	)			—				—				(306	)			(706	)			(23,296	)			(29,928	)
Goodwill			183,464				150,572				6,902				—				37,400				187,307				122,780				2,314				1,064				691,803
Increase (decrease) due to:
Acquisitions*1			—				—				—				—				—				12,626				—				—				—				12,626
Sales and dispositions			—				(617	)			—				—				—				(54	)			(4	)			—				—				(675	)
Impairments			(176,045	)			—				—				—				—				—				—				—				(1,090	)			(177,135	)
Translation adjustments			(4,134	)			4,444				(16	)			—				362				24,357				9,593				—				39				34,645
Other			1				—				—				—				—				3				—				—				(13	)			(9	)
Balance, March 31, 2015:
Goodwill - gross			179,331				154,399				7,186				5,320				37,762				224,239				132,675				3,020				24,386				768,318
Accumulated impairments			(176,045	)			—				(300	)			(5,320	)			—				—				(306	)			(706	)			(24,386	)			(207,063	)
Goodwill			3,286				154,399				6,886				—				37,762				224,239				132,369				2,314				—				561,255
Increase (decrease) due to:
Acquisitions*2			—				—				1,589				—				20,634				12,082				38,487				—				—				72,792
Sales and dispositions			—				—				—				—				—				—				—				—				—				—
Impairments			—				—				—				—				—				—				—				—				—				—
Translation adjustments			—				(2,106	)			(138	)			—				(1,625	)			(14,804	)			(9,084	)			—				—				(27,757	)
Other			—				—				—				—				—				—				—				—				—				—
Balance, March 31, 2016:
Goodwill - gross			179,331				152,293				8,637				5,320				56,771				221,517				162,078				3,020				24,386				813,353
Accumulated impairments			(176,045	)			—				(300	)			(5,320	)			—				—				(306	)			(706	)			(24,386	)			(207,063	)
Goodwill			3,286				152,293				8,337				—				56,771				221,517				161,772				2,314				—				606,290

 

Sony realigned its business segments during the fiscal year ended March 31, 2016. In connection with these realignments, the operations of So-net Corporation and its subsidiaries (“So-net”), which were included in All Other, are now included in the MC segment and the medical business, which was included in All Other, is now included in the IP&S segment. As part of these realignments, the carrying amounts of associated goodwill for So-net and the medical business have been reclassified for the fiscal years ended March 31, 2014 and March 31, 2015. Refer to Note 28.

*1 Acquisitions in the Pictures segment for the fiscal year ended March 31, 2015 mainly relate to the CSC Media Group Ltd. (“CSC Media Group”) acquisition. Refer to Note 24.

*2 Acquisitions for the fiscal year ended March 31, 2016 relate mainly to the Altair Semiconductor Ltd. (“Altair”) acquisition in the Devices segment, and the Orchard Media, Inc. (“The Orchard”) acquisition in the Music segment. Refer to Note 24.

 

Impairment of goodwill related to mobile communications business -

 

During the fiscal year ended March 31, 2015, Sony recorded an impairment charge of 176,045 million yen in the MC segment. The goodwill impairment reflects a revision in the strategy for the MC business to concentrate on its premium lineup and reduce the number of models in the mid-range lineup as well as concentrating on certain selected markets due to continued increasingly competitive markets in various geographical areas, primarily resulting from rapid growth by Chinese smartphone competitors. The impairment charge is included in other operating expenses, net in the consolidated statements of income, and is recorded entirely within the MC segment. Refer to Note 13.

 

 

 

In conjunction with Sony’s review for goodwill impairment, Sony also assessed whether the carrying amount of any of the tangible or definite-lived intangible assets of the MC segment was recoverable. As a result of the assessment, Sony determined that there were no tangible or definite-lived intangible assets within the MC segment that were impaired.

10.

Insurance-related accounts

Sony’s Financial Services segment subsidiaries in Japan maintain their accounting records as described in Note 2 in accordance with the accounting principles and practices generally accepted in Japan, which vary in some respects from U.S. GAAP.

 

Those differences are mainly that insurance acquisition costs for life and non-life insurance contracts are charged to income when incurred in Japan whereas in the U.S. those costs are deferred and amortized generally over the premium-paying period of the related insurance policies, and that future policy benefits for life insurance contracts calculated locally under the authorization of the supervisory administrative agencies are comprehensively adjusted to a net level premium method with certain adjustments of actuarial assumptions for U.S. GAAP purposes. For the purpose of preparing the consolidated financial statements, appropriate adjustments have been made to reflect the accounting for these items in accordance with U.S. GAAP.

 

The combined amounts of statutory net equity of the insurance subsidiaries, which is not measured in accordance with U.S. GAAP, as of March 31, 2015 and 2016 were 457,268 million yen and 510,501 million yen, respectively.

(1)

Insurance policies

Life insurance policies that a subsidiary in the Financial Services segment underwrites, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. The life insurance revenues for the fiscal years ended March 31, 2014, 2015 and 2016 were 670,506 million yen, 693,132 million yen and 803,549 million yen, respectively. Property and casualty insurance policies that a subsidiary in the Financial Services segment underwrites are primarily automotive insurance contracts, which are categorized as short-duration contracts. The non-life insurance revenues for the fiscal years ended March 31, 2014, 2015 and 2016 were 86,780 million yen, 90,431 million yen and 93,928 million yen, respectively.

(2)

Deferred insurance acquisition costs

Amortization of deferred insurance acquisition costs charged to income for the fiscal years ended March 31, 2014, 2015 and 2016 amounted to 45,236 million yen, 56,530 million yen and 92,203 million yen, respectively.

(3)

Future insurance policy benefits

Liabilities for future policy benefits, which mainly relate to individual life insurance policies, are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities, which require significant management judgment and estimates, are computed by the net level premium method based upon the assumptions as to future investment yield, morbidity, mortality, withdrawals and other factors. Future policy benefits are computed using interest rates ranging from 1.0% to 4.5% and are based on factors such as market conditions and expected investment returns. Morbidity, mortality and withdrawal assumptions for all policies are based on either the subsidiary’s own experience or various actuarial tables. Generally these assumptions are locked-in throughout the life of the contract upon the issuance of new insurance, although significant changes in experience or assumptions may require Sony to provide for expected future losses. At March 31, 2015 and 2016, future insurance policy benefits amounted to 4,111,894 million yen and 4,497,951 million yen, respectively.

(4)

Policyholders’ account in the life insurance business

Policyholders’ account in the life insurance business represents an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges. Policyholders’ account includes universal life insurance and investment contracts.  Universal life insurance includes interest sensitive whole life contracts and variable contracts. The credited rates associated with interest sensitive whole life contracts range from 1.9% to 2.0%. For variable contracts, policy values are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio. Investment contracts mainly include single payment endowment contracts, single payment juvenile contracts and policies after the start of annuity payments. The credited rates associated with investment contracts range from 0.1% to 6.3%.

 

 

 

 

Policyholders’ account in the life insurance business is comprised of the following:		Yen in millions
		March 31
		2015				2016
Universal life insurance			1,555,700				1,634,642
Investment contracts			591,951				638,737
Other			111,863				127,941
Total			2,259,514				2,401,320

11.

Short-term borrowings and long-term debt

Short-term borrowings are comprised of the following:

 

	Yen in millions
	March 31
	2015			2016
Unsecured loans:
with a weighted-average interest rate of 4.64%	56,008
with a weighted-average interest rate of 7.70%					86,467
Repurchase agreement:
with a weighted-average interest rate of 0.01%					62,805
Secured call money:
with a weighted-average interest rate of 0.10%		6,000
		62,008			149,272

At March 31, 2016, certain subsidiaries in the Financial Services segment pledged securities investments with a book value of 48,691 million yen as collateral for 62,805 million yen of short-term repurchase agreements. The repurchase agreement provides for net settlement upon a termination event.

In addition, certain subsidiaries in the Financial Services segment pledged marketable securities and securities investments with an aggregate book value of 34,749 million yen as collateral for cash settlements, variation margins of futures markets and certain other purposes.

 

 

 

Long-term debt is comprised of the following:

 

		Yen in millions
		March 31
		2015				2016
Unsecured loans, representing obligations principally to banks:
Due 2015 to 2024, with interest rates ranging from 0.29% to 5.10% per annum			425,437
Due 2016 to 2024, with interest rates ranging from 0.27% to 5.47% per annum							237,850
Unsecured 1.57% bonds, due 2015, net of unamortized discount			30,000
Unsecured 1.75% bonds, due 2015, net of unamortized discount			24,999
Unsecured 0.55% bonds, due 2016			10,000				10,000
Unsecured 0.66% bonds, due 2017			45,000				45,000
Unsecured 0.43% bonds, due 2018			10,000				10,000
Unsecured 0.86% bonds, due 2018			150,000				150,000
Unsecured 2.00% bonds, due 2018			16,300				16,300
Unsecured 2.07% bonds, due 2019			50,000				50,000
Unsecured 1.41% bonds, due 2022			10,000				10,000
Unsecured zero coupon convertible bonds, due 2022							120,000
Secured 0.10% loans, due 2016 to 2019			20,000				40,000
Capital lease obligations and other:
Due 2015 to 2025, with interest rates ranging from 0.36% to 8.07% per annum			66,880
Due 2016 to 2024, with interest rates ranging from 0.36% to 9.99% per annum							43,248
Guarantee deposits received			12,988				11,875
			871,604				744,273
Less - Portion due within one year			159,517				187,668
			712,087				556,605

 

At March 31, 2016, certain subsidiaries in the Financial Services segment pledged marketable securities and securities investments with a book value of 44,241 million yen as collateral for 40,000 million yen of long-term loans.

 

In March 2012, Sony executed a 1,365 million U.S. dollar unsecured bank loan with a group of lenders having six to ten year maturity terms in connection with Sony’s acquisition of Ericsson’s 50% equity interest in Sony Ericsson. This bank loan utilizes the Japan Bank for International Cooperation Facility, which was established to facilitate overseas mergers and acquisitions by Japanese companies as a countermeasure against yen appreciation. The terms of this U.S. dollar loan require accelerated repayment of the entire outstanding balance if Sony Corporation or its wholly-owned subsidiaries discontinue the business of mobile devices featuring telephone functionality. In March 2016, Sony repaid 682 million U.S. dollars of the 1,365 million U.S. dollars. As a result, the outstanding balance as of March 31, 2016 was 683 million U.S. dollars.

 

On July 21, 2015, Sony issued 120,000 million yen of 130% callable unsecured zero coupon convertible bonds with stock acquisition rights due 2022 (the “Zero Coupon Convertible Bonds”). The bondholders are entitled to stock acquisition rights effective from September 1, 2015 to September 28, 2022. The initial conversion price is 5,008 yen per common share. In addition to the standard anti-dilution provisions, the conversion price is reduced for a certain period before an early redemption triggered upon the occurrence of certain corporate events including a merger, corporate split and delisting event. The reduced amount of the conversion price will be determined by a formula that is based on the effective date of the reduction and Sony’s common stock price. The reduced conversion price ranges from 3,526.5 yen to 5,008.0 yen per common share. The conversion price is also adjusted for dividends in excess of 25 yen per common share per fiscal year. Sony has the option to redeem all of the Zero Coupon Convertible Bonds outstanding at 100% of the principal amount after July 21, 2020, if the closing sales price per share of Sony’s common stock on the Tokyo Stock Exchange is 130% or more of the conversion price of the Zero Coupon Convertible Bonds for 20 consecutive trading days. Sony was not required to bifurcate any of the embedded features contained in the Zero Coupon Convertible Bonds for accounting purposes. There are no significant adverse debt covenants under the Zero Coupon Convertible Bonds.

 

There are no significant adverse debt covenants or cross-default provisions related to the other short-term borrowings and long-term debt.

 

 

 

Aggregate amounts of annual maturities of long-term debt are as follows:

 

Fiscal year ending March 31		Yen in millions
2017			187,668
2018			82,616
2019			202,151
2020			75,474
2021			4,429
Later fiscal years			191,935
Total			744,273

 

At March 31, 2016, Sony had unused committed lines of credit amounting to 523,043 million yen and can generally borrow up to 180 days from the banks with whom Sony has committed line contracts. Furthermore, at March 31, 2016, Sony has commercial paper programs totaling 838,040 million yen. Sony can issue commercial paper for a period generally not in excess of 270 days up to the size of the programs.

12.

Housing loans and deposits from customers in the banking business

(1)

Housing loans in the banking business

Sony acquires and holds certain financial receivables in the normal course of business. The majority of financing receivables held by Sony consists of housing loans in the banking business and no other significant financial receivables exist.

 

A subsidiary in the banking business monitors the credit quality of housing loans based on the classification set by the financial conditions and the past due status of individual obligors. Past due status is monitored on a daily basis and the aforementioned classification is reviewed on a quarterly basis.

 

The allowance for the credit losses is established based on the aforementioned classifications and the evaluation of collateral. The amount of housing loans in the banking business and the corresponding allowance for credit losses as of March 31, 2015 were 1,074,386 million yen and 1,037 million yen, respectively, and as of March 31, 2016 were 1,235,311 million yen and 910 million yen, respectively. During the fiscal years ended March 31, 2015 and 2016, charge-offs on housing loans in the banking business and changes in the allowance for credit losses were not significant.

 

The balance of housing loans placed on nonaccrual status or past due status were not significant as of March 31, 2015 and 2016.

(2)

Deposits from customers in the banking business

All deposits from customers in the banking business within the Financial Services segment are interest bearing deposits. At March 31, 2015 and 2016, the balances of time deposits issued in amounts of 10 million yen or more were 256,391 million yen and 247,766 million yen, respectively. These amounts have been classified as current liabilities mainly due to the ability of the customers to make withdrawals prior to maturity.

 

At March 31, 2016, aggregate amounts of annual maturities of time deposits with a remaining term of more than one year are as follows:

 

Fiscal year ending March 31		Yen in millions
2018			13,882
2019			9,101
2020			9,982
2021			13,750
2022			8,626
Later fiscal years			51,827
Total			107,168

 

 

 

13.

Fair value measurements

As discussed in Note 2, assets and liabilities subject to the accounting guidance for fair value measurements held by Sony are classified and accounted for as described below.

(1)

Assets and liabilities that are measured at fair value on a recurring basis

The following section describes the valuation techniques used by Sony to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.

Trading securities, available-for-sale securities and other investments

Where quoted prices are available in an active market, securities are classified in level 1 of the fair value hierarchy. Level 1 securities include exchange-traded equities. If quoted market prices are not available for the specific security or the market is inactive, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and mainly classified in level 2 of the hierarchy. Level 2 securities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, such as the majority of government bonds and corporate bonds. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the fair value hierarchy. Level 3 securities primarily include certain hybrid financial instruments and certain private equity investments not classified within level 1 or level 2.

Derivatives

Exchange-traded derivatives valued using quoted prices are classified within level 1 of the fair value hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the majority of Sony’s derivative positions are valued using internally developed models that use as their basis readily observable market parameters – i.e., parameters that are actively quoted and can be validated to external sources, including industry pricing services. Depending on the types and contractual terms of derivatives, fair value can be modeled using a series of techniques, such as the Black-Scholes option pricing model, which are consistently applied. Where derivative products have been established for some time, Sony uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit rating of the counterparty. Further, many of these models do not contain a high level of subjectivity as the techniques used in the models do not require significant judgment, and inputs to the model are readily observable from actively quoted markets. Such instruments are generally classified within level 2 of the fair value hierarchy.

 

In determining the fair value of Sony’s interest rate swap derivatives, Sony uses the present value of expected cash flows based on market observable interest rate yield curves commensurate with the term of each instrument. For foreign currency derivatives, Sony’s approach is to use forward contract and option valuation models employing market observable inputs, such as spot currency rates, time value and option volatilities. These derivatives are classified within level 2 since Sony primarily uses observable inputs in its valuation of its derivative assets and liabilities.

 

 

 

The fair value of Sony’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2015 and 2016 are as follows:

 

	Yen in millions
	March 31, 2015
													Presentation in the consolidated balance sheets
	Level 1			Level 2			Level 3			Total			Marketable securities			Securities investments and other			Other current assets/ liabilities			Other noncurrent assets/ liabilities
Assets:
Trading securities		452,830			311,643			—			764,473			764,473			—			—			—
Available-for-sale securities
Debt securities
Japanese national government bonds		—			1,222,094			—			1,222,094			3,124			1,218,970			—			—
Japanese local government bonds		—			66,891			—			66,891			1,474			65,417			—			—
Japanese corporate bonds		—			105,363			3,506			108,869			27,030			81,839			—			—
Foreign government bonds		2,861			38,593			—			41,454			136			41,318			—			—
Foreign corporate bonds		—			455,357			9,491			464,848			139,540			325,308			—			—
Equity securities		199,874			118			—			199,992			—			199,992			—			—
Other investments*1		9,306			4,606			74,641			88,553			—			88,553			—			—
Derivative assets*2		—			30,407			—			30,407			—			—			29,951			456
Total assets		664,871			2,235,072			87,638			2,987,581			935,777			2,021,397			29,951			456
Liabilities:
Derivative liabilities*2		612			47,712			—			48,324			—			—			23,092			25,232
Total liabilities		612			47,712			—			48,324			—			—			23,092			25,232
	Yen in millions
	March 31, 2016
													Presentation in the consolidated balance sheets
	Level 1			Level 2			Level 3			Total			Marketable securities			Securities investments and other			Other current assets/ liabilities			Other noncurrent assets/ liabilities
Assets:
Trading securities		501,448			297,793			—			799,241			799,241			—			—			—
Available-for-sale securities
Debt securities
Japanese national government bonds		—			1,355,335			—			1,355,335			5,084			1,350,251			—			—
Japanese local government bonds		—			60,539			—			60,539			6,515			54,024			—			—
Japanese corporate bonds		—			140,635			3,346			143,981			5,727			138,254			—			—
Foreign government bonds		—			41,460			—			41,460			2,309			39,151			—			—
Foreign corporate bonds		—			402,694			15,853			418,547			124,680			293,867			—			—
Other		—			—			884			884			—			884			—			—
Equity securities		115,200			121			—			115,321			—			115,321			—			—
Other investments*1		7,179			4,027			13,463			24,669			—			24,669			—			—
Derivative assets*2		437			17,391			—			17,828			—			—			17,257			571
Total assets		624,264			2,319,995			33,546			2,977,805			943,556			2,016,421			17,257			571
Liabilities:
Derivative liabilities*2		668			48,467			—			49,135			—			—			20,680			28,455
Total liabilities		668			48,467			—			49,135			—			—			20,680			28,455

*1 Other investments include certain hybrid financial instruments and certain private equity investments.

*2 Derivative assets and liabilities are recognized and disclosed on a gross basis. 

Transfers into level 1 were 3,460 million yen and 3,556 million yen for the fiscal years ended March 31, 2015 and 2016, respectively, as quoted prices for certain trading securities and available-for-sale securities became available in an active market. Transfers out of level 1 were 13,376 million yen and 2,716 million yen for the fiscal years ended March 31, 2015 and 2016, respectively, as quoted prices for certain trading securities and available-for-sale securities were not available in an active market.

 

 

 

The changes in fair value of level 3 assets and liabilities for the fiscal years ended March 31, 2015 and 2016 are as follows:

 

	Yen in millions
	Fiscal year ended March 31, 2015
	Assets
	Available-for-sale securities
	Debt securities
	Japanese corporate bonds			Foreign corporate bonds			Other Investments
Beginning balance		1,011			6,807			75,837
Total realized and unrealized gains (losses):
Included in earnings*1		—			522			1,397
Included in other comprehensive income (loss)*2		(5	)		593			153
Purchases		2,500			15,222			522
Settlements		—			(4,653	)		(3,268	)
Transfers out of level 3*3		—			(9,000	)		—
Ending balance		3,506			9,491			74,641
Changes in unrealized gains relating to instruments still held at reporting date:
Included in earnings*1		—			—			1,397

 

	Yen in millions
	Fiscal year ended March 31, 2016
	Assets
	Available-for-sale securities
	Debt securities
	Japanese corporate bonds			Foreign corporate bonds			Other			Other Investments
Beginning balance		3,506			9,491			—			74,641
Total realized and unrealized gains (losses):
Included in earnings*1		6			458			—			(2,653	)
Included in other comprehensive income (loss)*2		30			(791	)		—			(2,316	)
Purchases		2,798			11,214			1,000			657
Sales		(3,000	)		(4,872	)		—			—
Settlements		—			(641	)		(116	)		(56,866	)
Transfers into level 3*4		2,002			1,498			—			—
Transfers out of level 3*3		(1,996	)		(504	)		—			—
Ending balance		3,346			15,853			884			13,463
Changes in unrealized losses relating to instruments still held at reporting date:
Included in earnings*1		—			(56	)		—			(2,653	)

*1 Earning effects are included in financial services revenue in the consolidated statements of income.

*2 Unrealized gains (losses) are included in unrealized gains (losses) on securities in the consolidated statements of comprehensive income.

*3 Certain corporate bonds were transferred out of level 3 because quoted prices became available.

*4 Certain corporate bonds were transferred into level 3 because differences between the fair value determined by indicative quotes from dealers and the fair value determined by internally developed prices became significant and the observability of the inputs used decreased.

 

 

 

Level 3 assets include certain hybrid financial instruments for which the price fluctuates primarily based on the main stock index in Japan (Nikkei index), certain private equity investments, and certain domestic and foreign corporate bonds for which quoted prices are not available in a market and where there is less transparency around inputs. In determining the fair value of such assets, Sony uses third-party information such as indicative quotes from dealers without adjustment. For validating the fair values, Sony primarily uses internal models which include management judgment or estimation of assumptions that market participants would use in pricing the asset.

 

(2)

Assets and liabilities that are measured at fair value on a nonrecurring basis

Sony also has assets and liabilities that are required to be remeasured to fair value on a nonrecurring basis when certain circumstances occur. During the fiscal years ended March 31, 2015 and 2016, such remeasurements to fair value related primarily to the following:

 

		During the fiscal year ended March 31, 2015
		Estimated fair value												Amounts included in earnings
		Level 1				Level 2				Level 3
Assets:
Long-lived assets impairments			—				—				768				(18,926	)
Goodwill impairments			—				—				0				(177,135	)
															(196,061	)

 

		During the fiscal year ended March 31, 2016
		Estimated fair value												Amounts included in earnings
		Level 1				Level 2				Level 3
Assets:
Long-lived assets impairments			—				—				19,680				(92,544	)
															(92,544	)

Long-lived assets impairments

Sony recorded impairment losses of 7,798 million yen and 4,929 million yen for the fiscal years ended March 31, 2014 and 2015, respectively, included within the HE&S segment, related to the LCD television asset group. These impairment losses primarily reflected a decrease in the estimated fair value of property, plant and equipment and certain intangible assets. For the LCD television asset group, the corresponding estimated future cash flows leading to the impairment charge reflected the deterioration in LCD television market conditions in Japan, Europe and North America, and unfavorable foreign exchange rates.

 

Sony recorded an impairment loss of 32,107 million yen and 30,643 million yen for the fiscal years ended March 31, 2014 and 2016, respectively, included within the Devices segment, related to long-lived assets in the battery business asset group. In the fiscal year ended March 31, 2014, in light of a lack of progress towards achieving adequate operating results, Sony conducted a strategic review of the business and evolving market trends. Sony reduced the corresponding estimated future cash flows and the estimated ability to recover the entire carrying amount of the long-lived assets within the period applicable to the impairment determination, resulting in an impairment charge. In the fiscal year ended March 31, 2016, due to increasingly competitive markets, Sony conducted a further strategic review of the business and evolving market trends. Following this review, Sony further reduced the corresponding estimated future cash flows of this business and the estimated ability to recover the entire carrying amount of the long-lived assets within the period applicable to the impairment determination, resulting in an impairment charge.

 

Sony recorded impairment losses of 12,303 million yen for the fiscal year ended March 31, 2014, included within All Other, related to long-lived assets in the disc manufacturing business. In the fiscal year ended March 31, 2015, Sony recorded an impairment loss of 8,608 million yen related to long-lived assets in the disc manufacturing business. The long-lived asset impairments in the disc manufacturing business for fiscal years ended March 31, 2014 and 2015 related to lowered forecasts of cash flows outside of Japan and the United States, primarily attributable to the manufacturing and distribution operations in Europe, which began additional restructuring activities in March 2014 and March 2015, and reflects the faster than expected contraction of the physical media market.

 

Sony recorded impairment losses of 59,616 million yen for the fiscal year ended March 31, 2016, included within the Devices segment, related to long-lived assets in the camera module business asset group. Due to a decrease in the projected future demand of camera modules, Sony conducted a strategic review of the business and its market conditions. Following this review, Sony reduced the corresponding estimated future cash flows and the estimated ability to recover the entire carrying amount of the long-lived assets within the period applicable to the impairment determination, resulting in an impairment charge.

 

 

 

Sony recorded impairment losses for long-lived assets relating to restructuring in the PC business during the fiscal year ended March 31, 2014. Refer to Notes 19 and 25.

 

These measurements are classified as level 3 because significant unobservable inputs, such as the conditions of the assets or projections of future cash flows, the timing of such cash flows and the discount rate reflecting the risk inherent in future cash flows, were considered in the fair value measurements. A discount rate of 10% and projected revenue growth rates ranging from zero to 15% were used in the fair value measurements related to the long-lived assets for the battery business, and a discount rate of 10% and projected declining revenue rates ranging from (6)% to (13)% were used in the fair value measurements related to the long-lived assets for the disc manufacturing business for the fiscal year ended March 31, 2014. For the fiscal year ended March 31, 2015, a discount rate of 10% and projected declining revenue rates ranging from (5)% to (9)% were used in the fair value measurements related to the long-lived assets for the disc manufacturing business. For the fiscal year ended March 31, 2016, a discount rate of 10% and projected revenue growth rates ranging from zero to 14% were used in the fair value measurements related to the long-lived assets for the battery business and a discount rate of 10% and projected revenue growth rates ranging from zero to 108% were used in the fair value measurements related to the long-lived assets for the camera module business. The high end of the camera module revenue growth rate reflects projected revenue from the introduction of new products in the near term.

Goodwill impairments

Sony recorded an impairment loss of 176,045 million yen for the fiscal year ended March 31, 2015 related to goodwill in the MC segment. Refer to Note 9. Sony’s determination of fair value of the MC reporting unit was based on the present value of expected future cash flows. These measurements are classified as a level 3 because significant unobservable inputs, such as the projections of future cash flows, the timing of such cash flows and the discount rate reflecting the risk inherent in future cash flows, were considered in the fair value measurements. A discount rate of 12% and projected revenue growth rates ranging from (3)% to 11% were used in the fair value measurements.

 

 

(3)

Financial instruments

The estimated fair values by fair value hierarchy level of certain financial instruments that are not reported at fair value are summarized as follows:

 

		Yen in millions
		March 31, 2015
		Estimated fair value																Carrying amount
		Level 1				Level 2				Level 3				Total				Total
Assets:
Housing loans in the banking business			—				1,181,554				—				1,181,554				1,074,386
Total assets			—				1,181,554				—				1,181,554				1,074,386
Liabilities:
Long-term debt including the current portion			—				878,609				—				878,609				871,604
Investment contracts included in policyholders’ account in the life insurance business			—				586,331				—				586,331				591,951
Total liabilities			—				1,464,940				—				1,464,940				1,463,555

 

		Yen in millions
		March 31, 2016
		Estimated fair value																Carrying amount
		Level 1				Level 2				Level 3				Total				Total
Assets:
Housing loans in the banking business			—				1,369,157				—				1,369,157				1,235,311
Total assets			—				1,369,157				—				1,369,157				1,235,311
Liabilities:
Long-term debt including the current portion			—				755,631				—				755,631				744,273
Investment contracts included in policyholders’ account in the life insurance business			—				677,375				—				677,375				638,737
Total liabilities			—				1,433,006				—				1,433,006				1,383,010

 

The summary excludes cash and cash equivalents, call loans, time deposits, notes and accounts receivable, trade, call money, short-term borrowings, notes and accounts payable, trade and deposits from customers in the banking business because the carrying values of these financial instruments approximated their fair values due to their short-term nature. The summary also excludes held-to-maturity securities disclosed in Note 7.

 

Cash and cash equivalents, call loans and call money are classified in level 1. Time deposits, short-term borrowings, deposits from customers in the banking business are classified in level 2. Held-to-maturity securities, included in marketable securities and securities investments and other in the consolidated balance sheets, primarily include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, such as the majority of government bonds and corporate bonds and are substantially all classified in level 2. The fair values of housing loans in the banking business, included in securities investments and other in the consolidated balance sheets, were estimated based on the discounted future cash flows using interest rates reflecting London InterBank Offered Rate base yield curves with certain risk premiums. The fair values of long-term debt including the current portion and investment contracts included in policyholders’ account in the life insurance business were estimated based on either the market value or the discounted future cash flows using Sony’s current incremental borrowing rates for similar liabilities.

 

 

 

14.

Derivative instruments and hedging activities

Sony has certain financial instruments including financial assets and liabilities acquired in the normal course of business. Such financial instruments are exposed to market risk arising from the changes in foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate swap agreements (including interest rate and currency swap agreements). Certain other derivative financial instruments are entered into in the Financial Services segment for asset-liability management (“ALM”) purposes. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. These derivatives generally mature or expire within six months after the balance sheet date. Other than derivatives utilized in the Financial Services segment for ALM, Sony does not use derivative financial instruments for trading or speculative purposes. These derivative transactions utilized for ALM in the Financial Services segment are executed within certain limits in accordance with an internal risk management policy.

 

Derivative financial instruments held by Sony are classified and accounted for as described below.

Fair value hedges

Both the derivatives designated as fair value hedges and the hedged items are reflected at fair value in the consolidated balance sheets. Changes in the fair value of the derivatives designated as fair value hedges, as well as offsetting changes in the carrying value of the underlying hedged items, are recognized in income. For the fiscal years ended March 31, 2014, 2015 and 2016, these fair value hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.

Cash flow hedges

Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income (“OCI”) and reclassified into earnings when the hedged transaction affects earnings. For the fiscal years ended March 31, 2014 and 2016, the ineffective portions of the hedging relationships were not significant. In addition, there were no amounts excluded from the assessment of hedge effectiveness for cash flow hedges. As of and for the fiscal year ended March 31, 2015, there were no cash flow hedge derivatives.

Derivatives not designated as hedges

Changes in the fair value of derivatives not designated as hedges are recognized in income.

A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:

 

Foreign exchange forward contracts and foreign currency option contracts

Foreign exchange forward contracts and purchased and written foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.

 

Sony also entered into foreign exchange forward contracts during the fiscal year ended March 31, 2016 which effectively fixed the cash flows from foreign currency denominated payables. Accordingly, these derivatives have been designated as cash flow hedges.

 

Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.

 

Foreign exchange forward contracts, foreign currency option contracts and currency swap agreements held by certain subsidiaries in the Financial Services segment are marked-to-market with changes in value recognized in financial service revenue.

 

 

 

Interest rate swap agreements (including interest rate and currency swap agreements)

Interest rate swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments and available-for-sale debt securities resulting from adverse fluctuations in interest rates, foreign currency exchange rates and changes in fair values. Interest rate swap agreements entered into in the Financial Services segment are used for reducing the risk arising from the changes in the fair value of fixed rate available-for-sale debt securities. These derivatives are considered to be a hedge against changes in the fair value of available-for-sale debt securities in the Financial Services segment. Accordingly, these derivatives have been designated as fair value hedges.

 

Sony also had certain interest rate swap agreements during the fiscal year ended March 31, 2014 for the purpose of reducing the risk arising from the changes in anticipated cash flows of variable rate debt and foreign currency denominated debt. These interest rate swap agreements, which effectively swapped foreign currency denominated variable rate debt for functional currency denominated fixed rate debt, were considered a hedge against changes in the anticipated cash flows of Sony’s foreign denominated variable rate obligations. Accordingly, these derivatives were designated as cash flow hedges.

 

Certain subsidiaries in the Financial Services segment have interest rate swap agreements as part of their ALM, which are marked-to-market with changes in value recognized in financial service revenue.

 

Any other interest rate swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate debt, are marked-to-market with changes in value recognized in other income and expenses.

 

Other agreements

Certain subsidiaries in the Financial Services segment have equity future contracts, other currency contracts and hybrid financial instruments as part of their ALM, which are marked-to-market with changes in value recognized in financial services revenue. The hybrid financial instruments, disclosed in Note 7 as debt securities, contained embedded derivatives that are not required to be bifurcated because the entire instruments are carried at fair value.

 

The estimated fair values of Sony’s outstanding derivative instruments are summarized as follows:

 

		Yen in millions
Derivatives designated as hedging instruments		Balance sheet location		Fair value								Balance sheet location		Fair value
				March 31										March 31
		Asset derivatives		2015				2016				Liability derivatives		2015				2016
Interest rate contracts		Prepaid expenses and other current assets			11				16			Current liabilities: Other			954				665
Interest rate contracts		Other assets: Other			207				33			Liabilities: Other			23,899				22,605
Foreign exchange contracts		Prepaid expenses and other current assets			40				1
					258				50						24,853				23,270

 

		Yen in millions
Derivatives not designated as hedging instruments		Balance sheet location		Fair value								Balance sheet location		Fair value
				March 31										March 31
		Asset derivatives		2015				2016				Liability derivatives		2015				2016
Interest rate contracts												Current liabilities: Other			—				38
Interest rate contracts		Other assets: Other			222				538			Liabilities: Other			1,178				5,850
Foreign exchange contracts		Prepaid expenses and other current assets			29,899				16,803			Current liabilities: Other			21,526				19,309
Foreign exchange contracts		Other assets: Other			28				—			Liabilities: Other			155				—
Equity contracts		Prepaid expenses and other current assets			—				437			Current liabilities: Other			612				668
					30,149				17,778						23,471				25,865
Total derivatives					30,407				17,828						48,324				49,135

 

 

 

Presented below are the effects of derivative instruments on the consolidated statements of income for the fiscal years ended March 31, 2014, 2015 and 2016.

 

		Yen in millions
Derivatives under fair value hedging relationships		Location of gain or (loss) recognized in income on derivative		Amount of gain or (loss) recognized in income on derivative
				Fiscal year ended March 31
				2014				2015		2016
Interest rate contracts		Financial services revenue			131			(8,271	)		(8,300	)
Foreign exchange contracts		Foreign exchange loss, net			(1	)		(9	)		3
Total					130			(8,280	)		(8,297	)

 

		Yen in millions
Derivatives under cash flow hedging relationships		Location of gain or (loss) recognized in income on derivative		Fiscal year ended March 31
				2014				2015				2016
Amount of gain or (loss) recognized in OCI on derivative
Interest rate contracts		-			167				—				—
Foreign exchange contracts		-			—				—				1,914
Total					167				—				1,914
Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)
Interest rate contracts		Interest expense			471				—				—
Foreign exchange contracts		Foreign exchange loss, net			348				—				(8	)
Foreign exchange contracts		Cost of sales			—				—				(3,104	)
Total					819				—				(3,112	)

 

		Yen in millions
Derivatives not designated as hedging instruments		Location of gain or (loss) recognized in income on derivative		Amount of gain or (loss) recognized in income on derivative
				Fiscal year ended March 31
				2014				2015		2016
Interest rate contracts		Financial services revenue			(167	)		(3,579)			(5,499	)
Interest rate contracts		Foreign exchange loss, net			—			883			—
Foreign exchange contracts		Financial services revenue			1,198			(1,942)			4,166
Foreign exchange contracts		Foreign exchange loss, net			2,703			13,375			(14,501	)
Equity contracts		Financial services revenue			—			(2,725)			3,267
Total					3,734			6,012			(12,567	)

 

 

 

 

The following table summarizes additional information, including notional amounts, for each type of derivative:

 

		Yen in millions
		March 31, 2015								March 31, 2016
		Notional amount				Fair value				Notional amount				Fair value
Foreign exchange contracts:
Foreign exchange forward contracts			1,335,811				11,654				1,030,020				(5,118	)
Currency option contracts purchased			9,920				202				211				2
Currency option contracts written			568				(3	)			210				(2	)
Currency swap agreements			754,056				(3,872	)			729,632				(99	)
Other currency contracts			83,980				305				75,157				2,712
Interest rate contracts:
Interest rate swap agreements			402,049				(25,591	)			436,739				(28,571	)
Equity contracts:
Equity future contracts			21,903				(612	)			72,794				(231	)

 

 

 

All derivatives are recognized as either assets or liabilities in the consolidated balance sheets on a gross basis, but certain subsidiaries have entered into master netting agreements or other similar agreements, which are mainly International Swaps and Derivatives Association (ISDA) Master Agreements. An ISDA Master Agreement is an agreement between two counterparties that may have multiple derivative contracts with each other, and such ISDA Master Agreement may provide for the net settlement of all or a specified group of these derivative contracts, through a single payment, in a single currency, in the event of a default on or affecting any one derivative contract, or a termination event affecting all or a specified group of derivative contracts. Presented below are the effects of offsetting derivative assets, derivative liabilities, financial assets and financial liabilities as of March 31, 2015 and 2016.

 

		Yen in millions
		As of March 31, 2015
		Gross amounts presented in the consolidated balance sheet				Gross amounts not offset in the consolidated balance sheet that are subject to master netting agreements
						Financial instruments				Cash collateral				Net amounts
Derivative assets subject to master netting agreements			26,032				10,387				—				15,645
Derivative assets not subject to master netting agreements			4,375												4,375
Total assets			30,407				10,387				—				20,020
Derivative liabilities subject to master netting agreements			43,791				37,820				612				5,359
Derivative liabilities not subject to master netting agreements			4,533												4,533
Total liabilities			48,324				37,820				612				9,892

 

		Yen in millions
		As of March 31, 2016
		Gross amounts presented in the consolidated balance sheet				Gross amounts not offset in the consolidated balance sheet that are subject to master netting agreements
						Financial instruments				Cash collateral				Net amounts
Derivative assets subject to master netting agreements			10,251				6,990				312				2,949
Derivative assets not subject to master netting agreements			7,577												7,577
Total assets			17,828				6,990				312				10,526
Derivative liabilities subject to master netting agreements			46,328				28,527				8,269				9,532
Derivative liabilities not subject to master netting agreements			2,807												2,807
Repurchase, securities lending and similar arrangements			62,805				61,864				—				941
Total liabilities			111,940				90,391				8,269				13,280

 

 

 

15.

Pension and severance plans

(1)

Defined benefit and severance plans

Upon terminating employment, employees of Sony Corporation and its subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. Sony Corporation and certain of its subsidiaries’ pension plans utilize a point-based plan under which a point is added every year reflecting the individual employee’s performance over that year. Under the point-based plan, the amount of payment is determined based on the sum of cumulative points from past services and interest points earned on the cumulative points regardless of whether or not the employee is voluntarily retiring.

 

Under the plans, in general, the defined benefits cover 65% of the indemnities under existing regulations to employees. The remaining indemnities are covered by severance payments by the companies. The pension benefits are payable at the option of the retiring employee either in a lump-sum amount or monthly pension payments. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations.

 

From April 1, 2012, Sony Corporation and substantially all of its subsidiaries in Japan have modified existing defined benefit pension plans such that life annuities will no longer accrue additional service benefits, with those participants instead accruing fixed-term annuities. The defined benefit pension plans were closed to new participants and a defined contribution plan was also introduced.

 

In addition, several of Sony’s foreign subsidiaries have defined benefit pension plans or severance indemnity plans, which cover substantially all of their employees. Under such plans, the related cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on the current rate of pay and length of service.

 

The components of net periodic benefit costs for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

Japanese plans:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Service cost			24,827				24,350				24,668
Interest cost			12,152				11,583				8,689
Expected return on plan assets			(17,822	)			(19,252	)			(20,851	)
Recognized actuarial loss			11,480				9,867				8,588
Amortization of prior service costs			(10,176	)			(9,614	)			(9,489	)
Net periodic benefit costs			20,461				16,934				11,605

 

Foreign plans:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Service cost			3,032				3,188				3,504
Interest cost			12,068				13,040				12,096
Expected return on plan assets			(11,480	)			(12,993	)			(14,117	)
Amortization of net transition asset			12				10				10
Recognized actuarial loss			3,693				2,991				4,236
Amortization of prior service costs			(643	)			(639	)			(478	)
Losses on curtailments and settlements			1,074				31				354
Net periodic benefit costs			7,756				5,628				5,605

The estimated net actuarial loss, prior service cost and obligation (asset) existing at transition for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal year are 23,195 million yen, 9,974 million yen and 5 million yen, respectively.

 

 

The changes in the benefit obligation and plan assets as well as the funded status and composition of amounts recognized in the consolidated balance sheets were as follows:

 

		Japanese plans								Foreign plans
		Yen in millions								Yen in millions
		March 31								March 31
		2015				2016				2015				2016
Change in benefit obligation:
Benefit obligation at beginning of the fiscal year			847,446				890,415				313,698				394,704
Service cost			24,350				24,670				3,188				3,504
Interest cost			11,583				8,689				13,040				12,096
Plan participants’ contributions			—				—				752				676
Amendments			—				—				(283	)			—
Actuarial (gain) loss *			48,061				144,416				74,801				(21,868	)
Foreign currency exchange rate changes			—				—				7,214				(16,893	)
Curtailments and settlements			—				—				(3,932	)			(1,246	)
Effect of changes in consolidated subsidiaries			(4	)			—				—				—
Other			(2,696	)			(14	)			—				—
Benefits paid			(38,325	)			(33,892	)			(13,774	)			(14,098	)
Benefit obligation at end of the fiscal year			890,415				1,034,284				394,704				356,875
Change in plan assets:
Fair value of plan assets at beginning of the fiscal year			654,792				710,602				225,024				280,216
Actual return on plan assets			74,447				(9,030	)			54,928				(6,035	)
Foreign currency exchange rate changes			—				—				5,752				(13,095	)
Employer contribution			7,978				1,951				9,434				7,905
Plan participants’ contributions			—				—				752				676
Curtailments and settlements			—				—				(2,989	)			(504	)
Other			(1,934	)			—				—				—
Benefits paid			(24,681	)			(24,091	)			(12,685	)			(12,822	)
Fair value of plan assets at end of the fiscal year			710,602				679,432				280,216				256,341
Funded status at end of the fiscal year			(179,813	)			(354,852	)			(114,488	)			(100,534	)

* Actuarial loss in Japanese plans for the fiscal year ended March 31, 2016 principally relates to changes in the assumptions for discount and mortality rates.

Amounts recognized in the consolidated balance sheets consist of:

 

		Japanese plans								Foreign plans
		Yen in millions								Yen in millions
		March 31								March 31
		2015				2016				2015				2016
Noncurrent assets			3,005				2,217				4,027				7,102
Current liabilities			—				—				(4,500	)			(2,892	)
Noncurrent liabilities			(182,818	)			(357,069	)			(114,015	)			(104,744	)
Ending balance			(179,813	)			(354,852	)			(114,488	)			(100,534	)

 

 

 

Amounts recognized in accumulated other comprehensive income, excluding tax effects, consist of:

 

		Japanese plans								Foreign plans
		Yen in millions								Yen in millions
		March 31								March 31
		2015				2016				2015				2016
Prior service cost (credit)			(44,394	)			(34,905	)			(2,161	)			(1,443	)
Net actuarial loss			218,462				389,302				94,480				82,850
Obligation existing at transition			—				—				15				7
Ending balance			174,068				354,397				92,334				81,414

 

The accumulated benefit obligations for all defined benefit pension plans were as follows:

 

		Japanese plans								Foreign plans
		Yen in millions								Yen in millions
		March 31								March 31
		2015				2016				2015				2016
Accumulated benefit obligations			885,479				1,028,690				364,094				331,975

 

The projected benefit obligations, the accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows:

 

		Japanese plans								Foreign plans
		Yen in millions								Yen in millions
		March 31								March 31
		2015				2016				2015				2016
Projected benefit obligations			879,995				1,022,373				330,478				292,171
Accumulated benefit obligations			876,282				1,018,228				323,221				286,705
Fair value of plan assets			698,400				666,753				235,343				202,913

 

Weighted-average assumptions used to determine benefit obligations as of March 31, 2015 and 2016 were as follows:

 

		Japanese plans								Foreign plans
		March 31								March 31
		2015				2016				2015				2016
Discount rate			1.0	%			0.6	%			3.1	%			3.2	%
Rate of compensation increase			*				*				2.9				2.1

* Substantially all of Sony’s Japanese pension plans were point-based. Point-based plans do not incorporate a measure of compensation rate increases.

 

 

Weighted-average assumptions used to determine the net periodic benefit costs for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

		Japanese plans												Foreign plans
		Fiscal year ended March 31												Fiscal year ended March 31
		2014				2015				2016				2014				2015				2016
Discount rate			1.5	%			1.4	%			1.0	%			4.1	%			4.1	%			3.1	%
Expected return on plan assets			3.0				3.0				3.0				5.8				5.6				4.8
Rate of compensation increase			*				*				*				3.1				3.1				2.9

* Substantially all of Sony’s Japanese pension plans were point-based. Point-based plans do not incorporate a measure of compensation rate increases.

Sony reviews these assumptions for changes in circumstances.

 

The weighted-average rate of compensation increase is calculated based only on the pay-related plans. The point-based plans discussed above are excluded from the calculation because payments made under the plan are not based on employee compensation.

 

The mortality rate assumptions are based on life expectancy and death rates for different types of participants. In the fiscal year ended March 31, 2016, Sony updated mortality rate assumptions to consider the latest mortality tables and in certain instances to utilize mortality tables based on gender.

 

To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as the historical and expected long-term rates of returns on various categories of plan assets. Sony’s pension investment policy recognizes the expected growth and the variability risk associated with the long-term nature of pension liabilities, the returns and risks of diversification across asset classes, and the correlation among assets. The asset allocations are designed to maximize returns consistent with levels of liquidity and investment risk that are considered prudent and reasonable. While the pension investment policy gives appropriate consideration to recent market performance and historical returns, the investment assumptions utilized by Sony are designed to achieve a long-term return consistent with the long-term nature of the corresponding pension liabilities.

 

The investment objectives of Sony’s plan assets are designed to generate returns that will enable the plans to meet their future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current economic environment and other pertinent factors. Sony’s investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could negatively impact the funding level of the plans, thereby increasing its dependence on contributions from Sony. To mitigate any potential concentration risk, thorough consideration is given to balancing the portfolio among industry sectors and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. The target allocations as of March 31, 2016, are, as a result of Sony’s asset liability management, 29% of equity securities, 53% of fixed income securities and 18% of other investments for the pension plans of Sony Corporation and most of its subsidiaries in Japan, and, on a weighted average basis, 33% of equity securities, 49% of fixed income securities and 18% of other investments for the pension plans of foreign subsidiaries.

 

 

The fair values of the assets held by Japanese and foreign plans, which are classified in accordance with the fair value hierarchy described in Note 2, are as follows:

		Japanese plans
		Yen in millions
		Fair value at March 31,				Fair value measurements using inputs considered as
Asset class		2015				Level 1				Level 2				Level 3
Cash and cash equivalents			5,789				5,789				—				—
Equity:
Equity securities*1			166,164				161,530				4,634				—
Fixed income:
Government bonds*2			217,359				—				217,359				—
Corporate bonds*3			54,639				—				54,639				—
Asset-backed securities*4			650				—				650				—
Commingled funds*5			122,798				—				122,798				—
Commodity funds*6			24,621				—				24,621				—
Private equity*7			32,584				—				—				32,584
Hedge funds*8			80,037				—				—				80,037
Real estate			5,961				—				—				5,961
Total			710,602				167,319				424,701				118,582

 

		Japanese plans
		Yen in millions
		Fair value at March 31,				Fair value measurements using inputs considered as
Asset class		2016				Level 1				Level 2				Level 3
Cash and cash equivalents			17,985				17,985				—				—
Equity:
Equity securities*1			148,658				144,597				4,061				—
Fixed income:
Government bonds*2			218,851				—				218,851				—
Corporate bonds*3			56,779				—				56,779				—
Asset-backed securities*4			1,148				—				1,148				—
Commingled funds*5			115,902				—				115,902				—
Commodity funds*6			20,547				—				20,547				—
Private equity*7			31,852				—				—				31,852
Hedge funds*8			60,395				—				—				60,395
Real estate			7,315				—				—				7,315
Total			679,432				162,582				417,288				99,562

*1   Includes approximately 53 percent and 48 percent of Japanese equity securities, and 47 percent and 52 percent of foreign equity securities for the fiscal years ended March 31, 2015 and 2016, respectively.

*2   Includes approximately 48 percent and 51 percent of debt securities issued by Japanese national and local governments, and 52 percent and 49 percent of debt securities issued by foreign national and local governments for the fiscal years ended March 31, 2015 and 2016, respectively.

*3   Includes debt securities issued by Japanese and foreign corporation and government related agencies.

*4   Includes primarily mortgage-backed securities.

*5   Commingled funds represent pooled institutional investments, including primarily investment trusts. They include approximately 46 percent and 44 percent of investments in equity, 52 percent and 54 percent of investments in fixed income, and 3 percent and 1 percent of investments in other for the fiscal years ended March 31, 2015 and 2016, respectively.

*6   Represents commodity futures funds.

 

 

*7  Includes multiple private equity funds of funds that primarily invest in venture, buyout, and distressed markets in the U.S. and Europe.

*8  Includes primarily funds that invest in a portfolio of a broad range of hedge funds to diversify the risks and reduce the volatilities associated with a single hedge fund.

		Foreign plans
		Yen in millions
		Fair value at March 31,				Fair value measurements using inputs considered as
Asset class		2015				Level 1				Level 2				Level 3
Cash and cash equivalents			8,665				8,665				—				—
Equity:
Equity securities*1			44,276				41,194				3,082				—
Fixed income:
Government bonds*2			69,882				—				69,882				—
Corporate bonds*3			33,290				—				25,906				7,384
Asset-backed securities			328				—				328				—
Insurance contracts*4			1,936				—				1,936				—
Commingled funds*5			86,931				—				86,931				—
Real estate and other*6			34,908				—				19,386				15,522
Total			280,216				49,859				207,451				22,906

 

		Foreign plans
		Yen in millions
		Fair value at March 31,				Fair value measurements using inputs considered as
Asset class		2016				Level 1				Level 2				Level 3
Cash and cash equivalents			4,078				4,078				—				—
Equity:
Equity securities*1			37,769				35,818				1,951				—
Fixed income:
Government bonds*2			60,835				—				60,835				—
Corporate bonds*3			30,425				—				23,425				7,000
Asset-backed securities			321				—				321				—
Insurance contracts*4			4,293				—				4,293				—
Commingled funds*5			77,456				—				77,456				—
Real estate and other*6			41,164				—				17,040				24,124
Total			256,341				39,896				185,321				31,124

*1   Includes primarily foreign equity securities.

*2   Includes primarily foreign government debt securities. 

*3   Includes primarily foreign corporate debt securities. 

*4   Represents annuity contracts with or without profit sharing.

*5   Commingled funds represent pooled institutional investments including mutual funds, common trust funds, and collective investment funds. They are primarily comprised of foreign equities and fixed income investments.

*6   Includes primarily private real estate investment trusts.

Each level in the fair value hierarchy in which each plan asset is classified is determined based on inputs used to measure the fair values of the asset, and does not necessarily indicate the risks or rating of the asset.

 

The following is a description of the valuation techniques used to measure Japanese and foreign plan assets at fair value. The valuation techniques are applied consistently from period to period.

 

 

 

Equity securities are valued at the closing price reported in the active market in which the individual securities are traded. These assets are generally classified as level 1.

 

The fair value of fixed income securities is typically estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are generally classified as level 2.

 

Commingled funds are typically valued using the net asset value provided by the administrator of the fund and reviewed by Sony. The net asset value is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. These assets are classified as level 1, level 2 or level 3 depending on availability of quoted market prices.

 

Commodity funds are valued using inputs that are derived principally from or corroborated by observable market data. These assets are generally classified as level 2.

 

Private equity and private real estate investment trust valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant market data to determine if the carrying value of these assets should be adjusted. These investments are classified as level 3.

 

Hedge funds are valued using the net asset value as determined by the administrator or custodian of the fund. These investments are classified as level 3.

 

 

 

The following table sets forth a summary of changes in the fair values of Japanese and foreign plans’ level 3 assets for the fiscal years ended March 31, 2015 and 2016:

 

		Japanese plans
		Yen in millions
		Fair value measurement using significant unobservable inputs (Level 3)
		Private equity				Hedge funds				Real estate				Total
Beginning balance at April 1, 2014			26,942				41,108				1,689				69,739
Return on assets held at end of year			5,642				5,796				(101	)			11,337
Purchases, sales, and settlements, net			—				33,133				4,373				37,506
Ending balance at March 31, 2015			32,584				80,037				5,961				118,582
Return on assets held at end of year			157				(3,593	)			315				(3,121	)
Purchases, sales, and settlements, net			(889	)			(16,049	)			1,039				(15,899	)
Ending balance at March 31, 2016			31,852				60,395				7,315				99,562

 

		Foreign plans
		Yen in millions
		Fair value measurement using significant unobservable inputs (Level 3)
		Corporate bonds				Real estate and other				Total
Beginning balance at April 1, 2014			6,255				8,932				15,187
Return on assets held at end of year			81				(408	)			(327	)
Purchases, sales, and settlements, net			—				210				210
Other*			1,048				6,788				7,836
Ending balance at March 31, 2015			7,384				15,522				22,906
Return on assets held at end of year			76				(104	)			(28	)
Return on assets sold during the year			—				19				19
Purchases, sales, and settlements, net			—				3,933				3,933
Transfers, net			—				2,692				2,692
Other*			(460	)			2,062				1,602
Ending balance at March 31, 2016			7,000				24,124				31,124

* Primarily consists of translation adjustments.

 

Sony makes contributions to its defined benefit pension plans as deemed appropriate by management after considering the fair value of plan assets, expected return on plan assets and the present value of benefit obligations. Sony expects to contribute approximately 11 billion yen to the Japanese plans and approximately 6 billion yen to the foreign plans during the fiscal year ending March 31, 2017.

 

 

The expected future benefit payments are as follows:

 

		Japanese plans				Foreign plans
Fiscal year ending March 31		Yen in millions				Yen in millions
2017			34,129				13,316
2018			34,595				13,742
2019			37,755				14,192
2020			39,943				14,988
2021			40,867				15,720
2022 – 2026			224,026				89,353

(2)

Defined contribution plans

Total defined contribution expenses for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Japanese plans			3,602				3,199				3,155
Foreign plans			12,703				13,857				12,419

 

16.

Stockholders’ equity

(1)

Common stock

Changes in the number of shares of common stock issued and outstanding during the fiscal years ended March 31, 2014, 2015 and 2016 have resulted from the following:

 

		Number of shares
Balance at March 31, 2013			1,011,950,206
Exercise of stock acquisition rights			134,800
Conversion of zero coupon convertible bonds			32,622,761
Balance at March 31, 2014			1,044,707,767
Exercise of stock acquisition rights			948,500
Conversion of zero coupon convertible bonds			124,116,993
Balance at March 31, 2015			1,169,773,260
Issuance of new shares			92,000,000
Exercise of stock acquisition rights			720,500
Balance at March 31, 2016			1,262,493,760

 

At March 31, 2016, 39,739,861 shares of common stock would be issued upon the conversion or exercise of all convertible bonds and stock acquisition rights outstanding.

 

Conversions of convertible bonds into common stock are accounted for in accordance with the provisions of the Companies Act of Japan (Kaishaho) and related regulations (collectively the “Companies Act”) by crediting approximately one-half of the conversion proceeds to the common stock account and the remainder to the additional paid-in capital account.

 

Sony Corporation may purchase its own shares at any time by a resolution of the Board of Directors up to the retained earnings available for dividends to shareholders, in accordance with the Companies Act. No common stock had been acquired by the resolution of the Board of Directors during the fiscal years ended March 31, 2014, 2015 and 2016.

 

 

 

(2) Retained earnings

 

 

The amount of statutory retained earnings of Sony Corporation available for dividends to shareholders as of March 31, 2016 was 467,311 million yen. The appropriation of retained earnings for the fiscal year ended March 31, 2016, including cash dividends for the six-month period ended March 31, 2016, has been incorporated in the consolidated financial statements. This appropriation of retained earnings was approved at the meeting of the Board of Directors of Sony Corporation held on April 28, 2016 and was then recorded in the statutory books of account, in accordance with the Companies Act.

 

Retained earnings include Sony’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of 20,986 million yen and 29,061 million yen at March 31, 2015 and 2016, respectively.

(3) Other comprehensive income

 

 

Changes in accumulated other comprehensive income, net of tax, by component for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

		Yen in millions
		Unrealized gains (losses) on securities				Unrealized gains (losses) on derivative instruments				Pension liability adjustment				Foreign currency translation adjustments				Total
Balance at March 31, 2013			109,079				(742	)			(191,816	)			(556,016	)			(639,495	)
Other comprehensive income before reclassifications			24,388				103				6,896				158,884				190,271
Amounts reclassified out of accumulated other comprehensive income			(5,078	)			639				4,987				—				548
Net current-period other comprehensive income			19,310				742				11,883				158,884				190,819
Less: Other comprehensive income attributable to noncontrolling interests			880				—				106				1,923				2,909
Balance at March 31, 2014			127,509				—				(180,039	)			(399,055	)			(451,585	)

 

		Yen in millions
		Unrealized gains (losses) on securities				Pension liability adjustment				Foreign currency translation adjustments				Total
Balance at March 31, 2014			127,509				(180,039	)			(399,055	)			(451,585	)
Other comprehensive income before reclassifications			53,069				(22,552	)			67,334				97,851
Amounts reclassified out of accumulated other comprehensive income*1			(14,351	)			1,365				(1,544	)			(14,530	)
Net current-period other comprehensive income			38,718				(21,187	)			65,790				83,321
Less: Other comprehensive income attributable to noncontrolling interests			12,074				(95	)			5,040				17,019
Balance at March 31, 2015			154,153				(201,131	)			(338,305	)			(385,283	)

 

 

 

 

 

		Yen in millions
		Unrealized gains (losses) on securities				Unrealized gains (losses) on derivative instruments				Pension liability adjustment				Foreign currency translation adjustments				Total
Balance at March 31, 2015			154,153				—				(201,131	)			(338,305	)			(385,283	)
Other comprehensive income before reclassifications			45,527				1,914				(174,380	)			(83,899	)			(210,838	)
Amounts reclassified out of accumulated other comprehensive income			(43,307	)			(3,112	)			2,627				—				(43,792	)
Net current-period other comprehensive income			2,220				(1,198	)			(171,753	)			(83,899	)			(254,630	)
Less: Other comprehensive income attributable to noncontrolling interests			15,637				—				(1,145	)			(1,087	)			13,405
Balance at March 31, 2016			140,736				(1,198	)			(371,739	)			(421,117	)			(653,318	)

 

*1 Foreign currency translation adjustments were transferred from accumulated other comprehensive income to net income as a result of a complete or substantially complete liquidation or sale of certain foreign subsidiaries and affiliates.

 

Reclassifications out of accumulated other comprehensive income for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

		Yen in millions
Comprehensive income components		Amounts reclassified from accumulated other comprehensive income												Affected line items in consolidated statements of income
		2014				2015				2016
Unrealized gains (losses) on securities			(881	)			(10,515	)			(19,598	)		Financial services revenue
			(7,801	)			(7,942	)			(47,087	)		Gain on sale of securities investments, net
			447				—				3,063			Loss on devaluation of securities investments
			14				—				—			Other
Total before tax			(8,221	)			(18,457	)			(63,622	)
Tax expense or (benefit)			3,143				4,106				20,315
Net of tax			(5,078	)			(14,351	)			(43,307	)
Unrealized gains (losses) on derivative instruments			471				—				—			Interest
			348				—				(8	)		Foreign exchange loss, net
			—				—				(3,104	)		Cost of sales
Total before tax			819				—				(3,112	)
Tax expense or (benefit)			(180	)			—				—
Net of tax			639				—				(3,112	)
Pension liability adjustment			5,440				2,615				2,867			*
Tax expense or (benefit)			(453	)			(1,250	)			(240	)
Net of tax			4,987				1,365				2,627
Foreign currency translation adjustments			—				(1,544	)			—			Foreign exchange loss, net
Tax expense or (benefit)			—				—				—
Net of tax			—				(1,544	)			—
Total amounts reclassified out of accumulated other comprehensive income, net of tax			548				(14,530	)			(43,792	)

* The amortization of pension and postretirement benefit components are included in the computation of net periodic pension cost. Refer to Note 15.

 

 

(4)

Equity transactions with noncontrolling interests

Net income (loss) attributable to Sony Corporation’s stockholders and transfers (to) from the noncontrolling interests for the fiscal years ended March 31, 2014, 2015 and 2016 were as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Net income (loss) attributable to Sony Corporation’s stockholders			(128,369	)			(125,980	)			147,791
Transfers (to) from the noncontrolling interests:
Decrease in additional paid-in capital for purchase of additional shares in consolidated subsidiaries			28				(2,483	)			(12,776	)
Change from net income (loss) attributable to Sony Corporation’s stockholders and transfers (to) from the noncontrolling interests			(128,341	)			(128,463	)			135,015

17.

Stock-based compensation plans

The stock-based compensation expense for the fiscal years ended March 31, 2014, 2015 and 2016 was 1,068 million yen, 1,286 million yen and 1,944 million yen, respectively. The total cash received from exercises under all of the stock-based compensation plans during the fiscal years ended March 31, 2014, 2015 and 2016 was 200 million yen, 1,637 million yen and 1,578 million yen, respectively. Sony issued new shares upon exercise of these rights.

 

Sony has a stock-based compensation incentive plan for selected directors, corporate executive officers and employees in the form of a stock acquisition rights plan. The stock acquisition rights generally have three year graded vesting schedules and are exercisable up to ten years from the date of grant.

 

The weighted-average fair value per share at the date of grant of stock acquisition rights granted during the fiscal years ended March 31, 2014, 2015 and 2016 was 821 yen, 1,139 yen and 1,331 yen, respectively. The fair value of stock acquisition rights granted on the date of grant and used to recognize compensation expense for the fiscal years ended March 31, 2014, 2015 and 2016 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

		Fiscal year ended March 31
		2014			2015			2016
Weighted-average assumptions
Risk-free interest rate		1.43	%		1.26	%		1.07	%
Expected lives		7.13	years		7.35	years		7.12	years
Expected volatility*		52.03	%		51.69	%		42.07	%
Expected dividends		1.55	%		1.24	%		0.75	%

* Expected volatility was based on the historical volatilities of Sony Corporation’s common stock over the expected life of the stock acquisition rights.

 

 

 

A summary of the activities regarding the stock acquisition rights plan during the fiscal year ended March 31, 2016 is as follows:

 

		Fiscal year ended March 31, 2016
		Number of shares				Weighted- average exercise price				Weighted- average remaining life				Total intrinsic value
						Yen				Years				Yen in millions
Outstanding at beginning of the fiscal year			16,408,500				3,358
Granted			2,342,000				3,355
Exercised			720,500				2,190
Forfeited or expired			2,251,800				3,976
Outstanding at end of the fiscal year			15,778,200				3,188				5.32				5,246
Exercisable at end of the fiscal year			11,558,300				3,319				3.95				4,133

 

The total intrinsic value of shares exercised under the stock acquisition rights plan during the fiscal years ended March 31, 2014, 2015 and 2016 was 52 million yen, 1,463 million yen and 1,338 million yen, respectively.

 

As of March 31, 2016, there was 2,944 million yen of total unrecognized compensation expense related to nonvested stock acquisition rights. This expense is expected to be recognized over a weighted-average period of 2.06 years.

18.

Thai Floods

In October 2011, certain of Sony’s Thailand subsidiaries temporarily closed operations due to significant floods (the “Floods”). The Floods caused significant damage to certain fixed assets including buildings, machinery and equipment as well as inventories in manufacturing sites and warehouses located in Thailand. In addition, the Floods impacted the operations of certain Sony subsidiaries in Japan and other countries.

 

Sony has insurance policies which cover certain damage directly caused by the Floods for Sony Corporation and certain of its subsidiaries, including manufacturing sites. The insurance policies cover the damage and costs associated with fixed assets, inventories and additional expenses including removal and cleaning costs and provide business interruption coverage, including lost profits.

 

Insurance recoveries were recognized as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Insurance recoveries for fixed assets, inventories and additional expenses			624				—				—
Insurance recoveries for business interruption			11,452				6,387				5,656
			12,076				6,387				5,656

 

The proceeds from insurance recoveries for fixed assets, inventories and additional expenses and for business interruption were included in investing activities and operating activities, respectively, in the consolidated statements of cash flows.

 

 

 

19.

Restructuring charges

As part of its effort to improve the performance of the various businesses, Sony has undertaken a number of restructuring initiatives. Sony defines restructuring initiatives as activities initiated by Sony, which are designed to generate a positive impact on future profitability. These activities include exiting a business or product category, implementing a headcount reduction program, realignment of its manufacturing sites to low-cost areas, utilizing the services of third-party original equipment and design manufacturers (OEMs and ODMs), a review of its development and design structure, and the streamlining of its sales and administrative functions. The restructuring activities are generally short term in nature and are generally completed within one year of initiation.

 

The changes in the accrued restructuring charges for the fiscal years ended March 31, 2014, 2015 and 2016 are as follows:

 

		Yen in millions
		Employee termination benefits				Non-cash write-downs and disposals, net*				Other associated  costs				Total
Balance at March 31, 2013			32,729				—				5,675				38,404
Restructuring costs			41,820				18,991				14,759				75,570
Non-cash charges			—				(18,991	)			—				(18,991	)
Cash payments			(46,017	)			—				(7,177	)			(53,194	)
Adjustments			3,312				—				659				3,971
Balance at March 31, 2014			31,844				—				13,916				45,760
Restructuring costs			53,261				17,169				20,259				90,689
Non-cash charges			—				(17,169	)			—				(17,169	)
Cash payments			(48,787	)			—				(19,937	)			(68,724	)
Adjustments			403				—				(42	)			361
Balance at March 31, 2015			36,721				—				14,196				50,917
Restructuring costs			27,401				1,828				7,298				36,527
Non-cash charges			—				(1,828	)			—				(1,828	)
Cash payments			(40,261	)			—				(11,232	)			(51,493	)
Adjustments			(1,330	)			—				1,473				143
Balance at March 31, 2016			22,531				—				11,735				34,266

* Significant asset impairments excluded from restructuring charges are described in Note 13.

 

 

 

 

Total costs incurred in connection with these restructuring programs by segment for the fiscal years ended March 31, 2014, 2015 and 2016 are as follows:

		Yen in millions
		Fiscal year ended March 31, 2014
		Employee termination benefits				Other associated costs*				Total net restructuring charges				Depreciation associated with restructured assets				Total
Mobile Communications			440				3,171				3,611				—				3,611
Game & Network Services			58				313				371				—				371
Imaging Products & Solutions			3,466				354				3,820				—				3,820
Home Entertainment & Sound			1,181				377				1,558				34				1,592
Devices			2,896				2,547				5,443				3,451				8,894
Pictures			6,570				152				6,722				13				6,735
Music			685				—				685				—				685
Financial Services			—				—				—				—				—
All Other and Corporate			26,524				26,836				53,360				1,521				54,881
Total			41,820				33,750				75,570				5,019				80,589

 

		Yen in millions
		Fiscal year ended March 31, 2015
		Employee termination benefits				Other associated costs*				Total net restructuring charges				Depreciation associated with restructured assets				Total
Mobile Communications			3,800				1,906				5,706				85				5,791
Game & Network Services			520				6,752				7,272				—				7,272
Imaging Products & Solutions			6,586				39				6,625				714				7,339
Home Entertainment & Sound			1,959				1				1,960				—				1,960
Devices			3,235				3,761				6,996				426				7,422
Pictures			1,918				—				1,918				—				1,918
Music			1,530				585				2,115				—				2,115
Financial Services			—				—				—				—				—
All Other and Corporate			33,713				24,384				58,097				6,122				64,219
Total			53,261				37,428				90,689				7,347				98,036

 

 

 

 

		Yen in millions
		Fiscal year ended March 31, 2016
		Employee termination benefits				Other associated costs*				Total net restructuring charges				Depreciation associated with restructured assets				Total
Mobile Communications			17,259				3,669				20,928				710				21,638
Game & Network Services			15				120				135				—				135
Imaging Products & Solutions			78				126				204				—				204
Home Entertainment & Sound			1,181				26				1,207				—				1,207
Devices			(10	)			(81	)			(91	)			—				(91	)
Pictures			1,594				7				1,601				5				1,606
Music			1,501				367				1,868				—				1,868
Financial Services			—				—				—								—
All Other and Corporate			5,783				4,892				10,675				1,017				11,692
Total			27,401				9,126				36,527				1,732				38,259

* Other associated costs includes non-cash write-downs and disposals, net

Depreciation associated with restructured assets as used in the context of the disclosures regarding restructuring activities refers to the increase in depreciation expense caused by revising the useful life and the salvage value of depreciable fixed assets under an approved restructuring plan. Any impairment of the assets is recognized immediately in the period it is identified.

Retirement programs

Sony has undergone several headcount reduction programs to further reduce operating costs primarily in an effort to improve the performance of certain segments related to the Electronics business and reduce cost at the headquarters function. Through measures including the realignment of its manufacturing sites, a review of its development and design structure, and the streamlining of its sales and administrative functions, Sony has continued to implement a company-wide (including headquarters) rationalization. Sony intends to reallocate and optimize its workforce through programs including work reassignments and outplacements. The employee termination benefits costs in the above table are included in selling, general and administrative in the consolidated statements of income.

 

During the fiscal year ended March 31, 2014, Sony announced its exit from the PC business resulting in a reduction in the scale of sales companies (refer to All Other and Corporate in this note), plans to operate the TV business in the HE&S segment as a wholly-owned subsidiary, and additional plans to optimize the sales and headquarters functions that indirectly support the Electronics businesses.

 

During the fiscal year ended March 31, 2015, Sony substantially completed the activities for optimizing the functions of sales companies and headquarters described above, other than those for the Mobile Communication segment. In the third quarter of the fiscal year ended March 31, 2015, Sony began restructuring plans regarding the Mobile Communication segment to reduce headcount by streamlining business operations, including closure and consolidation of manufacturing sites, and the consolidation of headquarters and administrative functions.

 

During the fiscal year ended March 31, 2016, the restructuring plans regarding the Mobile Communication segment progressed as planned by streamlining business operations, including closure and consolidation of manufacturing sites, and the consolidation of headquarters and administrative functions described above.

All Other and Corporate

Sony recorded restructuring charges resulting from exiting the PC business of 40,850 million yen and 19,635 million yen during the fiscal years ended March 31, 2014 and 2015, respectively. The amount for the fiscal year ended March 31, 2014 includes impairment losses of 12,817 million yen for long-lived assets and expenses of 8,019 million yen to compensate suppliers for unused components. The amounts above also include costs relating to a reduction in the scale of sales companies resulting from the decision to exit the PC business of 12,819 million yen and 8,278 million yen, for the fiscal years ended March 31, 2014 and 2015, respectively. Refer to Note 25.

 

 

 

In an effort to improve the performance of the disc manufacturing business, Sony initiated a number of restructuring activities to reduce its operating costs. These activities resulted in restructuring charges primarily consisting of headcount reductions and the closure and consolidation of manufacturing sites totaling 6,923 million yen for the fiscal year ended March 31, 2015. Refer to Note 13 for the long-lived assets impairments related to the disc manufacturing business other than restructuring charges.

 

As a result of efforts to optimize the sales and headquarters functions that indirectly support the Electronics businesses, which are described above, Sony recorded restructuring charges primarily consisting of headcount reductions totaling 22,345 million yen and 7,112 million yen during the fiscal years ended March 31, 2015 and 2016.

20.

Supplemental consolidated statements of income information

(1)

Other operating expense, net

Sony records transactions in other operating expense, net due to either the nature of the transaction or in consideration of factors including the relationship to Sony’s core operations.

 

Other operating expense, net is comprised of the following:

 

		Yen in millions
		March 31
		2014				2015				2016
Gain on sale of the U.S. headquarters building*1			(5,462	)			(5,991	)			(6,545	)
Gain on sale of Sony City Osaki*1			(4,914	)			(4,914	)			(4,914	)
Gain on sales of music publishing catalog in Pictures segment			(10,307	)			(1,871	)			—
(Gain) loss on sale, remeasurement, and issuance of M3 shares*2			(13,758	)			113				(2	)
(Gain) loss on purchase/sale of interests in subsidiaries and affiliates, net*3			(7,753	)			1,716				(31,778	)
(Gain) loss on sale, disposal or impairment of assets, net*4			90,860				192,605				90,410
			48,666				181,658				47,171

*1 A portion of gain on sale and leaseback transactions is deferred and is amortized on a straight-line basis over the lease term.

*2 Refer to Note 5.

*3 Refer to Notes 24 and 25.

*4 Refer to Notes 9, 13, 19 and 25.

(2)

Research and development costs

Research and development costs charged to cost of sales for the fiscal years ended March 31, 2014, 2015 and 2016 were 466,030 million yen, 464,320 million yen and 468,183 million yen, respectively.

(3)

Advertising costs

Advertising costs included in selling, general and administrative expenses for the fiscal years ended March 31, 2014, 2015 and 2016 were 474,372 million yen, 444,444 million yen and 391,326 million yen, respectively.

(4)

Shipping and handling costs

Shipping and handling costs for finished goods included in selling, general and administrative expenses for the fiscal years ended March 31, 2014, 2015 and 2016 were 62,871 million yen, 65,561 million yen and 50,803 million yen, respectively, which included the internal transportation costs of finished goods.

 

 

 

21.

Income taxes

Domestic and foreign components of income (loss) before income taxes and the provision for current and deferred income taxes attributable to such income are summarized as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Income (loss) before income taxes:
Sony Corporation and all subsidiaries in Japan			98,152				(88,855	)			149,256
Foreign subsidiaries			(72,411	)			128,584				155,248
			25,741				39,729				304,504
Income taxes - Current:
Sony Corporation and all subsidiaries in Japan			41,339				40,321				41,080
Foreign subsidiaries			59,904				40,430				53,498
			101,243				80,751				94,578
Income taxes - Deferred:
Sony Corporation and all subsidiaries in Japan			(6,330	)			(3,306	)			(1,745	)
Foreign subsidiaries			(331	)			11,288				1,956
			(6,661	)			7,982				211
Total income tax expense			94,582				88,733				94,789

 

 

 

 

A reconciliation of the differences between the Japanese statutory tax rate and the effective tax rate is as follows:

 

		Fiscal year ended March 31
		2014				2015				2016
Statutory tax rate			38.3	%			36.0	%			33.6	%
Non-deductible expenses			8.9				16.1				1.6
Income tax credits			(2.1	)			(1.4	)			(2.0	)
Change in statutory tax rate			3.6				(66.7	)			(3.3	)
Change in valuation allowances			365.7				221.1				10.7
Change in deferred tax liabilities on undistributed earnings of foreign subsidiaries and corporate joint ventures			0.2				17.4				(0.8	)
Lower tax rate applied to life and non-life insurance business in Japan			(31.0	)			(24.6	)			(2.3	)
Foreign income tax differential			25.7				(79.7	)			(6.9	)
Adjustments to tax reserves			58.3				(23.1	)			0.7
Effect of equity in net income (loss) of affiliated companies			9.0				0.1				0.0
Tax benefit related to intraperiod tax allocation			(111.9	)			(27.2	)			—
Impairment of goodwill related to mobile communications business			—				159.5				—
Other			2.7				(4.2	)			(0.2	)
Effective income tax rate			367.4	%			223.3	%			31.1	%

 

In March 2014, the Japanese legislature enacted tax law changes which included lowering the national corporate tax rate. As a result, the statutory tax rate for the fiscal year ended March 31, 2015 was approximately 36%. This tax law change did not have a material impact on Sony’s results of operations.

 

In March 2015, the Japanese legislature enacted tax law changes which included further lowering of the national corporate tax rate, limiting the annual use of net operating loss carryforwards to 65% of taxable income for the periods ending March 31, 2016 and 2017 and to 50% of taxable income for periods beginning on or after April 1, 2017, and increasing the net operating loss carryforward period from nine to ten years for losses incurred in the tax years beginning on or after April 1, 2017. As a result, the statutory tax rate for the fiscal year ending March 31, 2016 was approximately 33%. The limitation on the use of net operating loss carryforwards, however, may result in cash tax payments being due if there is taxable income in Japan even though Sony Corporation and its national tax filing group in Japan have significant net operating loss carryforwards available. In addition, the limitation on the use of losses, when combined with the relatively short carryforward period, increases the risk of some net operating loss carryforwards expiring unutilized. The impact of the tax law changes resulted in a net deferred tax benefit of 26,588 million yen for the fiscal year ended March 31, 2015, primarily due to a reduction to the deferred tax liabilities in the insurance business in Japan.

 

In March 2016, the Japanese legislature enacted tax law changes which included further lowering of the national corporate tax rate, limiting the annual use of net operating loss carryforwards to 60% of taxable income for the period ending March 31, 2017, to 55% of taxable income for the period ending March 31, 2018, and to 50% of taxable income for periods beginning on or after April 1, 2018. As a result, the statutory tax rate from the fiscal year ending March 31, 2017 onward will be approximately 31.5%. The impact of the tax law changes resulted in a net deferred tax benefit of 10,735 million yen for the fiscal year ended March 31, 2016, primarily due to a reduction to the deferred tax liabilities in the insurance business in Japan.

 

Under the accounting guidance for intraperiod tax allocation, Sony is required to consider all items of income (including items recorded in other comprehensive income) in determining the amount of tax benefit that should be allocated to a loss from continuing operations. During the fiscal years ended March 31, 2014 and 2015, Sony Corporation and its national tax filing group in Japan and certain other jurisdictions incurred a loss from continuing operations while also recording other comprehensive income. As a result, Sony allocated 28,797 million yen and 10,799 million yen of tax benefit to continuing operations, respectively, which was exactly offset by additional income tax expense in other comprehensive income. The total income tax provision did not change and these jurisdictions continue to be impacted by the full valuation allowance on deferred tax assets. During the fiscal year ended March 31, 2016, there was no application of the intraperiod allocation rules as no jurisdictions met the necessary criteria.

 

 

 

The significant components of deferred tax assets and liabilities are as follows:

 

		Yen in millions
		March 31
		2015				2016
Deferred tax assets:
Operating loss carryforwards for tax purposes			550,824				483,590
Accrued pension and severance costs			89,797				131,262
Film costs			177,741				175,439
Warranty reserves and accrued expenses			103,695				96,327
Future insurance policy benefits			25,304				27,419
Inventory			35,478				38,219
Depreciation			57,140				48,339
Tax credit carryforwards			105,645				145,011
Reserve for doubtful accounts			9,455				10,179
Impairment of investments			22,444				47,083
Deferred revenue in the Pictures segment			24,438				16,336
Other			165,552				140,218
Gross deferred tax assets			1,367,513				1,359,422
Less: Valuation allowance			(1,077,622	)			(1,055,858	)
Total deferred tax assets			289,891				303,564
Deferred tax liabilities:
Insurance acquisition costs			(150,677	)			(144,207	)
Future insurance policy benefits			(112,996	)			(132,521	)
Unbilled accounts receivable in the Pictures segment			(83,472	)			(99,625	)
Unrealized gains on securities			(94,065	)			(97,745	)
Intangible assets acquired through stock exchange offerings			(24,927	)			(23,794	)
Undistributed earnings of foreign subsidiaries and corporate joint ventures			(35,076	)			(33,933	)
Investment in M3			(37,342	)			(35,666	)
Other			(66,556	)			(53,750	)
Gross deferred tax liabilities			(605,111	)			(621,241	)
Net deferred tax liabilities			(315,220	)			(317,677	)

 

Based on the weight of the available positive and negative evidence, for the fiscal year ended March 31, 2016, Sony continued to maintain valuation allowances against the deferred tax assets at Sony Corporation and its national tax filing group in Japan, as well as at Sony Americas Holding Inc. (“SAHI”) and its consolidated tax filing group, Sony Mobile Communications in Sweden, Sony Europe Limited (“SEU”) in the U.K., certain subsidiaries in Brazil, and certain subsidiaries in other tax jurisdictions.

 

The net changes in the total valuation allowance were increases of 96,283 million yen and 50,092 million yen for the fiscal years ended March 31, 2014 and 2015, respectively, and a decrease of 21,764 million yen for the fiscal year ended March 31, 2016.

 

The increase in the valuation allowance during the fiscal year ended March 31, 2014 was primarily due to continuing losses at Sony Corporation and its national tax filing group in Japan and SAHI and its consolidated tax filing group in the U.S. In addition, certain other foreign subsidiaries recorded valuation allowances against their deferred tax assets.

 

The increase in the valuation allowances during the fiscal year ended March 31, 2015 was primarily due to increasing tax credit carryforwards at SAHI and its consolidated tax filing group in the U.S. and continuing losses at Sony Corporation and its national tax filing group in Japan.

 

The decrease in the valuation allowances during the fiscal year ended March 31, 2016 was primarily due to the effect of foreign currency translation adjustments at SAHI and its consolidated tax filing group in the U.S. and the reversal of valuation allowances for local tax purposes for certain Japanese subsidiaries based on the weight of the available positive and negative evidence, including the strength of earnings in recent years and their forecast of continuing profits. These decreases were partially offset by an increase in the valuation allowance for accrued pension and severance costs in the national tax filing group in Japan.

 

 

 

Net deferred tax assets (net of valuation allowance) and liabilities are included in the consolidated balance sheets as follows:

 

		Yen in millions
		March 31
		2015				2016
Current assets - Deferred income taxes			47,788				40,940
Other assets - Deferred income taxes			89,637				97,639
Current liabilities - Other			(6,769	)			(5,330	)
Long-term liabilities - Deferred income taxes			(445,876	)			(450,926	)
Net deferred tax liabilities			(315,220	)			(317,677	)

 

At March 31, 2016, deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries and corporate joint ventures not expected to be remitted in the foreseeable future totaling 333,177 million yen, and on the gain of 61,544 million yen on a subsidiary’s sale of stock arising from the issuance of common stock of Sony Music Entertainment (Japan) Inc. in a public offering to third parties in November 1991, as Sony does not anticipate any significant tax consequences on the possible future disposition of its investment based on its tax planning strategies.

 

At March 31, 2016, Sony had net operating loss carryforwards, the tax effect of which totaled 483,590 million yen, which may be available as an offset against future taxable income on tax returns to be filed in various tax jurisdictions. With the exception of 152,986 million yen with no expiration period, substantially all of the total net operating loss carryforwards expire at various dates between the fiscal years ending March 31, 2018 and 2024, and the remaining amounts have expiration periods up to 20 years depending on the jurisdiction.

 

Tax credit carryforwards at March 31, 2016 amounted to 145,011 million yen. With the exception of 21,807 million yen with no expiration period, substantially all of the total available tax credit carryforwards expire at various dates between the fiscal years ending March 31, 2017 and 2026.

 

 

 

A reconciliation of the beginning and ending gross amounts of unrecognized tax benefits is as follows:

 

		Yen in millions
		March 31
		2014				2015				2016
Balance at beginning of the fiscal year			191,886				214,795				157,345
Reductions for tax positions of prior years			(19,696	)			(2,898	)			(34,893	)
Additions for tax positions of prior years			9,325				9,532				6,253
Additions based on tax positions related to the current year			21,877				3,740				3,393
Settlements			(6,687	)			(75,272	)			(12,556	)
Lapse in statute of limitations			(4,643	)			(4,320	)			(8,229	)
Foreign currency translation adjustments			22,733				11,768				(6,411	)
Balance at end of the fiscal year			214,795				157,345				104,902
Total net amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate			93,098				93,538				49,323

 

The major changes, including settlements, in the total gross amount of unrecognized tax benefit balances relate to transfer pricing adjustments, including as a result of the Bilateral Advance Pricing Agreements (“APAs”) and competent authority requests filed for certain subsidiaries in the MC, G&NS IP&S, HE&S, and Devices segments and All Other, with respect to the intercompany cross-border transactions.  The APAs include agreements between Sony and two taxing authorities under the authority of the mutual agreement procedure specified in income tax treaties. Sony reviews its estimated tax expense based on the progress made in these procedures, and the progress of transfer pricing audits generally, and makes adjustments to its estimates as necessary. In addition, the APAs are government to government negotiations, and therefore it is possible that the final outcomes of the agreements may differ from Sony’s current assessment of the more-likely-than-not outcomes of such agreements.

 

During the fiscal year ended March 31, 2014, Sony reversed 2,699 million yen of interest expense and recorded 352 million yen of penalties. At March 31, 2014, Sony had recorded liabilities of 6,553 million yen and 4,060 million yen for the payments of interest and penalties, respectively.

 

During the fiscal year ended March 31, 2015, Sony recorded 290 million yen of interest expense and reversed 376 million yen of penalties. At March 31, 2015, Sony had recorded liabilities of 6,843 million yen and 3,684 million yen for the payments of interest and penalties, respectively.

 

During the fiscal year ended March 31, 2016, Sony reversed 1,055 million yen of interest expense and recorded 674 million yen of penalties. At March 31, 2016, Sony had recorded liabilities of 5,789 million yen and 4,358 million yen for the payments of interest and penalties, respectively.

 

Sony operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited by Japanese and foreign taxing authorities. As a result of audit settlements, the conclusion of current examinations, the expiration of the statute of limitations in several jurisdictions and other reevaluations of Sony’s tax positions, it is expected that the amount of unrecognized tax benefits will change in the next twelve months. Accordingly, Sony believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to 3,136 million yen within the next twelve months.

 

Sony remains subject to examinations by Japanese taxing authorities for tax years from 2008 through 2015, and by the U.S. and other material foreign taxing authorities for tax years from 1998 through 2015.

 

 

 

22.

Reconciliation of the differences between basic and diluted EPS

Reconciliation of the differences between basic and diluted EPS for the fiscal years ended March 31, 2014, 2015 and 2016 is as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Net income (loss) attributable to Sony Corporation’s stockholders for basic and diluted EPS computation			(128,369	)			(125,980	)			147,791
		Thousands of shares
Weighted-average shares outstanding			1,027,024				1,114,424				1,237,802
Effect of dilutive securities:
Stock acquisition rights			—				—				2,109
Zero coupon convertible bonds			—				—				17,972
Weighted-average shares for diluted EPS computation			1,027,024				1,114,424				1,257,883
							Yen
Basic EPS			(124.99	)			(113.04	)			119.40
Diluted EPS			(124.99	)			(113.04	)			117.49

 

Potential shares of common stock which were excluded from the computation of diluted EPS for the fiscal years ended March 31, 2014, 2015 and 2016 were 142,866 thousand shares, 17,019 thousand shares and 11,357 thousand shares, respectively. The potential shares were excluded as anti-dilutive for the fiscal years ended March 31, 2014 and 2015 due to Sony incurring a net loss attributable to Sony Corporation’s stockholders for these fiscal years, and potential shares related to stock acquisition rights were excluded as anti-dilutive for the fiscal year ended March 31, 2016 when the exercise price for those shares was in excess of the average market value of Sony’s common stock for the fiscal year. The zero coupon convertible bonds issued in July 2015 were included in the diluted EPS calculation for the fiscal year ended March 31, 2016 under the if-converted method beginning upon issuance.

23.

Variable interest entities

Sony has, from time to time, entered into various arrangements with VIEs. These arrangements include several joint ventures in the recorded music business, the U.S.-based music publishing business, the financing of film production and the outsourcing of manufacturing operations. In addition, Sony has entered into several accounts receivable sales programs that involve VIEs, which are described in Note 6. For the VIEs that are described below, it has been determined that Sony is the primary beneficiary and, accordingly, these VIEs are consolidated by Sony.

 

Sony’s U.S. subsidiary that is engaged in the recorded music business has entered into several joint ventures with companies involved in the production and creation of recorded music. Sony has reviewed these joint ventures and determined that they are VIEs. Based on a qualitative assessment, it was determined that Sony has the power to direct the activities that most significantly impact the VIEs’ economic performance, as well as the obligation to absorb the losses of theses VIEs as Sony is responsible for providing funding to these VIEs, and in most cases absorbs all losses until the VIEs become profitable. As a result, it has been determined that Sony is the primary beneficiary. The assets of Sony are not available to settle the obligations of these VIEs. As of March 31, 2016, the total assets and liabilities for these VIEs, on an aggregate basis, were 28,493 million yen and 2,459 million yen, respectively.

 

Sony’s U.S.-based music publishing subsidiary is a joint venture with a third-party investor and has been determined to be a VIE.  The subsidiary owns and acquires rights to musical compositions, exploits and markets these compositions, and receives royalties or fees for their use.  Under the terms of the joint venture, Sony has the obligation to fund any working capital deficits as well as any acquisition of music publishing rights made by the joint venture.  In addition, the third-party investor receives a guaranteed annual dividend of up to 17.3 million U.S. dollars through December 15, 2016. Based on a qualitative assessment, it was determined that Sony has the power to direct the activities that most significantly impact the VIE’s economic performance, as well as the obligation to absorb the losses of the VIE due to its obligation to provide funding to the joint venture. As a result, it has been determined that Sony is the primary beneficiary. As of March 31, 2016, the assets and liabilities of the VIE that were included in Sony’s consolidated balance sheets were as follows:

 

 

 

		Yen in millions
Assets:
Cash and cash equivalents			8,559
Account receivables, net			3,709
Other current assets			27,472
Property, plant and equipment, net			1,389
Intangibles, net			61,766
Goodwill			16,964
Other noncurrent assets			8,972
Total assets			128,831
Liabilities:
Accounts payable and accrued expenses			43,232
Other current liabilities			11,330
Other noncurrent liabilities			4,220
Total liabilities			58,782

 

Sony and the third-party investor entered into a binding Memorandum of Understanding on March 14, 2016 and a definitive agreement on April 18, 2016 (the “Music Publishing Purchase Agreements”) for Sony to obtain full ownership of the U.S.-based music publishing subsidiary by acquiring the 50% interest in the subsidiary held by the third-party investor. The Music Publishing Purchase Agreements call for total payments of 750 million U.S. dollars, which includes a lump sum payment of 733 million U.S. dollars as well as distributions the subsidiary previously committed to pay to the third-party investor. The closing of the transaction is subject to certain closing conditions, including regulatory approval.

 

VIEs in which Sony holds a significant variable interest, but is not the primary beneficiary are described as follows:

 

In connection with the July 2013 refinancing of the debt obligations of the third-party investor in the music publishing subsidiary described above, Sony has issued a guarantee to a creditor of the third-party investor in which Sony has agreed to repay the outstanding principal plus accrued interest up to a maximum of 260.5 million U.S. dollars to the creditor should the third-party investor default on its obligation.  The obligation of the third-party investor is collateralized by its 50% interest in Sony’s music publishing subsidiary. Should Sony have to make a payment under the terms of the guarantee, Sony would assume the creditor’s rights to the underlying collateral. The assets of the third-party investor that are being used as collateral were placed in a separate trust which is also a VIE in which Sony has significant variable interests. Based on a qualitative assessment, it was determined that Sony is not the primary beneficiary as Sony does not have the power to direct the activities of the trust. The assets held by the trust consist solely of the third-party investor’s 50% ownership interest in the music publishing subsidiary.  As of March 31, 2016, the fair value of the assets held by the trust exceeded 260.5 million U.S. dollars.

 

As described in Note 5, on June 29, 2012, an investor group which included a wholly-owned subsidiary of Sony Corporation completed its acquisition of EMI Music Publishing. To effect the acquisition, the investor group formed DH Publishing, L.P. (“DHP”) which acquired EMI Music Publishing. In addition, DHP entered into an agreement with Sony’s U.S.-based music publishing subsidiary in which the subsidiary provides administration services to DHP (the “Administration Agreement”). DHP was determined to be a VIE as many of the decision making rights for the entity do not reside within the entity’s equity interests, but rather are embedded in the Administration Agreement. Under the terms of the Administration Agreement, the largest non-Sony shareholder has approval rights over decisions regarding the activities that most significantly impact DHP, including the acquisition and retention of copyrights and the licensing of songs. These approval rights result in Sony and the largest non-Sony shareholder sharing the power to direct the activities of DHP, and as such, Sony is not the primary beneficiary of the VIE. At March 31, 2016, the only amounts recorded on Sony’s consolidated balance sheet that relate to the VIE are Sony’s net investment of 187.9 million U.S. dollars and a net receivable balance of 1.3 million U.S. dollars. Sony’s maximum exposure to losses as of March 31, 2016 is the aggregate amount recorded on its balance sheet of 189 million U.S. dollars.

 

 

 

Sony’s subsidiary in the Pictures segment entered into a distribution agreement with and made an investment in a production company that will develop, produce and finance feature-length motion pictures and television programming. The investment is accounted for under the cost method. The production company is a VIE as many of the decision making rights for the entity reside within the equity interests held by the management of the production company which are not at risk of economic loss. Based on a qualitative assessment, it was determined that Sony is not the primary beneficiary as Sony does not have the power to direct the activities of the production company. Sony’s maximum exposure to losses as of March 31, 2016 is the amount of investment and the future funding commitments, which total 50 million U.S. dollars.

 

As described in Note 6, certain accounts receivable sales programs also involve VIEs. These VIEs are all special purpose entities associated with the sponsor banks. Based on a qualitative assessment, Sony is not the primary beneficiary and therefore does not consolidate these entities as Sony does not have the power to direct the activities, an obligation to absorb losses, or the right to receive the residual returns of these VIEs. Sony’s maximum exposure to losses from these VIEs is considered insignificant.

24.

Acquisitions

(1)

Game Show Network acquisition

In December 2012, the other investor in Game Show Network (“GSN”) exercised its put right and Sony acquired an 18% equity interest for 234 million U.S. dollars, bringing Sony’s total equity interest to 58%. For the 18% interest, Sony made a payment of 117 million U.S. dollars plus interest of 4 million U.S. dollars on April 2, 2013 and a second payment of 117 million U.S. dollars plus interest of 12 million U.S. dollars on December 13, 2013. Beginning on April 1, 2015, a buy/sell provision also applies to the equity interests in GSN owned by Sony and the other investor and may be exercised from April 1 of each year for a 60 business day window.

(2)

Sony Semiconductor acquisitions

On March 31, 2014, Sony Semiconductor Corporation (“SCK”), a wholly-owned subsidiary of Sony, acquired from Renesas Electronics Corporation (“Renesas”) semiconductor fabrication equipment and certain related assets (“Renesas Transferred Assets”) for 7,510 million yen. SCK is utilizing the Renesas Transferred Assets to establish a new technology center and further strengthen its production capacity for CMOS image sensors. The purchase price was allocated and recorded primarily to machinery and equipment. SCK also entered into a supply arrangement with Renesas to manufacture and supply system LSIs for a certain period following the acquisition. In connection with this, SCK also acquired related inventories from Renesas.

 

As the purchase price for the Renesas Transferred Assets was fully allocated to identifiable tangible and intangible assets and no liabilities were assumed, no goodwill was recorded as part of the acquisition. The unaudited supplemental pro forma results of operations have not been presented because the effect of the acquisition was not material.

 

On December 4, 2015, Sony Corporation and Toshiba Corporation (“Toshiba”) signed definitive agreements (the “Transfer Agreements”) to transfer to Sony Corporation and to SCK, Toshiba-owned semiconductor fabrication facilities, equipment and related assets, as well as other related equipment and assets owned by Toshiba, for 19,000 million yen. 

 

On March 31, 2016, pursuant to the Transfer Agreements, SCK acquired from Toshiba a portion of the semiconductor fabrication facilities, equipment and related assets (the “Toshiba Transferred Assets”) for 16,700 million yen.  The purchase price for the Toshiba Transferred Assets is included within Other in the investing activities section of the consolidated statements of cash flows. SCK is utilizing the Toshiba Transferred Assets to establish a new technology center and further strengthen its production capacity for CMOS image sensors. The purchase price for the Toshiba Transferred Assets was allocated and recorded primarily to machinery and equipment. SCK also entered into a supply arrangement with Toshiba to manufacture and supply CMOS image sensors for a certain period following the acquisition. In connection with this acquisition, SCK also acquired related inventories from Toshiba. SCK subsequently changed its name to Sony Semiconductor Manufacturing Corporation, effective April 1, 2016.

 

As the purchase price for the Toshiba Transferred Assets was fully allocated to identifiable tangible and intangible assets and no liabilities were assumed, no goodwill was recorded as part of the acquisition. The unaudited supplemental pro forma results of operations have not been presented because the effect of the acquisition was not material.

(3)

Orchard acquisition

In April 2015, Sony Music Entertainment (“SME”), a wholly owned subsidiary of Sony, increased its shareholding in The Orchard to 100% by acquiring Orchard Asset Holdings, LLC’s 49% equity interest for 22,168 million yen (185 million U.S. dollars).

 

 

 

Prior to the acquisition, SME’s interest in The Orchard was accounted for under the equity method of accounting. As a result of SME’s obtaining a controlling interest in The Orchard, Sony consolidated The Orchard in accordance with the accounting guidance for business combinations achieved in stages and remeasured the 51% equity interest in The Orchard that it owned prior to the acquisition at a fair value, and recognized a gain of 18,085 million yen (151 million U.S. dollars) in other operating expense, net in the consolidated statement of income. As a result of the acquisition, Sony recorded 36,664 million yen (307 million U.S. dollars) of goodwill and 13,806 million yen (115 million U.S. dollars) of intangible assets. The cash consideration of 19,547 million yen (164 million U.S. dollars) paid in this transaction, net of cash received, is included within Other in the investing activities section of the consolidated statements of cash flows.

 

The unaudited supplemental pro forma results of operations have not been presented because the effect of the acquisition was not material.

(4)

Other acquisitions

During the fiscal year ended March 31, 2014, Sony completed other acquisitions for total consideration of 19,373 million yen which were paid for primarily in cash and there was no material contingent consideration subject to future change. As a result of these acquisitions, Sony recorded 10,243 million yen of goodwill and 10,965 million yen of intangible assets.

 

During the fiscal year ended March 31, 2015, Sony completed other acquisitions for total consideration of 23,103 million yen which were paid for primarily in cash and included the August 14, 2014 acquisition of CSC Media Group for total cash consideration of 18,900 million yen. CSC Media Group is one of the United Kingdom’s largest independent cable and satellite TV channel groups. There was no material contingent consideration subject to future change. As a result of these acquisitions, Sony recorded 12,626 million yen of goodwill and 10,731 million yen of intangible assets.

 

During the fiscal year ended March 31, 2016, Sony completed other acquisitions for total consideration of 46,233 million yen which were paid for primarily in cash and included the February 1, 2016 acquisition of Altair for total consideration of 25,565 million yen. Altair develops and sells products focused on LTE (Long Term Evolution) technologies. There was no material contingent consideration subject to future change. The cash consideration of 22,657 million yen paid in the Altair transaction is included within Other in the investing activities section of the consolidated statements of cash flows. As a result of these acquisitions, Sony recorded 36,128 million yen of goodwill and 14,983 million yen of intangible assets, of which 17,879 million yen of goodwill and 6,600 million yen of intangible assets related to the Altair transaction.

 

No significant amounts have been allocated to in-process research and development and all of the entities described above have been consolidated into Sony’s results of operations since their respective acquisition dates. Pro forma results of operations have not been presented because the effects of other acquisitions, individually and in aggregate, were not material.

25.

Divestitures

(1)

Gracenote

On January 31, 2014, Sony sold all the shares of Gracenote, Inc., a wholly-owned subsidiary within All Other, to the Tribune Company for 170 million U.S. dollars subject to certain adjustments. The sale resulted in net cash proceeds of 156 million U.S. dollars and a gain of 54 million U.S. dollars, recorded within other operating expense, net in the consolidated statements of income.

(2)

PC business

On February 6, 2014, Sony announced an updated strategic plan to concentrate the mobile business on smartphones and tablets and ultimately exit the PC business, which was included in All Other, following continued challenges in the PC market. As a result, for the fiscal year ended March 31, 2014, Sony recorded an impairment loss of 12,817 million yen for long-lived assets, based on the present value of estimated net cash flows. Additionally, Sony recorded charges of 8,019 million yen in cost of sales in the consolidated statements of income for expenses to compensate suppliers for unused components reflecting the termination of future manufacturing and charges of 7,278 million yen primarily for employee termination benefits which are included in selling, general and administrative expenses in the consolidated statements of income. These incremental costs directly resulted from Sony’s decision to exit the PC business and were recorded as restructuring charges. Also for the fiscal year ended March 31, 2014, Sony recorded charges of 17,391 million yen, primarily for the write-down of excess components in inventory which are included in cost of sales in the consolidated statements of income, and in All Other, Sony recorded restructuring charges of 12,819 million yen primarily in selling, general and administrative expenses in the consolidated statements of income relating to a reduction in the scale of sales companies resulting from Sony’s decision to exit the PC business.

 

 

 

In addition, on February 6, 2014, Sony and Japan Industrial Partners, Inc. (“JIP”) entered into a memorandum of understanding to sell Sony’s PC business to a new company to be established by JIP. As of March 31, 2014, the corresponding assets and liabilities were not classified as held for sale because significant terms and conditions were still under negotiation.

 

On July 1, 2014, Sony completed the sale of its PC business and certain related assets to VAIO Corporation, which was established by JIP, in accordance with the definitive agreements reached on May 2, 2014. Although Sony continued to incur certain costs related to exiting the PC business, no further significant gain or loss was recorded as a direct result of the sale.

(3)

Sale of the logistics business

On April 1, 2015, in connection with the formation of a logistics joint venture, Sony sold a part of its logistics business in Japan, Thailand, and Malaysia within Corporate to MITSUI-SOKO HOLDINGS Co., Ltd. for a sales price of 19,211 million yen. As a result of the sale, Sony recognized a gain of 12,284 million yen in other operating expense, net in the consolidated statement of income.

26.

Collaborative arrangements

Sony’s collaborative arrangements primarily relate to arrangements entered into, through a subsidiary in the Pictures segment, with one or more active participants to jointly finance, produce and/or distribute motion pictures or television programming under which both the subsidiary and the other active participants share in the risks and rewards of ownership. These arrangements are referred to as co-production and distribution arrangements.

 

Sony typically records an asset for only the portion of the motion pictures or television programming it owns and finances. Sony and the other participants typically distribute the product in different media or markets. Revenues earned and expenses incurred for the media or markets in which Sony distributes the product are typically recorded on a gross basis. Sony typically does not record revenues earned and expenses incurred when the other participants distribute the product. Sony and the other participants typically share in the profits from the distribution of the product in all media or markets. For motion pictures, if Sony is a net receiver of (1) Sony’s share of the profits from the media or markets distributed by the other participants less (2) the other participants’ share of the profits from the media or markets distributed by Sony then the net amount is recorded as net sales. If Sony is a net payer then the net amount is recorded in cost of sales. For television programming, Sony records its share of the profits from the media or markets distributed by the other participants as sales, and the other participants’ share of the profits from the media or markets distributed by Sony as cost of sales.

 

For the years ended March 31, 2014, 2015 and 2016, 17,291 million yen, 23,741 million yen and 30,888 million yen, respectively, were recorded as net sales for amounts due from the other participants and 16,359 million yen, 22,983 million yen and 38,303 million yen, respectively, were recorded as cost of sales for amounts owed to the other participants in these collaborative arrangements.

27.

Commitments, contingent liabilities and other

(1)

Loan commitments

Subsidiaries in the Financial Services segment have entered into loan agreements with their customers in accordance with the condition of the contracts. As of March 31, 2016, the total unused portion of the lines of credit extended under these contracts was 30,611 million yen. The aggregate amounts of future year-by-year payments for these loan commitments cannot be determined.

(2)

Purchase commitments and other

Purchase commitments and other outstanding as of March 31, 2016 amounted to 420,250 million yen. The major components of these commitments are as follows:

 

Certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of motion pictures and television programming as well as agreements with third parties to acquire completed motion pictures, or certain rights therein, and to acquire the rights to broadcast certain live action sporting events. These agreements cover various periods mainly within three years. As of March 31, 2016, these subsidiaries were committed to make payments under such contracts of 138,586 million yen.

 

As discussed in Note 23 and under the Guarantees section below, a subsidiary in the Music segment has entered into the Music Publishing Purchase Agreements with the third-party investor to obtain full ownership of the U.S.-based music publishing subsidiary, the closing of which is subject to certain conditions including regulatory approval. As of March 31, 2016, the subsidiary was committed to make payments of 750 million U.S. dollars under the Music Publishing Purchase Agreements.

 

 

 

Certain subsidiaries in the Music segment have entered into long-term contracts with recording artists, songwriters and companies for the future production, distribution and/or licensing of music product. These contracts cover various periods mainly within five years. As of March 31, 2016, these subsidiaries were committed to make payments of 54,198 million yen under such long-term contracts.

 

A subsidiary in the Game & Network Services segment has entered into long-term contracts for programming content. These contracts cover various periods mainly up to four years. As of March 31, 2016, this subsidiary was committed to make payments of 25,741 million yen under such long-term contracts.

 

Sony has entered into long-term sponsorship contracts related to advertising and promotional rights. These contracts cover various periods mainly within three years. As of March 31, 2016, Sony has committed to make payments of 15,727 million yen under such long-term contracts.

 

The schedule of the aggregate amounts of year-by-year payment of purchase commitments during the next five fiscal years and thereafter is as follows:

 

Fiscal year ending March 31		Yen in millions
2017			279,201
2018			67,192
2019			39,889
2020			14,265
2021			8,685
Later fiscal years			11,018
Total			420,250

(3)

Litigation

In October 2009, Sony Corporation’s U.S. subsidiary, Sony Optiarc America Inc., received a subpoena from the U.S. Department of Justice (“DOJ”) seeking information about its optical disk drive business. Sony understands that the European Commission and certain other governmental agencies outside the United States also opened investigations of competition in the optical disk drives market. In March 2014, the DOJ notified Sony that it had closed its investigation. In October 2015, the European Commission adopted a decision in which it fined Sony Corporation, its subsidiary in Japan, Sony Optiarc Inc., and two other subsidiaries 31 million euros. In December 2015, Sony filed an appeal with the European Union’s General Court. Sony understands that the investigations by several other agencies have now ended, but one other agency continues to investigate. A number of direct and indirect purchaser lawsuits, including class actions, have been filed in certain jurisdictions, including the United States, in which the plaintiffs alleged that Sony Corporation and certain of its subsidiaries violated antitrust laws and sought recovery of damages and other remedies. Although certain of these lawsuits have reached a settlement, including the class action brought by the direct purchasers in the United States, certain other lawsuits continue. Based on the remaining investigation and cases, it is not possible to estimate the amount of losses or range of possible losses, if any, that might ultimately result from adverse judgments, settlements or other resolution of all of these matters.

 

In May 2011, Sony Corporation’s U.S. subsidiary, Sony Electronics Inc., received a subpoena from the DOJ Antitrust Division seeking information about its secondary batteries business. Sony understands that the European Commission and certain other governmental agencies outside the United States also opened investigations of competition in the secondary batteries market. The DOJ has notified Sony that it has closed its investigation, but the European Commission and one other agency continue to investigate. A number of direct and indirect purchaser lawsuits, including class actions, have been filed in certain jurisdictions, including the United States, in which the plaintiffs allege that Sony Corporation and certain of its subsidiaries violated antitrust laws and seek recovery of damages and other remedies. Although certain of these lawsuits have reached a settlement, including the class actions brought by the direct purchasers and the indirect purchasers in the United States, the proposed settlements of which are pending court approvals, other lawsuits continue. Based on the stage of these proceedings, it is not possible to estimate the amount of losses or range of possible losses, if any, that might result from adverse judgments, settlements or other resolution of all of these matters.

 

 

 

A Sony subsidiary outside Japan is subject to a non-Japanese customs investigation in connection with the import and export of certain HE&S products. Sony is cooperating with the relevant government authorities. Based on the stage of this investigation and information currently available, it is not possible to estimate the amount of losses or range of possible losses, if any, that might ultimately result from adverse judgments, settlements or other resolution of this investigation.

 

In addition, Sony Corporation and certain of its subsidiaries are defendants or otherwise involved in other pending legal and regulatory proceedings. However, based upon the information currently available, Sony believes that the outcome from such legal and regulatory proceedings would not have a material impact on Sony’s results of operations and financial position.

(4)

Guarantees

Sony has issued guarantees that contingently require payments to guaranteed parties if certain specified events or conditions occur. The maximum potential amount of future payments under these guarantees as of March 31, 2016 amounted to 38,565 million yen. The major components of these guarantees are as follows:

As discussed in Note 23, Sony has agreed to repay the outstanding principal plus accrued interest up to a maximum of 260.5 million U.S. dollars to the creditor of the third-party investor of Sony’s U.S.-based music publishing subsidiary should the third-party investor default on its obligation.  The obligation of the third-party investor is collateralized by its 50% interest in Sony’s music publishing subsidiary. Should Sony have to make a payment under the terms of the guarantee, Sony would assume the creditor’s rights to the underlying collateral. As of March 31, 2016, the fair value of the collateral exceeded 260.5 million U.S. dollars. Sony entered into the Music Publishing Purchase Agreements with the third-party investor to obtain full ownership of the U.S.-based music publishing subsidiary. Under the terms of the Music Publishing Purchase Agreements, Sony will pay the third-party investor a lump sum payment of 733 million U.S. dollars upon closing plus 17 million U.S. dollars of distributions to which the subsidiary previously committed. The closing of the transaction is subject to certain closing conditions, including regulatory approval. Upon the successful close of the transaction, the guarantee provided to the creditor of the third-party investor will be terminated.

 

In addition to the above, Sony issues contractual product warranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term. The changes in product warranty liability for the fiscal years ended March 31, 2014, 2015 and 2016 are as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Balance at beginning of the fiscal year			66,776				79,718				75,129
Additional liabilities for warranties			83,959				87,902				83,227
Settlements (in cash or in kind)			(72,230	)			(78,356	)			(81,462	)
Changes in estimate for pre-existing warranty reserve			(6,070	)			(13,731	)			(6,440	)
Translation adjustment			7,283				(404	)			(3,511	)
Balance at end of the fiscal year			79,718				75,129				66,943

 

 

 

 

28.

Business segment information

The reportable segments presented below are the segments of Sony for which separate financial information is available and for which operating profit or loss amounts are evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The CODM does not evaluate segments using discrete asset information. Sony’s CODM is its Chief Executive Officer and President.

 

Sony realigned its business segments for the fiscal year ended March 31, 2016 to reflect modifications to its organizational structure, primarily repositioning certain operations, which were in All Other and the Devices segment. In connection with this realignment, the operations of Sony’s disc manufacturing business in Japan, which were included in All Other are now included in the Music segment and the operations of So-net Corporation and its subsidiaries, which were included in All Other are now included in the MC segment. Certain operations regarding pre-installed automotive audio products which were included in the Devices segment are now included in the HE&S segment. In addition, the medical business previously included in All Other has been integrated into the IP&S segment as a result of a change in the Corporate Executive Officer in charge of the medical business. In connection with these realignments, the sales and operating revenue and operating income (loss) of each segment for the comparable period have been reclassified to conform to the current presentation.

 

The MC segment includes the manufacture and sale of mobile phones and an Internet-related service business. The G&NS segment includes the manufacture and sales of home gaming products, network services business and production and sales of software. The IP&S segment includes Digital Imaging Products, Professional Solutions and Medical business. The HE&S segment includes Televisions, and Audio and Video. The Devices segment includes Semiconductors and Components. The Pictures segment includes Motion Pictures, Television Productions and Media Networks. The Music segment includes Recorded Music, Music Publishing and Visual Media and Platform. The Financial Services segment primarily represents individual life insurance and non-life insurance businesses in the Japanese market and a bank business in Japan. All Other consists of various operating activities, including, the disc overseas manufacturing business and the PC business. Sony’s products and services are generally unique to a single operating segment.

 

 

Segment sales and operating revenue:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Sales and operating revenue:
Mobile Communications -
Customers			1,262,849				1,409,179				1,121,925
Intersegment			2,165				1,036				5,548
Total			1,265,014				1,410,215				1,127,473
Game & Network Services -
Customers			946,479				1,292,146				1,479,775
Intersegment			97,379				95,883				72,118
Total			1,043,858				1,388,029				1,551,893
Imaging Products & Solutions -
Customers			739,800				720,138				704,468
Intersegment			4,005				3,712				6,724
Total			743,805				723,850				711,192
Home Entertainment & Sound -
Customers			1,196,698				1,235,686				1,155,085
Intersegment			3,040				2,371				3,957
Total			1,199,738				1,238,057				1,159,042
Devices -
Customers			552,398				725,960				766,757
Intersegment			189,422				201,120				169,023
Total			741,820				927,080				935,780
Pictures -
Customers			828,668				876,314				935,827
Intersegment			916				2,367				2,315
Total			829,584				878,681				938,142
Music -
Customers			498,330				540,504				600,969
Intersegment			18,626				18,740				16,675
Total			516,956				559,244				617,644
Financial Services -
Customers			988,944				1,077,604				1,066,319
Intersegment			4,902				6,025				6,750
Total			993,846				1,083,629				1,073,069
All Other -
Customers			701,089				298,694				242,149
Intersegment			60,683				87,909				91,092
Total			761,772				386,603				333,241
Corporate and elimination			(329,127	)			(379,508	)			(341,764	)
Consolidated total			7,767,266				8,215,880				8,105,712

G&NS intersegment amounts primarily consist of transactions with All Other. Devices intersegment amounts primarily consist of transactions with the MC segment, the G&NS segment and the IP&S segment. All Other intersegment amounts primarily consist of transactions with the Pictures segment, the Music segment and the G&NS segment. Corporate and elimination includes certain brand and patent royalty income.

 

 

Segment profit or loss:

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Operating income (loss):
Mobile Communications			8,721				(217,574	)			(61,435	)
Game & Network Services			(18,845	)			48,104				88,668
Imaging Products & Solutions			12,201				41,779				72,134
Home Entertainment & Sound			(20,982	)			24,102				50,558
Devices			(16,937	)			89,031				(28,580	)
Pictures			51,619				58,527				38,507
Music			52,406				60,604				87,323
Financial Services			170,292				193,307				156,543
All Other			(120,245	)			(94,977	)			2,009
Total			118,230				202,903				405,727
Corporate and elimination			(91,735	)			(134,355	)			(111,530	)
Consolidated operating income			26,495				68,548				294,197
Other income			42,453				25,076				66,849
Other expenses			(43,207	)			(53,895	)			(56,542	)
Consolidated income before income taxes			25,741				39,729				304,504

Operating income (loss) is sales and operating revenue less costs and expenses, and includes equity in net income (loss) of affiliated companies.

 

All Other includes the results of the PC business and the disc manufacturing business (Refer to Notes 13 and 25). For the fiscal year ended March 31, 2015, the PC business results include sales company fixed costs which were allocated based on historical results.

 

Corporate and elimination includes headquarters restructuring costs, restructuring costs related to the reduction in scale of sales companies following the decision to exit from the PC business (Refer to Notes 19 and 25), and certain other corporate expenses, including the amortization of certain intellectual property assets such as the cross-licensing of intangible assets acquired from Ericsson at the time of the Sony Mobile Communications acquisition, which are not allocated to segments.

 

Within the HE&S segment, the operating income (loss) of Televisions, which primarily consists of LCD televisions, for the fiscal years ended March 31, 2014, 2015 and 2016 were (25,705) million yen, 8,286 million yen and 25,812 million yen, respectively. The operating income (loss) of Televisions excludes restructuring charges which are included in the overall segment results and are not allocated to product categories.

 

 

 

Other significant items:

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Equity in net income (loss) of affiliated companies:
Mobile Communications			(2,700	)			(534	)			(186	)
Game & Network Services			—				—				—
Imaging Products & Solutions			188				(70	)			—
Home Entertainment & Sound			—				—				—
Devices			—				—				—
Pictures			(1,829	)			(742	)			(981	)
Music			2,338				3,471				3,801
Financial Services			(2,336	)			(782	)			(645	)
All Other			(3,035	)			2,578				249
Consolidated total			(7,374	)			3,921				2,238
Depreciation and amortization:
Mobile Communications			23,815				24,128				24,186
Game & Network Services			16,529				18,336				20,798
Imaging Products & Solutions			39,589				32,622				28,472
Home Entertainment & Sound			25,806				25,238				21,781
Devices			106,472				87,795				105,975
Pictures			18,078				19,980				22,375
Music			15,572				14,644				17,795
Financial Services, including deferred insurance acquisition costs			54,348				66,223				102,270
All Other			25,416				11,507				10,286
Total			325,625				300,473				353,938
Corporate			51,070				54,151				43,153
Consolidated total			376,695				354,624				397,091

 

 

 

The following table includes a breakdown of sales and operating revenue to external customers by product category for certain segments. Sony management views each segment as a single operating segment.

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Sales and operating revenue:
Mobile Communications			1,262,849				1,409,179				1,121,925
Game & Network Services
Hardware			513,425				733,757				721,829
Network			200,229				351,467				529,318
Other			232,825				206,922				228,628
Total			946,479				1,292,146				1,479,775
Imaging Products & Solutions
Digital Imaging Products			442,723				432,594				418,232
Professional Solutions			277,417				271,903				262,675
Other			19,660				15,641				23,561
Total			739,800				720,138				704,468
Home Entertainment & Sound
Televisions			754,308				835,068				797,764
Audio and Video			431,519				396,814				354,946
Other			10,871				3,804				2,375
Total			1,196,698				1,235,686				1,155,085
Devices
Semiconductors			342,072				501,015				558,983
Components			207,833				217,935				197,316
Other			2,493				7,010				10,458
Total			552,398				725,960				766,757
Pictures
Motion Pictures			422,255				434,253				447,355
Television Productions			247,568				252,456				270,115
Media Networks			158,845				189,605				218,357
Total			828,668				876,314				935,827
Music
Recorded Music			347,684				383,350				412,718
Music Publishing			66,869				70,959				71,258
Visual Media and Platform			83,777				86,195				116,993
Total			498,330				540,504				600,969
Financial Services			988,944				1,077,604				1,066,319
All Other			701,089				298,694				242,149
Corporate			52,011				39,655				32,438
Consolidated total			7,767,266				8,215,880				8,105,712

 

 

 

Geographic Information:

 

Sales and operating revenue attributed to countries and areas based on location of external customers for the fiscal years ended March 31, 2014, 2015 and 2016 and property, plant and equipment, net as of March 31, 2015 and 2016 are as follows:

 

		Yen in millions
		Fiscal year ended March 31
		2014				2015				2016
Sales and operating revenue:
Japan			2,199,099				2,233,776				2,317,312
United States			1,302,052				1,528,097				1,733,759
Europe			1,753,526				1,932,941				1,881,329
China			520,539				546,697				540,497
Asia-Pacific			1,013,635				1,052,453				959,171
Other Areas			978,415				921,916				673,644
Total			7,767,266				8,215,880				8,105,712

 

		Yen in millions
		March 31
		2015				2016
Property, plant and equipment, net:
Japan			495,502				625,143
United States			85,412				99,743
Europe			38,637				31,738
China			69,854				19,884
Asia-Pacific			41,096				37,042
Other Areas			8,784				7,268
Total			739,285				820,818

 

Major countries and areas in each geographic segment excluding Japan, United States and China are as follows:

(1) Europe:

United Kingdom, France, Germany, Russia, Spain and Sweden

(2) Asia-Pacific:

India, South Korea and Oceania

(3) Other Areas:

The Middle East/Africa, Brazil, Mexico and Canada

 

There are no individually material countries with respect to sales and operating revenue or property, plant and equipment, net included in Europe, Asia-Pacific and Other Areas.

 

Transfers between reportable business segments or geographic areas are made at amounts which Sony’s management believes approximate arms-length transactions.

 

There were no sales and operating revenue with any single major external customer for the fiscal years ended March 31, 2014, 2015 and 2016.

 

 

 

29.

Subsequent events

In April 2016, a series of earthquakes occurred in the Kumamoto region of Japan. Due to these earthquakes, the operations at Sony Semiconductor Manufacturing Corporation’s Kumamoto Technology Center, which is the primary manufacturing site for image sensors for digital cameras and security cameras as well as micro-display devices, have been affected. These earthquakes may have an adverse impact on Sony’s operation of multiple business segments. Sony is currently evaluating the impact of these events on its financial position and results of operations for future periods.