Business and Other Risks

8. Financial Statements

In addition to business and other risks described above, the Group may also be impacted by the following risks related to its Financial Statements.

8-1. Inventories

Inventories are recorded in the financial statements at acquisition cost. In the event that the net sales value of certain inventories declines below the acquisition cost as of the end of the reporting term, the net sales value is recorded and the difference between the net sales value and the acquisition cost is recorded as cost of sales. The net sales value of accumulated inventories that remain unsold following an operating cycle is calculated based on estimated future demand and market trends. There is a risk of significant losses in the event that the market environment deteriorates beyond reasonable estimates and the net sales value declines significantly.

8-2. Property, Plant and Equipment

Depreciation of property, plant and equipment is mainly calculated by the straight-line method based on the estimated useful lives of the respective assets, which vary according to the circumstances of each business. In the future, in cases where assets are no longer in use owing to obsolescence from technological advances, or due to changes in the use of the assets, useful life may be shorter than current estimates. As such, there is a risk that losses may occur.

In addition, there is a risk of asset impairment losses if anticipated cash flow from assets declines as a result of sudden changes in the operating environment that lead to higher rates of idle equipment, lower rates of capacity utilization, or business reorganization.

8-3. Software

For the depreciation of software intended for commercial sale, we have adopted a method based on projected sales volume over the estimated life of the product. While projected sales volume is calculated based upon reasonable sales plans, one-time losses may occur if unit sales fall short of the original sales plan.

For software used in-house, we utilize the straight-line method based on the estimated useful life of the software. Should actual useful life in the future be less than the original estimate, there is a risk of incidental losses.

8-4. Goodwill

In terms of goodwill, the straight-line method is used to amortize excess earnings power of businesses acquired, including those acquired by subsidiaries. During the amortization period, incidental losses may occur if the profitability of an acquired business declines or we sell or exit from an acquired business.

8-5. Marketable Securities

With regard to held-to-maturity securities, valuations are made based on the amortized cost method. For other marketable securities that have a market value, the market value method is used based on the price as of the closing date of the financial period. For securities that do not have market values, the valuations are made utilizing primarily the moving-average method. In regard to other marketable securities that have a market value, the value of such securities may change due to fluctuations in market value and, as a result, net assets may increase or decrease. In addition, when the fair value of other marketable securities decreases significantly, and excepting those cases in which the value is deemed to be recoverable, an impairment loss is posted. In future, should there be a significant decrease in fair value, and such value is not deemed to be recoverable, there is a possibility of impairment losses.

8-6. Deferred Tax Assets

The amount of deferred tax assets is posted appropriately on our balance sheet taking into account the balance of losses carried forward and other temporary differences. In the event that projected taxable income is higher or lower because of variations in future financial performance, there is a risk that the balance of deferred tax assets may increase or decrease. In addition, in the event that future revisions to tax regulations cause a change in the effective tax rate, there is a risk that the balance of deferred tax assets may increase or decrease.

8-7. Provision for Product Warranties

To prepare for expenses to cover costs relating to our obligations for the free repair and exchange of products covered under contracted warranty periods, we record at the time of sales a provision, based on past experience, to cover future estimated product repair and exchange costs. The Fujitsu Group is pursuing vigorous quality control measures at the manufacturing, development and procurement stages. However, should product defects exceed estimated levels, there is the possibility that additional expenses may arise.

8-8. Provision for Losses on Construction Contracts

The Group records a provision for expected losses on contract software development contracts and construction contracts for projects in which the profitability has deteriorated significantly as of the end of the reporting period. In order to prevent the generation of unprofitable projects, the Group is standardizing its business processes and has created specialist organizations to audit projects and mitigate such risks from the time the contracts are won until they are completed. Should project costs increase beyond estimates, however, there is a possibility that additional losses may arise.

8-9. Retirement Benefit Obligations

Expenses and obligations for employee retirement benefits are calculated according to a variety of actuarial assumptions (discount rate, retirement rate, mortality rate, expected income rate, etc.). Actuarial losses are recognized over the average remaining employee working years. If actual experience differs from these underlying assumptions, or if the underlying assumptions themselves change, there is a possibility that it will affect the amount of the expense or obligation for retirement benefits.

8-10. Provision for Loss on Repurchase of Computers

A portion of the computers manufactured by the Fujitsu Group are sold to Japan Electronic Computer Co. Ltd. (JECC) and other leasing companies, which lease them to end users. Fujitsu enters into a contract with the leasing companies to repurchase the computers in the future, and at the time of sale a provision is recorded reflecting the expected loss that will be incurred at the time of repurchase. In the event there are changes in usage trends among customers, additions or reductions to the provision may be needed.

8-11. Revenue Recognition

The sales of system products (excluding contract software development) are recognized upon acceptance by customers. Sales of personal computers, peripheral equipment, and electronic devices are recognized upon delivery to customers. Sales from contract software development projects are recognized based on the percentage-of-completion method.

In the event that estimated costs exceed estimated revenue, the Group strictly appraises the recoverable value and recognizes unrecoverable value as a loss. Should project costs increase beyond estimates, however, there is a possibility that additional losses may arise.

Business and Other Risks

7. Natural Disasters and Unforeseen Incidents