Annual Report>2005>Financial Section>Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JFE HOLDINGS, INC. AND SUBSIDIARIES     Years ended March 31, 2005 and 2004

1. Basis of Presentation

The accompanying consolidated financial statements of JFE Holdings, Inc. (the “Company” hereinafter) and consolidated subsidiaries are prepared on the basis of accounting principles generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards, and are compiled from the consolidated financial statements prepared by the Company as required by the Securities and Exchange Law of Japan.
  The Company’s overseas subsidiaries maintain their accounts and records in conformity with generally accepted accounting principles and practices prevailing in their respective countries of domicile.
The notes to the consolidated financial statements include information that is not required under the Japanese GAAP but is presented herein as additional information.
  The translation of the Japanese yen amounts into U.S. dollars is included solely for the convenience of the reader, using the approximate exchange rate at March 31, 2005, which was ¥107.39 to US$1.00. These convenient translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be converted into U.S. dollars at this or any other rate of exchange.

2. Summary of Significant Accounting Policies

(a) Consolidation Principles
The consolidated financial statements include the accounts of the Company’s 226 domestic and foreign subsidiaries (the “Group” as JFE Holdings, Inc. consolidated group, hereinafter). All significant inter-company transactions and accounts are eliminated in consolidation.
  Investments in an unconsolidated subsidiary and 42 affiliates are accounted for by the equity method whereby the Group includes in net income its share of income or losses of these companies, and records its investments at cost adjusted for its share of income, losses or dividends received.

  Significant Subsidiaries and Affiliates
  The Company’s significant subsidiaries and affiliates are as follows:

*: affiliates    
  (Year ended March 31, 2005)
Name Percentage of voting
securities directly or
indirectly owned
by the Company
Steel:
JFE Steel Corporation   100.0%
NKK BARS & SHAPES CO., LTD.(Note 3) 100.0% (100.0%)
JFE Welded Pipe Manufacturing Co., Ltd.(Note 2) 99.7% ( 99.7%)
JFE Chemical Corporation 100.0% (100.0%)
DAIWA Steel Corporation 73.6% ( 73.6%)
JFE Metal Products & Engineering Inc. 94.9% ( 94.9%)
JFE Galvanizing & Coating Co., Ltd. 98.4% ( 98.4%)
JFE LOGISTICS CORPORATION 83.7% ( 83.7%)
JFE PRECISION CORPORATION 100.0% (100.0%)
JFE Container Co., Ltd. 54.4% ( 54.4%)
JFE CIVIL ENGINEERING & CONSTRUCTION CORPORATION 100.0% (100.0%)
JFE MINERAL COMPANY, LTD. 96.5% ( 96.5%)
JFE LIFE CORPORATION 99.9% ( 99.9%)
JFE Mechanical Co., Ltd. 93.8% ( 93.8%)
TOYOHIRA STEEL CORPORATION 51.3% ( 51.3%)
KAWATETSU BRIDGE AND STEEL STRUCTURE CORPORATION 100.0% (100.0%)
JFE Systems, Inc.(Note 3) 67.7% ( 67.7%)
MIZUSHIMA FERROALLOY CO., LTD. 93.8% ( 93.8%)
JFE PIPE FITTING MFG. CO., LTD. 82.4% ( 82.4%)
JFE Refractories Corporation 98.7% ( 98.7%)
River Steel Co., Ltd. 90.0% ( 90.0%)
JFE Kozai Corporation(Note 2) 94.5% ( 94.5%)
JFE ELECTRICAL & CONTROL SYSTEMS, Inc 100.0% (100.0%)
TOUHOKU STEEL CORPORATION 87.5% ( 87.5%)
JFE Techno-Research Corporation(Note 2) 100.0% (100.0%)
THAI COATED STEEL SHEET CO., LTD. 81.4% ( 81.4%)
JFE SHOJI HOLDINGS, INC.*(Note 2) 39.6% ( 39.6%)
FUKUYAMA JOINT THERMAL POWER CO., LTD. * 50.0% ( 50.0%)
GECOSS CORPORATION*(Note 3) 39.4% ( 39.4%)
Mizushima Joint Thermal Power Co., Ltd. * 50.0% ( 50.0%)
NIPPON CHUZO K.K. * 42.2% ( 42.2%)
EXA Corporation * 49.0% ( 49.0%)
K.K. JFE SANSO CENTER * 40.0% ( 40.0%)
California Steel Industries, Inc. * 50.0% ( 50.0%)
THAI COLD ROLLED STEEL SHEET PUBLIC CO., LTD. * 38.4% ( 38.4%)
     
Engineering:
JFE Engineering Corporation   100.0%
JFE Koken Corporation 100.0% (100.0%)
JFE Plant & Service Corporation 100.0% (100.0%)
JFE Kankyo Corporation(Note 2) 80.0% ( 80.0%)
Universal Shipbuilding Corporation* 50.0% ( 50.0%)
JP Steel Plantech Co.* 25.6% ( 25.6%)
NIPPON CHUTETSUKAN K.K. * 29.3% ( 29.3%)
     
Urban Development:
JFE Urban Development Corporation   100.0%
     
LSI:
Kawasaki Microelectronics, Inc.   99.7%
     
Others:
JFE R&D Corporation   100.0%
JFE Finance Corporation   100.0%
   
Notes:
1. Figures in parenthesis ( ) in the percentage of voting securities column represent the percentage indirectly owned.
2. Reorganization of subsidiaries:
JFE Welded Pipe Manufacturing Co., Ltd. resolved to disband on March 31, 2005 as part of the reorganization of welded pipe operations within the JFE Group. On April 1, 2005, it transferred to JFE Steel Corporation the welded pipe manufacturing operations at the East Japan Works (Keihin) that it had performed under consignment from the company, and transferred its welded pipe sales operations to JFE KOKAN KENZAI CO., LTD. Note that JFE KOKAN KENZAI CO., LTD. changed its name to JFE Welded Pipe Manufacturing Co., Ltd. on April 1, 2005.
   JFE Kozai Corporation was established on October 1, 2004 from the merger of TOKYO SHEARING CO., LTD. and KAWATETSU KOZAI KAISHA, LTD. as part of the reorganization of steel plate distribution and processing operations within the JFE Group.
  JFE Techno-Research Corporation was established on October 1, 2004 from the merger of KAWASAKI STEEL Techno-Research Corporation, KOKAN KEISOKU K.K. and NK Techno Service Co., Ltd. as part of the reorganization of intellectual property and technology information, research support, and inspection and analysis operations within the JFE Group.
  On October 1, 2004, the operations of JFE Kankyo Corporation were transferred from the Steel Division to the Engineering Division to strengthen the JFE Group’s environmental and recycling operations. The company’s categorization has likewise been changed from “steel business” to “engineering business.”
  JFE SHOJI HOLDINGS, INC was established on August 2, 2004 as part of the reorganization of trading functions within the JFE Group. NKK TRADING INC. and KAWASHO CORPORATION, which were listed in the consolidated accounts for the previous year, were placed under the JFE SHOJI HOLDINGS INC umbrella and on October 1, 2004 were integrated and reorganized into four operating companies: JFE SHOJI TRADE CORPORATION, which handles steel and steel-related businesses, KAWASHO FOODS CORPORATION, which handles foods businesses, KAWASHO SEMICONDUCTOR CORPORATION, which handles semiconductor businesses, and KAWASHO REAL ESTATE CORPORATION, which handles real estate businesses.
3. Major subsidiaries which changed names:
NKK BARS & SHAPES CO., LTD. changed its name to JFE Bars & Shapes Corporation on April 1, 2005.   Kawatetsu Systems, Inc., which was listed in the year ended March 31, 2004, changed its name to JFE Systems, Inc. on December 1, 2004.
   KAWASHO GECOSS CORPORATION, which was listed in the year ended March 31, 2004, changed its name to GECOSS CORPORATION on July 1, 2004.

(b) Translation of Foreign Currencies
Revenues and expenses are translated at the rates of exchange prevailing when transactions are made, and assets and liabilities are translated into Japanese yen at the exchange rates in effect on the respective balance sheet date.
  The balance sheet accounts of the foreign subsidiaries are translated into Japanese yen at the current exchange rates as of the balance sheet dates except for shareholders’ equity, which is translated at historical rates. Differences arising from such translation are shown as “translation adjustments” in a separate component of shareholders’ equity in the balance sheet.

(c) Valuation of Securities
Available-for-sale Securities
   Marketable:
Valued primarily at market based on an average of the market prices for a period of one month prior to the settlement date. (Valuation differences are recorded fully to balance sheet by the direct capitalization method, with the costs of sales calculated primarily by the moving average method.)
Non-marketable:
Valued primarily at cost by the moving average method.

(d) Valuation of Inventories
Valued primarily at cost by the last in first out (LIFO) method.

(e) Depreciation Method for Property, Plant and Equipment
Depreciation is calculated primarily by the declining balance method.

(f) Allowance for Doubtful Accounts
The projected uncollectible amount is provided as the allowance using historical default rates in the past for ordinary credits and individual collectability assessments for credits deemed to have high likelihood of default and for other specific credits.

(g) Accrued Retirement Benefits
Accrued retirement benefits are provided based on the amount of projected benefit obligation reduced by pension plan assets at fair value at the end of the fiscal period.
  Prior service cost is amortized in projected average years of service of the employees.
  Actuarial losses are amortized in projected average years of service of the employees from the following fiscal year after the year in which they occurred.
  The transitional obligation at the date of adoption of the new Accounting Standard for Retirement Benefits standards, ¥128,917 million ($1,200,464 thousand), has been amortized in primarily 5 years from the year ended March 31, 2001.

(h) Reserve for Rebuilding Furnaces
The estimated cost of the next repair is allocated to the reserves in equal amounts over the year to the next repair.

(i) Leases
Finance leases other than those that are deemed to transfer the ownership of the leased assets to lessees are accounted for by a method similar to that applicable to ordinary operating leases.

(j) Revenue Recognition Method for Long-Term Construction Contracts
The revenue of long-term construction contracts, in respect of over 1-year duration and ¥500 million in amount, is recognized by the percentage-of-completion method.

(k) Consolidated Tax Return
Effective March 31, 2005, the Company files a consolidated tax return with certain domestic subsidiaries.

(l) Per Share Information
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income used in the computation was ¥159,548 million ($1,485,685 thousand) and ¥106,867 million, the average number of shares used in the computation was 582,365 thousand and 575,058 thousand for the years ended March 31, 2005 and 2004, respectively.
  Cash dividends per share shown in the statement of income are the amounts applicable to the respective year.

(m) Adoption of “Accounting Standard for Impairment of Fixed Assets”
On August 9, 2002, the Business Accounting Council issued “Accounting Standard for Impairment of Fixed Assets,” and on October 31, 2003, the Accounting Standards Board of Japan issued “the Financial Accounting Standard Implementation Guidance No.6, for impairment of fixed assets.” The standard shall be effective for the fiscal year beginning April 1, 2005, or thereafter, with possible early adoption for the fiscal year ended March 31, 2004. The Company adopted this standard with effect from the year ended March 31, 2005. As a result of this adoption, income before income taxes decreased by ¥75,383 million ($701,958 thousand). The accumulated impairment loss was directly deducted from each asset’s acquisition cost.

3. Cash and Cash Equivalents

Cash and cash equivalents at March 31, 2005 and 2004 consisted of the following:
Cash and cash equivalents

4. Securities

The following is a summary of held-to-maturity securities and available-for-sale securities at March 31, 2005 and 2004:
Marketable:
summary of held-to-maturity securities and available-for-sale securities
summary of held-to-maturity securities and available-for-sale securities
summary of held-to-maturity securities and available-for-sale securities
summary of held-to-maturity securities and available-for-sale securities

Non-marketable: Available-for-sale securities:

summary of held-to-maturity securities and available-for-sale securities

5. Inventories

Inventories at March 31, 2005 and 2004 were as follows:
summary of held-to-maturity securities and available-for-sale securities

6. Long-term Debt

Long-term debt at March 31, 2005 and 2004 consisted of the following:
Long-term debt
Notes:
1. Details of the Convertible Bond are as follows:
1) Type of shares
  Common stock
2) Issue value of stock acquisition rights
  Non-assessable
3) Conversion price
  ¥3,465 per Share
4) Total principal amount issued
  The total of ¥102.5 billion plus 102.5% of the principal amount of the Bond portion for Stock Acquisition Rights issued, upon obtaining appropriate proof and compensation, to replace Euro Yen Zero Coupon Guaranteed Convertible Bonds, that are lost, stolen or destroyed.
5) Total principal amount issued of new shares by exercise of rights
  No exercise
6) The rate of granting of stock acquisition rights
  100%
7) Stock Acquisition Right exercise period
  Stock Acquisition Rights may be exercised at any time from June 28, 2004 to the close of banking operations (local time of the party exercising) on June 10, 2009 (or the third banking day prior to redemption in the event of accelerated redemption of the Bond).
2. Calculated as 0.35% over 6-month yen TIBOR as at two bank operating days prior to the payment deadline (issue date for the first time) directly prior to the beginning of the interest calculation period.
3. 10-year yen bond swap rate — 0.82%
4. From May 16, 2001 to May 15, 2006: 1.30% per annum
From May 16, 2006 to May 15, 2009: 2.00% per annum

7. Pledged Assets

At March 31, 2005 and 2004, pledged assets were as follows:
pledged assets

  In addition, the Company intends to set pledges for consolidated subsidiary shares (book value on the financial statements of individual consolidated subsidiaries of ¥2,335 million [$21,748 thousand] and ¥2,409 million at March 31, 2005 and 2004), respectively.

8. Revaluation of Land for Business

In the years ended March 31, 2001 and 2002, part of the subsidiaries and affiliates revaluated the land for business purposes based on the Law Concerning Revaluation of Land and its amendment issued on March 31, 2001 and 2002, respectively.
  Revaluation differences, net of the portion charged to “deferred tax assets,” “deferred tax liabilities” and “minority interests,” were recorded as “revaluation reserve for land, net of tax” in shareholders’ equity.
  The fair value of these lands is lower than the revaluated bookvalue, and the difference was ¥16,975 million ($158,071 thousand) and ¥14,671 million on March 31, 2005 and 2004, respectively.

9. Accrued Retirement Benefits

The following tables set forth the changes in the benefit obligation, plan assets and funded status of the Company and its subsidiaries at March 31, 2005 and 2004.
pledged assets

  Retirement and pension costs of the Company and its subsidiaries included the following components for the years ended March 31, 2005 and 2004.
pledged assets
Note:
  Accrued retirement benefit cost incurred by consolidated subsidiaries applying a simplified method to calculate retirement benefit obligation is included under “service cost.”
   
  The rationale for calculations of retirement benefit obligations for the years ended March 31, 2005 and 2004 is as follows:
    2005 2004
1. Retirement benefit projection amortization method: Primarily, the straight-line method over the period Primarily, the straight-line method over the period
2. Discount rate: Primarily 1.5% Primarily 1.5%
3. Expected return on
plan assets:
Primarily 1.6% Primarily 2.6%
4. Amortization period for prior service cost: Primarily 10 years
(Treated as cost using the straight-line method for a set number of years within the average remaining service period for employees at the time of accrual.)
Primarily 10 years
(Treated as cost using the straight-line method for a set number of years within the average remaining service period for employees at the time of accrual.)
5. Amortization period for actuarial losses: Primarily 10 years
(Amortized using the straight-line method over a set number of years within the average remaining service period for the employees during the consolidated fiscal year in which discrepancies were accrued. These amounts are treated as cost posted to the next consolidated fiscal year after the year in which they were accrued.)
Primarily 10 years
(Amortized using the straight-line method over a set number of years within the average remaining service period for the employees during the consolidated fiscal year in which discrepancies were accrued. These amounts are treated as cost posted to the next consolidated fiscal year after the year in which they were accrued.)
6. Amortization period for transitional obligations due to adoption of new accounting standards: Primarily 5 years Primarily 5 years

10. Contingencies

At March 31, 2005 and 2004, the Group was contingently liable as follows:
CONTINGENCIES

  These guarantees include ¥124 million ($1,158 thousand) and ¥1,238 million borne by other companies under re-guarantee agreements at March 31, 2005 and 2004, respectively.

11. Leases

The Group leases certain buildings and structures, machinery and equipment, office space and other assets. Total lease payments under these leases were ¥8,202 million ($76,384 thousand) and ¥8,737 million for the years ended March 31, 2005 and 2004, respectively.
  Pro forma information on leased property, such as acquisition costs, accumulated depreciation and net book value for property held under finance leases which do not transfer ownership of the leased property to the lessee on an “as if capitalized” basis for the years ended March 31, 2005 and 2004 was as follows:


LEASES

  Future minimum lease payments under finance leases as of March 31, 2005 and 2004, were as follows:
LEASES

The acquisition costs and future minimum lease payments under finance leases include the imputed interest expense portion.
  Depreciation expenses, which were not reflected in the accompanying consolidated statements of income, computed by the straight-line method, were ¥8,202 million ($76,384 thousand) and ¥8,737 million for the years ended March 31, 2005 and 2004, respectively.

12. Derivatives and Hedging Activities

The Group’s basic policy is that derivative financial instruments are used to reduce the interest rate risk and foreign exchange rate risk, not to speculate. The Group has established controls including policies and procedures for risk assessments and for the approval, reporting and monitoring of transactions involving derivative financial instruments. The Group does not hold or issue derivative financial instruments for trading purposes.
  The Group is exposed to certain market risks arising from its forward exchange contracts and swap agreements. The Group is also exposed to the risk of credit loss in the event of non-performance by the counterparties to the currency and interest; however, the Group does not anticipate non-performance by any of these counterparties, all of whom are financial institutions with high credit ratings.
  Interest rate swap agreements outstanding at March 31, 2005 and 2004 were as follows:
DERIVATIVES AND HEDGING ACTIVITIES

13. Research and Development Expenses

Research and development expenses charged to income were ¥37,192 million ($346,330 thousand) and ¥36,529 million for the years ended March 31, 2005 and 2004, respectively.

14. Income Taxes

The Company and its domestic subsidiaries are subject to several taxes based on income, which in the aggregate resulted in a statutory tax rate of approximately 41.0% and 40.7% for the years ended March 31, 2005 and 2004, respectively. Foreign subsidiaries are subject to income taxes of the countries in which they operate.
  The reconciliation of the difference between the statutory tax rate and the effective tax rate for the year ended March 31, 2005, is as follows:
DERIVATIVES AND HEDGING ACTIVITIES

The reconciliation of the difference between the statutory tax rate and the effective tax rate for the year ended March 31, 2004 is not disclosed because the difference between the two tax rates was less than 5% of the statutory tax rate.
  The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at March 31, 2005 and 2004 are presented below:
DERIVATIVES AND HEDGING ACTIVITIES

15. Segment Information

Information regarding operations in industry segments, geographic segments and sales to foreign customers of the Group for the years ended March 31, 2005 and 2004 was as follows:
  The Company began disclosing consolidated ordinary income effective this reporting term in order to more clearly present the results of business units under the operating companies system. In conjunction with this, the Company also discloses these consolidated figures for the previous fiscal year.

(1) Industry Segments
INDUSTRY SEGMENTS

INDUSTRY SEGMENTS
INDUSTRY SEGMENTS
INDUSTRY SEGMENTS
INDUSTRY SEGMENTS
INDUSTRY SEGMENTS
INDUSTRY SEGMENTS
INDUSTRY SEGMENTS

(2) Geographic Segments
Geographic segment information has not been disclosed because the sales and assets of consolidated foreign subsidiaries for the years ended March 31, 2005 and 2004 were less than 10% of consolidated net sales and assets.

(3) Sales to Foreign Customers
Sales to foreign customers for the years ended March 31, 2005 and 2004 amounted to ¥822,695 million ($7,660,819 thousand) and ¥678,948 million, respectively.

16. Extraordinary Profit (Loss)

For the years ended March 31, 2005 and 2004, extraordinary profit (loss) consisted of the following:
EXTRAORDINARY PROFIT (LOSS)