Epson
Annual Report 2016

Plain-text annual report

ANNUAL REPORT 2016 SEIKO EPSON CORPORATION April 2015 - March 2016 Cautionary Statement This report includes forward-looking statements that are based on management’s view from the information available at the time of the announcement. These statements are subject to various risks and uncertainties. Actual results may be materially different from those discussed in the forward-looking statements. The factors that may affect Epson include, but are not limited to, general economic conditions, the ability of Epson to continue to quickly introduce new products and services, consumption trends, competition, technology trends, and exchange rate fluctuations. In this annual report, “Epson” or the “Group” refers to the Epson Group, while “the Company” may refer to the Group or the parent company, Seiko Epson Corporation. 1 Table of Contents Consolidated Financial Highlights ............................................................................................................... 3 Information on the Company ....................................................................................................................... 7 1. Overview of the business group............................................................................................................ 7 2. Major equipment and facilities .......................................................................................................... 11 3. Overview of capital expenditures ....................................................................................................... 13 4. Plans for new additions or disposals .................................................................................................. 14 5. Major management contracts ............................................................................................................ 15 Risks Related to Epson’s Business Operations ......................................................................................... 16 Business Conditions ..................................................................................................................................... 21 1. Overview of business results ............................................................................................................... 21 2. Manufacturing, orders received and sales......................................................................................... 25 3. Analysis of financial condition and results of operations ................................................................. 26 4. Research and development activities ................................................................................................. 29 5. Issues for Fiscal 2016 ........................................................................................................................... 31 6. Dividend policy .................................................................................................................................... 34 Corporate Governance ................................................................................................................................ 35 1. Approach to corporate governance .................................................................................................... 35 2. Details of audit remuneration ............................................................................................................. 49 3. Basic policy regarding company control ........................................................................................... 50 Management ................................................................................................................................................ 52 Index to Consolidated Financial Statements ............................................................................................. 55 Consolidated Statement of Financial Position ...................................................................................... 56 Consolidated Statement of Comprehensive Income ............................................................................. 58 Consolidated Statement of Changes in Equity ...................................................................................... 60 Consolidated Statement of Cash Flows .................................................................................................. 62 Notes to Consolidated Financial Statements ......................................................................................... 63 Report of Independent Auditors .......................................................................................................... 121 Additional Information ............................................................................................................................. 122 1. Principal subsidiaries and affiliates ................................................................................................. 122 2. Distribution of ownership among shareholders .............................................................................. 126 3. Major shareholders ........................................................................................................................... 127 4. Employee stock ownership plans ..................................................................................................... 128 5. Epson stock price ............................................................................................................................... 130 6. Corporate data and investor information ....................................................................................... 131 2 Consolidated Financial Highlights Seiko Epson Corporation and Subsidiaries For the years ended March 31 Statement of Comprehensive Income Revenue Information-related equipment business segment Devices and precision products business segment Sensing and industrial solutions business segment Other Adjustments Printing Solutions business segment Visual Communications business segment Wearable & Industrial Products business segment Other Adjustments Gross profit Selling, general and administrative expenses Profit from operating activities Profit before tax Profit for the period attributable to owners of the parent company Total comprehensive income for the period Statement of Cash Flows Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash flows Net cash provided by (used in) financing activities Statement of Financial Position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Equity attributable to owners of the parent company IFRS 2014 Millions of yen 2015 2016 Thousands of U.S. dollars 2016 1,008,407 1,086,341 1,092,481 9,695,429 841,228 907,296 148,779 156,297 16,174 23,396 1,333 891 1,390 (2,038) - - - - - - - - - - - - - - - 730,867 736,369 6,535,064 177,186 184,033 1,633,235 173,478 170,415 1,512,380 1,390 3,418 1,404 257 12,460 2,290 362,589 395,924 397,660 3,529,108 (272,501) (294,648) (312,708) (2,775,186) 79,549 77,977 84,203 131,380 132,536 112,560 94,026 91,530 45,772 834,451 812,300 406,221 120,480 145,483 (1,469) (13,036) 114,859 108,828 113,054 1,003,319 (41,244) (32,735) (51,558) (457,561) 73,615 76,093 61,495 545,758 (56,567) (55,392) (67,171) (596,121) 560,645 348,245 908,890 336,087 208,045 362,371 650,383 355,898 1,006,282 355,442 153,531 494,325 601,451 339,888 941,340 325,019 145,644 467,818 5,337,690 3,016,410 8,354,100 2,884,452 1,292,545 4,151,739 3 IFRS 2014 Millions of yen 2015 2016 Thousands of U.S. dollars 2016 235.35 50.00 314.61 115.00 127.94 60.00 1,012.83 1,381.66 1,307.58 1.14 0.52 11.60 39.9 27.7 9.2 7.9 49.1 26.3 13.7 12.1 55,104 52,010 13,723 12,787 1,197 1,246 - - - - - - 252 2,895 73,171 306 3,529 69,878 49.7 9.5 9.7 8.6 - - - 41,051 10,041 13,312 340 2,861 67,605 Per Share Data (yen and U.S. dollars) Basic earnings per share (Note2) Cash dividends per share (Note4) Equity attributable to owners of the parent company, per share (Note2) Financial Ratios (%) Equity attributable to owners of the parent company, ratio ROE (Profit for the period attributable to owners of the parent company / Beginning and ending balance average equity attributable to owners of the parent company) ROA (Profit from operating activities / Beginning and ending balance average total assets) ROS (Profit from operating activities / Revenue) Number of Employees Information-related equipment business segment Devices and precision products business segment Sensing and industrial solutions business segment Printing Solutions business segment Visual Communications business segment Wearable & Industrial Products business segment Other Corporate Total Notes 1. The Consolidated Financial Statements have been prepared on the basis of International Financial Reporting Standards (IFRS) from the year ended March 31, 2014. 2. Seiko Epson Corporation (the “Company”) completed the Company’s ordinary shares split with an effective date of April 1, 2015. As a result, each share of the Company’s ordinary shares was split into two shares. Basic earnings per share was calculated under the assumption that the shares split took effect at the beginning of the year ended March 31, 2014. 3. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥112.68 =U.S.$1 as of March 31, 2016. 4. In this table, cash dividends per share refers to the amount paid for each share in each fiscal year. 5. Equity attributable to owners of the parent company is equity excluding non-controlling interest in subsidiaries. 4 For the years ended March 31 Statements of Income Net sales Information-related equipment business segment Devices and precision products business segment Other Eliminations and corporate Information-related equipment business segment Devices and precision products business segment Sensing and industrial solutions business segment Other Eliminations and corporate Gross profit Selling, general and administrative expenses Operating income Ordinary income Income (loss) before income taxes and minority interests Profit (loss) attributable to owners of parent Research and development costs Capital expenditures Depreciation and amortization Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash flows Net cash provided by (used in) financing activities JGAAP Millions of yen 2013 2012 2014 877,997 851,297 1,003,606 691,801 688,029 174,811 156,872 17,316 (5,932) 1,273 5,122 - - - - - - - - - 248,846 224,219 24,626 27,022 15,622 5,032 52,106 38,908 37,651 685,862 836,436 140,790 148,956 11,413 16,181 1,273 11,957 234,439 213,184 21,255 17,629 (3,479) (10,091) 49,923 43,155 39,320 1,334 699 322,976 238,007 84,968 78,121 71,916 83,698 50,531 37,825 38,725 26,678 42,992 111,253 (31,528) (39,511) (4,849) (57,406) 3,480 21,298 (39,519) 71,733 (56,567) 5 Balance Sheet Current assets Property, plant and equipment (net of accumulated depreciation) Total assets Current liabilities Non-current liabilities Net assets Number of Employees Information-related equipment business segment Devices and precision products business segment Sensing and industrial solutions business segment Other Corporate Total Per Share Data (Yen) Net income (loss) (Note1) Cash dividends (Note3) JGAAP Millions of yen 2013 2012 487,190 213,086 740,769 313,314 179,314 248,140 519,457 217,388 778,547 326,688 193,052 258,806 2014 602,452 216,170 865,872 313,636 200,505 351,730 55,841 50,823 55,104 16,101 13,859 13,723 - 249 3,112 75,303 26.22 26.00 - 241 3,838 68,761 (56.41) 20.00 1,197 252 2,895 73,171 233.94 50.00 976.41 40.3 27.6 9.5 8.5 Shareholders’ equity (Note1) 1,377.60 1,435.20 Financial Ratios (%) Shareholders’ equity ratio ROE (net income (loss)/average shareholders’ equity at beginning and end of year) ROA (ordinary income/average total assets at beginning and end of year) ROS (operating income /net sales) 33.3 2.0 3.5 2.8 33.0 (4.0) 2.3 2.5 Notes 1. Seiko Epson Corporation (the “Company”) completed the Company’s ordinary shares split with an effective date of April 1, 2015. As a result, each share of the Company’s ordinary shares was split into two shares. Basic earnings per share was calculated under the assumption that the shares split took effect at the beginning of the year ended March 31, 2014. 2. Ordinary income is a common item on financial statements in Japan, which is calculated by adding to or subtracting from operating income items such as interest income, rent income, interest expenses and foreign exchange gains or losses. 3. In this table, cash dividends per share refers to the amount paid for each share in each fiscal year. 4. Shareholders’ equity is net assets excluding minority interests. 6 Information on the Company 1. Overview of the business group Epson is primarily engaged in developing, manufacturing, selling, and providing services for products in the printing solutions, visual communications, wearable and industrial products, and the other business. Epson is organized into operations divisions that come under consolidated management. The majority of advanced R&D and product development is conducted in Japan (by Corporate R&D and R&D organizations in the various operations divisions), while manufacturing and sales activities are conducted around the world by Epson Group manufacturing and sales companies, both in Japan and abroad. A brief description of Epson’s various businesses is provided below along with a list of the main Epson Group companies involved in each segment. The business segments were changed from the current fiscal year. Printing Solutions Business Segment This segment comprises the printer business, professional printing business, and others. The businesses in this segment leverage Epson’s original Micro Piezo and other technologies to develop, manufacture, and sell products. The main activities of these businesses are described below. Printer business This business is primarily responsible for home and office inkjet printers, serial impact dot matrix (SIDM) printers, page printers, and color image scanners, and related consumables. Professional printing business This business is primarily responsible for commercial inkjet printers, industrial inkjet printing systems, printers for use in POS systems, label printers, and related consumables. Others This business sells PCs in the Japanese market through a domestic subsidiary. 7 The major Epson Group companies involved in this segment are listed in the table below. Business area Main products Main Epson Group companies Manufacturing companies Sales companies Printers Inkjet printers, serial impact dot matrix printers, page printers, color image scanners, and related consumables, and others Professional printing Commercial inkjet printers, industrial inkjet printing systems, printers for use in POS systems, label printers, and related consumables, and others Tohoku Epson Corporation Akita Epson Corporation Epson Portland Inc. Epson Telford Ltd. Tianjin Epson Co., Ltd. Epson Engineering (Shenzhen) Ltd. P.T. Epson Batam P.T. Indonesia Epson Industry Epson Precision (Philippines), Inc. Others PCs and other equipment - Epson Sales Japan Corporation Epson America, Inc. Epson Europe B.V. Epson (U.K.) Ltd. Epson Deutschland GmbH Epson France S.A. Epson Italia s.p.a. For.Tex S.r.l. Epson Iberica, S.A. Epson (China) Co., Ltd. Epson Korea Co., Ltd. Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Singapore Pte. Ltd. P.T. Epson Indonesia Epson (Thailand) Co., Ltd. Epson Australia Pty. Ltd. Epson India Pvt. Ltd. Epson Sales Japan Corporation Epson Direct Corporation Visual Communications Business Segment The businesses in this segment leverage Epson’s original microdisplay and projection technologies to develop, manufacture, and sell 3LCD projectors for business, education, and the home; high-temperature polysilicon TFT LCD panels for 3LCD projectors; and smart eyewear. The major Epson Group companies involved in this segment are listed in the table below. Business area Main products Main Epson Group companies Manufacturing companies Sales companies Visual communications 3LCD projectors, high-temperature polysilicon TFT LCD panels for 3LCD projectors, smart eyewear, and others Epson Engineering (Shenzhen) Ltd. Epson Precision (Philippines), Inc. Epson Sales Japan Corporation Epson America, Inc. Epson Europe B.V. Epson (U.K.) Ltd. Epson Deutschland GmbH Epson France S.A. Epson Italia s.p.a. Epson Iberica, S.A. Epson (China) Co., Ltd. Epson Korea Co., Ltd. Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Singapore Pte. Ltd. P.T. Epson Indonesia Epson (Thailand) Co., Ltd. Epson Australia Pty. Ltd. Epson India Pvt. Ltd. 8 Wearable & Industrial Products Business Segment This segment comprises the wearable products business, robotics solutions business, and the microdevices business. The main activities of these businesses are described below. Wearable products business This business leverages its ultrafine and ultraprecision machining and processing technologies and its high-density mounting and assembly technologies to develop, manufacture and sell watches, as well as to develop, manufacture and sell useful products that use high-accuracy sensors to connect people and information. Watch business This business primarily develops, manufactures, and sells watches and watch movements. Sensing system business This business is primarily engaged in developing, manufacturing, and selling sensing systems and equipment that have extremely accurate built-in sensors and that are used in the personal health and sports fields etc. Robotics solutions business This business uses advanced precision mechatronics and other technologies to develop, manufacture, and sell industrial robots and other production systems that dramatically increase productivity. Micro-devices and others business This business designs, manufactures, and sells small, accurate, energy-efficient electronic devices for external customers as well as for other businesses in the Epson Group. It also provides metal powders and surface finishing services. Quartz device business This business provides crystal units, crystal oscillators, and quartz sensors for consumer, automotive, and industrial equipment applications. Semiconductor business This business provides CMOS LSIs and other chips mainly for consumer electronics and automotive applications. Others This business develops, manufacturers, and sells a variety of high-performance metal powders for use as raw materials in the production of electronic components, etc. This business also provides high-value-added surface finishing in a wide variety of industrial fields. 9 The major Epson Group companies involved in this segment are listed in the table below. Business area Main products Wearable products Watches Wristwatches, watch movements, and others Sensing systems and equipment Main Epson Group companies Manufacturing companies Sales companies Epson Precision (Shenzhen) Ltd. Orient Watch (Shenzhen) Ltd. Epson Precision (Johor) Sdn. Bhd. Orient Watch Co., Ltd. Epson Hong Kong Ltd. Akita Epson Corporation Epson Sales Japan Corporation Robotics solutions Industrial robots, IC handlers, and others Epson Engineering (Shenzhen) Ltd. Microdevices and others Quartz devices Crystal units, crystal oscillators, quartz sensors, and others Miyazaki Epson Corporation Epson Precision Malaysia Sdn. Bhd. Semiconductors CMOS LSIs, and others Tohoku Epson Corporation Singapore Epson Industrial Pte. Ltd. Others Metal powders, surface finishing Epson Atmix Corporation Singapore Epson Industrial Pte. Ltd. Epson Sales Japan Corporation Epson America, Inc. Epson Deutschland GmbH Epson (China) Co., Ltd. Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Electronics America, Inc. Epson Europe Electronics GmbH Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Singapore Pte. Ltd. Other Business Segment This segment comprises the businesses of Epson Group companies that offer services for and within the Epson Group. 10 2. Major equipment and facilities Epson’s major equipment and facilities are as follows. (1) Seiko Epson Corporation Name of plant (location) Business segment Type of facilities As of March 31, 2016 Book value (Millions of yen) Buildings and structures Machinery, equipment and vehicles Land (Area: m2) Other Total Number of employees (Persons) 1,247 (43,322) [3,171] - (-) 5,753 (189,347) [41,552] 3,764 (179,759) [1,758] - (-) [108,004] 1,443 (113,082) [28,909] 1,375 (160,528) 129 (39,943) [1,502] 1,996 (247,143) 2,177 (538,828) 7,627 (36,245) 1,047 (41,836) [5,764] 74 2,947 507 81 836 53 3,017 40,089 5,219 95 5,301 546 1,858 4,647 1,477 1,012 20,341 939 900 7,037 211 180 4,196 436 907 11,541 1,091 787 13,479 60 10,597 352 5,784 51 210 711 Head Office (Suwa-shi, Nagano) Tokyo Office (Shinjuku-ku, Tokyo) Hirooka Plant (Shiojiri-shi, Nagano) Matsumoto Minami Plant (Matsumoto-shi, Nagano) Toyoshina Plant (Azumino-shi, Nagano) Suwa Minami Plant (Fujimi-machi, Suwa-gun, Nagano) Chitose Plant (Chitose-shi, Hokkaido) Ina Plant (Minowa-machi, Kamiina-gun, Nagano) Overall administration and other Overall administration and other Printing solutions Other Other facilities 1,485 141 Other facilities 755 - Printer development and design and component manufacturing facilities Research and development facilities 16,869 14,449 Printing solutions Printer development and design facilities 1,346 95 Visual communications Wearable & Industrial products Printing solutions Visual communications Other 3LCD projector, smart eyewear and factory automation development and design facilities Printer component and liquid crystal panel manufacturing facilities Research and development facilities 1,825 963 5,080 12,804 Visual communications Liquid crystal panel manufacturing facilities 2,152 2,609 Wearable & Industrial products Crystal device development and design facilities 1,941 1,945 Fujimi Plant (Fujimi-machi, Suwa-gun, Nagano) Wearable & Industrial products Other Wearable & Industrial products Wearable & Industrial products Sakata Plant (Sakata-shi, Yamagata) Hino Office (Hino-shi, Tokyo) Shiojiri Plant (Shiojiri-shi, Nagano) Sensing systems and semiconductor development and design facilities Research and development facilities Semiconductor manufacturing facilities Other 7,299 1,337 6,453 4,060 Sales facilities 2,908 1 Wearable & Industrial products Watch development, design and manufacturing facilities 1,518 2,866 11 (2) Domestic subsidiaries Business segment Type of facilities As of March 31, 2016 Book value (Millions of yen) Buildings and structures Machinery, equipment and vehicles Land (Area: m2) Other Total Number of employees (Persons) Printing solutions Wearable & Industrial products Printer component and semiconductor manufacturing facilities Printing solutions Wearable & Industrial products Printer component and sensing system manufacturing facilities 1 16 2,311 146 Wearable & Industrial products Manufacturing facilities for metal powders, etc. 2,508 1,679 - (-) 650 (65,436) 409 (30,653) [34,208] 763 781 1,888 423 3,533 825 172 4,770 250 Company name (location) Tohoku Epson Corporation (Sakata-shi, Yamagata) Akita Epson Corporation (Yuzawa-shi, Akita) Epson Atmix Corporation (Hachinohe-shi, Aomori) (3) Overseas subsidiaries Company name (location) Business segment Type of facilities As of March 31, 2016 Book value (Millions of yen) Buildings and structures Machinery, equipment and vehicles Land (Area: m2) Other Total Number of employees (Persons) Epson Engineering (Shenzhen) Ltd. (Shenzhen, China) Printing solutions Visual communications Wearable & Industrial products Singapore Epson Industrial Pte. Ltd. (Singapore) Printing solutions Wearable & Industrial products Printer, 3LCD projector, liquid crystal panel and factory automation manufacturing facilities Printer consumables, watch component and semiconductor manufacturing facilities and surface finishing facilities 2,947 3,132 3,981 7,167 - (-) [64,104] 59 (41,065) [51,492] 4,454 10,535 9,292 951 12,159 5,537 9,381 8,682 1,908 4,386 5,973 Printing solutions Printer manufacturing facilities Printing solutions Visual communications P.T. Indonesia Epson Industry (Bekasi, Indonesia) Epson Precision (Philippines), Inc. (Lipa, Philippines) Epson Precision Malaysia Sdn. Bhd. (Kuala Lumpur, Malaysia) Notes 1. The above figures do not include consumption tax. 2. “Other” under the book value column includes tools, furniture and fixtures and other property, plant and Crystal device manufacturing facilities - (-) [254,871] 563 (100,000) [173,200] Printer and 3LCD projector manufacturing facilities Wearable & Industrial products 335 (32,437) 2,852 14,921 2,701 13,061 3,853 3,179 3,015 8,325 470 31 equipment, but does not include construction in progress. 3. Portions of land are leased from companies not included in consolidated accounts. The size of each area of leased land is indicated in brackets [ ]. 4. Tohoku Epson Corporation uses a portion of the facilities of the Sakata Plant. 5. Figures for Singapore Epson Industrial Pte. Ltd. and Epson Precision (Philippines), Inc., are included in consolidated business results. 6. The above book value amounts are after adjustments for consolidated accounts. 12 3. Overview of capital expenditures Capital expenditures for the consolidated fiscal year under review were concentrated in key strategic areas, primarily new products and rationalizing, upgrading and maintaining equipment and facilities to help foster the development of new businesses and prepare for future growth. In addition, Epson continued to carefully select investments and efficiently utilize existing facilities in an effort to generate stable cash flow. As a result of these efforts, total capital expenditures (including property, plant and equipment, software and lease rights) amounted to ¥69.4 billion. No equipment with significant impact on production capacity was sold or removed. Capital expenditures in each business segment are discussed below. Printing solutions segment Investment used for commercializing new products such as printers, and for rationalizing, upgrading and maintaining equipment and facilities amounted to ¥36.6 billion in the fiscal year under review. Visual communications segment Investment used for commercializing new products such as 3LCD projectors, and for rationalizing, upgrading and maintaining equipment and facilities amounted to ¥10.7 billion in the fiscal year under review. Wearable & Industrial products segment Investment used for commercializing new products such as watches, sensing systems, factory automation products and crystal devices, and for rationalizing, upgrading and maintaining equipment and facilities amounted to ¥10.2 billion in the fiscal year under review. Other and overall Investment in R&D and other activities amounted to ¥11.7 billion in the fiscal year under review. 13 4. Plans for new additions or disposals Epson plans to allocate ¥80.0 billion to capital expenditures for the consolidated fiscal year ending March 31, 2017. Business segment Printing solutions Visual communications Wearable & Industrial products Other and overall Planned amount of capital expenditures (100 million yen) Main type and purpose of equipment and facilities 460 110 110 Commercializing new products; rationalizing, upgrading and maintaining equipment and facilities, etc. Commercializing new products; rationalizing, upgrading and maintaining equipment and facilities, etc. Commercializing new products; rationalizing, upgrading and maintaining equipment and facilities, etc. 120 Investment in research and development, etc. Total 800 – Notes 1. The above amounts do not include consumption tax. 2. Required funds will be covered by current funds in hand. 3. There are no plans to dispose of or sell major equipment and facilities with the exception of disposals and sales associated with regular and ongoing upkeep of equipment and facilities. 14 5. Major management contracts Reciprocal technical assistance agreements Name of contracting company Name of other party Country Type of contract Contract period Seiko Epson Corporation Hewlett-Packard Company Seiko Epson Corporation International Business Machines Corporation U.S.A. U.S.A. Seiko Epson Corporation Seiko Epson Corporation Seiko Epson Corporation Microsoft Corporation U.S.A. Eastman Kodak Company U.S.A. Xerox Corporation U.S.A. Seiko Epson Corporation Texas Instruments Incorporated U.S.A. Seiko Epson Corporation Canon Incorporated Japan License to use patents relating to information-related equipment License to use patents relating to information-related equipment License to use patents relating to information-related equipment and software used by such equipment License to use patents relating to information-related equipment License to use patents relating to electrophotography and inkjet printers License to use patents relating to semiconductors and information-related equipment License to use patents relating to information-related equipment May 1, 2012 until the expiry of the patents April 1, 2006 until the expiry of the patents September 29, 2006 until the expiry of the patents October 1, 2006 until the expiry of the patents March 31, 2008 until the expiry of the patents April 1, 2008 until March 31, 2018 August 22, 2008 until the expiry of the patents 15 Risks Related to Epson’s Business Operations At present, we have identified the following significant factors as risks that could have a materially adverse effect on our future business, financial condition or operating results and that should thus be taken into account by investors. We strive to recognize, prevent, and control potential risks and to address risks that materialize. Also, all forward-looking statements hereunder were made at Epson’s discretion as of the date this Annual Report was submitted. 1. Our financial performance could be adversely affected by fluctuations in printer sales. The ¥736.3 billion in revenue in the printing solutions segment in the year ended March 2016 accounted for slightly less than 70% of Epson’s ¥1,092.4 billion in consolidated revenue. Inkjet printers (including printer consumables) for the home, emerging markets, as well as for office and industrial applications accounted for a large majority of our revenue and profit. Consequently, a decrease in revenue from printers and printer consumables could have a materially adverse effect on our operating results. 2. Our financial performance could be adversely affected by competition. Adverse effects of competition on sales All of our products, including our core printer and projector products, are subject to the effects of vigorous competition, which could cause, among other things, prices to fall, demand to shift toward lower-priced products, and unit shipments to decline. We are taking strategic action to address the risk of declines in prices, a shift of demand toward lower-priced products, and unit shipments. On one hand, we must provide products tailored to customer needs in each market along with high-value products and services. On the other hand, we must reduce manufacturing costs by increasing design and development efficiency and by reducing fixed costs. However, there is no assurance we will succeed in these efforts, and if we are unable to effectively counteract downward pressure on prices, our operating results could be adversely affected. Adverse effects of competition on technology Some of the products that we sell contain technology that places Epson in competition against other companies. For example: - The Micro Piezo technology1 that we use in our inkjet printers competes with the thermal inkjet technologies2 of other companies; - The 3LCD technology3 that we use in our projectors competes with other companies’ DLP technologies4, and Epson’s projectors also compete against flat panel displays (FPDs)5 of other companies. We believe that the technologies we use in these products have competitive advantage over the alternative technologies of other companies. However, if consumer opinion with respect to our technologies changes, or if other revolutionary technologies appear on the market and compete with our technologies, we could lose our competitive advantage in technology and our operating results could be adversely affected. 1Micro Piezo technology is an inkjet technology created by Epson that manipulates piezoelectric elements to fire small droplets of ink from nozzles. 2Thermal inkjet technology (also known as bubble-jet technology) is a printer technology in which the ink is heated to create bubbles and the pressure from the bubbles is used to fire the ink. 33LCD technology uses high-temperature polysilicon TFT liquid-crystal panels as light valves. The light from the light source is divided into the three primary colors (red, green and blue) using special mirrors, the picture is created on separate LCDs for each color, and then the picture is recombined without loss and projected on the screen. 4DLP technology uses a digital micro-mirror device (DMD) as a display device. A DMD is a semiconductor on which a large number of micro mirrors are arranged, each mirror directing light onto its own individual pixel. An image is formed by the light from the light source being reflected from the mirrors onto the screen. DLP and DMD are registered trademarks of Texas Instruments Incorporated. 5FPD encompasses a variety of thin electronic display technologies. The emergence of new competitors We presently face competition from powerful companies that have advanced technological capabilities, abundant financial resources, or strong financial compositions. We also face competition from companies around the world that have market recognition, strong supply capacities, or the ability to compete on price. There is, therefore, a 16 possibility that other companies could use their brand power, technological strength, ability to procure funds, marketing power, sales skills, low-cost production ability, or other advantages to enter business areas where we are active. 3. Sudden changes in the business environment could affect Epson. Epson seeks to drive inkjet innovation, visual innovation, wearables innovation, and robotics innovation. We are looking to achieve our vision for each business by providing value to customers in the form of smart technologies, environmental benefits, and functional performance. Epson is executing plans and strategies based on a long-range corporate vision and a mid-range business plan that we believe will enable us to establish a competitive advantage in technology, which believe will be crucial for increasing our competitiveness. We are driving further advances in our original core technologies, including Micro Piezo inkjet technology, microdisplays, sensing, and robotics, all of which arose from the efficient, compact, and precision technologies that have become a part of Epson’s DNA over many decades. By combining these technologies to create platforms, we are developing, manufacturing, and selling products and providing services that match customer needs. However, in the product markets and businesses where Epson is concentrating its management resources the pace of technological innovation is typically rapid, and product life cycles are short. In addition, demand and investment trends in Epson’s major markets could change along with global economic conditions and could affect sales of Epson products. Moreover, there is no guarantee that the mid-range business plan and business strategies that Epson is currently pursuing will succeed. Epson will also strive to make rapid and smooth transition from existing products to new products by understanding market and customer needs, investing and conducting research and development from a medium- and long-range view based on product market forecasts, and creating development and design platforms. However, if Epson cannot suitably respond to technological innovations in its main markets, or if economic downturns or other factors prevent a recovery in demand, or if Epson is unable to adequately meet sudden fluctuations in demand in a major market, its operating results could adversely be affected. 4. Our revenue and earnings could be adversely impacted by sales of third-party inkjet printer consumables. Ink cartridges, which comprise the bulk of consumables sold for inkjet printers, are an important source of revenue and profit for Epson. However, third parties also supply ink cartridges and other inkjet printer consumables that can be used in Epson printers. These alternative products are typically sold for less than genuine Epson brand consumables and are more prevalent in emerging markets compared to the markets of developed countries. To counter sales of third-party consumables for inkjet printers, we must emphasize the quality of genuine Epson products and must look to continuously realize customer value by further enhancing customer convenience with inkjet printers tailored to the needs of customers in each market. Printer models equipped with high-capacity ink tanks are an example of such products. We also take legal measures if any of the patent rights or trademark rights we hold over our ink cartridges are infringed upon. However, there is no assurance that any of these efforts will be effective, and if our ink cartridge revenue declines because unit shipments of Epson brand ink cartridges shrink as sales of third-party alternative products expand and as we lose market share, or if we must lower the prices of Epson brand products to stay competitive, our operating results could be adversely affected. 5. Expanding businesses overseas entails risks for Epson. We continue to expand our businesses overseas, and overseas revenue accounted for approximately 75% of our consolidated revenue for the business year ended March 2016. We have production sites all over Asia, including China, Indonesia, Singapore, Malaysia and the Philippines, as well as in the United States, the United Kingdom, and other countries. We have also established many sales companies all over the world. As of the end of March 31, 2016, our overseas employees accounted for more than 70% of our total workforce. We believe that our global presence provides many advantages. For example, it enables us to undertake marketing activities aligned with the market needs of individual regions. It also makes us cost-competitive by reducing manufacturing costs and lead times. There are, however, unavoidable risks associated with overseas manufacturing and sales operations. These include but are not limited to changes in national laws, ordinances, or regulations related to manufacturing and sales; social, political or economic changes; transport delays; damage to infrastructure (e.g., power supply); currency exchange restrictions; insufficient skilled labor; changes in regional labor environments; changes in taxes, regulations or the like protective of trade; and laws, ordinances, regulations or the like related to the import and export of Epson products. 17 6. Procuring products from certain suppliers entails risks for Epson. We procure some parts and materials from third parties, but we generally conduct ongoing transactions without entering into long-term purchase agreements. We try to have multi-source relating to parts and materials. However, certain parts and materials are procured from a single source because procuring them from an alternative supplier is not possible. We must have procurement operations that are stable and efficient, so we work with our suppliers to maintain product quality, improve products, and reduce costs. However, if our manufacturing and sales activities were to be disrupted due to things such as supplier’s parts shortages or supplier’s quality problems, our operating results could adversely be affected. 7. Problems could arise relating to quality issues. The existence of quality guarantees on Epson products and the details of those guarantees differ from one customer account to another, depending on the agreement we have entered into with them. If an Epson product is defective or does not conform to the required standard, it may have to be replaced or repaired or otherwise reworked at Epson’s expense. Or, if the product causes personal injury or property damage, we could bear product liability or hold other liability. We could also be liable to a customer and could incur expenses for repairs or corrections on the grounds that we did not adequately display or explain an Epson product’s features or performance. Furthermore, product quality problems could cause loss of trust in Epson products, and we could lose major accounts or see a drop in demand for our products, any of which might adversely affect our operating results. 8. Epson’s intellectual property rights activities expose Epson to certain risks. Patent rights and other intellectual property rights are extremely important for maintaining our competitiveness. We have independently developed many of the technologies we need, and we acquire patent rights, trademark rights, and other forms of intellectual property rights for them both in Japan and overseas. We also license the intellectual property rights for products and technologies by entering into agreements with other companies. We must strengthen our intellectual property portfolio by placing personnel in key positions to manage our intellectual property. If any of the situations envisioned below relating to intellectual property were to occur, our operating results could adversely be affected. - An objection might be raised to, or an application to invalidate might be filed with respect to, an intellectual property right of Epson, and as a result, that right might be recognized as invalid. - A third party to whom we originally had not granted a license could come to possess a license as a result of a merger with or acquisition by another party, potentially causing us to lose the competitive advantage conferred by that intellectual property. - New restrictions could be imposed on an Epson business as a result of a buyout or a merger with a third party, - and we could be forced to spend money to find a solution to those restrictions. Intellectual property rights that we hold might not give us a competitive advantage, or we might not be able to use them effectively. - We or any of our customers could be accused by a third party of infringing on intellectual property rights, which could force us to spend a large amount of time and money to resolve this and associated issues, or which could interfere with our efforts to focus our management resources. If a third-party’s claim of intellectual property right infringement were to be upheld, we could incur material damage if required to pay large amounts in compensation or royalties or if forced to stop using the applicable technology. - - A suit could be brought against Epson by an employee or other person seeking remuneration for an invention or the like, potentially forcing us to spend significant time and money to resolve the issue and, depending on the outcome, potentially requiring us to pay a large sum as remuneration. 9. Epson is vulnerable to risks of problems arising relating to the environment. Epson is subject, both in Japan and overseas, to various environmental regulations concerning industrial waste and emissions into the atmosphere that arise from manufacturing processes. Environmental conservation is one of our most important management policies, and we proactively engage in environmental conservation efforts on a variety of fronts, in line with “Environmental Vision 2050” and our mid-range action plans. For example, we have programs to develop and manufacture products that have a small environmental footprint. We also have programs to reduce energy use, promote the recovery and recycling of end-of-life products, ensure compliance with international substance regulations (primarily the RoHS Directive and REACH regulations in the EU), and improve 18 environmental management systems. Thanks to these efforts, we have not had any serious environmental issues to date. In the future, however, it is possible that an environmental problem could arise that would require us to pay damages and/or fines, bear costs for cleanup, or force a halt of production. Moreover, new regulations could be enacted that would require major expenditures, and, if such a situation should occur, Epson’s operating results could be adversely affected. 10. Epson faces risks concerning the hiring and retention of personnel. We must hire and retain talented personnel both in Japan and overseas to develop advanced new technologies and manufacture advanced new products, but the competition for such personnel is becoming increasingly intense. We must hire and retain talented personnel by, for example, introducing compensation and benefit packages that are commensurate with roles and by proactively promoting people with the right skills overseas. If we are unable to continue to hire and keep enough of such employees, or if we are unable to pass along technologies and skills, we could find it difficult or impossible to execute our business plans. 11. Fluctuations in foreign currency exchanges create risks for Epson. A significant portion of our revenue is denominated in U.S. dollars or the euro. We expanded our overseas procurement and moved our production sites overseas, so our dollar-denominated expenses currently exceed our dollar-denominated revenue. On the other hand, our euro-denominated revenue is still significantly greater than our euro-denominated expenses. On the whole, our revenues in other foreign currencies also significantly exceed our expenses in those currencies. Also, although we use currency forwards and other means to hedge against the risks inherent in foreign currency exchanges, unfavorable movements in the exchange rates of foreign currencies such as the U.S. dollar, euro, or other foreign currencies against the yen could adversely affect our financial situation and financial results. 12. There are risks inherent in pension systems. We have a defined-benefit pension plan and a lump-sum payment on retirement as defined-benefit plans. We revised the defined-benefit retirement pension plan in April 2014 in response to a drop in the rate of return on pension assets and an increase in the number of beneficiaries. The revisions are designed to enable us to adapt to future market changes and maintain stable operations into the future. However, if there is a change in the operating results of the pension assets or in the ratio used as the basis for calculating retirement allowance liabilities, our financial position and operating results could be adversely affected. 13. Epson is vulnerable to proceedings relating to antitrust laws and regulations. With business operations that span the globe, Epson is subject in Japan and overseas to proceedings relating to antitrust laws and regulations, such as those prohibiting private monopolies and those protecting fair trade. Overseas authorities sometimes investigate or gather information on certain industries and, in conjunction with this, Epson’s market conditions and sales methods may come under investigation. Such investigations and proceedings, or violations of applicable statutes, could interfere with our sales activities. They could also potentially damage Epson’s credibility or result in a large civil fine. Any of these could adversely affect our operating results. Seiko Epson and certain of its consolidated subsidiaries are currently under investigation by some competition authorities regarding allegations of involvement in a liquid crystal display price-fixing cartel. It is difficult at this time to predict the outcome of these investigations and when they may be settled. 14. Epson is at risk of material legal actions being brought against it. Epson conducts businesses internationally. We are engaged primarily in the development, manufacture and sales of printing solutions, visual communications equipment, and wearable and industrial products, as well as the provision of services related thereto. Given the nature of these businesses, there is a possibility that an action could be brought or legal proceedings could be started against Epson regarding, for example, intellectual property rights, product liability, antitrust laws or environmental regulations. As of the date we submitted our Annual Securities Report, Epson was contending with the following material actions. In June 2010, Epson Europe B.V. (“EEB”), a consolidated subsidiary of Seiko Epson, brought a civil suit against La SCRL Reprobel (“Reprobel”), a Belgium-based group that collects copyright royalties, seeking restitution for copyright royalties for multifunction printers. With Reprobel subsequently filing a suit against EEB, the two lawsuits were adjoined. EEB’s claims were rejected at the first trial, but EEB, dissatisfied with the decision, intends to appeal. 19 Apart from this, civil actions have been brought against Epson and certain of our consolidated subsidiaries by customers in the United States, regarding allegations of involvement in a liquid crystal display price-fixing cartel. It is difficult at this time to predict the outcome of these civil actions and when they may be settled, but our operating results and future business could be affected, depending on the outcomes of suits and legal proceedings. 15. Epson is vulnerable to certain risks in internal control over financial reporting. We are building and using internal controls to ensure the reliability of financial reporting. With the establishment and operation of internal controls for financial reporting high on our list of important management issues, we have been pursuing a Group-wide effort to audit and improve corporate oversight of our Group companies. However, since there is no assurance that we will be able to establish and operate an effective internal control system on a continuous basis, and since there are inherent limitations to internal control systems, if the internal controls that Epson implements fail to function effectively, or if there are deficiencies in internal control over financial reporting or material weaknesses in the internal controls, it might adversely affect the reliability of our financial reporting. 16. Epson is vulnerable to risks inherent in its tie-ups with other companies. One of our business strategy options is to enter into business tie-ups with other companies. However, the parties may review the arrangements of tie-ups, and there is a possibility that tie-ups could be dissolved or be subject to changes. There is also no assurance that the business strategy of tie-ups will succeed or contribute to our operating results exactly as expected. 17. Epson could be severely affected in the event of a natural or other disaster. We have research and development, procurement, manufacturing, logistics, sales and service sites around the globe, and our operating results could be adversely affected by any number of unpredictable events, including but not limited to natural disasters, pandemics involving new strains of the influenza virus, infection by computer viruses, leaks or theft of customer data, failures of mission-critical internal IT systems, supply chain disruptions, and acts of terrorism or war. The central region of Nagano Prefecture, home to some of our key plants and offices, has numerous cities and towns designated as “Areas Requiring Enhanced Measures to Respond to Earthquake Disasters” due to the high risk of a large-scale disaster in the event of an earthquake in the Tokai region. Moreover, an active fault line traces the Itoigawa–Shizuoka geotectonic line through the middle of the Nagano Prefecture region. We revised our earthquake-response policy after the new designation of Areas Requiring Enhanced Measures to Respond to Disasters in April 2002, and we planned disaster drills, prepared earthquake disaster management and response plans, and established business continuity plans to mitigate the effects of disasters to the extent possible. However, if a major earthquake occurs in the central region of Nagano Prefecture, it is possible that, despite these countermeasures, the effect on Epson could be extreme. Although Epson is insured against losses arising from earthquakes, the scope of indemnification is limited. 18. Laws, regulations, or licenses and the like pose risks for Epson. Epson is a multinational corporation with a variety of business operations around the globe. We ensure compliance with the laws and regulations of the countries in which we operate by building a robust compliance framework in each country and each business and by communicating the nature and importance of compliance requirements internally. To expand our businesses in the future, we must strengthen our sales and marketing activities that target new customers, including public institutions, and we plan to develop new areas, such as the health and medical markets, where greater adherence to all forms of relevant laws, regulations, and compliance (compliance with laws and regulations) is demanded. Compliance remains high on our list of important management issues, and we are developing measures to prevent and control potential issues as appropriate. However, if we were to violate or potentially violate laws and regulations relating to, among others, corruption, advertising and labeling, personal data and privacy protection, or export control, or if the authorities were to introduce stricter laws and regulations or impose more stringent laws, we could see our credibility damaged, could become subject to the imposition of a large civil fine, or could see constraints placed on our business activities. We could also see the costs of complying with such laws and regulations increase, and any of the foregoing could adversely affect our financial performance and future business development. 20 Business Conditions 1. Overview of business results (1) Operating results The global economic recovery in the fiscal year under review lost momentum primarily due to an economic deceleration in China and other emerging nations and plummeting resource prices. Regionally, the U.S. economy continued to gradually expand, leading the Federal Reserve to raise interest rates in December after seven years near zero, as job growth and an improved labor market fueled rising wages and buoyed consumption, but a cautious approach to interest rate hikes is being taken. The Latin American economy slowed due to falling prices for natural resources and currency devaluations. The European economy as a whole continues to gradually recover, but elements of uncertainty remain, such as the refugee problem and Russian recession. The Chinese economy is gradually decelerating. In other Asian countries, on the other hand, there were signs that domestic demand was behind a pickup in economic activity. In Japan, employment and the income environment continued to improve partly in response to government fiscal and monetary policies, but the economy as a whole tread water due to factors such as uncertainty caused by an economic slowdown in emerging countries and pressure on the earnings of exporters as a result of the surge in the value of yen after the start of the year. The situation in the main markets of the Epson Group (“Epson”) was as follows. Inkjet printer demand was flat year on year in North America and Europe. Large-format inkjet printer demand was firm in North America and Japan, but demand in Latin America was subdued due to the effects of economic deceleration. Serial-impact dot-matrix (SIDM) printer demand was firm in China owing to upgrade demand in the tax collection systems market, but demand continued to contract in the Americas and Europe. Demand for point-of-sale (POS) system products remained stable in North America, Europe, and Japan. Demand for projectors in the European education market was weak. It was also subdued in China largely due to concerns about an economic downturn and in Latin America due to the effects of an economic slowdown. Cell phones and digital cameras are the main applications markets for Epson’s electrical devices. In the cell phone market, demand for feature phones continued to decline while demand for smart phones remained firm. Demand in the digital camera market was subdued. In the precision products market, demand for watches was generally firm in Europe but weakened in Japan in the second half due to soft demand from overseas visitors and in China due to a slowdown in spending. Demand for industrial robots increased in the electronics and electrical machinery industry in response to a growing need for automation. Against this backdrop, Epson established a new 10-year corporate vision called “Epson 25” that will steer Epson’s activities up to the start of the 2025 fiscal year. At the same time, Epson introduced the Epson 25 Mid-Range Business Plan (FY2016-2018), a three-year plan for the first phase of work toward achieving the Epson 25 vision. Epson 25 was created based on an understanding of the mega trends, changes, and other forces that will shape Epson’s business in the future. It contains the following vision statement: “Creating a new connected age of people, things and information with efficient, compact and precision technologies.” In line with this vision, Epson will provide customer value in the form of smart technology, the environment, and performance. The Mid-Range Business Plan (FY2016-2018) is a roadmap for the first phase of work toward achieving the Epson 25 vision. During this phase Epson will sustain the momentum it gained by strategically adopting new business models and developing new market segments under the previous corporate vision. At the same time, it will move forward on product development while aggressively investing as needed to provide a solid business foundation. Specifically, Epson will continue to grow by further increasing its competitive edge in businesses where SE15 strategic initiatives were successful, and to quickly address issues and establish a path to growth in businesses where Epson was unable to fully advance. The average exchange rates of the yen against the U.S. dollar and of the yen against the euro during the 2015 fiscal year were ¥120.14 and ¥132.58, respectively. This represents a 9% depreciation in the value of the yen against the dollar and a 4% appreciation in the value of the yen against the euro, year over year. The yen appreciated against the currencies of some emerging countries in places such as Latin America. 21 Epson’s consolidated full-year financial results reflect the foregoing factors. Revenue was ¥1,092.4 billion, up 0.6% year over year. Business profit was ¥84.9 billion, down 16.1% year over year. Profit from operating activities was ¥94.0 billion, down 28.4% year over year. Profit before tax was ¥91.5 billion, down 30.9% year over year. Profit for the period was ¥46.0 billion, down 59.2% year over year. Profit from operating activities in the previous fiscal year included a profit resulting from changes in the defined-benefit plan in Japan that reduced past service costs by ¥30 billion. While tax expenses were lower in the previous fiscal year due to the recognition of deferred tax assets arising from the carryforward of unused tax losses, the profit for this fiscal year was weighed down by an increase in tax expenses due to the partial reversal of deferred tax assets arising from the carryforward of unused tax losses. (Note) Business profit is calculated by subtracting cost of sales and selling, general and administrative expenses from revenue. A breakdown of the financial results in each reporting segment is provided below. The operations grouped within each segment changed effective in the first quarter of the current accounting period in conjunction with a reorganization that took effect on April 1, 2015. The printing systems business, which was included in the information-related equipment segment, the label printer business, which was included in the visual communications business of the former information-related equipment segment, and the industrial inkjet printing systems business, which was included in the former sensing and industrial solutions segment, were merged and are reported under the printing solutions segment. Also, a new visual communications segment was created. All the businesses in the former visual communications business, which was included in the former information-related equipment segment, except the label printer business, are now reported under this segment. In addition, the crystal devices, semiconductors, and precision products businesses, all of which were included in the former devices and precision products segment, and the sensing systems and industrial robots and IC handlers businesses, which were included in the former sensing and industrial solutions segment, were merged. They are now reported under the wearable and industrial products segment. Printing Solutions Segment Printer business revenue increased, helped in part by foreign exchange effects. Inkjet printer revenue increased despite a decline in ink cartridge printer shipments. Revenue jumped because we continued to rapidly expand sales of high-capacity ink tank printers in Asia and elsewhere by reinforcing the lineup and expanding the sales territory. Revenue from consumables also increased, the result of an improved install base composition. Page printer revenue decreased due to the result of Epson’s focus on selling high added value models and due to a decrease in revenue from toners. SIDM printer total revenue decreased. Although there was continuing stable demand in the Chinese tax collection system market, and although passbook printer sales were driven higher by hardware and system upgrade demand in both Europe and China, unit shipments declined due to the contraction of the European and American markets and a decline in demand in Asian countries other than China. Revenue in the professional printing business increased, helped in part by foreign exchange effects. Large-format inkjet printer revenue declined as sales were weighed down by the effects of steep currency devaluations and economic deceleration in Latin America, China’s slowing growth, and stepped up price-cutting by competitors in the large photo and color proof printing markets. However, inkjet textile printer revenue grew, driven by an expanded range of applications from apparel to small personal items and interior goods. POS system product revenue grew primarily because of increased demand for compact receipt printers in the Americas and Europe. Meanwhile, sales of label printers that enable on-demand in-house printing increased along with a growing need for the use of color labels. Segment profit in the printing solutions segment decreased due to a combination of factors, including ink cartridge printer price competition in Japan and North America; the stronger U.S. dollar, which caused the cost of products manufactured overseas to rise; and strategic investment and spending on mid-term growth. As a result of the foregoing factors, revenue in the printing solutions segment was ¥736.3 billion, up 0.8% year on year. Segment profit was ¥104.7 billion, down 6.0% year on year. 22 Visual Communications Segment Visual communications revenue increased, owing in part to foreign exchange effects. 3LCD projector sales were affected by downward pressure from the effects of a decrease in tender offers in the European education sector, steep currency devaluations and economic deceleration in Latin America, and China’s slowing growth. However, sales of new entry-level models were strong in Asia, and unit shipments and revenue increased in North America and Japan. Segment profit in the visual communications segment decreased primarily due to the decrease in tender offers in the education sector, which led to a decline in sales of high added value products, the appreciation of the dollar, which caused manufacturing costs for products produced overseas to rise, and strategic investment and spending on mid-term growth. As a result of the foregoing factors, revenue in the visual communications segment was ¥184.0 billion, up 3.9% year on year. Segment profit was ¥15.5 billion, down 19.7% year on year. Wearable and Industrial Products Segment Although unit sales of watches and watch movements decreased, revenue in the wearable products business increased primarily owing to higher average selling prices, a result of increased sales of luxury watch models, and foreign exchange effects. Revenue in the robotics solutions business increased. Although Epson did not receive a large order for industrial robots as it did previous fiscal year, sales grew on increased orders in China, Japan, and Europe. IC handler revenue decreased due to a combination of slowing growth in semiconductors for smartphones and dealer inventory adjustments. Revenue in the microdevices business decreased despite foreign exchange effects. In crystal devices, sales in the automotive sector grew, but revenue fell due to a combination of price erosion and a decline in unit volume of products used in for cell phones and other personal electronics. Semiconductor revenue decreased due to worsening market conditions. The surface finishing business, which developed new customers, and the metal powders business, which reported strong sales of high-performance material powders for mobile equipment, both recorded revenue growth. Segment profit in the wearable and industrial products segment decreased mainly as a result of lower semiconductor sales in the microdevices business and higher manufacturing costs in the wearable products business. As a result of the foregoing factors, revenue in the wearable and industrial products segment was ¥170.4 billion, down 1.8% year on year. Segment profit was ¥9.8 billion, down 5.0% year on year. Other Other revenue amounted to ¥1.4 billion, up 1.1% year on year. Segment loss was ¥0.5 billion compared to a ¥0.3 billion segment loss in the previous fiscal year. Adjustments Adjustments to the total profit of reporting segments amounted to negative ¥44.6 billion. (Adjustments in the previous fiscal year were negative ¥39.6 billion.) The loss mainly comprises selling, general and administrative expenses for areas that do not correspond to the reporting segments, such as research and development expenses for new businesses and basic technology, and general corporate expenses. 23 (2) Cash Flow Performance Net cash provided by operating activities during the year was ¥113.0 billion, compared to ¥108.8 billion in the previous fiscal year. While recording ¥46.0 billion in profit for the period, net cash was positively affected by factors such as the recording ¥45.9 billion in depreciation and amortization and the difference of ¥45.4 billion in income taxes recorded and ¥20.7 billion in income taxes paid. Net cash used in investing activities totaled ¥51.5 billion compared to ¥32.7 billion in the previous fiscal year. Epson used ¥66.1 billion in the acquisition of property, plant and equipment and intangible assets. Proceeds from sales of investment property provided ¥13.9 billion in cash. Net cash used in financing activities totaled ¥67.1 billion compared to ¥55.3 billion in the previous fiscal year. Epson recorded a ¥40.0 billion redemption of bonds issued and ¥25.0 billion in dividends paid. As a result, cash and cash equivalents at the end of the fiscal year totaled ¥230.4 billion compared to ¥245.3 billion at the end of the previous fiscal year. (3) Parallel disclosure Differences between the main items on IFRS consolidated financial statements and those on consolidated financial statements prepared based on Japanese accounting standards (Expenses associated with post-employment benefits) Under Japanese accounting standards, Epson wrote off actuarial gains and losses and past service costs over a certain period of time. Under IFRS, remeasurements of net defined benefit liabilities (assets) are recognized in full as other comprehensive income in the period in which they are incurred and transferred to retained earnings immediately. Past service costs are recognized as a net loss either in the period when the plan is amended or curtailed, or in the period when associated restructuring costs or termination benefits are recognized, whichever is earlier. Since actuarial assumptions for defined benefit liabilities differ, retirement benefit costs are additionally recognized. Due to these effects, the cost of sales and selling, general and administrative expenses, and finance costs in the previous fiscal year increased by ¥6.2 billion when calculated based on IFRS rather than Japanese standards, while other operating income increased by ¥30.0 billion and other comprehensive income decreased by ¥1.5 billion. The cost of sales, selling, general and administrative expenses, and finance costs in the fiscal year increased by ¥3.8 billion, while other comprehensive income decreased by ¥22.1 billion. *Please refer to the following for Epson’s financial results for previous fiscal years: http://global.epson.com/IR/ 24 2. Manufacturing, orders received and sales (1) Actual manufacturing The following table shows actual manufacturing information by segment in the fiscal year under review. Business segment Year ended March 31, 2016 (From April 1, 2015, to March 31, 2016) (Millions of yen) Change compared to previous fiscal year (%) Printing solutions Visual communications Wearable & Industrial products Total for the reporting segments Other Total 704,994 166,687 163,986 1,035,668 505 1,036,173 99.1 93.5 96.3 97.7 77.1 97.7 Notes 1. The above figures are based on sales prices. Intersegment transactions are offset and therefore eliminated. 2. The above figures do not include consumption tax. 3. The above figures include outsourced manufacturing. (2) Orders received Epson’s policy is to manufacture products based on sales forecasts. Accordingly, this section does not apply. (3) Actual sales The following table shows actual sales information by segment in the fiscal year under review. Business segment Year ended March 31, 2016 (From April 1, 2015, to March 31, 2016) (Millions of yen) Change compared to previous fiscal year (%) Printing solutions Visual communications Wearable & Industrial products Total for the reporting segments Other Total Notes 1. Intersegment transactions are offset and therefore eliminated. 2. The above figures do not include consumption tax. 3. No customer accounts for more than 10% of the actual total sales. 736,033 183,997 164,384 1,084,415 753 1,085,169 100.8 104.0 98.1 100.9 93.2 100.9 25 3. Analysis of financial condition and results of operations (1) Analysis of operating results Revenue Consolidated revenue was ¥1,092.4 billion, a year-over-year increase of ¥6.1 billion (0.6%). Revenue for each reporting segment is discussed below. Revenue in the printing solutions segment was ¥736.3 billion, a year-over-year increase of ¥5.5 billion (0.8%). The most significant factors that contributed to this change are as follows. Inkjet printer revenue continued to sharply expand particularly in Asia despite a decline in ink cartridge printer shipments, owing to a reinforced lineup of high-capacity ink tank printers and an expanded sales territory. Revenue from consumables rose in conjunction with an improved composition of the install base. Page printer revenue decreased due to a slump in consumables sales in addition to a decline in unit shipments, the result of Epson’s focus on selling high added value models. SIDM printer revenue increased due to sustained steady demand in the Chinese tax collection system market, as well as to hardware and system upgrade demand, which fueled sales of passbook printers in Europe and China. On the other hand, unit shipments declined in Europe and Americas due to a contraction of those markets and a decline in demand in Asian countries other than China. Large-format inkjet printer revenue grew even though sales were weighed down by the effects of steep currency devaluations and economic deceleration in Latin America, China’s slowing growth, and stepped up price-cutting by competitors in the large photo and color proof printing markets. This revenue growth was driven by an expanded range of applications for inkjet textile printers, from apparel to small personal items and interior goods. POS system product revenue grew primarily because of increased demand for compact receipt printers in the Americas and Europe. Meanwhile, revenue from label printers that enable on-demand in-house printing increased along with a growing need for the use of color labels. Revenue in the visual communications segment was ¥184.0 billion, a year-over-year increase of ¥6.8 billion (3.9%). The most significant factors that contributed to this change are as follows. 3LCD projector revenue increased despite downward pressure on revenue from the effects of a decrease in tender offers in the European education sector, steep currency devaluations and economic deceleration in Latin America, and China’s slowing growth, as sales of new entry-level models were strong in Asia, and unit shipments and revenue increased in North America and Japan. Revenue in the wearable and industrial products segment was ¥170.4 billion, a year-over-year decrease of ¥3.0 billion (1.8%). The most significant factors that contributed to this change are as follows. Quartz revenue decreased despite increased automotive sales. The decrease was due to a combination of price erosion and a decline in unit volume of products used in for cell phones and other personal electronics. Semiconductor revenue decreased primarily because of market weakness. Watch revenue increased despite a decline in watch and watch movement unit shipments. The increase is attributed primarily to growth in sales of premium watches, which lifted average selling prices, and foreign exchange effects. Despite the lack of a large order such as that received in the previous fiscal year, industrial robot revenue grew on increased orders from China, Japan, and Europe. IC handler revenue decreased due to a combination of slowing growth in smartphone chips and dealer inventory adjustments. Revenue increased in the surface finishing business, which developed new customers, and in the alloy powders business, which reported strong sales of high-performance material powders for mobile equipment. In the “other” segment, revenue was ¥1.4 billion, a 1.1% increase compared to the previous fiscal year. Cost of sales and gross profit Cost of sales was ¥694.8 billion, a year-over-year increase of ¥4.4 billion (0.6%). The increase in cost of sales is primarily associated with foreign exchange effects. As a result, gross profit was ¥397.6 billion, up ¥1.7 billion (0.4%) year over year. Selling, general and administrative expenses and business profit Selling, general and administrative (SG&A) expenses were ¥312.7 billion, an increase of ¥18.0 billion (6.1%). The increase in selling, general and administrative expenses is primarily due to foreign exchange effects as well 26 as greater spending on advertising and sales promotions to increase brand recognition and increased spending on research and development on new products. As a result, business profit was ¥84.9 billion, down ¥16.3 billion (16.1%) year over year. Segment profit (business profit) in each reporting segment was as follows. Segment profit in the printing solutions segment was ¥104.7 billion, a year-over-year decrease of ¥6.7 billion (6.0%). This decrease was due to a combination of factors, including but not limited to foreign exchange effects; ink cartridge printer price competition in Japan and North America; the stronger U.S. dollar, which caused the cost of products manufactured overseas to rise; and strategic investment and spending. Segment profit in the visual communications segment was ¥15.5 billion, a year-over-year decrease of ¥3.8 billion (19.7%). In addition to foreign exchange effects, this decrease was largely due to a decrease in sales of high added value products that was connected to a decline in education market orders in Europe. Segment profit in the wearable and industrial products segment was ¥9.8 billion, a year-over-year decline of ¥0.5 billion (5.0%). This decline resulted from factors such as lower semiconductor revenue and higher watch manufacturing costs. Segment loss in the “other” segment was ¥0.5 billion, compared to a ¥0.3 billion loss in the previous fiscal year. As for adjustments, segment loss increased to ¥44.6 billion compared to the ¥39.6 billion loss incurred in the previous fiscal year. Adjustments consisted primarily of patent royalties and R&D expenses for basic research that do not belong to a reporting segment, and SG&A expenses, primarily comprising expenses associated with new businesses and Head Office functions. Other operating income, other operating expenses, and profit from operating activities Other operating income was ¥14.8 billion, a year-over-year decrease of ¥25.0 billion (62.9%). Other operating income decreased mainly because the figure from the previous fiscal year included a ¥30.0 billion positive effect associated with reduced past service costs accompanying changes in the defined-benefit plan in Japan. Other operating expenses totaled ¥5.7 billion, a year-over-year decrease of ¥4.0 billion (41.5%). This decrease was mainly due to the recording of a foreign exchange gain this fiscal year, whereas in the previous fiscal year Epson recorded a ¥2.5 billion foreign exchange loss. Finance income and finance costs Finance income was ¥1.6 billion, a year-over-year decrease of ¥1.6 billion (49.5%). The decrease in finance income was primarily due to a decrease in interest income. Finance costs were ¥4.2 billion, a year-over-year increase of ¥1.9 billion (83.3%). The increase in finance costs was primarily due to an increase in foreign exchange loss. Profit before tax The foregoing resulted in profit before tax of ¥91.5 billion, a year-over-year decrease of ¥41.0 billion (30.9%). Income taxes Income taxes were ¥45.4 billion, a year-over-year increase of ¥26.7 billion (143.8%). While tax expenses were lower in the previous fiscal year due to the recognition of deferred tax assets arising from the carryforward of unused tax losses, this fiscal year income taxes increased mainly due to an increase in tax expenses resulting from the partial reversal of deferred tax assets arising from the carryforward of unused tax losses. Profit for the year Profit for the year was ¥46.0 billion, down ¥66.7 billion (59.2%) year over year. (2) Liquidity and capital resources Cash flow Net cash provided by operating activities was ¥113.0 billion, an increase of ¥4.2 billion compared to the previous fiscal year. Although the decrease in profit for the period and trade payables were a ¥66.7 billion and ¥8.9 billion negative impact, respectively, net cash provided by operating activities increased mainly because of a ¥26.8 billion effect from increased net defined benefit liabilities, a ¥26.7 billion effect from increased income taxes, and a ¥25.8 billion effect resulting from a decrease in inventories. Net cash used in investing activities totaled ¥51.5 billion, increasing by ¥18.8 billion year on year. This increase 27 was mainly due to a ¥23.3 billion increase in outlays associated with the acquisition of property, plant and equipment and intangible assets. Net cash used in financing activities totaled ¥67.1 billion, increasing by ¥11.7 billion year on year despite a ¥28.3 billion net increase in short-term loans payable. This increase is chiefly due to the effects of a ¥12.1 billion increase in dividends paid, a ¥10.0 billion decline in proceeds from issuance of bonds, and a ¥20.0 billion increase in payments due to redemption. As a result of the foregoing factors, cash and cash equivalents at the end of the fiscal year stood at ¥230.4 billion, a decrease of ¥14.8 billion compared to the end of the previous fiscal year, giving Epson sufficient liquidity. Total interest-bearing liabilities were ¥141.7 billion, down ¥44.2 billion compared to the end of the previous fiscal year owing to repayment. Long-term loans payable (excluding the current portion) at the end of the period totaled ¥50.0 billion, at a weighted average interest rate of 0.68% due in 2017. These borrowings were obtained as unsecured bank loans. Financial condition Total assets were ¥941.3 billion, down ¥64.9 billion compared to the end of the previous fiscal year. While there was a ¥17.2 billion increase in property, plant and equipment, total assets decreased mainly because of a ¥15.8 billion decrease in trade and other receivables, an ¥18.8 billion decrease in inventories, a ¥23.5 billion decrease in deferred tax assets, and cash and cash equivalents decreased by ¥14.8 billion, in part due to the redemption of bonds payable and dividends paid. Total liabilities were ¥470.6 billion, down ¥38.3 billion compared to the end of the previous fiscal year. While there was a ¥23.6 billion increase in net defined benefit liabilities, total liabilities decreased mainly because of a ¥9.4 billion decrease in trade and other payables and a ¥43.9 billion decrease in other financial liabilities included in current and non-current liabilities accompanying the redemption of bonds payable. The equity attributable to owners of the parent company totaled ¥467.8 billion, a ¥26.5 billion decrease compared to the previous fiscal year end. Epson recorded a ¥46.0 billion profit for the period, but with retained earnings flat year on year mainly due to decreases associated with the recording of ¥25.0 billion in dividend payments and a ¥22.1 billion remeasurement of defined benefit plan net liabilities, the decrease in equity attributable to owners of the parent company was largely due to a ¥25.0 billion decrease in other components of equity, including a decrease in exchange differences on translation of foreign operations accompanying the rise of the yen against some other currencies. Working capital, defined as current assets less current liabilities, was ¥276.4 billion, a decrease of ¥18.5 billion compared to the end of the previous fiscal year. The ratio of interest-bearing liabilities to total assets declined to 15.1% from 18.5% at the end of the previous fiscal year. 28 4. Research and development activities Epson conducts research and development to create products and services that offer value that exceeds customer expectations. We seek to create value by driving advances in Micro Piezo inkjet technology, microdisplays, sensing, and robotics, all of which are unique core technologies that evolved from the efficient, compact, and precision technologies that have become embedded in Epson’s DNA. Further value is added by developing technology platforms that meet the needs of a wide spectrum of customers. The R&D organizations in our operations divisions follow these basic guidelines to develop core technologies and shared technology platforms that will strengthen Epson’s market position, in both the near and long term. Meanwhile, the mission of Corporate R&D is to develop new and existing core technologies as well as shared technology platforms so as to create new businesses and revolutionize existing ones. Total R&D spending during the fiscal year was ¥53.1 billion. The printing solutions segment accounted for ¥22.1 billion, the visual communications segment for ¥10.2 billion, and the wearable and industrial products segment for ¥6.5 billion. The “other” segment and corporate segment accounted for the remaining ¥14.1 billion. The main R&D accomplishments in each segment are described below. Printing solutions segment The printer business launched as its flagship consumer inkjet printer model an A3 all-in-one that produces stunning color and monochrome photographic prints thanks to Epson ClearChrome K2 ink, a new six-color dye ink set that has red and grey ink in addition to the standard cyan, magenta, yellow, and black colors. This product is Epson’s first consumer printer to come fully equipped with the Logical Color Conversion System (LCCS), color-generating technology that is used in Epson’s Proselection series. LCCS realizes smooth gradations, a wide color gamut, and stable image quality. Epson also launched its fastest-ever A4 business inkjet printer, a model that also boasts a durability rating of 300,000 pages. This product eliminates the stress of waiting for your prints. Its PrecisionCore printhead achieves speeds of approximately 24 images per minute (ipm)1 in both color and monochrome (compared to a high of 20 ipm for the PX-M840F business inkjet printer). And, with only a short warm-up period needed, first print time for both color and monochrome prints is only about seven seconds. In the professional printing business, Epson launched new large-format inkjet printers, including a 10-color pigment ink model equipped with UltraChrome HDX ink and an 8-color pigment ink model equipped with UltraChrome HD ink. These printers produce denser blacks because Epson used new ink technology to increase the volume of pigment particles in the photo black ink by about 50% compared to earlier ink2. As a result, they are an excellent choice for high-end print applications, such as photos, posters, and proofs. 1 Images per minute (ipm) indicates the number of images that can be printed under the conditions for the office category of the printing productivity measurement standard established by the International Standards Organization. 2 As measured in tests conducted by Epson Visual communications segment Epson developed a new lineup of 3LCD projectors for business. The models in this lineup range from products that offer 6,000 lumens3 of brightness to a series of laser projectors that deliver 25,000 lumens of brightness, making them the brightest projectors on the market4. These laser projectors are the first LCD projectors on the market to combine an inorganic phosphor wheel and inorganic LCD panels with a laser light source. The superior reliability of the inorganic materials results in up to 20,000 hours5 of virtually maintenance-free use. Epson also developed a sleek new third generation of Moverio smart glasses. These smart glasses are the first in the Moverio series to use an optical engine with Epson’s 0.43-inch ultra-compact high-definition color silicon organic light-emitting diode (OLED) displays, and the 100,000:1 contrast enables them to seamlessly merge the projected digital content with the real world better than the previous generation, which had a contrast ratio of 230:1. In addition, Epson optimized the OLED displays specifically for smart glasses, reducing the size of the optical lenses and making Moverio lighter than ever. In fact, the headset itself is 20% lighter than that of the previous model. Epson also launched sales of a smart headset with advanced features for professional use. The smart headset was developed by using Moverio smart glasses in joint real-world tests in a variety of fields, suggesting ways that smart glasses could help improve work processes, and sharing information about needs identified through these activities with the development team. Binocular, see-through Moverio smart headsets drive greater 29 efficiency in the workplace by displaying large perceived images in the wearer’s field of vision and enabling him or her to work hands-free. 3 Lumen is a unit that indicates the amount of light (the luminous flux) emitted from a light source. 4 The brightest on the market as of the end of December 2015, per Epson research. 5 The approximate time it takes for brightness to fall to 50% of the initial level. Wearable and industrial products segment In the wearable products business, Epson added new products to its line of GPS sports monitors “WristableGPS”. Among them are new GPS trekking products “WristableGPS for Trek” equipped with Sensor Fusion Technology, which combines data from multiple sensors to achieve measurements of greater accuracy, thus providing trekkers with greater safety and peace of mind. Epson also released GPS running wearables that offer full support for every activity level. The same wearable can estimate6 VO2 max (the maximum rate of oxygen consumption per kilogram of body mass in one minute), an important indicator of aerobic physical fitness, or simply record a person’s activity level with an activity tracking function. Epson’s robotics solutions business developed a compact six-axis (vertically articulated) industrial robot that can be installed in confined spaces thanks to what Epson believes is the world’s first retractable, folding arm on a six-axis robot7. With a footprint of 600 mm x 600 mm, this robot occupies about 40% less floor space than Epson’s earlier equivalent model and weighs only two-thirds as much. Also, with fewer maneuvers needed to avoid collisions, cycle times8 are shortened by about 30%. Epson’s microdevices business developed a small, extremely accurate atomic oscillator for communications networks and industrial applications. This product is one-sixteenth the size of Epson’s earlier model (75cc vs. 1,200cc) yet provides the same level of long-term frequency stability, the result of an Epson-engineered VCSEL (vertical cavity surface emitting laser) and specially designed IC. In addition, power consumption is one-sixth that of the previous model owing to the optimization of the control system. 6 VO2 max is estimated from running speed and heart rate but can also be measured when the right running conditions are met. 7 The arm was announced at the end of October 2015, making it the first on a six robot, per Epson research. 8 The time required to perform a certain defined task in a manufacturing process Other and corporate In November 2015 Epson announced the development of the PaperLab, the world’s first compact in-office paper recycler that produces new paper from used paper (ordinary copier paper in A4 and A3 sizes) in an essentially water-free process (a small amount of water is used to maintain humidity inside the machine)9. Information on the used paper is completely and securely destroyed in the process. Epson, which sells high-speed, energy-efficient business inkjet printers that deliver crisp, vivid output at a low cost per print, helps customers improve the efficiency of their operations by providing value through printouts. In the future, we will also develop a smart recycling business that will change the future of paper by enabling offices to recycle their used paper and produce new paper on-site. Epson plans to commercialize the PaperLab in 2016. Enterprises and government offices that install a PaperLab will be able to produce a variety of paper types—office paper of different thicknesses, business card paper, and even colored and scented paper—right in a back office. 9 The first to use a dry papermaking process, per Epson research. 30 5. Issues for Fiscal 2016 Seiko Epson Corporation (“Epson”) will begin the 2016 fiscal year under a new 10-year corporate vision and a new mid-range business plan. The Epson 25 Corporate Vision describes what Epson would like to achieve by the start of the 2025 fiscal year. Meanwhile, the Epson 25 Mid-Range Business Plan (FY2016-18) is a three-year plan for the first phase of work toward achieving the vision. Epson will look to sustain growth and increase corporate value over the medium- to long term by steadily executing the strategies described below. (1) Epson 25 Corporate Vision The Epson 25 Corporate Vision (hereafter called “Epson 25”), which was created based on an understanding of the mega trends, changes, and other forces that will shape Epson’s business in the future, contains the following vision statement: “Creating a new connected age of people, things and information with efficient, compact and precision technologies.” “Efficient, compact and precision technologies” are original technologies that will create the value that Epson will provide to its customers in three areas: smart technologies, the environment, and performance. Smart technologies. Use advanced products and software so customers can easily, conveniently, and securely use our products anywhere and anytime. Environment. Contribute to the development of a sustainable society by leveraging efficient, compact and precision technologies to reduce the environmental impact of products and services across their life cycles. Performance. Create new and higher value by providing outstanding products that contribute to customer productivity, accuracy and creativity. Advances in information and communication technology will interconnect vast amounts of information on the Internet, causing cyber space to expand indefinitely. As a manufacturing company that specializes in generating value in the real world, Epson will play an important role in “creating a new connected age of people, things and information” by using attractive, advanced products as leverage to collaborate with IT companies and increase the value of the technologies it provides to customers. In this “new connected age” Epson aims to free people from repetitive manual labor and from unnecessary wastes of time and energy. Epson’s goal is to heighten people’s creativity, and to create a sustainable and affluent society in which people enjoy safe and healthy lifestyles. In line with this vision, Epson will provide value in the form of smart technologies, the environment, and performance in four areas of innovation: inkjet innovation, visual innovation, wearables innovation and robotics innovation. Epson will drive innovations in these areas by achieving the vision in each of its businesses. To support the realization of Epson 25, Epson will further strengthen its business infrastructure and company-wide information systems in the areas of human resources, technology, manufacturing, sales, and the environment. Epson set out financial performance targets in Epson 25. Assuming exchange rates of 115 yen to the U.S. dollar and 125 yen to the euro, Epson will aim to achieve, by the 2025 fiscal year, ¥1,700 billion in revenue, ¥200 billion in business profit, a 12% return on sales (business profit*/revenue), and a 15% return on equity (profit for the period/equity attributable to owners of the parent company). * Business profit is very similar to operating income under Japanese accounting standards (J-GAAP), both conceptually and numerically. Epson began using business profit as an indicator after adopting International Financial Reporting Standards (IFRS) in FY2014 to facilitate comparisons with past results. Vision in Each Business Printing: inkjet innovation Refine original Micro Piezo technology, and expand into high-productivity segments. Improve environmental performance and create a sustainable printing ecosystem. 31 Visual communications: visual innovation Refine original microdisplay and projection technologies, and create outstanding visual experiences and a natural visual communications environment for every aspect of business and lifestyles. Wearables: wearables innovation Leverage our watchmaking heritage, refine timekeeping and sensing accuracy, and offer a sense of status and fashion. Robotics: robotics innovation Combine our core technologies with sensing and smart technologies in manufacturing, expand applications, and create a future in which robots support people in a wide variety of situations. Microdevices: Support the four innovations Contribute to Epson’s finished products and to the development of smart communications, power, transportation and manufacturing systems with advanced Epson quartz timing and sensing solutions and low-power semiconductor solutions. (2) Epson 25 Mid-Range Business Plan (FY2016-2018) The Epson 25 Mid-Range Business Plan (FY2016-2018) is a roadmap for the first phase of work toward achieving the Epson 25 vision. During this phase Epson will sustain the momentum it gained by strategically adopting new business models and developing new market segments under the previous corporate vision. At the same time, it will move forward on product development while aggressively investing as needed to provide a solid business foundation. The basic strategy for achieving this will be to continue to grow by further increasing its competitive edge in businesses where SE15 strategic initiatives were successful, and to quickly address issues and establish a path to growth in businesses where Epson was unable to fully advance. Epson will look to ensure growth by creating products and services that generate customer value in smart technologies, the environment, and performance, as the Epson 25 aims to achieve. While taking care to grow profit over the short term, Epson will also invest management resources as appropriate, quickly establish new business models, and strengthen its sales organizations to achieve the Epson 25 vision. Epson will also position itself for future growth by pursing the business strategies below and by building up its business infrastructure. These moves will enable Epson to aim to achieve the following financial performance targets in FY2018, the final year of the phase 1 plan. Assuming exchange rates of 115 yen to the U.S. dollar and 125 yen to the euro, Epson will aim to achieve, by the 2018 fiscal year, ¥1,200 billion in revenue, ¥96 billion in business profit, an 8% return on sales, and a 10% or higher return on equity on a continuous basis. Strategies in Each Business  In the printer business Epson will aim to establish a competitive advantage in the home printer market by boosting the attractiveness of its products and to getting office market development on track with linehead models. In professional printing, Epson will establish a competitive advantage with hardware, improve support and other organizational infrastructure, and achieve solid growth in new domains. In visual communications Epson will further strengthen its presence in the projection market and use laser light sources to pave the way to rapid growth in new markets. In wearable products, Epson will lay the foundation for building wearables into a core business by refining watch resources and combining them with sensors to create families of differentiated products. In robotics solutions Epson will create a framework for growth on top of its technology base. In microdevices, Epson will create a stable business platform in the quartz business by building competitive strength. The semiconductor business, meanwhile, will create new core technologies and devices.      32 Strengthening Business Infrastructure Technology. Refine our efficient, compact and precision technologies, advance our actuator, optical control, and sensor technologies, and bring in data communications technology to continue to create new customer value. Manufacturing. Provide timely products that others cannot easily imitate. Offer them at highly competitive costs and quality. Sales and support. Strengthen the office and industrial domains, establish optimum area sales organization, improve products quality with a market-driven (market-in) approach, and transform the brand image. Environment. Expand initiatives to reduce environmental impacts across product and service life cycles and supply chains. 33 6. Dividend policy The Company strives to sustain business growth through the creation of customer value and to generate stable cash flow by improving profitability and using management resources efficiently. While the top priority is on strategic investment in growth, the Company also actively returns profits in parallel with its efforts to build a robust financial structure that is capable of withstanding changes in the business environment. In line with this policy, the Company has set a consolidated dividend payout ratio in the range of 40% as a medium-term target, the ratio based on profit after an amount equivalent to the statutory effective tax rate is deducted from business profit, a profit category that shows profit from the Company’s main operations (and which is very similar to operating income under Japanese accounting standards, both conceptually and numerically). The Company intends to be more active in giving back to shareholders by agilely repurchasing shares as warranted by share price, the capital situation, and other factors. The Company’s dividend policy is to pay cash dividends twice a year. The year-end dividend is determined by resolution of the general shareholders’ meeting and the interim dividend is determined at a meeting of the board of directors. Although there is evidence that the near-term economic environment has been deteriorating, the Company’s full-year financial performance was in line with the outlook primarily as a result of strategic progress in the Company’s businesses. The Company therefore has paid an annual dividend of ¥60 per share, as forecast at the beginning of the fiscal year. (Epson declared a two-for-one stock split of the Company’s common shares, effective April 1st, 2015.) The Company’s Articles of Incorporation allow the Company to issue an interim dividend with a record date of September 30 every year by resolution of the board of directors. The Company’s distribution of retained earnings for the fiscal year under review is as follows. Distribution of retained earnings for the fiscal year under review Date approved October 29, 2015, by resolution of the board of directors June 28, 2016, by resolution of the general shareholders’ meeting Cash dividends (Millions of yen) Cash dividend per share (Yen) 10,733 10,733 30 30 34 Corporate Governance 1. Approach to corporate governance (1) Basic corporate governance principles The general principles of corporate governance at Epson are as follows: ▪ Respect the rights of shareholders, and ensure equality. ▪ Bear in mind the interests of, and cooperate with, stakeholders, including shareholders, customers, local communities, business partners, and Epson personnel. ▪ Appropriately disclose company information and maintain transparency. ▪ Directors, executive officers, and special audit & supervisory officers shall be aware of their fiduciary duties and shall fulfill the roles and responsibilities expected of them. ▪ Engage in constructive dialogue with shareholders. To achieve the goals declared in the Management Philosophy, promote sustainable growth, and increase corporate value over the medium and long terms, Epson strives to continuously enhance and strengthen corporate governance so as to realize transparent, fair, fast, and decisive decision-making. With the approval of a resolution at the June 28, 2016 general shareholders’ meeting, Epson transitioned to a company with an Audit & Supervisory Committee, as we believe this is the best structure for Epson to further improve the supervisory function of the Board of Directors, improve discussions, and speed up decision-making. As a company with an Audit & Supervisory Committee, Epson will further improve the supervisory function of the Board of Directors, improve discussions, and speed up decision-making to further increase the effectiveness of corporate governance. (2) Corporate governance system Outline Structured as a company with an Audit & Supervisory Committee, Epson will strengthen its management monitoring and supervisory functions. Moreover, by separating management supervision and operations functions, we have built a structure that will allow rapid decision-making. The main corporate management bodies and their aims are described below: Board of Directors The Board of Directors, with a mandate from shareholders, is responsible for realizing efficient and effective corporate governance, through which Epson will accomplish its social mission, sustain growth, and maximize corporate value over the medium and long terms. To fulfill these responsibilities, the Board of Directors will exercise a supervisory function over general management affairs, maintain management fairness and transparency, and make important business decisions, including decisions on things such as management plans, business plans, and investments exceeding a certain amount. The Board of Directors is composed of 12 directors, including five outside directors. Meetings of the Board of Directors are held basically once per month and as needed. The Board of Directors makes decisions on basic business policies, important business affairs, and other matters that the Board of Directors is responsible for deciding as provided for in internal regulations. Business affairs that the Board of Directors is not responsible for deciding are delegated to executive management, and the Board monitors these. To speed up business decisions and increase business agility as a company with an Audit & Supervisory Committee, Epson expanded the scope of affairs delegated to executive management from the Board of Directors and limits board deliberations to only the most important issues. Epson, whose Corporate Governance Policy states that at least one-third of the board members should be outside directors, will work to further improve the supervisory function of the Board of Directors. Audit & Supervisory Committee The Audit & Supervisory Committee, with a mandate from shareholders, is responsible for independently and objectively auditing and monitoring the execution of director duties and for ensuring the sound and sustained growth of Epson. The Audit & Supervisory Committee has established criteria for properly evaluating accounting auditors that are being considered for selection. Even after selecting them, the Audit & Supervisory Committee verifies that accounting auditors possess the necessary independence and expertise. The Audit & Supervisory Committee conducts audits in cooperation with internal audit departments, accounting auditors, and others. 35 The Audit & Supervisory Committee is composed of four Audit & Supervisory Committee members, three of whom are outside directors. It is chaired by a full-time member of the Audit & Supervisory Committee. Meetings are held once per month and as needed. Corporate Strategy Council The Corporate Strategy Council is an advisory body to the president whose purpose is to help ensure that the right decisions are made based on a range of opinions on the executive management side. Meetings of the Corporate Strategy Council are where directors, executive officers, and special audit & supervisory officers exhaustively examine important business topics that affect the Epson Group as a whole and matters on the agenda for meetings of the Board of Directors. Compliance Committee The Compliance Committee’s function is to discuss the content of reports that it receives concerning important compliance activities, and report its findings and communicate its opinions to the Board of Directors in order to see that compliance activities are appropriately executed by line management. As an advisory body to the Board of Directors, the Compliance Committee is composed of outside directors and directors who are Audit & Supervisory Committee members. The Compliance Committee is chaired by a full-time member of the Audit & Supervisory Committee. Meetings are held every half year and as needed. A Chief Compliance Officer (CCO) is elected by the Board of Directors and supervises and monitors compliance-related affairs on the whole. The CCO periodically reports the state of compliance affairs to the Compliance Committee. Nomination Committee and Compensation Committee Epson has created a Nomination Committee and a Compensation Committee as advisory bodies to the Board of Directors. These committees, which are composed primarily of outside directors, are designed to ensure transparency and objectivity in the screening and nomination of candidates for director, executive officer, and special audit & supervisory officer and in matters of director compensation. Both committees include outside directors, who comprise the majority of members, the representative director/president, and the director in charge of human resources. Directors who are full-time members of the Audit & Supervisory Committee can attend meetings of either committee as observers. Epson’s system of corporate governance is schematically represented below: Reasons for adopting the current system of corporate governance To promote sustainable growth and increase corporate value over the medium and long terms, Epson has 36 continuously sought to enhance and strengthen corporate governance to ensure that decision-making is transparent, fair, fast, and decisive. The election of multiple outside directors and the establishment of discretional advisory committees to nominate officers and determine compensation are some of the ways this is being achieved. With the approval of a resolution at the June 28, 2016 general shareholders’ meeting, Epson transitioned to a company with an Audit & Supervisory Committee, as we believe this is the best structure for Epson to further improve the supervisory function of the Board of Directors, improve discussions, and speed up decision-making. Internal control system Epson’s Board of Directors approved a basic policy on the internal control system (a system for ensuring that business is conducted suitably by the corporate group), and Epson has implemented the approved internal control system. The Board of Directors also passed a resolution at the June 28, 2016 meeting of the Board of Directors to partially amend Epson’s basic internal control system policy in conjunction with the transition to a company with an Audit & Supervisory Committee. The content of the revised basic policy is described below. Basic internal control system policy The Company considers its Management Philosophy to be its most important business concept, and to realize it Epson has established “Principles of Corporate Behavior” that are shared across the Group, including at subsidiaries. The Company will establish the following basic policy regarding the internal control system (a system for ensuring that business is conducted suitably by the corporate group) and provide an improved internal control system for the Epson Group as a whole. Compliance (1) The Company will establish “Principles of Corporate Behavior” as a guide for putting the Management Philosophy into practice. The Company will also establish regulations that spell out things such as basic compliance requirements and the organizational framework. (2) The Company has created a Compliance Committee to serve as an advisory body to the Board of Directors. The Compliance Committee is chaired by a full-time member of the Audit & Supervisory Committee and is composed of outside directors and members of the Audit & Supervisory Committee. The Compliance Committee meets regularly and as needed to hear and discuss important matters concerning the Company’s compliance program. It reports its findings and offers opinions to the Board of Directors. Accounting auditors can attend meetings of the Compliance Committee as observers. (3) A Chief Compliance Officer (CCO) is elected and supervises and monitors the execution of all compliance operations. The CCO periodically reports the state of compliance affairs to the Compliance Committee. (4) Compliance promotion and enforcement will be supervised by the president of Seiko Epson. Group-wide compliance programs will be carried out by Head Office supervisory departments with the cooperation of departments in the various operations divisions and subsidiaries. Compliance programs of the divisions and their related subsidiaries will be promoted by the respective chief operating officers of the divisions. The compliance management department helps to ensure the completeness and effectiveness of compliance programs by monitoring compliance across the Epson Group and by taking corrective action or making adjustments where needed. (5) The Corporate Strategy Council, an advisory body to the president comprised of members of the Board of Directors, etc. of the Company, will address important matters with respect to compliance promotion and enforcement in the Epson Group as a whole, including subsidiaries. The Council will strive to ensure the effectiveness of compliance by exhaustively discussing and analyzing the implementation of programs for assuring observance of statutes, internal regulations, business ethics, and initiatives in high-risk and other key areas. (6) The Company, including its subsidiaries, will strive to provide an effective whistleblowing system. Employees are encouraged and are able to easily and immediately report compliance violations using internal and external hotlines and e-mail addresses. Controls are in place to protect whistleblowers from reprisal, and allegations are reported to the Company’s Audit & Supervisory Committee, the Compliance Committee, and the Corporate Strategy Council in a way that whistleblowers cannot be identified. (7) The Company strives to enhance legal awareness by providing Epson Group employees with web-based training and other educational opportunities. 37 (8) The president of Seiko Epson periodically reports important compliance-related matters to the Board of Directors and take measures as needed to respond to issues. (9) The Company’s “Principles of Corporate Behavior” states that the Company will have no association whatsoever with antisocial forces (i.e., organized crime groups). The Company takes a firm stance in rejecting any and all contact with antisocial forces that threaten social order and security. Business execution system (1) The Company formulates long-term corporate visions and mid-range business plans, and it sets clear medium-and long-range goals for the Epson Group as a whole. (2) The Company has instituted a system to ensure the appropriate and efficient execution of business. To that end, the Company has established regulations governing organizational management, levels of authority, the division of responsibilities, and the management of affiliated companies, thus distributing power and authority across the entire Group. (3) Personnel responsible for business operations report the matters below to the Board of Directors at least once every three months. • Current business performance and performance outlook • Risk management responses • Status of key business operations Risk management (1) The Company has established a basic risk management regulation that stipulates the risk management system of the Company, including its subsidiaries, and that defines the organization, risk management methods and procedures, and other basic elements of this system. (2) Overall responsibility for risk management in the Epson Group, including subsidiaries, belongs to the president of Seiko Epson. Group-wide risk management is carried out by Head Office supervisory departments with the cooperation of the operations divisions and subsidiaries. Risks unique to an individual business are managed by the chief operating officer of that business, including at subsidiaries consolidated under them. The Company has also set up the risk management department, monitors overall risk management Group-wide, makes corrections and adjustments thereto, and ensures the effectiveness of risk management programs. (3) The Corporate Strategy Council strives to ensure effective management of serious risks that could have an egregious effect on society by dynamically and exhaustively discussing and analyzing ways to identify and control risks. Also, when major risks become apparent, the president leads the entire company in mounting a swift initial response in line with the Company’s prescribed crisis management program. (4) The president of Seiko Epson periodically reports critical risk management issues to the Board of Directors and formulates appropriate measures to respond to these issues, as needed. Ensuring the appropriateness of operations in the corporate group (1) The Group’s management structure helps to ensure that operations in the corporate group, including subsidiaries, are conducted appropriately. Essentially, the Company is organized into product-based divisions. Each division is headed by a chief operating officer who owns global consolidated responsibility for that business. Meanwhile, supervisory functions within the Head Office own global responsibility. Responsibility for providing the framework for business operations at subsidiaries is owned by the head of each business. Group-wide corporate functions are the responsibility of the heads of Head Office supervisory departments. (2) The Company has business processes that enable business to be controlled on a Group level. This is accomplished by regulation governing the management of affiliated companies that require subsidiaries to report or acquire pre-approval for certain business affairs from the parent company, Seiko Epson, and by requiring issues that meet certain criteria to be submitted to Epson’s Board of Directors for resolution. The Company has established regional head offices in certain regions to supervise local subsidiaries in order to ensure the suitability and efficiency of operations Group-wide. (3) Per the Basic Regulation for Internal Audits, internal audit departments serve as monitoring organizations that are independent from the management and supervisory functions of the operations divisions and the Head Office. Internal audit departments audit internal controls and the state of their implementation in all Epson Group companies, including subsidiaries. The findings of the internal audit departments are 38 presented to the head of the audited organization along with requests for corrective action, where needed. This information is also regularly reported to the president of Seiko Epson and to the Audit & Supervisory Committee. In this way, Epson strives to optimize operations across the entire Group. Safeguarding and management of work-related information (1) Information on the performance of duties is safeguarded and managed in accordance with regulations governing, among other things, document control, management approval, and contracts. All directors are able to access this information at all times. (2) The Company strives to prevent the leak and loss of Epson Group internal information by managing confidential information according to the level of sensitivity, in accordance with internal information security regulations. Audit system (1) The Audit & Supervisory Committee can interview directors who are not members of the Audit & Supervisory Committee, executive officers, and other personnel whenever they deem necessary in the performance of duties based on the Audit & Supervisory Committee Audit Regulation. (2) Audit & Supervisory Committee members can attend Corporate Strategy Council sessions, corporate management meetings, and other important business meetings that will enable them to conduct audits based on the same information as that available to directors who are not members of the Audit & Supervisory Committee. Members of the Audit & Supervisory Committee also routinely review important documents related to management decision-making. (3) An Audit & Supervisory Committee Office was set up to assist the duties of the Audit & Supervisory Committee. The head of the Audit & Supervisory Committee Office serves as the Special Audit & Supervisory Officer and assigns full-time personnel to the Audit & Supervisory Committee Office. The head and personnel of the Audit & Supervisory Committee Office discharge their duties to assist the Audit & Supervisory Committee, obeying the orders of the Audit & Supervisory Committee alone and not orders from directors who are not members of the Audit & Supervisory Committee. Matters relating to the personnel of the office must be approved in advance by the Audit & Supervisory Committee. (4) To ensure that audits by the Audit & Supervisory Committee are systematic and effective, a framework has been created to secure close cooperation between the internal audit departments and the Audit & Supervisory Committee. (5) If a situation involving the Audit & Supervisory Committee or cooperation with the internal audit departments or other organizations is observed to interfere with the effectiveness of audits by the Audit & Supervisory Committee, the Audit & Supervisory Committee can ask the representative director or Board of Directors to take corrective action. (6) The Audit & Supervisory Committee receives audit reports from internal audit departments and can issue specific instructions to internal audit departments as needed. If the instructions issued to internal audit departments by the Audit & Supervisory Committee and the president are in conflict, the president will have the internal audit departments honor the instructions of the Audit & Supervisory Committee. (7) Per the Audit & Supervisory Committee Audit Regulation, the Audit & Supervisory Committee can ask directors who are not members of the Audit & Supervisory Committee, the compliance management department, and the risk management department, as well as others to report or explain the state of management within the Epson Group, including subsidiaries. It can also view supporting materials. The Audit & Supervisory Committee can also ask, as needed, subsidiary company directors, corporate auditors, internal audit departments, and other organizations to report the state of management of the subsidiary. (8) The Audit & Supervisory Committee shall strive to enhance the effectiveness of audits by holding regular discussions with accounting auditors. (9) The Audit & Supervisory Committee and representative director regularly meet to enable the committee to directly assess business operations. 39 (10) Funds required by the Audit & Supervisory Committee to perform its duties are properly budgeted for in advance. However, funds required to perform the duties of the Audit & Supervisory Committee in emergency or extraordinary situations will be promptly paid in advance or refunded on each occasion. (3) Internal audits Audit & Supervisory Committee audits Epson’s Audit & Supervisory Committee is composed of four directors, three of whom are outside directors. Due to the need for someone who understands the Company’s internal control system, the fourth is a full-time member of the Audit & Supervisory Committee who is highly knowledgeable about internal affairs. Audit & Supervisory Committee members can attend meetings of the Corporate Strategy Council and other important meetings as part of their efforts to properly monitor business affairs. They examine the legality and suitability of actions taken by the directors by checking and confirming compliance and by supervising and verifying things such as the state of the internal control system, including internal control over financial reporting. When they deem it necessary, Audit & Supervisory Committee members can ask internal audit departments to investigate affairs or can provide specific instructions regarding the performance of their duties. In addition, the Audit & Supervisory Committee ordinarily conducts audits using internal audit departments but can exercise its investigation authority to conduct its own audits if the effectiveness of audits conducted by the internal audit departments is not being maintained. Mr. Noriyuki Hama, a full-time member of the Audit & Supervisory Committee, has many years of experience in finance and general accounting, while Audit & Supervisory Committee member Ms. Chikami Tsubaki is a certified public accountant. Both have an appreciable degree of knowledge and insight into finance and accounting. Internal audits Epson’s internal compliance system guards against potential legal and internal regulatory violations in departmental operations. Internal audit departments serve as monitoring organizations that are independent from the management and supervisory functions of the operations divisions and the Head Office. They audit internal controls and the implementation of controls in all Epson Group companies, including subsidiaries. Internal audit departments conduct internal audits based on an annual audit plan. After conducting internal audits, they report their observations, including recommendations for improvements based on the facts, to the president and to the Audit & Supervisory Committee in a timely manner. Internal audit departments also regularly report the internal audit situation to the president and Audit & Supervisory Committee. Interconnections among Audit & Supervisory Committee audits, internal audits, and accounting audits, and the relationship of these audits to the internal control department Epson’s internal audit departments regularly present their audit plans and audit results to the Audit & Supervisory Committee. In response, the Audit & Supervisory Committee can, when it deems necessary, ask internal audit departments to investigate affairs or can provide specific instructions regarding the performance of their duties. The Audit & Supervisory Committee ordinarily conducts audits using internal audit departments but can conduct its own audits if the effectiveness of audits conducted by the internal audit departments is not being maintained. Internal audit departments are seen as a keystone for internal control functions built by the president and operations departments. On the other hand, to ensure the effectiveness and independence of audits by the Audit & Supervisory Committee and internal audit departments, if the instructions issued to internal audit departments by the Audit & Supervisory Committee and the president are in conflict, the president must have internal audit departments honor the instructions of the Audit & Supervisory Committee. The Audit & Supervisory Committee and the internal audit departments will thus proactively cooperate going forward, but Epson set up an Audit & Supervisory Committee Office headed by the Special Audit & Supervisory Officer as an organization dedicated to supporting the Audit & Supervisory Committee. The Audit & Supervisory Committee Office is independent from executive management and supports the Audit & Supervisory Committee, with a direct reporting line to it. 40 The Audit & Supervisory Committee and accounting auditors enhance the effectiveness of audits by periodically discussing issues with one another. Accounting auditors have the right to observe meetings of the Compliance Committee, which is made up of outside directors and a director who is a member of the Audit & Supervisory Committee. (4) Overview of limited liability agreements The Company concludes agreements with non-executive directors that limit their liability for damages under Article 423 (1), pursuant to the provisions of Article 427 (1) of the Companies Act. The maximum amount of liability for damages under these agreements is limited to the amount provided for by laws and regulations. The liability of the non-executive directors shall be limited only if they have acted in good faith and without gross negligence in performing their duties. (5) Outside directors The role of outside directors To ensure that outside directors are independent from the Company’s management team, have a broad view, and are able to objectively supervise the making of important decisions, the Company has set forth the role of outside directors in the Corporate Governance Policy as below. In principle, outside directors should comprise at least one-third of the members of the Board of Directors. (i) Monitoring of the management - Monitoring of corporate executives through involvement in the officer election process and the compensation determination process based on an evaluation of the business as a whole - Monitoring of the business as a whole through the exercise of voting rights on important business decisions made by the Board of Directors (ii) Advisory function for improving business efficiency (iii) Monitoring of conflicts of interest - Monitoring of conflicts of interest between Epson and its directors and executive officers - Monitoring of conflicts of interest between Epson and related parties Principle of independence The Company’s Board of Directors has established a “Standard of Outside Officers’ Independence” and, in compliance with this standard, elects director candidates who are unlikely to have conflicts of interest with general shareholders. All current outside directors satisfy the independence requirements of the standard. Standard of Outside Officers’ Independence The Company shall not nominate a person as an Outside Officer candidate who falls under any of the below. (1) A person which deems the Company as a major business partner1, or in the case of a company, an executing person2 of a contractor in the past five years. (2) A person which the Company deems as a major business partner3, or in the case of a company, an executing person of a customer in the past five years. (3) A business consultant, certified public accountant or lawyer who has received monies, etc. (meaning a large sum of money and other properties4) other than Officers’ remuneration from the Company in the past three years, or in the case where the receiver of the monies, etc. is an entity including corporate entities and unions, a quasi-executing person who has belonged to the payee’s group in the past three years. (4) A major shareholder5 of the Company, or in the case of a company, an executing person or Audit & Supervisory Board Member of the shareholder in the past five years. (5) An executing person or Audit & Supervisory Board Member in a corporation of which the major shareholder is the Company. (6) A person who has belonged to an auditing firm which has conducted a legal accounting audit of the Company in the past ten years. (7) A person who has belonged to a leading managing underwriter of the Company in the past ten years. (8) A payee of a large donation6, or in the case the receiver of the donation is an entry including corporate entities and unions, a judicial partner, general partner, or quasi-executing person who has belonged to the payee group at any time. 41 (9) A person coming from a corporation which has a relationship of interlocking Outside Officers7 with the Company. (10) A spouse or relative within the second degree of kinship of a person having the interests listed above. Notes 1 “Person which deems the Company as a major business partner” means a business partner (mainly supplier) who has received payment not less than 2% of its consolidated net sales from the Company in any fiscal year of the past three years. “Executing person” means an Executive Officer, Executive Director or Operating Officer, employee occupying a senior management position higher than general manager. “Person which the Company deems as a major business partner” means a business partner (mainly buyer) who has made payment not less than 2% of the Company’s consolidated net sales to the Company in any fiscal year of the past three years. “A large sum of money and other properties” means average compensation (other than Officers’ remuneration) which exceeds the below for the past three years: i) no less than 10 million yen in the case where the payee is a person or ii) no less than 2% of the annual revenues at any fiscal year in the case where the payee is a group. “Major shareholder” means a shareholder who holds directly or indirectly no less than 10% of the voting power. “Large sum of donation” means a donation whose annual average in the past three years exceeds either; i) 10 million yen or ii) 30% of the annual expense of the group, whichever is higher. “Interlocking Outside Officers” means mutual dispatch of Outside Officers between the Company and another corporation. 2 3 4 5 6 7 Number of outside directors, selection criteria, and human, capital, business or other interests between outside directors and the Company Epson had five outside directors (of whom three are Audit & Supervisory Committee members) as of the submission date of its the security report. (i) Hideaki Omiya Mr. Omiya has served as a Chairman of the Board of Mitsubishi Heavy Industries, Ltd. and has considerable experience and insight as a chief executive and engineer. He has monitored corporate management appropriately offering proposals actively regarding important decision making in management from an objective and comprehensive perspective. Epson expects that he will monitor corporate management appropriately aimed at achieving sustainable growth and improving the Company’s corporate value over the medium to long term. He was involved in business execution at Mitsubishi Heavy Industries, Ltd. Although the Company has had transactions involving the purchase and sale of semiconductor manufacturing equipment with Mitsubishi Heavy Industries, Ltd. in the past three years, these transactions are immaterial, totaling less than 0.1% of the consolidated net sales of the Company and Mitsubishi Heavy Industries, Ltd. and thus does not fall under the category of “major business partner” as prescribed in the “Standard of Outside Officers’ Independence.” Epson has registered him as an Independent Director with the Tokyo Stock Exchange. He owns a small number of Epson shares, but there are no human, capital, business or other interests between him and the Company. (ii) Mari Matsunaga Ms. Matsunaga has created new business models and has a considerable insight and experiences through her involvement in the management of multiple companies as Outside Officers. Epson expects that she will monitor corporate management appropriately aimed at achieving sustainable growth and improving the Company’s corporate value over the medium to long term. Although the Company has asked her to give speech in the past three years, the speaker expenses were less than 500,000 yen and thus does not fall under the category of “a large sum of money and other properties” as prescribed in the “Standard of Outside Officers’ Independence.” Epson has registered her as an Independent Director with the Tokyo Stock Exchange. 42 (iii) Michihiro Nara (outside director who is an Audit & Supervisory Committee member) Mr. Nara has a high level of expertise as an attorney. He has considerable insight and experiences through his involvement in the management of multiple companies as an independent outside officer and achievements as an Outside Audit & Supervisory Board Member of the Company. Epson expects that he will appropriately supervise and contribute to the soundness of the Company’s management aimed at achieving sustainable growth and improving the Company’s corporate value over the medium to long term. Although he has never been involved in corporate management except as an outside officer, we believe that he will perform his duties as a Director who is Audit & Supervisory Committee member appropriately because of the above reasons. The Company has not entered into a consulting agreement, and has not conducted any consignment of business activities under any individual agreement, with him who is an attorney-at-law, and the law office to which he belongs. Epson has registered him as an Independent Director with the Tokyo Stock Exchange. He owns a small number of Epson shares, but there are no human, capital, business or other interests between him and the Company. (iv) Chikami Tsubaki (outside director who is an Audit & Supervisory Committee member) Ms. Tsubaki has a high level of expertise as a certified public accountant. She has a considerable insight and experiences through her involvement in the management of multiple companies as independent outside officer. Epson expects that she will appropriately supervise and contribute to the soundness of the Company’s management aimed at achieving sustainable growth and improving the Company’s corporate value over the medium to long term. Although she has never been involved in corporate management except as an outside officer, we believe that she will perform her duties as a Director who is Audit & Supervisory Committee member appropriately because of the above reasons. The Company has not entered into a consulting agreement, and has not conducted any consignment of business activities under any individual agreement, with she who is a certified public accountant, and there is no transactional relationship. Epson has registered her as an Independent Director with the Tokyo Stock Exchange. (v) Yoshio Shirai (outside director who is an Audit & Supervisory Committee member) Mr. Shirai has served as Directors at TOYOTA MOTOR CORPORATION, Hino Motors, Ltd. and Toyota Tsusho Corporation, and has considerable insight and a wealth of experience as a corporate manager. Epson expects that he will appropriately supervise and contribute to the soundness of the Company’s management aimed at achieving sustainable growth and improving the Company’s corporate value over the medium to long term. He has served as a business executor at Hino Motors, Ltd. and Toyota Tsusho Corporation in the past five years. The Company has had no transactions with Hino Motors, Ltd. and Toyota Tsusho Corporation in the past three years, and thus, none of the aforementioned two companies falls under the category of “major business partner” as prescribed in the “Standard of Outside Officers’ Independence.” He was an executive at TOYOTA MOTOR CORPORATION until June 2007, but there have been no business transactions between Epson and the TOYOTA MOTOR CORPORATION in the past three years. Epson has registered him as an Independent Director with the Tokyo Stock Exchange. (6) Officer compensation, etc. (i) Compensation for performance through the 2015 fiscal year Basic policy - The policy on director and executive officer compensation is as follows. (a) Compensation shall provide incentive to directors and executive officers to improve business performance in order to increase corporate value in both the near, medium, and long terms. (b) Compensation shall be sufficient to attract qualified persons both from within the Company and from outside. (c) Compensation shall be commensurate with period performance so that directors and executive officers can demonstrate their management capabilities to the fullest during their tenure. Compensation system - Director and executive officer compensation shall consist of basic remuneration and bonuses. - Bonuses shall be paid for the accomplishment of management responsibilities, in amounts commensurate with performance. Outside directors are not eligible for bonuses. - A portion of director and executive officer compensation is linked to the Company’s share price. 43 Directors and executive officers shall allocate a percentage of their basic remuneration, the percentage to be separately decided by the Board of Directors, to the acquisition of Company shares through the officer stock ownership plan. Participation in the officer stock ownership plan is optional for outside directors. - The compensation of corporate auditors is decided by board of corporate auditors and shall not exceed the basic remuneration decided by resolution of general shareholders’ meeting. Participation in the officer stock ownership plan is optional for corporate auditors, who are not eligible for bonuses. Procedure for determining compensation - Compensation is determined by an appropriate body, such as the general shareholders’ meeting and the Board of Directors, after a fair, transparent, and rigorous review by the Director Compensation Committee, which is composed mainly of outside directors and which issues an opinion, to ensure transparency and objectivity. Compensation paid Category Directors (including total for outside directors) Corporate auditors (including total for outside corporate auditors) Total Total compensation (millions of yen) Compensation breakdown (millions of yen) Number of individuals Basic remuneration Bonus 359 (28) 96 (39) 455 94 (-) - (-) 94 454 (28) 96 (39) 550 10 (2) 5 (3) 15 Notes 1. The number of individuals above includes one corporate auditor who retired on January 31, 2016. 2. Epson introduced a stock performance (stock-based) component to the compensation system to link compensation more closely to share price, so Epson stock accounts for a portion of the basic remuneration. 3. A resolution passed at the general shareholders’ meeting of June 26, 2001, established the maximum basic remuneration at ¥70 million per month for directors and at ¥12 million per month for corporate auditors. 4. The compensation paid includes ¥94 million in director bonuses (bonuses to be paid to the eight directors, excluding outside directors), which were approved at the June 28, 2016 annual general shareholders’ meeting. There is no bonus system for corporate auditors. 5. An outside corporate auditor who retired at the closing of the annual general shareholders’ meeting held on June 28, 2016 will be paid a retirement benefit of ¥15 million pursuant to a resolution of the annual general shareholders’ meeting held on June 23, 2006 on the payment of officer retirement benefits. 6. Stock options are not granted. (ii) Compensation for performance in and after the 2016 fiscal year The introduction of a more transparent and fair performance-linked stock compensation plan was approved at the annual general shareholders’ meeting on June 28, 2016. The plan for officers is designed to strengthen a sense of shared interest with shareholders and to show a commitment to sustaining growth and increasing corporate value over the long term. Basic policy The basic policies regarding the officer compensation system are as follows. Compensation for officers who have executive duties (a) Compensation shall provide incentive to improve business performance in order to increase corporate value in both the near, medium, and long terms. (b) Compensation shall be sufficient to attract qualified persons both from within the Company and from outside. (c) Compensation shall be commensurate with period performance so that they can demonstrate their management capabilities to the fullest during their tenure. Compensation for officers who do not have executive duties (a) The composition of compensation shall guarantee independence so that these officers can suitably exert their general management supervisory function, etc. 44 (b) Compensation shall be sufficient to attract qualified persons both from within the Company and from outside. Compensation system - Officer compensation consists of the following components: basic remuneration, bonus, and stock compensation. Basic remuneration Basic remuneration is monetary compensation that is paid monthly in an amount decided by taking into account all factors such as the officer’s position and responsibilities. It reflects the results of performance evaluations based on criteria set according to the roles of the officers. Bonus The bonus is monetary compensation that is paid once per year in an amount decided in accordance with considerations such as the level of achievement with respect to annual operating performance targets. It reflects the results of performance evaluations based on criteria set according to the roles of the officers. Stock compensation Under stock compensation, a trust scheme is used to deliver Company shares to officers, the number of shares being based on points system, where in officers are awarded points depending on the level of achievement with respect to medium- and long-term operating performance targets, such as business profit, ROS and ROE. - Given their role of fulfilling a general management supervisory function, etc., from a perspective that is independent from executive functions, officers who do not have executive duties do not receive performance and share price-linked bonuses and stock compensation. Procedure for determining compensation - Compensation is determined by general shareholders’ meeting and the Board of Directors or Audit & Supervisory Committee, after a fair, transparent, and rigorous review by the Director Compensation Committee, which is composed mainly of outside directors and which issues an opinion, to ensure transparency and objectivity. 45 (7) Securities held by the Company a. Balance sheet total of stocks held for reasons other than pure investment 20 companies ¥12,894 million b. Issuing company, number, and balance sheet total of stocks held for reasons other than pure investment Previous fiscal year Special investment securities Company NGK Insulators, Ltd. Shares (stock) 3,757,000 Balance sheet total (millions of yen) Reason held 9,636 To maintain and strengthen the Mizuho Financial Group, Inc. 15,008,880 3,168 To maintain and strengthen the business relationship with a supplier of key parts used in Epson products Seiko Holdings Corporation 1,644,080 The Hachijuni Bank, Ltd. 489,500 Hakuto Co., Ltd. 190,000 Marubun Corporation 332,640 King Jim Co., Ltd. 221,980 Otsuka Corporation 30,000 Joshin Denki Co., Ltd. 70,000 Pixelworks, Inc. 100,000 Nippon BS Broadcasting Corporation 33,200 business relationship with a source of steady funding and a provider of financial services 996 To maintain and strengthen the business relationship with a major buyer of Epson products 415 To maintain and strengthen the business relationship with a source of steady funding and a provider of financial services 272 To maintain and strengthen the business relationship with a major buyer of Epson products 263 To maintain and strengthen the business relationship with a major buyer of Epson products 180 To maintain and strengthen the business relationship with a major buyer of Epson products 153 To maintain and strengthen the business relationship with a major buyer of Epson products 66 To maintain and strengthen the business relationship with a major buyer of Epson products 60 To maintain and strengthen the business relationship with a supplier of key parts used in Epson products 41 To maintain and strengthen the business relationship with a company whose parent company is major buyer of Epson products 46 Fiscal year under review Special investment securities Company NGK Insulators, Ltd. Shares (stock) 3,757,000 Balance sheet total (millions of yen) Reason held 7,810 To maintain and strengthen the business relationship with a supplier of key parts used in Epson products Mizuho Financial Group, Inc. 15,008,880 2,522 To maintain and strengthen the Seiko Holdings Corporation 1,644,080 Marubun Corporation 332,640 The Hachijuni Bank, Ltd. 489,500 Hakuto Co., Ltd. 190,000 King Jim Co., Ltd. 221,980 Otsuka Corporation 30,000 Joshin Denki Co., Ltd. 70,000 Nippon BS Broadcasting Corporation 33,200 Pixelworks, Inc. 100,000 c. Stocks held purely for investment purposes None business relationship with a source of steady funding and a provider of financial services 733 To maintain and strengthen the business relationship with a major buyer of Epson products 255 To maintain and strengthen the business relationship with a major buyer of Epson products 237 To maintain and strengthen the business relationship with a source of steady funding and a provider of financial services 188 To maintain and strengthen the business relationship with a major buyer of Epson products 186 To maintain and strengthen the business relationship with a major buyer of Epson products 178 To maintain and strengthen the business relationship with a major buyer of Epson products 60 To maintain and strengthen the business relationship with a major buyer of Epson products 35 To maintain and strengthen the business relationship with a company whose parent company is major buyer of Epson products 24 To maintain and strengthen the business relationship with a supplier of key parts used in Epson products 47 (8) Accounting audits (a) Names and other details of certified public accountants performing audits Name of CPA Audit company No. of successive years performing audits Designated and Engagement Partner, Certified Public Accountant Designated and Engagement Partner, Certified Public Accountant Designated and Engagement Partner, Certified Public Accountant Hidetoshi Watanabe Ernst & Young ShinNihon LLC Seiji Yamamoto Ernst & Young ShinNihon LLC Takahiro Yamazaki Ernst & Young ShinNihon LLC 3 3 5 (b) Composition of auditing team The auditing team comprises 52 staff including 23 certified public accountants, eight junior accountants, and 21 other accounting staff. (9) Number of directors Epson’s Articles of Incorporation provide for a maximum of nine directors who are not members of the Audit & Supervisory Committee and a maximum of five directors who are members of the Audit & Supervisory Committee. (10) Election and retirement of directors According to its Articles of Incorporation, directors of the Company can be elected by a majority vote by at least one-third of shareholders with voting rights, and not through cumulative voting. Provisions regarding the retirement of directors do not vary from the provisions of the Companies Act. (11) Matters requiring resolutions of shareholders’ meetings that can be implemented by resolutions of the Board of Directors Treasury stock acquisition The Company’s Articles of Incorporation allow the Company to acquire treasury stock through stock market trade and other means by resolution of the Board of Directors. This enables a more flexible capital policy in response to a changing business environment. Director exemption from liability When liability falls under the requirements stipulated in Article 426, Paragraph 1 of the Companies Act, the Company’s Articles of Incorporation allow the Company to exempt the directors from liability for damages in Article 423, Paragraph 1 of the Companies Act up to the amount remaining after the legal minimum liability is deducted from the total liability amount by resolution of the Board of Directors. This allows the directors to fully apply themselves to their expected role of building an organization capable of aggressive business expansion. Interim dividend The Company’s Articles of Incorporation allow the Company to declare an interim dividend with a date of record of September 30 every year by resolution of the board of directors. This provides the Company with flexibility in paying dividends to shareholders. (12) Special resolution requirements of the general shareholders’ meeting The Company’s Articles of Incorporation set forth the requirements for a special resolution of the general shareholders’ meeting stipulated in Article 309, Paragraph 2 of the Companies Act as a two-thirds majority vote by at least one-third of shareholders with voting rights. This policy is intended to ensure smooth operation of the general shareholders’ meeting by relaxing the quorum requirements for special resolutions at the general shareholders’ meeting. 48 2. Details of audit remuneration (1) Remuneration for audits by certified public accountants (Millions of yen) Category Previous fiscal year Fiscal year under review Remuneration for audit certification work Remuneration for non-audit work Remuneration for audit certification work Remuneration for non-audit work Filing company Consolidated subsidiaries Total 158 66 225 2 2 5 149 65 214 0 3 4 (2) Other important remuneration Previous fiscal year Total payments for audits carried out on behalf of 63 consolidated overseas subsidiaries by certified public accountants belonging to the Ernst & Young network for the fiscal year ended March 31, 2015, amounted to ¥562 million. Fiscal year under review Total payments for audits carried out on behalf of 64 consolidated overseas subsidiaries by certified public accountants belonging to the Ernst & Young network for the fiscal year ended March 31, 2016, amounted to ¥590 million. (3) Non-audit work performed by auditing certified public accountant at filing company Previous fiscal year Remuneration paid for non-audit work performed by the certified public accountant was for various consultancy services. Fiscal year under review Remuneration paid for non-audit work performed by the certified public accountant was for various consultancy services. (4) Governing policy for auditor remuneration This does not apply because remuneration for auditing services is determined according to the nature of the audit work. 49 3. Basic policy regarding company control Epson’s board of directors agreed on a basic policy governing persons who control our financial and business policy decisions (hereinafter the “basic policy”). (1) Overview Epson believes that its shareholders should be determined through free trade on the market. Therefore, the decision as to whether to accept a takeover offer that would allow another party to acquire a controlling share of Epson and thus gain power over the Company’s financial and business decisions should ultimately be put before the shareholders. To ensure and enhance the corporate value and common interests of shareholders, Epson believes it is essential for Epson’s directors, managers, and employees to work as a team to create value, to pursue the Epson tradition of creativity and challenge, and to earn and keep the trust of its customers. Not all large-scale acquisitions of shares enhance the value of the company whose shares are being acquired, nor do they always serve the common interests of shareholders. Epson recognizes the need to use all necessary and appropriate means to protect the Company’s corporate value and the common interests of its shareholders against persons seeking to improperly acquire large numbers of shares in an attempt to gain control over decisions concerning the Company’s financial and business policies. (2) Summary of measures in support of the basic policy 1) Specific actions in support of the basic policy In March 2016 the Company established the Epson 25 Corporate Vision, a document that describes Epson’s goals over the decade between the 2016 and 2025 fiscal years. At the same time, the Company established the Epson 25 Mid-Range Business Plan (FY2016-2018), a three-year plan for the first phase of work toward achieving the Epson 25 vision. Under the Phase 1 Mid-Range Business Plan Epson will build a robust foundation for business by sustaining the results of successful strategic initiatives pursued to date, developing products for the future, and aggressively investing as needed. 2) Efforts to deter parties who are deemed inappropriate based on Epson’s basic policy in gaining control over the Company’s financial and business policy decision making Aiming to ensure and enhance corporate value and the common interests of its shareholders, Epson introduced a series of measures to prevent large-scale acquisition of Epson shares. The measures were approved at the June 2008 Ordinary General Meeting of Shareholders and updated at the June 2011 Ordinary General Meeting of Shareholders. The old measures were formally reworded and shareholders approved their updating at the June 24, 2014 Ordinary General Meeting of Shareholders. (The updated measures are called “the Plan,” below.) The purpose of the Plan is to prevent large-scale acquisitions of Epson stock certificates that do not enhance corporate value or that are not in the common interests of shareholders by having shareholders decide whether to allow such acquisitions and by giving the Epson board of directors the time and information they need to present shareholders with an alternative proposal and enable the board to discuss and negotiate with the acquirer on behalf of shareholders. Specifically, a party that intends to acquire or make a takeover bid for 20% or more of stock certificates outstanding shall be required to submit in advance to the Epson board of directors a statement of intent as well as sufficient and necessary information for decision making on the part of shareholders and for evaluation and consideration by a special committee. The party shall also be required to comply with the procedures defined in the Plan. Furthermore, the Plan allows for the activation of provisions to halt the acquisition in question if, for example, it is not conducted in line with the Plan or it is deemed contrary to corporate value as a company or the common interest of its shareholders. 50 To prevent the Epson board of directors from making arbitrary decisions about using anti-takeover measures, the decision to invoke preventive measures is subject to the assessment of a special committee made up of highly independent external parties. Actions of the special committee shall include examination of stock acquisition details, requesting information from the Epson board of directors regarding alternative proposals, disclosing information to shareholders, and negotiating with parties intending to make acquisitions. The special committee shall advise the Epson board of directors regarding the necessity of anti-takeover measures, and the Epson board of directors shall promptly accept or reject a resolution to invoke preventive measures, paying the utmost consideration to that advice. (3) Decisions made by the Epson board of directors regarding specific actions and the justification for those decisions The actions described in (2) 1) above were specifically formulated to enhance both Epson’s corporate value and the common interests of its shareholders in a continuous and sustained manner. These actions support the basic policy. As well as having been introduced and updated in order to ensure and enhance corporate value and the common interests of shareholders, the Plan is in accordance with the basic policy outlined in (1) above. Specifically, the Plan guarantees fairness and objectivity, is reasonable, and supports Epson’s corporate value and the common interests of its shareholders because, among other things, a) it was introduced (and updated) after being approved by shareholders at the Ordinary General Meeting of Shareholders; b) it contains provisions for reasonable and objective implementation; c) a special committee comprising members with a high degree of independence from Epson management was established and activation of the Plan is subject to the assessment of that special committee; d) the special committee may solicit expert opinions from third parties at Epson’s expense; and e) the Plan was determined to be valid for approximately three years from the introduction and update and may be abolished by the board of directors at any time. The Plan is not for keeping Epson executive officers in their posts. 51 Management Directors, audit & supervisory committee member and executive officers of the Company as of the date when the annual securities report (yukashoken-houkokusho) was submitted and their functions are listed below. Name Position Current function Minoru Usui Shigeki Inoue President (Representative Director) Senior Managing Director (Representative Director) Yoneharu Fukushima Managing Director Koichi Kubota Managing Director Masayuki Kawana Director Tatsuaki Seki Director Chief Operating Officer, Wearable Products Operations Division, and General Administrative Manager, Corporate Planning Division Chief Operating Officer, Robotics Solutions Operations Division, and General Administrative Manager, First Technology Development Division Chief Operating Officer, Printer Operations Division, and Deputy General Administrative Manager, Corporate Planning Division General Administrative Manager, Human Resources Division, and President, Orient Watch Co., Ltd. General Administrative Manager, Management Control Division Hideaki Omiya Mari Matsunaga Noriyuki Hama Michihiro Nara Outside Director Outside Director Director (Full-Time Audit & Supervisory Committee Member) Outside Director (Audit & Supervisory Committee Member) 52 Name Chikami Tsubaki Position Outside Director Current function (Audit & Supervisory Committee Member) Yoshio Shirai Outside Director (Audit & Supervisory Committee Member) Tadaaki Hagata Motonori Okumura Managing Executive Officer Executive Officer Junichi Watanabe Executive Officer Kiyofumi Koike Executive Officer Yasumasa Kitamatsu Executive Officer Hideki Shimada Executive Officer Masayuki Kitamura Executive Officer Akihiro Fukaishi Executive Officer Sunao Murata Executive Officer Yoshiyuki Moriyama Executive Officer Toshiya Takahata Executive Officer 53 President, Epson Precision (Philippines), Inc. General Administrative Manager, Second Technology Development Division Chief Operating Officer, Visual Products Operations Division, and General Administrative Manager, Production Planning Division Chairman, Epson (China) Co., Ltd. Deputy General Administrative Manager, Second Technology Development Division Deputy Chief Operating Officer, Printer Operations Division Chief Operating Officer, Microdevices Operations Division Deputy Chief Operating Officer, Professional Printing Operations Division Chief Operating Officer, Professional Printing Operations Division Deputy Chief Operating Officer, Wearable Products Operations Division General Administrative Manager, Intellectual Property Division Name Position Current function Tsuyoshi Kitahara Executive Officer Naoyuki Saeki Executive Officer Nobuyuki Shimotome Executive Officer Kazuyoshi Yamamoto Executive Officer Munenori Ando Executive Officer Hitoshi Igarashi Executive Officer Keith Kratzberg Executive Officer Isamu Otsuka Executive Officer Taro Shigemoto Special Audit & Supervisory Officer Deputy General Administrative Manager, First Technology Development Division President, Epson Sales Japan Corporation Deputy General Administrative Manager, First Technology Development Division President, Epson Europe B.V. President, Epson (China) Co., Ltd. Deputy Chief Operating Officer, Printer Operations Division President, Epson America, Inc. President, Epson Atmix Corporation 54 Index to Consolidated Financial Statements Seiko Epson Corporation and Subsidiaries Consolidated Statement of Financial Position................................................................................................ 56 Consolidated Statement of Comprehensive Income ...................................................................................... 58 Consolidated Statement of Changes in Equity ............................................................................................... 60 Consolidated Statement of Cash Flows ........................................................................................................... 62 Notes to Consolidated Financial Statements .................................................................................................. 63 Report of Independent Auditors ................................................................................................................... 121 55 Consolidated Statement of Financial Position Years ended March 31, 2015 and 2016: Millions of yen Notes March 31, 2015 March 31, 2016 Thousands of U.S. dollars March 31, 2016 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Income tax receivables Other financial assets Other current assets Subtotal Non-current assets held for sale Total current assets Non-current assets Property, plant and equipment Intangible assets Investment property Investments accounted for using the equity method Net defined benefit assets Other financial assets Other non-current assets Deferred tax assets Total non-current assets Total assets 8,35 9,35 10 11,35 12 13,15 14 17 23 11,35 12 18 245,330 167,482 220,426 1,963 3,544 11,539 650,287 96 650,383 227,257 19,170 4,758 3,232 7 25,345 5,958 70,168 355,898 1,006,282 230,498 151,660 201,608 1,232 1,674 14,335 601,010 441 601,451 244,463 18,179 1,967 1,605 - 21,962 5,122 46,587 339,888 941,340 2,045,598 1,345,935 1,789,208 10,933 14,856 127,247 5,333,777 3,913 5,337,690 2,169,533 161,332 17,456 14,243 - 194,905 45,496 413,445 3,016,410 8,354,100 56 Liabilities and equity Liabilities Current liabilities Trade and other payables Income tax payables Other financial liabilities Provisions Other current liabilities Total current liabilities Non-current liabilities Other financial liabilities Net defined benefit liabilities Provisions Other non-current liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Equity Share capital Capital surplus Treasury shares Other components of equity Retained earnings Equity attributable to owners of the parent company Non-controlling interests Total equity Total liabilities and equity Millions of yen Notes March 31, 2015 March 31, 2016 Thousands of U.S. dollars March 31, 2016 19,35 20,35 21 22 20,35 23 21 22 18 24 24 24 24 140,047 8,384 75,745 24,322 106,942 355,442 112,466 31,234 6,141 2,977 711 153,531 508,973 53,204 84,321 (20,464) 83,073 294,191 494,325 2,982 497,308 1,006,282 130,624 6,830 62,479 23,019 102,065 325,019 81,741 54,845 4,941 3,114 1,001 145,644 470,663 53,204 84,321 (20,471) 57,989 292,775 1,159,247 60,614 554,481 204,286 905,824 2,884,452 725,425 486,732 43,849 27,656 8,883 1,292,545 4,176,997 472,168 748,322 (181,673) 514,635 2,598,287 467,818 4,151,739 2,858 470,676 941,340 25,364 4,177,103 8,354,100 57 Consolidated Statement of Comprehensive Income Years ended March 31, 2015 and 2016: Millions of yen Year ended March 31, Notes 2015 2016 Thousands of U.S. dollars Year ended March 31, 2016 Revenue Cost of sales Gross profit Selling, general and administrative expenses Other operating income Other operating expense Profit from operating activities Finance income Finance costs Share of profit of investments accounted for using the equity method Profit before tax Income taxes    Profit from continuing operations Loss from discontinued operations Profit for the period Other comprehensive income Items that will not be reclassified subsequently to profit or loss, net of tax Remeasurement of net defined benefit liabilities (assets) Net gain (loss) on revaluation of financial assets measured at FVTOCI (Note) Subtotal Items that may be reclassified subsequently to profit or loss, net of tax Exchange differences on translation of foreign operations Net changes in fair value of cash flow hedges Share of other comprehensive income of investments accounted for using the equity method Subtotal Total other comprehensive income, net of tax   Total comprehensive income for the period 7,26 10,13, 14 13,14, 27 29 13,30 31 31 18 32 33 33 33 33 33 (Note) FVTOCI: Fair Value Through Other Comprehensive Income 1,086,341 (690,416) 395,924 (294,648) 39,907 (9,802) 131,380 3,268 (2,320) 207 132,536 (18,631) 113,904 (1,118) 112,785 (1,512) 2,121 608 30,113 1,718 257 32,089 32,698 145,483 1,092,481 (694,821) 397,660 (312,708) 14,807 (5,732) 94,026 1,652 (4,252) 104 91,530 (45,421) 46,109 (42) 46,067 (22,161) (2,610) (24,771) (21,309) (1,215) (240) (22,765) (47,536) (1,469) 9,695,429 (6,166,321) 3,529,108 (2,775,186) 131,407 (50,878) 834,451 14,660 (37,733) 922 812,300 (403,097) 409,203 (373) 408,830 (196,671) (23,163) (219,834) (189,121) (10,782) (2,129) (202,032) (421,866) (13,036) 58 Profit for the period attributable to: Owners of the parent company Non-controlling interests Profit for the period Total comprehensive income for the period attributable to: Owners of the parent company Non-controlling interests Total comprehensive income for the period Millions of yen Year ended March 31, Notes 2015 2016 Thousands of U.S. dollars Year ended March 31, 2016 112,560 225 112,785 144,841 642 145,483 Yen Year ended March 31, Notes 2015 2016 45,772 294 46,067 (1,456) (12) (1,469) 406,221 2,609 408,830 (12,930) (106) (13,036) U.S. dollars Year ended March 31, 2016 Earnings per share for the period: Basic earnings per share for the period Earnings per share from continuing operations for the period: Basic earnings per share for the period Earnings per share from discontinued operations for the period: Basic loss per share for the period 34 34 34 314.61 127.94 317.74 128.06 1.14 1.14 (3.13) (0.12) (0.00) 59 Consolidated Statement of Changes in Equity Years ended March 31, 2015 and 2016: Equity attributable to owners of the parent company Millions of yen Other components of equity Notes 24 25 As of April 1, 2014 Profit for the period Other comprehensive income Total comprehensive income for the period Acquisition of treasury shares Dividends Acquisition of subsidiary Transfer from other components of equity to retained earnings Total transactions with the owners As of March 31, 2015 (Note) FVTOCI: Fair Value Through Other Comprehensive Income Share capital Capital surplus Treasury shares Remeasurement of net defined benefit liabilities (assets) Net gain (loss) on revaluation of financial assets measured at FVTOCI (Note) Exchange differences on translation of foreign operations Net changes in fair value of cash flow hedges Total other components of equity Retained earnings Total equity attributable to owners of the parent company Non-controlling interests Total equity 53,204 - - - - - - 84,321 - - - - - - (20,457) - - - (6) - - - - (1,512) (1,512) - - - 5,332 - 2,253 2,253 - - - 45,046 - 29,821 29,821 - - - (662) - 1,718 1,718 - - - 49,716 - 32,281 32,281 - - - 195,587 112,560 - 112,560 - (12,880) - 362,371 112,560 32,281 144,841 (6) (12,880) - 2,385 225 416 642 - (95) 50 364,757 112,785 32,698 145,483 (6) (12,975) 50 - - - - 53,204 - 84,321 (6) (20,464) 1,512 1,512 - (436) - - (436) 7,149 - 74,868 - 1,055 1,075 1,075 83,073 (1,075) - - - (13,955) 294,191 (12,887) 494,325 (45) 2,982 (12,932) 497,308 60 Equity attributable to owners of the parent company Millions of yen Other components of equity Notes 24 25 Share capital Capital surplus Treasury shares Remeasurement of net defined benefit liabilities (assets) Net gain (loss) on revaluation of financial assets measured at FVTOCI (Note) Exchange differences on translation of foreign operations Net changes in fair value of cash flow hedges Total other components of equity Retained earnings Total equity attributable to owners of the parent company Non-controlling interests Total equity 53,204 - - - - - - 84,321 - - - - - - (20,464) - - - (6) - - - - (22,160) (22,160) - - - 7,149 - (2,600) (2,600) - - - 74,868 - (21,252) (21,252) - - - 1,055 - (1,215) (1,215) - - - 83,073 - (47,229) (47,229) - - - 294,191 45,772 - 45,772 - (25,044) - 494,325 45,772 (47,229) (1,456) (6) (25,044) - 2,982 294 (307) (12) - (111) - 497,308 46,067 (47,536) (1,469) (6) (25,155) - - - - - 53,204 - 84,321 (6) (20,471) 22,160 22,160 - (15) - - (15) 4,533 - 53,616 - (160) 22,145 22,145 57,989 (22,145) - - - (47,189) 292,775 (25,050) 467,818 (111) 2,858 (25,162) 470,676 As of April 1, 2015 Profit for the period Other comprehensive income Total comprehensive income for the period Acquisition of treasury shares Dividends Acquisition of subsidiary Transfer from other components of equity to retained earnings Total transactions with the owners As of March 31, 2016 (Note) FVTOCI: Fair Value Through Other Comprehensive Income Notes 24 25 As of April 1, 2015 Profit for the period Other comprehensive income Total comprehensive income for the period Acquisition of treasury shares Dividends Acquisition of subsidiary Transfer from other components of equity to retained earnings Total transactions with the owners As of March 31, 2016 (Note) FVTOCI: Fair Value Through Other Comprehensive Income Thousands of U.S. dollars Equity attributable to owners of the parent company Other components of equity Share capital Capital surplus Treasury shares Remeasurement of net defined benefit liabilities (assets) Net gain (loss) on revaluation of financial assets measured at FVTOCI (Note) Exchange differences on translation of foreign operations Net changes in fair value of cash flow hedges Total other components of equity Retained earnings Total equity attributable to owners of the parent company Non-controlling interests Total equity 472,168 - - - - - - 748,322 - - - - - - (181,620) - - - (53) - - - - - - 472,168 - 748,322 (53) (181,673) - - (196,671) (196,671) - - - 196,671 196,671 - 63,465 - (23,094) (23,094) - - - 664,429 - (188,604) (188,604) - - - 9,363 - (10,782) (10,782) - - - (142) - - (142) 40,229 - 475,825 - (1,419) 737,257 - (419,151) (419,151) - - - 196,529 196,529 514,635 2,610,852 406,221 - 406,221 - (222,257) - 4,386,979 406,221 (419,151) (12,930) (53) (222,257) - 26,465 2,609 (2,715) (106) - (995) - 4,413,444 408,830 (421,866) (13,036) (53) (223,252) - (196,529) - - - (418,786) 2,598,287 (222,310) 4,151,739 (995) 25,364 (223,305) 4,177,103 61 Consolidated Statement of Cash Flows Years ended March 31, 2015 and 2016: Millions of yen Year ended March 31, Notes 2015 2016 Thousands of U.S. dollars Year ended March 31, 2016 Cash flows from operating activities Profit for the period Depreciation and amortisation Impairment loss and reversal of impairment loss Finance (income) costs, net Share of (profit) loss of investments accounted for using the equity method Loss (gain) on sales and disposal of property, plant and equipment, intangible assets and investment property, net Income taxes Decrease (increase) in trade receivables Decrease (increase) in inventories Increase (decrease) in trade payables Increase (decrease) in net defined benefit liabilities Other, net Subtotal Interest and dividend income received Interest expenses paid Payments for loss on litigation Income taxes paid Net cash provided by (used in) operating activities Cash flows from investing activities Proceeds from sales of investment securities Purchase of property, plant and equipment Proceeds from sales of property, plant and equipment Purchase of intangible assets Proceeds from sales of intangible assets Proceeds from sales of investment property Purchase of investments in subsidiaries Other, net Net cash provided by (used in) investing activities Cash flows from financing activities Net increase (decrease) in current borrowings Repayment of non-current borrowings Proceeds from issuance of bonds issued Redemption of bonds issued Payments of lease obligations Dividends paid Dividends paid to non-controlling interests Purchase of treasury shares Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 25 8 8 112,785 44,907 3,563 (948) (207) (4,288) 18,631 (2,279) (19,252) 21 (25,355) 8,842 136,419 2,481 (1,552) (859) (27,660) 108,828 249 (37,045) 272 (5,738) 29 14,012 (1,097) (3,417) (32,735) (30,167) (2,000) 10,000 (20,000) (241) (12,880) (95) (6) (55,392) 13,118 33,819 211,510 245,330 46,067 45,923 (2,210) 2,600 (104) (6,886) 45,421 10,661 6,610 (8,915) 1,514 (3,215) 137,468 1,664 (1,218) (4,144) (20,715) 113,054 51 (59,614) 582 (6,538) 31 13,969 (500) 460 (51,558) (1,819) (86) - (40,000) (103) (25,044) (111) (6) (67,171) (9,155) (14,832) 245,330 230,498 408,830 407,552 (19,613) 23,073 (922) (61,111) 403,097 94,613 58,661 (79,117) 13,436 (28,514) 1,219,985 14,767 (10,809) (36,776) (183,848) 1,003,319 452 (529,055) 5,165 (58,022) 275 123,970 (4,437) 4,091 (457,561) (16,152) (763) - (354,987) (914) (222,257) (995) (53) (596,121) (81,266) (131,629) 2,177,227 2,045,598 62 Notes to Consolidated Financial Statements 1. Reporting Entity Seiko Epson Corporation (the “Company”) is a stock corporation domiciled in Japan. The addresses of the Company’s registered head office and principal business offices are available on the Company’s website (http://www.epson.jp). The details of businesses and principal business activities of the Company and its affiliates (“Epson”) are stated in “7. Segment Information.” 2. Basis of Preparation (1) Compliance with IFRS Epson’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (hereinafter referred to as “IFRS”) as issued by the International Accounting Standards Board which are applied based on the provision of Article 93 of Ordinance on Terminology, Forms and Preparation Methods of Consolidated Financial Statements, as Epson meets the criteria of a “Specified Companies applying Designated IFRS” defined under Article 1-2 of Ordinance on Terminology, Forms and Preparation Methods of Consolidated Financial Statements. (2) Basis of Measurement Except for the financial instruments stated in “3. Significant Accounting Policies,” Epson’s consolidated financial statements are prepared on the cost basis. (3) Functional Currency and Presentation Currency Epson’s consolidated financial statements are presented in Japanese yen (hereinafter referred to as “yen” or “¥”), which is the functional currency of the Company. The units are in millions of yen unless otherwise noted, and figures less than one million yen are rounded down. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥ 112.68 to U.S. $1 as of March 31, 2016. (4) Reporting Period of Subsidiaries The fiscal year end date of certain overseas subsidiaries is December 31, and Epson consolidates financial results of those subsidiaries in conformity with the provisional settlement of accounts as of the consolidated fiscal year end. 3. Significant Accounting Policies (1) Basis of Consolidation Consolidated financial statements of Epson include financial statements of the Company and subsidiaries, and interests in investments in associates and joint ventures. (A) Subsidiaries A subsidiary is an entity that is controlled by Epson. Epson controls the entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The acquisition date of a subsidiary is the date on which Epson obtains control of the subsidiary, and the subsidiary is included in the consolidation from the date of acquisition until the date on which Epson loses control. All intergroup balances, transactions, unrealised profit or loss arising from intergroup transaction are eliminated on consolidation. Comprehensive income for subsidiaries is attributed to the owners of the parent company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. 63 (B) Associates An associate is an entity over which Epson has significant influence that is the power to participate in the financial and operating policy decisions of the entity. Investments in associates are accounted for using the equity method from the date on which Epson has the significant influence until the date on which it ceases to have the significant influence. (C) Joint Ventures A joint venture is a joint arrangement whereby Epson and the other parties that have joint control of the arrangement have rights to the net assets of the arrangement. The joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities, that significantly affect the returns of the arrangement, require the unanimous consent of the parties sharing control. Epson accounts for that investment using the equity method. (2) Business Combinations Each business combination is accounted for by applying the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by Epson, the liabilities incurred by Epson to former owners of the acquiree and the equity interests issued by Epson. As the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Epson’s previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, goodwill is recognised in the consolidated statement of financial position. If the difference is a negative monetary value, the resulting gain is immediately recognised as profit in the consolidated statement of comprehensive income. Acquisition-related costs incurred are recognised as expenses except for the costs to issue debt or equity securities. (3) Foreign Currency Translation Consolidated financial statements of Epson are presented in Japanese yen, which is the functional currency of the Company. Each company in Epson determines its functional currency and measures its results and financial position in that currency. Foreign currency transaction is translated into the functional currency at a spot exchange rate at the date of transaction or a rate that approximates the actual rate at the date of the transaction. Foreign currency monetary items are translated using the closing rate. Exchange differences arising on the settlement of monetary items or on translating monetary items are recognised in profit or loss. However, exchange differences arising on financial instruments designated as hedging instruments for net investments in foreign operations, financial assets measured at fair value through other comprehensive income, and cash flow hedges are recognised in other comprehensive income. Assets and liabilities of foreign operations are translated into Japanese yen at the closing date, while income and expenses of foreign operations are translated into Japanese yen at exchange rates at the dates of the transactions or a rate that approximates the exchange rates at the dates of the transactions. All resulting exchange differences are recognised in other comprehensive income. On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation is recognised in profit or loss in the period of disposition. (4) Financial Instruments Epson accounts for financial instruments in accordance with IFRS 9 “Financial Instruments” (announced in November 2009, revised in October 2010), which Epson has early adopted. (A) Financial Assets (i) Initial Recognition and Measurement Financial assets are classified into financial assets measured at fair value and amortised cost at initial recognition. Financial assets are classified as financial assets measured at amortised cost if both of the following conditions are met. Otherwise, they are classified as financial assets measured at fair value. (a) The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows. (b) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 64 For financial assets measured at fair value, each equity instrument is designated as measured at fair value through profit or loss or as measured at fair value through other comprehensive income, except for equity instruments held for trading purposes that must be measured at fair value through profit or loss. Such designations are applied continuously. All financial assets are initially measured at fair value plus transaction costs that are directly attributable to the financial assets, except when classified in the category of financial assets measured at fair value through profit or loss. Epson recognises trade and other receivables on the date they are originated. All other financial assets are recognised on the trade date when Epson becomes a party to the contractual provisions of the instrument. (ii) Subsequent Measurement After initial recognition, financial assets are measured based on the classification as follows: (a) Financial Assets Measured at Amortised Cost Financial assets measured at amortised cost are measured at amortised cost using the effective interest method. (b) Financial Assets Measured at Fair Value Financial assets other than those measured at amortised cost are measured at fair value. Changes in fair value of financial assets measured at fair value are recognised in profit or loss. However, changes in fair value of equity instruments designated as measured at fair value through other comprehensive income are recognised in other comprehensive income and the cumulative change in fair value in other comprehensive income is transferred to retained earnings when equity instruments are derecognised or the decline in its fair value is significant. Dividends on the financial assets are recognised in profit or loss for each fiscal year. (iii) Derecognition Financial assets are derecognised when the contractual rights to the cash flows from them expire or when they are transferred in transactions in which substantially all the risks and rewards of ownership are transferred. (B) Impairment of Financial Assets At the end of each fiscal year, Epson assesses whether there is any objective evidence that financial assets measured at amortised cost are impaired. Evidence of impairment includes significant financial difficulty of the borrower or a group of borrowers, a default or delinquency in interest or principal payments, and bankruptcy of the borrower. Epson assesses whether objective evidence of impairment exists individually for financial assets that are individually significant and collectively for financial assets that are not individually significant. If there is any objective evidence that impairment losses on financial assets measured at amortised cost have been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. When impairment is recognised, the carrying amount of the financial asset is reduced by an allowance account and impairment loss is recognised in profit or loss. If the amount of the impairment loss provided decreases due to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed in profit or loss through the allowance account. (C) Financial Liabilities (i) Initial Recognition and Measurement Financial liabilities are classified into financial liabilities measured at fair value through profit or loss and financial liabilities measured at amortised cost. Epson determines the classification at initial recognition. All financial liabilities are measured at fair value at initial recognition. However, financial liabilities measured at amortised cost are measured at cost after deducting transaction costs that are directly attributable to the financial liabilities. (ii) Subsequent Measurement After initial recognition, financial liabilities are measured based on the classification as follows: (a) Financial Liabilities Measured at Fair Value through Profit or Loss Financial liabilities measured at fair value through profit or loss include financial liabilities designated as measured at fair value through profit or loss at initial recognition. 65 (b) Financial Liabilities Measured at Amortised Cost Financial liabilities measured at amortised cost are measured at amortised cost using the effective interest method. (iii) Derecognition Financial liabilities are derecognised when the obligation is discharged, canceled or expired. (D) Offsetting a Financial Asset and a Financial Liability A financial asset and a financial liability are offset and the net amount presented in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and Epson intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. (E) Derivatives Accounting Epson utilizes derivatives, including forward foreign exchange contracts and non-deliverable forwards, to hedge foreign exchange and interest rate risks. These derivatives are initially measured at fair value when the contract is entered into, and are subsequently remeasured at fair value. Changes in fair value of derivatives are recognised in profit or loss in the consolidated statement of comprehensive income. However, the gains or losses on hedging instruments relating to the effective portion of cash flow hedges and hedges of net investments in foreign operations are recognised in other comprehensive income in the consolidated statement of comprehensive income. (F) Hedge Accounting At the inception of a hedge, Epson formally designates and documents the hedging relationship to which hedge accounting is applied and the objectives and strategies of risk management for undertaking the hedge. The documentation includes identification of hedging instruments, the hedged items or transactions, the nature of the risks being hedged and how the hedging instrument’s effectiveness is assessed in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risks. Even though these hedges are expected to be highly effective in offsetting changes in fair value or cash flows, they are assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which the hedges were designated. Epson classifies hedging relationships that meet the qualifying criteria for hedge accounting in the following categories and applies hedge accounting to the hedging relationships. (i) Fair Value Hedge The gain or loss on the derivative is recognised in profit or loss in the consolidated statement of comprehensive income. The hedging gain or loss on the hedged items attributable to the hedged risks adjust the carrying amount of the hedged item and is recognised in profit or loss in the consolidated statement of comprehensive income. (ii) Cash Flow Hedge The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income in the consolidated statement of comprehensive income, while the ineffective portion is recognised immediately in profit or loss in the consolidated statement of comprehensive income. The amounts of hedging instruments recognised in other comprehensive income are reclassified to profit or loss when the transactions of the hedged items affect profit or loss. In cases where hedged items result in the recognition of non-financial assets or liabilities, the amounts recognised in other comprehensive income are accounted for as adjustments to the initial carrying amount of non-financial assets or liabilities. When forecast transactions or firm commitments are no longer expected to occur, any related cumulative gains or losses that have been recognised in other comprehensive income are reclassified to profit or loss. When hedging instruments expire, are sold, terminated or exercised without the replacement or rollover of other hedging instruments, or when the hedge designation is revoked, amounts that have been recognised in other comprehensive income continue to be recognised in equity until the forecast transactions or firm commitments occur. (iii) Hedges of a Net Investment in Foreign Operation Hedges of a net investment in foreign operation are accounted for similarly to cash flow hedges. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income in the consolidated statement of comprehensive income, while the ineffective portion is recognised in profit or loss in the consolidated statement of comprehensive income. On the disposal of the foreign operation, the cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge that has been recognised in other comprehensive income is reclassified from equity to profit or loss. 66 (G) Fair Value of Financial Instruments Fair value of financial instruments that are traded in an active market as of the end of fiscal year refers to quoted market prices or dealer quotations. If there is no active market, fair value of financial instruments is determined using appropriate valuation models. (5) Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value as such that has a short maturity of three months or less from the date of acquisition. (6) Inventories The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Inventories are measured at the lower of cost or net realizable value, and the cost of inventories is assigned by using the weighted-average cost formula. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (7) Property, Plant and Equipment The cost of property, plant and equipment includes any costs directly attributable to the acquisition of the asset and dismantlement, removal and restoration costs, as well as borrowing costs eligible for capitalisation. After recognition as an asset, property, plant, and equipment is measured by using the cost model and is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Except for assets that are not subject to depreciation such as land, assets are depreciated using the straight-line method over their estimated useful lives. The estimated useful lives of major assets are as follows: • Buildings and structures: 10 to 35 years • Machinery and vehicles: 2 to 12 years The estimated useful lives, depreciation method and residual value are reviewed at each fiscal year end and, if expectations differ from previous estimates, the effect of changes in accounting estimates is recognised prospectively. (8) Intangible Assets (A) Goodwill Goodwill acquired in a business combination is measured at the amount recognised at the acquisition date less any accumulated impairment losses. Goodwill is not amortised and allocated to a cash-generating unit that is identified according to locations and types of businesses. The cash-generating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. An impairment loss is recognised in profit or loss in the consolidated statement of comprehensive income and not reversed in a subsequent period. (B) Intangible Assets other than Goodwill The cost of a separately acquired intangible asset is measured initially at cost, and the cost of intangible asset acquired in a business combination is its fair value at the acquisition date. The cost of internally generated intangible asset is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria. After initial recognition, an intangible asset is measured by using the cost model and is carried at its cost less any accumulated amortisation and any accumulated impairment losses. An intangible asset with a finite useful life is amortised using the straight-line method over its estimated useful life. The estimated useful life of major intangible asset with a finite useful life is as follows: • Software: 3 to 5 years The estimated useful lives and amortisation method are reviewed at each fiscal year end and, if expectations differ from previous estimates, the effect of changes in accounting estimates is recognised prospectively. An intangible asset with an indefinite useful life or an intangible asset not yet available for use are not amortised and tested for impairment annually, and whenever there is an indication that the intangible asset may be impaired. (9) Leases Epson classifies a lease as finance lease if it transfers substantially all the risks and rewards incidental to ownership of an asset and a lease as operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an asset. 67 At the commencement of the lease term, finance leases are recognised as assets and liabilities in the consolidated statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The asset is depreciated using the straight-line method over the shorter of the lease term and its estimated useful life which is consistent with that for depreciable assets that are owned. Contingent rents are recognised as expenses in the periods in which they are incurred. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term in the consolidated statement of comprehensive income. Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset) and the arrangement conveys a right to use the asset. (10) Investment Property Investment property is property held to earn rentals or for capital appreciation or both. After recognition as an asset, investment property is measured by using the cost model and is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Investment property is depreciated using the straight-line method over its estimated useful life. The estimated useful life of major investment properties is 35 years. (11) Impairment of Non-financial Assets Epson assesses whether there is any indication that an asset may be impaired. If any such indication exists, or irrespective of whether there is any indication of impairment, where impairment testing is required, the recoverable amount of the asset is estimated. If it is not possible to estimate the recoverable amount for each asset, the recoverable amount of the cash-generating unit to which the asset belongs is determined. The recoverable amount is measured at the higher of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use. If carrying amount of an asset or cash-generating unit exceeds its recoverable amount, an impairment loss is recognised and the carrying amount of the asset is reduced to its recoverable amount. The impairment loss is recognised in profit or loss. In determining an asset’s value in use, an estimate of the future cash flows expected to derive from the asset are discounted to the present value, using pretax discount rates that reflect current market assessments of the time value of money and the risks specific to the asset. An impairment loss for goodwill is recognised in profit or loss in the consolidated statement of comprehensive income and not reversed in a subsequent period. Epson assesses whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amount of that asset is estimated. If the recoverable amount exceeds the carrying amount of the asset, an impairment loss is reversed to the carrying amount that would have been determined (net of amortisation or depreciation) if no impairment loss had been recognised for the asset in prior years. (12) Non-current Assets Held for Sale and Discontinued Operations Epson classifies a non-current asset or disposal group as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. The non-current asset or disposal group as held for sale is available for immediate sale in its present condition and its sale is highly probable when Epson management commits to a plan to sell the asset or disposal group. Epson measures the non-current asset or disposal group classified as held for sale at the lower of its carrying amount and fair value less costs to sell. The non-current asset is not depreciated or amortised while it is classified as held for sale or while it is part of a disposal group classified as held for sale. A discontinued operation is a component of an entity, that is a cash-generating unit or a group of cash-generating units, that either has been disposed of, or is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations, (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or (c) is a subsidiary acquired exclusively with a view to resale. (13) Post-employment Benefits Epson has defined benefit plans and defined contribution plans as post-employment benefits plans. For each defined benefit plan, Epson calculates the present value of defined benefit obligations and the related current service cost and past service cost, using the projected unit credit method. For a discount rate, a discount period is set based on the estimated timing of benefit payments in each period, and the discount rate is determined by reference to market yields as of the end of fiscal year on high quality corporate bonds for the period corresponding to the discount period. The net defined benefit liability (asset) is measured by deducting the fair value of any plan assets (including adjustments of the net defined benefit asset and the asset ceiling, if necessary) 68 from the present value of the defined benefit obligation. Net interest on the net defined benefit liability (asset) is recognised in profit or loss. Remeasurements of the net defined benefit liability (asset) are recognised in other comprehensive income and transferred to retained earnings immediately. Past service cost is recognised as an expense at the earlier of when a plan amendment or curtailment occurs and when any related restructuring costs or termination benefits are recognised. The contribution payable to a defined contribution plan is recognised as an expense. (14) Provisions Epson recognises provision when it has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits is required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the effect of the time value of money is material, the amount of a provision is measured at the present value of the expenditures expected to be required to settle the obligation. (15) Revenue (A) Sale of Goods Epson recognises revenue from the sale of goods when the significant risks and rewards of ownership of the goods have been transferred to the buyers, Epson retains neither continuing managerial involvement nor effective control over the goods sold, it is probable that the economic benefits associated with the transaction will flow to Epson, and the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be measured reliably. The risks and rewards of ownership of the goods are usually transferred at the time of delivery of the goods to customers. The amount of revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates. (B) Interest Interest is recognised using the effective interest method. (C) Dividends Dividends are recognised when the shareholder’s right to receive payment is established. (D) Royalties Royalties are recognised on an accrual basis in accordance with the substance of the relevant agreement. (E) Rendering of Services Revenues arising from rendering of services are recognised by reference to the stage of completion of the transaction as of the end of fiscal year. (16) Government Grants A government grant is recognised at fair value when there is reasonable assurance that Epson will comply with the conditions attaching to it, and that the grant will be received. Grants related to assets are deducted in calculating the carrying amount of the asset. Grants related to income are recognised in profit or loss on a systematic basis over the periods in which Epson recognises as expenses the related costs for which the grants are intended to compensate. (17) Borrowing Costs Borrowing costs are interest and other costs incurred in connection with the borrowing of funds. The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, that necessarily takes a substantial period of time to get ready for their intended use or sale, are capitalized as part of the cost of that asset. Other borrowing costs are recognised as an expense in the period when they are incurred. (18) Income Taxes Income taxes are presented as the total of current tax expense and deferred tax expense. Current tax is the amount of income taxes payable or recoverable and is recognised as an expense or income and included in profit or loss for the period, except to the extent that the tax arises from a transaction which is recognised either in other comprehensive income or directly in equity or a business combination. For the calculation of the tax amount, Epson uses the tax rates and tax laws that have been enacted or substantively enacted by the end of fiscal year. Deferred tax expense is calculated based on a temporary difference that is the difference between the carrying 69 amount of the assets or liabilities in the consolidated financial statements and their tax bases. A deferred tax asset is recognised for all deductible temporary differences, the carryforward of unused tax credits and unused tax losses to the extent that it is probable that future taxable profit will be available against which they can be utilized. A deferred tax liability is recognised for all taxable temporary differences. A deferred tax liability is not recognised for taxable temporary differences when the deferred tax liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting profit nor taxable profit or loss at the time of the transaction. Also a deferred tax liability is not recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures to the extent that the timing of the reversal of the temporary difference is controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is not recognised for deductible temporary differences arising from investments in subsidiaries and associates, and interests in joint ventures to the extent that it is not probable that the temporary difference will reverse in the foreseeable future and that taxable profit will be available against which the temporary difference can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the end of fiscal year. (19) Treasury Shares Treasury shares are measured at their cost and deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale or cancellation of the treasury shares. Any difference between the carrying amount and the consideration paid is recognised in equity. (20) Earnings per Share Basic earnings per share are calculated by dividing profit or loss attributable to ordinary shareholders of the Company by the weighted-average number of ordinary shares outstanding during the period, adjusting by the number of treasury shares. (21) Dividends Year-end dividend distributions to the shareholders of the Company are recognised as liabilities in the period in which the distribution is approved by the Annual Shareholders’ Meeting. Interim dividend distributions are recognised as liabilities in the period in which the distribution is approved by Epson’s Board of Directors. 4. Significant Accounting Estimates and Judgments The preparation of Epson’s consolidated financial statements includes management estimates and assumptions in order to measure income, expenses, assets and liabilities, and disclosed contingencies as of the fiscal year end date. These estimates and assumptions are based on the best judgment of management in light of historical experience and various factors deemed to be reasonable as of the fiscal year end date. Given their nature, actual results may differ from those estimates and assumptions. The estimates and assumptions are continuously reviewed by management. The effects of a change in estimates and assumptions are recognised in the period of the change and subsequent periods. Among the above estimates and assumptions, the following were items that may have a material effect on the amounts recognised in Epson’s consolidated financial statements: (1) Impairment of Property, Plant and Equipment, Goodwill, Intangible Assets and Investment Property Epson performs an impairment test for property, plant and equipment, goodwill, intangible assets and investment property when there is any indication that the recoverable amount has fallen below the carrying amount of the assets. The impairment test is performed by comparing the carrying amount and the recoverable amount of assets. If the recoverable amount falls below the carrying amount, impairment losses are recognised. Recoverable amount is determined with certain assumptions of useful life, future cash flow of an asset, discount rate and long-term growth rate. These assumptions are based on the best estimates and judgments of management, but they could be affected by variable and uncertain future economic conditions. Any changes in these assumptions could have a material impact on Epson’s consolidated financial statements in future periods. 70 The method for calculating the recoverable amount is stated in “13. Property, Plant and Equipment.” (2) Post-employment Benefits Epson has several types of post-employment benefit plans, including defined benefit plans. The present value of defined benefit obligations on each of these plans and the related service costs and others are calculated based on actuarial assumptions. These actuarial assumptions require estimates and judgments on variables, such as discount rates. The actuarial assumptions are determined based on the best estimates and judgments of management, but they could be affected by variable and uncertain future economic conditions. Any changes in these assumptions could have a material impact on Epson’s consolidated financial statements in future periods. These actuarial assumptions and related sensitivity analysis are stated in “23. Post-employment Benefits.” (3) Provisions Epson recognises various provisions, including provisions for product warranties and provisions for loss on litigation, in the consolidated statement of financial position. These provisions are recognised based on the best estimates of the expenditures required to settle the obligations, taking into account risks and uncertainty related to the obligations as of the fiscal year end date. Expenditures necessary for settling the obligations are calculated by taking all possible future results into account; however, they may be affected by unexpected events or changes in conditions which may have a material impact on Epson’s consolidated financial statements in future periods. The nature and amount of recognised provisions are stated in “21. Provisions.” (4) Income Taxes Epson, which conducts business around the world, makes reasonable estimates of income tax to be paid to local tax authorities in accordance with local laws and regulations, and recognises income taxes payable and current tax expense based on these estimates. Calculating income taxes payable and current tax expense requires estimates and judgments on various factors, including, for example, the interpretation of tax regulations by taxable entities and the tax authority in the jurisdiction or experience of prior tax investigation. Therefore, there may be differences between the amount recognised as income taxes payable and current tax expense and the amount of actual income taxes payable and current tax expense. These differences may have a material impact on Epson’s consolidated financial statements in future periods. In addition, deferred tax assets are recognised to the extent that it is probable that taxable income will be available against which deductible temporary differences can be utilised. In recognising the deferred tax assets, Epson judges the possibility of future taxable income and reasonably estimate the timing and amount of future taxable income based on the business plan. The timing and amount of taxable income may be affected by variable and uncertain future economic conditions, and changes could have a material impact on Epson’s consolidated financial statements in future periods. The content and amounts related to income taxes are stated in “18. Income Taxes.” (5) Contingencies With regard to contingencies, any items that may have a material impact on business in the future are disclosed in light of all the available evidence as of the fiscal year end date and by taking into account the probability of these contingencies and their impact on financial reporting. The content of contingencies is stated in “39. Contingencies.” 5. Changes in Accounting Policies There is no application of accounting standard and interpretation newly by Epson from the fiscal year 2015. 71 6. New Accounting Standards Not Yet Adopted Basis of preparation by the date of approval of the consolidated financial statements, new accounting standards, amended standards and new interpretations that have been issued, but have not been early adopted by Epson are as follows. The implications from adoption of these standards and interpretations are assessed by Epson. IFRS IFRS 9 Financial Instruments Mandatory adoption (from the year beginning) January 1, 2018 Timing of adoption by Epson Description of new and revised standards To be determined Amendments to hedge accounting Limited changes to classification and measurement of financial assets, and introduction of an expected credit loss impairment model IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases January 1, 2018 To be determined Amendments to accounting treatment for recognising revenue January 1, 2019 To be determined Amendments to the principles for the recognition, measurement, presentation and disclosure of leases Recognision of assets and liabilities for most leases by lessees Substantially unchanged in lessor accounting 7. Segment Information (1) Outline of Reportable Segments The reportable segments of Epson are determined based on the operating segments that are components of Epson about which separate financial information is available and are evaluated regularly by the Board of Directors in deciding how to allocate resources and in assessing performance. From the beginning of this fiscal year, Epson changed its organisational structure and the reportable segments into three segments: “Printing Solutions”, “Visual Communications” and “Wearable & Industrial Products”. They are determined by types of products, nature of products, and markets. Segment information for the year ended March 31, 2015 has been reclassified based on new reportable segments. Epson conducts development, manufacturing and sales within its reportable segments as follows: Reportable segments Printing Solutions Main products Inkjet printers, serial impact dot matrix printers, page printers, color image scanners, commercial inkjet printers, industrial inkjet printing systems, printers for use in POS systems, label printers and related consumables, personal computers and others. Visual Communications 3LCD projectors, HTPS-TFT panels for 3LCD projectors, smart eyewear and others. Wearable & Industrial Products Watches, watch movements, sensing systems, industrial robots, IC handlers, crystal units, crystal oscillators, quartz sensors, CMOS LSIs, Metal powders, surface finishing and others. 72 (2) Revenues and Performances for Reportable Segments Revenues and performances for reportable segments were as follows. Transactions between the segments were mainly based on prevailing market prices. FY2014: Year ended March 31, 2015 Printing Solutions Reportable segments Visual Communi- cations Wearable & Industrial Products Millions of yen Subtotal Other (Note 2) Adjustments (Note 3) Consolidated Revenue External revenue Inter-segment revenue Total revenue Segment profit (loss) (Business profit) (Note 1) 730,534 333 730,867 176,938 247 177,186 167,589 5,889 173,478 1,075,062 6,470 1,081,532 808 581 1,390 10,470 (7,052) 3,418 1,086,341 - 1,086,341 111,442 19,421 10,338 141,202 (318) (39,608) 101,275 Other operating income (expense) Profit from operating activities Finance income (costs), net Share of profit of investments accounted for using the equity method 30,104 131,380 948 207 Profit before tax 132,536 Other items Depreciation and amortisation expense Impairment loss and Reversal of impairment loss on other than financial assets Segment assets Capital expenditures Printing Solutions Reportable segments Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 4) Consolidated (23,011) (7,242) (8,075) (38,329) (20) (6,127) (44,478) (38) (81) (590) (710) - (2,852) (3,563) 372,246 22,190 119,363 6,876 138,596 8,360 630,206 37,427 564 12 375,511 7,987 1,006,282 45,427 (Note 1) Segment profit (loss) (Business profit) is calculated by subtracting cost of sales and selling, general and administrative expenses from revenue. (Note 2) “Other” consists of the intra-group services. (Note 3) Adjustments to segment profit (loss) (business profit) of (¥39,608) million comprised “Eliminations” of ¥334 million and “Corporate expenses” of (¥39,943) million. The corporate expenses included expenses relating to research and development for basic technology, new businesses and general corporate expenses which are not attributed to reportable segments. (Note 4) Adjustments to segment assets of ¥375,511 million comprised “Eliminations” of (¥4,583) million and “Corporate assets” of ¥380,095 million. 73 FY2015: Year ended March 31, 2016 Millions of yen Reportable segments Printing Solutions Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 3) Consolidated Revenue External revenue 736,033 183,997 164,384 1,084,415 Inter-segment revenue 336 35 6,031 6,403 753 651 7,312 1,092,481 (7,055) - Total revenue 736,369 184,033 170,415 1,090,819 1,404 257 1,092,481 Segment profit (loss) (Business profit) (Note 1) 104,740 15,593 9,817 130,150 (566) (44,632) 84,951 Other operating income (expense) Profit from operating activities Finance income (costs), net Share of profit of investments accounted for using the equity method Profit before tax 9,074 94,026 (2,600) 104 91,530 Other items Depreciation and amortisation expense Impairment loss and Reversal of impairment loss on other than financial assets Segment assets Reportable segments Printing Solutions Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 4) Consolidated (24,183) (7,420) (8,171) (39,775) (21) (5,602) (45,399) (251) (406) (203) (861) - 3,071 2,210 Capital expenditures 36,623 10,763 10,293 57,680 348,610 108,097 130,867 587,576 638 40 353,125 941,340 11,701 69,423 (Note 1) Segment profit (loss) (Business profit) is calculated by subtracting cost of sales and selling, general and administrative expenses from revenue. (Note 2) “Other” consists of the intra-group services. (Note 3) Adjustments to segment profit (loss) (business profit) of (¥44,632) million comprised “Eliminations” of ¥470 million and “Corporate expenses” of (¥45,102) million. The corporate expenses included expenses relating to research and development for basic technology, new businesses and general corporate expenses which are not attributed to reportable segments. (Note 4) Adjustments to segment assets of ¥353,125 million comprised “Eliminations” of (¥3,999) million and “Corporate assets” of ¥357,124 million. 74 FY2015: Year ended March 31, 2016 Thousands of U.S. dollars Reportable segments Printing Solutions Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 3) Consolidated Revenue External revenue 6,532,073 1,632,925 1,458,857 9,623,855 Inter-segment revenue 2,991 310 53,523 56,824 6,683 5,777 64,891 9,695,429 (62,601) - Total revenue 6,535,064 1,633,235 1,512,380 9,680,679 12,460 2,290 9,695,429 Segment profit (loss) (Business profit) (Note 1) 929,535 138,383 87,122 1,155,040 (5,023) (396,095) 753,922 Other operating income (expense) Profit from operating activities Finance income (costs), net Share of profit of investments accounted for using the equity method Profit before tax 80,529 834,451 (23,073) 922 812,300 Other items Depreciation and amortisation expense Impairment loss on other than financial assets Segment assets Reportable segments Printing Solutions Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 4) Consolidated (214,625) (65,850) (72,515) (352,990) (186) (49,726) (402,902) (2,237) (3,603) (1,801) (7,641) - 27,254 19,613 3,093,824 959,327 1,161,403 5,214,554 5,662 3,133,884 8,354,100 Capital expenditures 325,027 95,518 91,347 511,892 354 103,861 616,107 (Note 1) Segment profit (loss) (Business profit) is calculated by subtracting cost of sales and selling, general and administrative expenses from revenue. (Note 2) “Other” consists of the intra-group services. (Note 3) Adjustments to segment profit (loss) (business profit) of ($396,095) thousand comprised “Eliminations” of $4,171 thousand and “Corporate expenses” of ($400,266) thousand. The corporate expenses included expenses relating to research and development for basic technology, new businesses and general corporate expenses which are not attributed to reportable segments. (Note 4) Adjustments to segment assets of $3,133,884 million comprised “Eliminations” of ($35,480) million and “Corporate assets” of $3,169,364 million. 75 (3) Geographic Information The regional breakdowns of non-current assets and external revenues as of each fiscal year end were as follows: Non-current Assets Japan China Other Total Millions of yen March 31, 2015 2016 Thousands of U.S. dollars March 31, 2016 163,689 26,464 70,223 260,377 168,114 25,704 77,520 271,338 1,491,959 228,115 687,986 2,408,060 (Note) Non-current assets, excluding other financial assets, deferred tax assets and retirement benefits assets, are segmented by the location of the assets. External Revenue Japan The United States China Other Total Millions of yen Year ended March 31, 2016 2015 Thousands of U.S. dollars Year ended March 31, 2016 276,238 205,215 148,176 456,710 1,086,341 264,012 227,849 144,466 456,152 1,092,481 2,343,024 2,022,089 1,282,090 4,048,226 9,695,429 (Note) Revenue is segmented by country based on the location of the customers. (4) Major Customers Information Epson had no transactions with a single external customer amounting to 10% or more of total external revenue. 76 8. Cash and Cash Equivalents The breakdown of “Cash and cash equivalents” was as follows: Cash and deposits Short-term investments Total Millions of yen March 31, 2015 111,330 134,000 245,330 2016 102,404 128,093 230,498 Thousands of U.S. dollars March 31, 2016 908,803 1,136,795 2,045,598 9. Trade and Other Receivables The breakdown of “Trade and other receivables” was as follows: Notes and trade receivables Other receivables Allowance account for credit losses Total Millions of yen March 31, 2015 156,440 12,563 (1,521) 167,482 2016 140,623 12,463 (1,426) 151,660 Thousands of U.S. dollars March 31, 2016 1,247,985 110,605 (12,655) 1,345,935 Trade and other receivables are presented net of the allowance account for credit losses in the consolidated statement of financial position. Trade and other receivables are classified as financial assets measured at amortised cost. 10. Inventories The breakdown of “Inventories” was as follows: Merchandise and finished goods Work in process Raw materials Supplies Total Millions of yen March 31, 2015 140,825 54,360 19,250 5,989 220,426 2016 122,013 52,256 20,363 6,975 201,608 Thousands of U.S. dollars March 31, 2016 1,082,827 463,755 180,715 61,911 1,789,208 The amount of inventories included in cost of sales recognised as an expense totaled (¥676,128) million and (¥687,289) million (($6,099,476) thousand) for the years ended March 31, 2015 and 2016, respectively. Losses recognised as cost of sales as a result of valuations for the years ended March 31, 2015 and 2016 were (¥32,138) million and (¥29,158) million (($258,768) thousand), respectively. In addition, Epson has no inventories pledged as collateral. 77 11. Other Financial Assets (1) The breakdown of “Other financial assets” Derivative assets Equity securities Bonds receivable Time deposits Other Allowance account for credit losses Total Current assets Non-current assets Total Millions of yen March 31, 2015 2016 3,181 19,639 108 44 5,980 (64) 28,889 3,544 25,345 28,889 1,383 16,060 88 37 6,119 (53) 23,637 1,674 21,962 23,637 Thousands of U.S. dollars March 31, 2016 12,273 142,527 780 328 54,323 (470) 209,761 14,856 194,905 209,761 Derivative assets are classified as financial assets measured at fair value through profit or loss, excluding a case where hedge accounting is applied. Equity securities held for other than trading purposes are classified as financial assets measured at fair value through other comprehensive income, and time deposits and bonds receivable are classified as financial assets measured at amortised cost. (2) Names of major equity securities measured at fair value through other comprehensive income, their fair values and dividends received Millions of yen March 31, 2015 March 31, 2016 Thousands of U.S. dollars March 31, 2016 Fair value Dividends received Fair value Dividends received Fair value Dividends received NGK Insulators, Ltd. Mizuho Financial Group, Inc. 9,636 3,168 93 105 7,810 2,522 123 69,311 116 22,381 1,091 1,029 Equity securities are held mainly for strengthening relationships with investees. Therefore, they are designated as financial assets measured at fair value through other comprehensive income. 78 12. Other Assets The breakdown of “Other current assets” and “Other non-current assets” was as follows: Prepaid expense Advances to suppliers Other Total Current assets Non-current assets Total Millions of yen March 31, 2015 13,620 1,954 1,922 17,497 11,539 5,958 17,497 2016 13,887 1,724 3,845 19,457 14,335 5,122 19,457 Thousands of U.S. dollars March 31, 2016 123,242 15,299 34,202 172,743 127,247 45,496 172,743 79 13. Property, Plant and Equipment (1) Schedule of Property, Plant and Equipment The schedules of the cost, accumulated depreciation and accumulated impairment losses, and carrying amount of “Property, plant and equipment” were as follows: Millions of yen Land, buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Construction in progress Other Total Cost As of April 1, 2014 Individual acquisition Acquisition of subsidiary Transfer to(from) investment property Transfer to(from) non-current assets held for sale Sale or disposal Exchange differences on translation of foreign operations Transfer from construction in progress Other As of M arch 31, 2015 Individual acquisition Acquisition of subsidiary Transfer to(from) investment property Transfer to(from) non-current assets held for sale Sale or disposal Exchange differences on translation of foreign operations Transfer from construction in progress Other As of M arch 31, 2016 Cost As of M arch 31, 2015 Individual acquisition Acquisition of subsidiary Transfer to(from) investment property Transfer to(from) non-current assets held for sale Sale or disposal Exchange differences on translation of foreign operations Transfer from construction in progress Other As of M arch 31, 2016 470,871 810 1,416 (9,462) (396) (7,057) 6,968 5,332 (13) 468,469 3,997 717 (182) (1,267) (17,675) (5,173) 9,267 195 458,348 440,677 6,682 44 - - (14,268) 14,422 14,134 (1,641) 460,050 7,658 253 - (40) (10,000) (11,160) 16,038 (1,230) 461,570 170,468 7,613 145 - - (12,145) 14,004 5,184 24,001 2,561 580 - - - (45) 334 5,714 (25,206) (1,190) 184,611 8,787 62 - (111) (9,699) (7,430) 6,112 85 182,418 (125) 4,143 43,874 - - - (79) (901) (31,418) (534) 15,084 - - - (12) 4 24 (19) 3,137 764 - - - (187) (11) - (1,210) 2,492 Thousands of U.S. dollars Land, buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Construction in progress Other Total 4,157,516 4,082,800 1,638,365 77,981 550 - (985) (86,075) (65,938) 54,242 763 36,767 389,368 27,860 6,808 - - - - - - (701) (1,670) (7,996) (126) (278,815) - (4,758) (10,756) 1,618,903 133,865 22,116 35,472 6,372 (1,615) (11,245) (156,860) (45,908) 82,241 1,723 4,067,696 67,962 2,245 - (354) (88,746) (99,041) 142,332 (10,908) 4,096,290 80 1,089,762 39,687 1,606 (9,462) (396) (33,529) 35,734 - (2,989) 1,120,412 65,083 1,033 (182) (1,418) (37,641) (24,678) - (2,694) 1,119,913 9,943,308 577,591 9,167 (1,615) (12,584) (334,052) (219,009) - (23,936) 9,938,870 Accumulated Depreciation and Accumulated Impairment Losses Land, buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Construction in progress Other Total Millions of yen As of April 1, 2014 Depreciation expense (Note) Impairment losses Acquisition of subsidiary Transfer to(from) investment property Transfer to(from) non-current assets held for sale Sale or disposal Exchange differences on translation of foreign operations Other As of M arch 31, 2015 Depreciation expense (Note) Impairment losses Acquisition of subsidiary Transfer to(from) investment property Transfer to(from) non-current assets held for sale Sale or disposal Exchange differences on translation of foreign operations Other As of M arch 31, 2016 (337,763) (9,398) (2,960) (765) 6,175 300 6,830 (3,185) (35) (340,803) (8,797) (725) (43) 136 832 17,454 2,337 2 (381,837) (14,186) (249) (43) - - 13,725 (10,445) 1,595 (391,441) (15,443) (149) (79) - 40 9,555 8,718 1,184 (146,481) (14,129) (135) (128) - - 11,910 (11,674) 1,010 (159,629) (13,888) (357) (47) - 106 9,373 6,393 84 (329,606) (387,615) (157,965) (0) (1,122) - - - - - 0 - - - - (161) - - - 55 - - (105) (9) - - - - 5 (2) (152) (1,280) (38) - - - - 27 9 1,124 (157) (867,205) (37,724) (3,345) (937) 6,175 300 32,472 (25,307) 2,417 (893,155) (38,168) (1,395) (169) 136 979 36,466 17,459 2,396 (875,449) Accumulated Depreciation and Accumulated Impairment Losses Land, buildings and structures As of M arch 31, 2015 (3,024,520) Depreciation expense (Note) Impairment losses Acquisition of subsidiary Transfer to(from) investment property Transfer to(from) non-current assets held for sale Sale or disposal Exchange differences on translation of foreign operations Other (78,070) (6,471) (381) 1,206 7,394 154,898 20,740 54 Thousands of U.S. dollars Machinery, equipment and vehicles Tools, furniture and fixtures Construction in progress Other Total (3,473,917) (137,051) (1,416,657) (123,251) - - (11,379) (357) (1,322) (701) - 354 84,797 77,369 10,509 (3,168) (417) - 940 83,182 56,735 746 (1,419) - - - 488 - - - - - - 259 99 9,974 (7,926,473) (338,729) (12,380) (1,499) 1,206 8,688 323,624 154,943 21,283 As of M arch 31, 2016 (7,769,337) (Note) Depreciation expense for property, plant and equipment was included in cost of sales and selling, general and administrative expenses in the consolidated statement of comprehensive income. (3,439,962) (1,401,890) (2,925,150) (1,404) (931) 81 Millions of yen Carrying Amount As of April 1, 2014 As of March 31, 2015 As of March 31, 2016 Land, buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Construction in progress Other Total 133,107 127,665 128,741 58,839 68,609 73,955 23,986 24,982 24,452 5,183 4,143 14,978 1,438 1,856 2,335 222,556 227,257 244,463 Thousands of U.S. dollars Carrying Amount As of March 31, 2015 As of March 31, 2016 Land, buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Construction in progress Other Total 1,132,996 1,142,546 608,883 656,328 221,708 217,013 36,767 132,934 16,481 20,712 2,016,835 2,169,533 The carrying amount of property, plant and equipment includes the carrying amount of the following leased assets: Millions of yen Leased Assets As of April 1, 2014 As of March 31, 2015 As of March 31, 2016 Land, buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Total 223 109 63 62 98 188 116 76 46 402 284 298 Thousands of U.S. dollars Leased Assets As of March 31, 2015 As of March 31, 2016 Land, buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Total 977 559 869 1,677 674 408 2,520 2,644 (2) Impairment Losses Epson’s business assets are generally grouped by business segment under the Company’s management accounting system, and their cash flows are continuously monitored. Assets planned to be sold and idle assets are separately assessed for impairment on the individual asset level. Impairment losses recognised in the years ended March 31, 2015 and 2016, represent the losses related to idle assets that Epson has no plan to use in the future, and the carrying amount was reduced to the recoverable amounts. They were recognised as other operating expense in the consolidated statement of comprehensive income. The recoverable amounts of these assets are determined using their fair values less disposal cost, which were assessed on the basis of reasonable estimates such as a valuation by an external real estate appraiser. The valuation is made in accordance with the income approach using Level 3 inputs which include the future cash flow. 82 14. Intangible Assets The schedules of the cost, accumulated amortisation and accumulated impairment losses, and carrying amount of “Intangible assets” were as follows: Cost Software Patent rights Millions of yen Product development assets Goodwill Other Total Cost Software Patent rights Goodwill Other Total As of April 1, 2014 Individual acquisition Acquisition of subsidiary Sale or disposal Exchange differences on translation of foreign operations Other As of March 31, 2015 Individual acquisition Acquisition of subsidiary Sale or disposal Exchange differences on translation of foreign operations Other As of March 31, 2016 37,622 4,149 125 (2,385) 892 1,181 41,586 5,809 1 (1,544) (792) (303) 44,756 As of March 31, 2015 Individual acquisition Acquisition of subsidiary Sale or disposal Exchange differences on translation of foreign operations Other As of March 31, 2016 369,062 51,553 8 (13,702) (7,028) (2,698) 397,195 65,666 6,383 689 (2,417) 912 511 71,744 6,665 320 (1,578) (1,182) (2,075) 73,894 636,704 59,149 2,839 (14,004) (10,489) (18,414) 655,785 15,536 770 - - - - 16,306 273 - - - 0 6,255 1,338 161 - 1 (336) 7,421 571 2 (0) (11) (2) Product development assets 65,859 5,067 17 (0) (97) (26) 144,720 2,422 - - - 0 1,848 4,403 - 402 - 75 - 2,326 - 313 - (57) - 124 0 (32) (57) (333) 4,104 11 2 (33) (320) (1,770) 1,994 20,642 36,421 - 2,777 - 107 37 (302) (505) (2,859) - (15,690) 16,580 7,980 2,582 Thousands of U.S. dollars 147,142 70,820 22,914 17,714 83 Accumulated Amortisation and Accumulated Impairment Losses Software Patent rights Millions of yen Product development assets Goodwill Other Total As of April 1, 2014 Amortisation expense (Note) Impairment losses Acquisition of subsidiary Sale or disposal Exchange differences on translation of foreign operations Other As of March 31, 2015 Amortisation expense (Note) Impairment losses Acquisition of subsidiary Sale or disposal Exchange differences on translation of foreign operations Other As of March 31, 2016 (28,005) (3,839) (3) (114) 2,343 (582) (476) (30,678) (4,666) (31) (0) 1,538 563 142 (33,132) (12,219) (1,036) - - - - - (13,255) (1,037) - - - - (0) (14,293) (3,541) (1,380) (77) (112) - (18) - (5,130) (1,363) - (0) 0 9 - (6,484) Thousands of U.S. dollars - - - - - - - - - - - - - - - (2,953) (556) (5) - 5 (0) - (3,509) (382) (0) (0) 8 308 1,771 (1,805) (46,719) (6,813) (86) (227) 2,349 (600) (476) (52,574) (7,449) (32) (0) 1,546 881 1,913 (55,715) Accumulated Amortisation and Accumulated Impairment Losses Software Patent rights Product development assets Goodwill Other Total As of March 31, 2015 Amortisation expense (Note) Impairment losses Acquisition of subsidiary Sale or disposal Exchange differences on translation of foreign operations Other As of March 31, 2016 (272,257) (41,409) (283) (0) 13,649 4,996 1,268 (117,642) (9,203) (45,526) (12,096) - - - - (0) - (0) 0 79 - (294,036) (126,845) (57,543) - - - - - - - - (31,152) (3,399) (0) (0) 71 2,743 15,708 (16,029) (466,577) (66,107) (283) (0) 13,720 7,818 16,976 (494,453) (Note) Amortisation expense for intangible assets was included in cost of sales and selling, general and administrative expenses in the consolidated statement of comprehensive income. Carrying Amount Software Patent rights Millions of yen Product development assets Goodwill Other Total As of April 1, 2014 As of March 31, 2015 As of March 31, 2016 9,617 10,907 11,624 3,316 3,050 2,286 2,714 2,291 1,496 1,848 2,326 2,582 1,450 594 188 18,947 19,170 18,179 Thousands of U.S. dollars Carrying Amount Software Patent rights As of March 31, 2015 As of March 31, 2016 96,805 103,159 27,078 20,297 Product development assets 20,333 13,277 Goodwill Other Total 20,642 22,914 5,269 1,685 170,127 161,332 84 15. Finance Lease Transactions Epson leases host computers and computer terminals as a lessee. The total of future minimum lease payments, future finance costs and their present value for leased assets recognised based on the finance lease contracts by maturity were as follows: Not later than 1 year Total of future minimum lease payments Future finance costs Present value Later than 1 year and not later than 5 years Total of future minimum lease payments Future finance costs Present value Later than 5 years Total of future minimum lease payments Future finance costs Present value Total Total of future minimum lease payments Future finance costs Present value Millions of yen March 31, 2015 2016 Thousands of U.S. dollars March 31, 2016 72 (2) 70 111 (2) 108 0 (0) 0 185 (4) 180 92 (3) 88 150 (5) 145 0 (0) 0 242 (9) 233 816 (36) 780 1,331 (44) 1,287 0 (0) 0 2,147 (80) 2,067 85 16. Operating Lease Transactions (1) Future Minimum Lease Payments under Non-cancellable Operating Leases The total of future minimum lease payments under non-cancellable operating leases was as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total Millions of yen March 31, 2015 4,497 8,663 1,529 14,690 2016 5,277 11,926 1,046 18,251 Thousands of U.S. dollars March 31, 2016 46,831 105,858 9,282 161,971 (2)Total of Minimum Lease Payments and Contingent Rents The total of minimum lease payments and contingent rents of operating lease contracts recognised as an expense was as follows: Total of minimum lease payments Contingent rents Millions of yen Year ended March 31, 2015 7,399 114 2016 8,264 120 Thousands of U.S. dollars Year ended March 31, 2016 73,340 1,064 86 17. Investment Property (1) Schedule of Investment Property The schedule of the carrying amount of “Investment property” was as follows: Millions of yen Year ended March 31, Balance at the beginning of the year Expenditure after acquisition Transfer from(to) property, plant and equipment Depreciation expense Impairment losses and reversal of impairment losses Sale or disposal Exchange differences on translation of foreign operations Balance at the end of the year Breakdown of “Balance at the beginning of the year” Cost Accumulated depreciation and accumulated impairment losses Total Breakdown of “Balance at the end of the year” Cost Accumulated depreciation and accumulated impairment losses Total 2015 10,273 459 3,286 (170) (126) (8,972) 6 4,758 11,491 (1,217) 10,273 11,595 (6,837) 4,758 Thousands of U.S. dollars Year ended March 31, 2016 42,225 - 409 (798) 32,277 (56,249) (408) 17,456 2016 4,758 - 45 (90) 3,637 (6,335) (46) 1,967 11,595 102,901 (6,837) (60,676) 4,758 4,173 42,225 37,024 (2,205) (19,568) 1,967 17,456 (2) Fair Value The carrying amount and the fair value of “Investment property” were as follows: Millions of yen March 31, 2015 March 31, 2016 Thousands of U.S. dollars March 31, 2016 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Investment property 4,758 4,380 1,967 1,468 17,456 13,028 The fair value of investment property is determined on the basis of a valuation conducted by an external real estate appraiser. The valuation is made in accordance with the income approach using Level 3 inputs which include the future cash flow. 87 18. Income Taxes (1) Deferred Tax Assets and Deferred Tax Liabilities The breakdown of “Deferred tax assets” and “Deferred tax liabilities” by major causes of their occurrence were as follows: Inter-company profits and write downs on inventories Carryforward of unused tax losses Net defined benefit liabilities Fixed assets (Note 1) Other Total deferred tax assets Undistributed profit Fixed assets (Note 1) Other Total deferred tax liabilities Net deferred tax assets (Note 2) Millions of yen March 31, 2015 2016 Thousands of U.S. dollars March 31, 2016 22,654 29,168 5,280 7,425 27,948 92,477 (14,186) (3,813) (5,019) (23,020) 69,457 18,995 9,032 7,983 6,113 22,947 65,073 (12,922) (3,078) (3,486) (19,488) 45,585 168,574 80,156 70,846 54,250 203,685 577,511 (114,678) (27,316) (30,955) (172,949) 404,562 (Note 1) “Fixed assets” include impairment losses and excess of depreciation of property, plant and equipment, intangible assets and investment property. (Note 2) The difference between the net amount of deferred tax assets recognised in the years ended March 31, 2015 and 2016, less the respective net amounts of deferred tax assets recognised directly in equity and in other comprehensive income, is mainly attributable to the impact of foreign exchange movements. Epson assesses its ability to utilize carryforward of unused tax losses in future periods based on the Mid-Range Business Plan and financial forecasts approved by the Board of Directors annually. This takes account of Epson’s medium and long-term strategy and financial plans and the expected future economic outlook. The ability to utilize carryforward of unused tax losses in future periods for recognising deferred tax assets also takes account of material tax adjusting items, the expected future taxable income and the period (if any) in which carryforward of unused tax losses might expire. Epson believes that the recognised deferred tax assets are probable and the tax benefits can be realised based on the prior taxable income and the expected future taxable income when the deferred tax assets can be recognised. Epson does not recognise deferred tax assets for some carryforward of unused tax losses and some deductible temporary differences. Epson reduces the amount of the deferred tax assets to the extent that it is no longer probable that the tax benefits can be realised with based on an individual analysis of each company’s condition as a result of assessing the recoverability of the deferred tax assets. The amounts of carryforward of unused tax losses, for which deferred tax assets have not been recognised, as of March 31, 2015 and 2016, were ¥8,247 million and ¥64,751 million ($574,645 thousand), respectively. The amounts of deductible temporary differences, for which deferred tax assets have not been recognised, as of March 31, 2015 and 2016, were ¥240,737 million and ¥324,150 million ($2,876,730 thousand), respectively. The deductible temporary differences are not expired under present tax laws. The expiration schedule of carryforward of unused tax losses was as follows: 88 1st year 2nd year 3rd year 4th year 5th year and thereafter Total Millions of yen March 31, 2015 2016 - - - - 8,247 8,247 - - - - 64,751 64,751 Thousands of U.S. dollars March 31, 2016 - - - - 574,645 574,645 Epson has no taxable temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognised as of March 31, 2015 and 2016. (2) Tax Expense “Tax expense” recognised as an expense was as follows: Current tax expense Deferred tax expense Total Millions of yen Year ended March 31, 2015 (23,216) 4,584 (18,631) 2016 (19,720) (25,700) (45,421) Thousands of U.S. dollars Year ended March 31, 2016 (175,008) (228,089) (403,097) Deferred tax expense increased by ¥3,424 million and ¥1,575 million ($13,977 thousand) mainly due to the effect of changes in Japanese applicable tax rates for the years ended March 31, 2015 and 2016, respectively. Deferred tax expense includes the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period, and expenses or benefits arising from write-downs of deferred tax assets or the reversal of previous write-downs of deferred tax assets. These effects increased/decreased the deferred tax expense by ¥13,253 million and (¥11,740) million ($104,188 thousand) for the years ended March 31, 2015 and 2016, respectively. (3) Reconciliation of the Effective Tax Rate The breakdown of major items that caused differences between the effective statutory tax rate and the actual tax rate was as follows. Epson is subject mainly to corporate tax, inhabitant tax, and enterprise tax, and the effective statutory tax rates calculated based on these taxes were 35.4% and 32.8% for the years ended March 31, 2015 and 2016, respectively. The Special Corporation Tax for Reconstruction has been abolished in this fiscal year. Foreign subsidiaries are subject to income tax at their locations. Effective statutory tax rate Different tax rates applied to foreign subsidiaries Expenses not deductible for tax purposes Reassessment of recoverability of deferred tax assets Other Actual tax rate % Year ended March 31, 2015 Year ended March 31, 2016 35.4 (5.4) (0.8) (18.8) 3.7 14.1 32.8 (3.4) 1.0 16.7 2.5 49.6 89 19. Trade and Other Payables The breakdown of “Trade and other payables” was as follows: Notes and trade payables Other payables Total Millions of yen March 31, 2015 2016 80,359 59,688 140,047 69,972 60,651 130,624 Thousands of U.S. dollars March 31, 2016 620,979 538,268 1,159,247 Trade and other payables are classified as financial liabilities measured at amortised cost. 20. Other Financial Liabilities The breakdown of “Other financial liabilities” was as follows: Millions of yen March 31, 2015 2016 Thousands of U.S. dollars March 31, 2016 % Average interest rate (Note 1) Due Derivative financial liabilities Current borrowings Current portion of non-current borrowings Current portion of bonds issued (Note 2) Non-current borrowings Bonds issued (Note 2) Other   Total Current liabilities Non-current liabilities   Total 259 35,380 53 39,978 50,533 59,853 2,153 188,211 75,745 112,466 188,211 823 31,104 500 29,989 50,000 29,928 1,874 7,303 276,038 4,437 266,143 443,734 265,601 16,650 144,220 1,279,906 62,479 81,741 144,220 554,481 725,425 1,279,906 - 1.15 0.65 - 0.68 - - - - - - 2017 - - (Note 1) The average interest rate is calculated using the interest rate and outstanding balance as of March 31, 2016. (Note 2) The summary of issuing conditions of the bonds issued was as follows: 90 Company Name of bonds issued Issue date % interest rate Collateral Maturity date Sep 3, 2010 0.58 Non Sep 3, 2015 Millions of yen March 31, 2015 2016 20,000 (20,000) Thousands of U.S. dollars March 31, 2016 - - The Company The Company The Company The Company The Company The Company The Company T he 5th Series unsecured straight bonds issued (with inter-bond pari passu clause) T he 7th Series unsecured straight bonds issued (with inter-bond pari passu clause) T he 8th Series unsecured straight bonds issued (with inter-bond pari passu clause) T he 9th Series unsecured straight bonds issued (with inter-bond pari passu clause) T he 10th Series unsecured straight bonds issued (with inter-bond pari passu clause) T he 11th Series unsecured straight bonds issued (with inter-bond pari passu clause) T he 12th Series unsecured straight bonds issued (with inter-bond pari passu clause) Jun 14, 2011 0.72 Non Jun 14, 2016 20,000 Sep 12, 2012 0.55 Non Sep 11, 2015 20,000 (20,000) 20,000 177,493 (20,000) (177,493) - - Sep 12, 2012 0.67 Non Sep 12, 2017 10,000 10,000 88,746 Sep 11, 2013 0.33 Non Sep 9, 2016 10,000 10,000 (10,000) 88,746 (88,746) Sep 11, 2013 0.57 Non Sep 11, 2018 10,000 10,000 88,746 Jun 13, 2014 0.35 Non Jun 13, 2019 10,000 10,000 88,746 100,000 60,000 (40,000) (30,000) 532,477 (266,239) *The figures in parentheses represent the current portion of bonds issued. Derivative financial liabilities were classified as financial liabilities measured at fair value through profit or loss excluding those which hedge accounting was applied to, and bonds issued and borrowings were classified as financial liabilities measured at amortised cost. There were no financial covenants on bonds issued and borrowings that had a significant impact on Epson’s financing activities. 91 21. Provisions The breakdown and the schedule of “Provisions” were as follows: FY2014: Year ended March 31, 2015 Provision for product warranties Provision for rebates Asset retirement obligations Provision for loss on litigation Other provisions Total Millions of yen As of April 1, 2014 Arising during the year Utilised Unused amounts reversed Exchange differences on translation of foreign operations As of March 31, 2015 Current liabilities Non-current liabilities  Total FY2015: Year ended March 31, 2016 10,100 10,699 (9,788) (324) 690 11,376 10,043 1,333 11,376 7,443 7,973 (7,443) - (149) 7,823 7,823 - 7,823 1,431 102 (76) - 17 1,474 30 1,443 1,474 3,452 1,076 (916) - 5,371 6,429 (4,482) (691) (285) (164) 3,326 6,461 866 2,460 3,326 5,558 902 6,461 27,799 26,280 (22,707) (1,016) 108 30,463 24,322 6,141 30,463 Provision for product warranties Provision for rebates Asset retirement obligations Provision for loss on litigation Other provisions Total Millions of yen As of April 1, 2015 Arising during the year Utilised Unused amounts reversed Exchange differences on translation of foreign operations As of March 31, 2016 Current liabilities Non-current liabilities  Total 11,376 11,729 (10,831) (514) (575) 11,185 9,806 1,378 11,185 7,823 10,037 (7,823) - (965) 9,072 9,072 - 9,072 1,474 824 (66) - (21) 2,211 299 1,911 2,211 3,326 19 (3,265) - 52 133 5 127 133 6,461 5,154 (6,038) (94) (124) 5,358 3,835 1,522 5,358 30,463 27,765 (28,025) (608) (1,634) 27,960 23,019 4,941 27,960 FY2015: Year ended March 31, 2016 Thousands of U.S. dollars Provision for product warranties Provision for rebates Asset retirement obligations As of April 1, 2015 Arising during the year Utilised Unused amounts reversed Exchange differences on translation of foreign operations As of March 31, 2016 Current liabilities Non-current liabilities  Total 100,958 104,089 (96,121) (4,561) (5,102) 99,263 87,034 12,229 99,263 69,426 89,075 (69,426) - (8,564) 80,511 80,511 - 80,511 92 Provision for loss on litigation Other provisions 29,517 168 (28,966) - 57,367 45,762 (53,625) (834) Total 270,349 246,405 (248,723) (5,395) 461 (1,110) (14,501) 13,081 7,311 (585) - (186) 19,621 1,180 47,560 248,135 2,653 16,968 19,621 44 1,136 1,180 34,044 13,516 47,560 204,286 43,849 248,135 (1) Provision for product warranties Epson recognises an accrual for estimated future warranty costs based on the rate of historical service contract expenses to sales. Other specific warranty provisions are made for those products where future warranty expenses can be specifically estimated. Most of these expenses are expected to be incurred in the next fiscal year. (2) Provision for rebates Epson recognises provisions for rebates, related to sales made on or prior to the fiscal year end, that are paid to distributors or customers based on direct outcomes such as the sales performance or early payment. These expenses are expected to be paid in the next fiscal year. (3) Asset retirement obligations Epson recognises a provision for retirement costs of property, plant and equipment for which Epson is required to bear, and which derive from the acquisition, construction, development or normal use of such assets to the amount that it is probable that Epson will pay in light of historical experience. These expenses are expected to be paid mainly after five years or more. However, they may be affected by future business plans. (4) Provision for loss on litigation Epson recognises a provision for loss on litigation based on the estimated future compensation payment and litigation expenses which need to be provided at each fiscal year end. These expenses are expected to be paid after three years or more. 22. Other Liabilities The breakdown of “Other current liabilities” and “Other non-current liabilities” was as follows: Accrued expense Accrued bonus to employees Accrued employee’s unused paid vacations Other Total Current liabilities Non-current liabilities Total Millions of yen March 31, 2015 26,916 34,124 25,069 23,809 109,920 106,942 2,977 109,920 2016 25,948 28,564 25,052 25,615 105,179 102,065 3,114 105,179 Thousands of U.S. dollars March 31, 2016 230,280 253,496 222,328 227,376 933,480 905,824 27,656 933,480 93 23. Post-employment Benefits The Company and some Japanese subsidiaries have the following defined benefit plans: defined benefit corporate pension plans and lump-sum severance plans. In addition, they also have defined contribution plans. Some overseas subsidiaries have defined benefit plans and defined contribution plans. Epson’s major defined benefit plans are administrated by the Corporate Pension Fund (the “Fund”) in accordance with the Defined-Benefit Corporate Pension Act (Act No. 50 of 2001). The benefits of defined benefit plans are determined based on conditions, such as years of service, the salary proportional method based on average employee salaries for services or final base salaries for retirement benefits and a funded method based on the points employees have earned for each year of service. The Fund has a Board of Representatives consisting of representatives of the Company and its Japanese subsidiaries and representatives of the plan participants in accordance with the rules of the Fund. The Board of Representatives is responsible for changes in the rules of the Fund, dismissal of the board members including members who execute operations related to the administration and investment of pension reserves for the Fund, and resolutions of the business report and the closing of account. (1)Schedule of Defined Benefit Obligations The schedule of the defined benefit obligations was as follows: Balance at the beginning of the year Service cost Interest cost Remeasurement Actuarial gains and losses arising from changes in demographic assumptions Actuarial gains and losses arising from changes in financial assumptions Past service cost and losses (gains) arising from settlements Exchange differences on translation of foreign operations Benefits paid Balance at the end of the year Millions of yen Year ended March 31, 2015 293,895 10,687 4,337 2016 293,035 10,480 3,673 Thousands of U.S. dollars Year ended March 31, 2016 2,600,594 93,006 32,596 2,749 (2,811) (24,946) 19,492 20,008 177,564 (30,071) (2,270) (20,145) 1,175 (2,039) (18,095) (9,229) 293,035 (8,625) 311,452 (76,544) 2,764,030 94 (2) Schedule of Plan Assets The schedule of the plan assets was as follows. Epson’s major defined benefit plans are regulated by maintaining a balance between the pension obligations and plan assets through reviewing the financial condition of the fund that affects future benefits. Epson plans to pay contributions of ¥8,038 million ($71,334 thousand) for the year ending March 31, 2017. Balance at the beginning of the year Interest income Remeasurement Return on plan assets Gains (losses) arising from settlements Exchange differences on translation of foreign operations Contributions by the employer Contributions by plan participants Benefits paid Balance at the end of the year Millions of yen Year ended March 31, 2015 237,543 3,807 20,257 - 396 7,345 1,223 (8,764) 261,808 2016 261,808 2,972 (4,993) (2,270) (1,310) 7,342 1,177 (8,119) 256,606 Thousands of U.S. dollars Year ended March 31, 2016 2,323,464 26,384 (44,311) (20,145) (11,643) 65,157 10,445 (72,053) 2,277,298 (3)Schedule of Right to Reimbursement As Epson’s major defined benefit plans are corporate defined benefit pension plans, there are no contributions from third parties. (4)Effect of Asset Ceiling There was no effect from the asset ceiling. (5) Reconciliation of Defined Benefit Obligations and Plan Assets The reconciliation of the defined benefit obligations and plan assets to the net defined benefit liabilities or assets recognised in the consolidated statement of financial position were as follows: Funded defined benefit obligations Plan assets Subtotal Unfunded defined benefit obligations Net defined benefit liabilities or assets recognised in the consolidated statement of financial position Net defined benefit liabilities Net defined benefit assets Net defined benefit liabilities and assets recognised in the consolidated statement of financial position Millions of yen March 31, 2015 286,837 (261,808) 25,029 6,198 2016 305,438 (256,606) 48,831 6,014 Thousands of U.S. dollars March 31, 2016 2,710,657 (2,277,298) 433,359 53,373 31,227 54,845 486,732 31,234 (7) 54,845 - 486,732 - 31,227 54,845 486,732 95 (6) Breakdown of Plan Assets The breakdown of plan assets by major category was as follows: Investments quoted in active markets Equity securities Bonds receivable Alternative investments (Note 2) Cash and deposits Other Total Investments unquoted in active markets Pooled funds (Equity securities) Pooled funds (Bonds receivable) General accounts of life insurance companies (Note 1) Alternative investments (Note 2) Total Millions of yen March 31, 2015 2016 Thousands of U.S. dollars March 31, 2016 24,580 117 20,934 4,433 3,666 53,732 40,690 69,875 84,780 12,729 208,075 19,923 48 6,926 4,630 3,196 34,725 29,647 62,220 93,829 36,183 221,881 176,810 425 61,466 41,089 28,384 308,174 263,107 552,183 832,722 321,112 1,969,124 (Note 1) A certain interest rate and principal for the general accounts of life insurance companies are guaranteed by life insurance companies. (Note 2) Alternative investments are the investments through hedge funds, multi-asset funds, securitization funds and other funds. (Note 3) In plan assets, there are no transferable financial instruments, real estate held by Epson or other assets used by Epson. The investment strategy for Epson’s plan assets was as follows: Epson’s plan assets under defined benefit plans are managed in accordance with the rules of the Fund for securing stable returns in the middle- and long-term in order to ensure the redemption of the defined benefit obligations. Epson sets a best qualified asset mix policy through performing pension ALM, which is combined management of assets and liabilities by an external agency to secure stable returns. Epson invests plan assets consistently with the asset mix policy which includes setting of the risk, target rate of return and composition ratio of plan assets by asset category. 96 (7) Matters Related to Actuarial Assumptions The major item of actuarial assumptions was as follows: Discount rate 1.3 0.8 March 31, 2015 March 31, 2016 % The valuation of defined benefit obligations reflects judgments on uncertain future events. The sensitivities of defined benefit obligations due to changes of 1% in the discount rate as of March 31, 2016 were as follows. Each of these sensitivities assumes that other variables remain fixed. Negative figures show a decrease in the defined benefit obligations, while positive figures show an increase. Discount rate (1% increase) Discount rate (1% decrease) Millions of yen March 31, 2016 (45,953) 53,392 Thousands of U.S. dollars March 31, 2016 (407,818) 473,837 The weighted-average duration of the defined benefit obligations at March 31, 2016 was 15.4 years. (8) Defined Contribution Plans Expenses for the defined contribution plans were ¥17,875 million and ¥19,340 million ($171,636 thousand) for the years ended March 31, 2015 and 2016, respectively. 97 24. Equity and Other Equity Items (1) Share Capital and Capital Surplus (A) Authorised Shares The number of authorized shares as of March 31, 2015 and 2016 was 607,458,368 ordinary shares and 1,214,916,736 ordinary shares, respectively. Increase in the number of authorized shares during the year ended March 31, 2016 resulted from the Company’s common shares split with an effective date of April 1, 2015. (B) Fully Paid Issued Shares The schedule of the number of issued shares, the amount of “Share capital” and “Capital surplus” was as follows: a share Millions of yen Thousands of U.S. dollars Number of ordinary issued shares (Note1) Share capital Capital surplus Share capital Capital surplus As of April 1, 2014 Increase (decrease) As of March 31, 2015 Increase (decrease) (Note2) As of March 31, 2016 199,817,389 - 199,817,389 199,817,389 399,634,778 53,204 - 53,204 - 53,204 84,321 - 84,321 - 84,321 472,168 - 472,168 748,322 - 748,322 (Note1) The shares issued by the Company are non-par value ordinary shares that have no restriction on any content of rights. (Note2) Increase in the number of ordinary issued shares during the year ended March 31, 2016 resulted from the Company’s common shares split with an effective date of April 1, 2015. (2) Treasury Shares The schedule of the number of treasury shares and the corresponding amount was as follows: a share Millions of yen Number of shares Amount Thousands of U.S. dollars Amount As of April 1, 2014 Increase (decrease) (Note1) As of March 31, 2015 Increase (decrease) (Note2) As of March 31, 2016 20,927,083 1,574 20,928,657 20,931,739 41,860,396 20,457 6 20,464 6 20,471 181,620 53 181,673 (Note1) Increase in the number of treasury shares during the year ended March 31, 2015 resulted from the purchase of odd shares. (Note2) Increase in the number of treasury shares during the year ended March 31, 2016 resulted from the purchase of odd shares and the Company’s common shares split with an effective date of April 1, 2015. (3) Other Components of Equity (A) Remeasurement of net defined benefit liabilities (assets) Remeasurement of net defined benefit liabilities (assets) comprise actuarial gain and loss on the present value of defined benefit obligations and the return on plan assets excluding amounts included in net interest. The amount is recognised as other comprehensive income when occurred and is transferred immediately from other components of equity to retained earnings. 98 (B) Net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income This is the valuation difference in fair value of financial assets measured at fair value through other comprehensive income. (C) Exchange differences on translation of foreign operations This is a foreign currency translation difference that occurs when consolidating financial statements of foreign operations are prepared in foreign currencies. (D) Net changes in fair value of cash flow hedges Epson uses derivatives for hedging to avoid the risk of fluctuation in future cash flows. This is the effective portion of changes in fair value of derivative transactions designated as cash flow hedges. 25. Dividends Dividends paid were as follows: FY2014: Year ended March 31, 2015 (Resolution) Annual Shareholders Meeting (June 24, 2014) Board of Directors (October 31, 2014) Class of shares Ordinary shares Ordinary shares Millions of yen Yen Total dividends Dividends per share Basis date Effective date 6,618 6,261 37 March 31, 2014 June 25, 2014 35 September 30, 2014 December 5, 2014 FY2015: Year ended March 31, 2016 (Resolution) Annual Shareholders Meeting (June 25, 2015) Board of Directors (October 29, 2015) Class of shares Ordinary shares Ordinary shares FY2015: Year ended March 31, 2016 Millions of yen Yen Total dividends Dividends per share Basis date Effective date 14,311 10,733 80 March 31, 2015 June 26, 2015 30 September 30, 2015 December 4, 2015 (Resolution) Annual Shareholders Meeting (June 25, 2015) Board of Directors (October 29, 2015) Class of shares Thousands of U.S. dollars Total dividends U.S. dollars Dividends per share Basis date Effective date Ordinary shares 127,005 0.70 March 31, 2015 June 26, 2015 Ordinary shares 95,252 0.26 September 30, 2015 December 4, 2015 (Note) The Company completed the Company’s ordinary shares split with an effective date of April 1, 2015 based on the resolution by the Company’s Board of Directors on January 30, 2015. Dividends per share whose basis date was prior to March 31, 2015 was stated by the actual dividends paid which was before the shares split. Dividends whose basis dates were during the years ended March 31, 2015 and 2016, but whose effective dates were subsequent to March 31, 2015 and 2016 were as follows: 99 FY2014: Year ended March 31, 2015 (Resolution) Annual Shareholders Meeting (June 25, 2015) Class of shares Millions of yen Yen Total dividends Dividends per share Basis date Effective date Ordinary shares 14,311 80 March 31, 2015 June 26, 2015 FY2015: Year ended March 31, 2016 (Resolution) Annual Shareholders Meeting (June 28, 2016) Class of shares Millions of yen Yen Total dividends Dividends per share Basis date Effective date Ordinary shares 10,733 30 March 31, 2016 June 29, 2016 FY2015: Year ended March 31, 2016 Class of shares Thousands of U.S. dollars Total dividends U.S. dollars Dividends per share Basis date Effective date Ordinary shares 95,252 0.26 March 31, 2016 June 29, 2016 (Resolution) Annual Shareholders Meeting (June 28, 2016) 26. Revenue The breakdown of “Revenue” was as follows: Sale of goods Royalty income Other Total Millions of yen Year ended March 31, 2015 1,071,687 8,201 6,452 1,086,341 2016 1,080,551 4,137 7,793 1,092,481 Thousands of U.S. dollars Year ended March 31, 2016 9,589,554 36,714 69,161 9,695,429 100 27. Selling, General and Administrative Expenses The breakdown of “Selling, general and administrative expenses” was as follows: Millions of yen Year ended March 31, 2015 (94,749) (47,837) (28,722) (19,823) (20,109) (18,162) (65,245) (294,648) 2016 (98,355) (53,172) (32,284) (22,624) (21,269) (16,590) (68,410) (312,708) Thousands of U.S. dollars Year ended March 31, 2016 (872,870) (471,884) (286,510) (200,780) (188,755) (147,231) (607,156) (2,775,186) Employee benefit expense Research and development expense Promotion expense Advertising expense Service contract expense Transportation expense Other Total 28. Employee Benefit Expenses The employee benefit expenses included in the consolidated statement of comprehensive income were as follows: Salaries and wages Legal welfare expense Welfare expense Expenses of post-employment benefits Expense for defined contribution plans Expense for defined benefit plans Total Millions of yen Year ended March 31, 2015 (206,796) (19,660) (10,653) (17,875) (12,303) (267,289) 2016 (211,849) (19,519) (11,188) (19,340) (32,334) (294,232) Thousands of U.S. dollars Year ended March 31, 2016 (1,880,094) (173,225) (99,290) (171,636) (286,972) (2,611,217) 101 29. Other Operating Income The breakdown of “Other operating income” was as follows: Gain on sales of property, plant and equipment, intangible assets and investment property Income from reversal of impairment loss Foreign exchange gain Income from a revision of the defined benefit plan (Note) Other Total Millions of yen Year ended March 31, 2015 2016 5,270 - - 30,071 4,564 39,907 7,733 3,828 931 - 2,314 14,807 Thousands of U.S. dollars Year ended March 31, 2016 68,627 33,972 8,262 - 20,546 131,407 (Note) As a result of a revision to the defined benefit plan, Epson recognised a ¥30,071 million decline in expenses associated with past service costs at the Company and certain domestic subsidiaries. This resulted in a ¥30,071 million increase in other operating income for the year ended March 31, 2015. 30. Other Operating Expense The breakdown of “Other operating expense” was as follows: Impairment loss Loss on litigation Loss on the disposal of property, plant and equipment and intangible assets Foreign exchange loss Other Total Millions of yen Year ended March 31, 2015 (3,563) (510) (745) (2,595) (2,388) (9,802) 2016 (1,618) (829) (755) - (2,529) (5,732) Thousands of U.S. dollars Year ended March 31, 2016 (14,359) (7,357) (6,700) - (22,462) (50,878) 102 31. Finance Income and Finance Costs The breakdowns of “Finance income” and “Finance costs” were as follows: Finance Income Interest income Dividend income Foreign exchange gain (Note) Other Total Finance Costs Interest expense Foreign exchange loss (Note) Employee benefit expense Other Total Millions of yen Year ended March 31, 2015 2,159 278 567 263 3,268 2016 1,275 340 - 36 1,652 Millions of yen Year ended March 31, 2015 (1,559) - (531) (229) (2,320) 2016 (1,319) (2,177) (700) (55) (4,252) Thousands of U.S. dollars Year ended March 31, 2016 11,315 3,017 - 328 14,660 Thousands of U.S. dollars Year ended March 31, 2016 (11,705) (19,320) (6,212) (496) (37,733) (Note) The increase or decrease in the fair value of currency derivatives is included in the foreign exchange gain (loss). 103 32. Discontinued Operations As of April 1, 2010, Epson transferred a part of its business and some assets in the field of small- and medium-sized liquid crystal displays to Sony Corporation and Sony Mobile Display Corporation and terminated the production operation at the end of December, 2010. The profit and loss related to allegations concerning a LCD price-fixing cartel that occurred during the years ended March 31, 2015 and 2016 was classified into “Discontinued operations”. As of November 16, 2012, Epson concluded an agreement with Hoya Corporation (“Hoya”) about the transfer of the optical products business of the Company and related subsidiaries to Hoya group. After the Company and related subsidiaries transferred their optical products business to Hoya Group on February 1, 2013, the profit and loss related to the optical products business was classified into “Discontinued operations”. (1) Reportable Segments Small- and medium-sized liquid crystal displays business: Other Optical products business: Other (2) The analysis of profit and loss of discontinued operations Selling, general and administrative expenses Other operating income Other operating expense Loss from operating activities Loss before tax Loss from discontinued operations Millions of yen Year ended March 31, 2015 2016 (459) 1,000 (1,659) (1,118) (1,118) (1,118) (42) - - (42) (42) (42) (3) The analysis of cash flow of discontinued operations Millions of yen Year ended March 31, 2015 2016 Thousands of U.S. dollars Year ended March 31, 2016 (373) - - (373) (373) (373) Thousands of U.S. dollars Year ended March 31, 2016 Net cash provided by (used in) operating activities Total (411) (411) (1,060) (1,060) (9,407) (9,407) 104 33. Other Comprehensive Income The amount arising during the year, reclassification adjustments to profit or loss and tax effects for each component of “Other comprehensive income” were as follows: FY2014: Year ended March 31, 2015 Millions of yen Amount arising Reclassification adjustments Before tax effects Tax effects Net of tax effects Remeasurement of net defined benefit liabilities (assets) Net gain (loss) on revaluation of financial assets measured at FVTOCI (Note) Exchange differences on translation of foreign operations Net changes in fair value of cash flow hedges Share of other comprehensive income of investments accounted for using the equity method Total (1,016) 2,244 31,219 2,418 257 35,124 (Note) FVTOCI: Fair Value Through Other Comprehensive Income FY2015: Year ended March 31, 2016 - - (1,106) 149 - (956) (1,016) 2,244 30,113 2,568 257 34,167 (496) (123) - (850) - (1,512) 2,121 30,113 1,718 257 (1,469) 32,698 Millions of yen Amount arising Reclassification adjustments Before tax effects Tax effects Net of tax effects Remeasurement of net defined benefit liabilities (assets) Net gain (loss) on revaluation of financial assets measured at FVTOCI (Note) Exchange differences on translation of foreign operations Net changes in fair value of cash flow hedges Share of other comprehensive income of investments accounted for using the equity method Total (22,465) (3,547) (21,309) 175 (240) (47,386) (Note) FVTOCI: Fair Value Through Other Comprehensive Income FY2015: Year ended March 31, 2016 - - - (1,953) - (22,465) (3,547) (21,309) (1,777) (240) 304 937 - 561 - (22,161) (2,610) (21,309) (1,215) (240) (1,953) (49,340) 1,803 (47,536) Thousands of U.S. dollars Amount arising Reclassification adjustments Before tax effects Tax effects Net of tax effects Remeasurement of net defined benefit liabilities (assets) Net gain (loss) on revaluation of financial assets measured at FVTOCI (Note) Exchange differences on translation of foreign operations Net changes in fair value of cash flow hedges Share of other comprehensive income of investments accounted for using the equity method Total (199,369) (31,478) (189,121) 1,562 (2,129) (420,535) - - - (17,332) (199,369) (31,478) (189,121) (15,770) 2,698 8,315 - 4,988 (196,671) (23,163) (189,121) (10,782) - (2,129) - (2,129) (17,332) (437,867) 16,001 (421,866) (Note) FVTOCI: Fair Value Through Other Comprehensive Income 105 34. Earnings per Share Basis of calculating basic earnings per share (1) Profit attributable to ordinary shareholders of the parent company Profit from continuing operations attributable to owners of the parent company Loss from discontinued operations attributable to owners of the parent company Profit used for calculation of basic earnings per share Millions of yen Year ended March 31, 2015 2016 Thousands of U.S. dollars Year ended March 31, 2016 113,678 45,815 406,594 (1,118) (42) (373) 112,560 45,772 406,221 (2)Weighted-average number of ordinary shares outstanding during the year Thousands of shares Year ended March 31, 2015 Year ended March 31, 2016 Weighted-average number of ordinary shares 357,779 357,775 (Note) The Company completed the Company’s ordinary shares split with an effective date of April 1, 2015 based on the resolution by the Company’s Board of Directors on January 30, 2015. As a result, each share of the Company’s ordinary shares was split into two shares. Basic earnings per share was calculated under the assumption that the shares split took effect at the beginning of the previous fiscal year. 106 35. Financial Instruments (1) Capital Management Epson selects the most effective fund management method focusing on the preservation of funds in view of safeness and flexibility. In addition, Epson obtains financing from bank loans and bonds issued. Epson has a policy not to transact derivatives for speculation purposes, but for avoiding the risks stated below. Epson manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital (equity attributable to owners of the parent company). The amounts were as follows: Interest-bearing debt Cash and cash equivalents Net interest-bearing debt Capital (equity attributable to owners of the parent company) Millions of yen March 31, 2015 2016 185,978 (245,330) (59,351) 494,325 141,755 (230,498) (88,743) 467,818 Thousands of U.S. dollars March 31, 2016 1,258,020 (2,045,598) (787,578) 4,151,739 Epson monitors financial indicators in order to maintain a well-balanced capital structure that ensures an appropriate return on equity and a sound and flexible financial condition for future investment. Epson monitor credit ratings for financial soundness and flexibility, and ROE (return on equity) for profitability, while focusing on changes in the domestic and overseas environment. (2) Financial Risk Management Epson is exposed to financial risks (credit risks, liquidity risks, foreign exchange risks, interest rate risks, and market price fluctuation risks) in the process of its business activities; and it manages risks based on a specific policy in order to avoid or reduce said risks. The results of risk management are quarterly reported by the financial and general accounting department to the Executive Committee of the Company. Epson’s policy limits derivatives to transactions for the purpose of mitigating risks from transactions based on actual demand. Therefore, Epson do not transact derivatives for speculation purposes or trading purposes. 107 (3) Credit Risk Receivables, such as notes and trade receivables, resulting from the operating activities of Epson are exposed to customer credit risks. Epson holds mainly bonds receivable as investments of surplus funds and equity securities of customers and suppliers to strengthen relationships with them; those securities are exposed to the issuers’ credit risks. In addition, through derivative transactions that Epson conducts in order to hedge foreign exchange fluctuation risks and interest rate fluctuation risks, Epson is exposed to the credit risks of the financial institutions which are counterparties to these transactions. In principle, Epson sets credit lines or transaction conditions with respect to trade receivables for counterparties based on Epson’s Credit Control Regulation in order to prevent credit risks relating to counterparties. In addition, the receivable balances of counterparties are monitored in order to mitigate the credit risks. The financial and general accounting department of the Company regularly monitors the status of the occurrence and collection of bad debts, and reports them to the Executive Committee of the Company. There is no over-concentrated credit risk for a single customer. With regard to the investment of cash surpluses and derivatives, Epson invests in bonds receivable and other financial instruments with a certain credit rating and transacts with financial institutions with a high credit rating in principle in order to prevent credit risks based on Epson’s Capital Management Regulation. In addition, the financial and general accounting department of the Company regularly monitors the performances of these transactions and reports the results to the Executive Committee of the Company. The analysis of the aging of “Trade and other receivables” and “Other Financial Assets” that are past due but not impaired as of March 31, 2016 was as follows. It includes amounts considered recoverable by credit insurance and collateral. Within 30 days Over 30 days, within 60 days Over 60 days, within 90 days Over 90 days Total Millions of yen March 31, 2016 Thousands of U.S. dollars March 31, 2016 5,973 536 140 247 6,898 53,027 4,756 1,242 2,192 61,217 Epson uses an allowance account for credit losses to record impairment losses on the uncollectible amounts of individually significant trade receivables at the end of the reporting period and to record impairment losses on trade receivables that are not individually significant at an amount based on the historical loan loss ratio at the end of the reporting period. The allowance account for credit losses against the financial assets is included in “Trade and other receivables” and “Other Financial Assets” in the consolidated statement of financial position. The schedule of the allowance account for credit losses of “Trade and other receivables” and “Other Financial Assets” was as follows: Balance as of April 1 Addition (Note) Decrease (utilised) Decrease (reversal) Other Balance as of March 31 Millions of yen March 31, 2015 2016 1,758 478 (483) (311) 145 1,586 1,586 669 (724) (12) (39) 1,479 Thousands of U.S. dollars March 31, 2016 14,075 5,927 (6,425) (106) (346) 13,125 (Note) “Trade and other receivables” and “Other Financial Assets” for which impairment was recognised individually at March 31, 2015 and 2016 were ¥52 million and ¥45 million ($399 thousand), respectively; and their corresponding allowance account for credit losses were ¥52 million and ¥45 million ($399 thousand), respectively. 108 (4) Liquidity Risk Epson raises funds by borrowings and bonds issued; however, these liabilities are exposed to the liquidity risk that it would not be able to repay liabilities on the due date due to the deterioration of the financing environment. Epson establishes a financing plan based on the annual business plan and the financial and general accounting department of the Company regularly monitors and collects information on the balance of liquidity-in-hand and interest-bearing debt and reports it to the Executive Committee of the Company. In addition, Epson manages liquidity risks with the balance of liquidity-in-hand maintained at a proper level by working out the financing plan on a timely basis, and by taking into consideration the financial environment. The financial liability balance (including derivative financial instruments) by maturity was as follows: FY2014: As of March 31, 2015 Carrying amount Contractual cash flow Due within 1 year Due after 1 year through 2 years Due after 2 years through 3 years Due after 3 years through 4 years Due after 4 years through 5 years Due after 5 years Millions of yen Non-derivative financial liabilities Trade and other payables Borrowings Bonds issued Lease obligations Other Total Derivative financial liabilities Foreign exchange forward contract Total FY2015: As of March 31, 2016 140,047 85,966 99,831 180 1,973 327,999 259 259 140,047 85,966 100,000 185 1,973 328,172 140,047 35,433 40,000 72 3 215,557 259 259 259 259 - 533 30,000 51 98 30,682 - - - 50,000 10,000 31 108 60,140 - - - - 10,000 18 419 10,438 - - Carrying amount Contractual cash flow Due within 1 year Due after 1 year through 2 years Due after 2 years through 3 years Due after 3 years through 4 years Due after 4 years through 5 years Millions of yen Non-derivative financial liabilities Trade and other payables Borrowings Bonds issued Lease obligations Other Total Derivative financial liabilities Foreign exchange forward contract Total FY2015: As of March 31, 2016 130,624 81,604 59,917 233 1,641 274,021 823 823 130,624 81,604 60,000 242 1,641 274,112 130,624 31,604 30,000 92 0 192,322 823 823 823 823 - 50,000 10,000 76 63 60,140 - - - - 10,000 48 337 10,386 - - - - 10,000 19 34 10,053 - - - - 10,000 9 185 10,194 Due after 5 years - - - - - 4 94 98 - - Carrying amount Contractual cash flow Due within 1 year Due after 1 year through 2 years Due after 2 years through 3 years Due after 3 years through 4 years Due after 4 years through 5 years Due after 5 years Thousands of U.S. dollars Non-derivative financial liabilities Trade and other payables Borrowings Bonds issued Lease obligations Other Total 1,159,247 724,209 531,744 2,067 14,583 2,431,850 1,159,247 724,209 532,477 2,147 14,583 2,432,663 1,159,247 280,475 266,239 816 17 1,706,794 Derivative financial liabilities Foreign exchange forward contract Total 7,303 7,303 7,303 7,303 7,303 7,303 - 443,734 88,746 703 569 533,752 - - - - 88,746 425 3,001 92,172 - - - - 88,746 168 303 89,217 - - - - - 35 834 869 - - 109 - - - 0 1,158 1,159 - - - - - 0 1,111 1,111 - - - - - 0 9,859 9,859 - - (5) Foreign Exchange Risk Epson operates businesses globally and, therefore, is exposed to the following risks due to foreign exchange fluctuation: (A) The risk that the profit or loss and cash flow in each functional currency of Epson is influenced by foreign exchange fluctuation as a result of external transactions and intergroup transactions, including the payment and receipt of dividends, in currencies that are different from each functional currency of Epson. (B) The risk that the equity of Epson is influenced by foreign exchange fluctuation when equity denominated in each functional currency of Epson is translated into Japanese yen and consolidated. (C) The risk that the profit or loss of Epson is influenced by foreign exchange fluctuation when profit or loss denominated in each functional currency of Epson is translated into Japanese yen and consolidated. Epson hedges against risk (A) using derivatives or foreign currency-denominated interest-bearing debt when future cash flow is projected or when receivables and payables are fixed. As a rule, the net of foreign currency-denominated operating receivables and payables is hedged mainly using forward foreign exchange contracts. Epson does not hedge against risk (B) and (C), in principle. In order to mitigate risks mentioned above resulting from the foreign exchange fluctuation, in accordance with Epson’s Foreign Exchange Management Regulation, Epson establishes a foreign currency hedge policy based on the current conditions and forecast of the foreign exchange market, implements the aforementioned hedges under the supervision of the Foreign Exchange Management Committee of the Company. The financial and general accounting department of the Company regularly reports the performances to the Executive Committee of the Company. The breakdown of currency derivatives was follows: Derivative transactions to which hedge accounting is not applied Millions of yen March 31, Contract amount 2015 Over one year Fair value Contract amount 2016 Over one year Fair value Contract amount Thousands of U.S. dollars March 31, 2016 Over one year Fair value Foreign exchange forward contract Buying Selling Non-Deliverable Forward Selling Total 3,238 34,957 2,940 41,136 Derivative transactions to which hedge accounting is applied Contract amount 2015 Over one year Foreign exchange forward contract Selling Non-Deliverable Forward Selling Total 37,030 8,172 45,203 - - - - - - - (52) 1,383 36 1,367 4,146 32,978 2,754 39,879 Millions of yen March 31, Fair value Contract amount 2016 Over one year 1,557 35,755 (44) 1,512 7,504 43,259 - - - - - - - 57 732 (24) 765 36,794 292,679 24,440 353,913 - - - - 505 6,496 (212) 6,789 Thousands of U.S. dollars Fair value Contract amount March 31, 2016 Over one year Fair value (Note) 28 317,315 (240) (212) 66,595 383,910 - - - 248 (2,129) (1,881) (Note) Cash flow hedge is applied, and derivative transactions are measured at fair value in the consolidated statement of financial position. 110 Foreign Exchange Sensitivity Analysis In cases where each currency other than the functional currency that denominates the financial instruments held by Epson as of March 31, 2016 increases by 10% in value against the functional currency, the impact on profit before tax in the consolidated statement of comprehensive income was as follows. The impact from the translation of functional currency-denominated financial instruments, and assets, liabilities, income and expenses of foreign operations into Japanese yen is not included. Also, it is based on the assumption that currencies other than the currencies used for the calculation do not fluctuate. Millions of yen March 31, 2016 Thousands of U.S. dollars March 31, 2016 Profit before tax 1,698 15,069 (6) Interest Rate Risk Epson’s interest rate risk arises from cash equivalents and interest-bearing debt. Borrowings and bonds issued with floating rates are subject to the effects of changes in future cash flows caused by the fluctuation of market interest rates; while, borrowings and bonds issued with fixed rates are subject to the effects of changes in the fair value caused by the fluctuation of market interest rates. In response to the fluctuation of market interest rates, Epson reduces the interest rate risk by implementing an interest rate swap and adjusting appropriate proportion of financing between floating rates and fixed rates. In accordance with Epson’s Capital Management Regulation, the interest rate swap is approved by the finance officer of the Company. Interest Rate Sensitivity Analysis In cases where the interest rate of financial instruments held by Epson as of March 31, 2016 increases by 100bp, the impact on profit before tax in the consolidated statement of comprehensive income was as follows: The analysis included financial instruments affected by interest rate fluctuation and based on the assumption that other factors, including the impacts of foreign exchange fluctuation, were constant. Millions of yen March 31, 2016 Thousands of U.S. dollars March 31, 2016 Profit before tax 819 7,268 (7) Market Price Fluctuation Risk With respect to equity securities, Epson regularly assesses the fair value and financial conditions of the issuers, and reviews the portfolio held by taking into account the relationship with counterparty entities in accordance with Epson’s Securities Operation Regulation. Epson intends to hold equity instruments not for short-term trading but for long-term investment. Therefore, Epson does not sell the instruments actively. The equity price fluctuation risks are calculated based on the price of equity instruments at the fiscal year end. In cases where the equity price changes by 5% in value, the impact on other comprehensive income before tax effects as of March 31, 2016 was ¥806 million ($7,152 thousand) due to the changes in the fair value. 111 (8) Fair Value of Financial Instruments (A) Fair value measurement The fair values of financial assets and liabilities are determined as follows: (Derivatives) The fair values are calculated based on prices obtained from financial institutions. (Equity securities and bonds receivable) When market values for equity securities and bonds receivable are available, such values are used as the fair values. The fair values of the equity securities and bonds receivable whose market values are unavailable are measured by using the discounted cash flow method, price comparison method based on the prices of similar types of securities and bonds and other valuation methods. (Borrowings) As current borrowings are settled on a short-term basis, the fair values approximate their carrying amounts. For non-current borrowings with floating rates, it is assumed that the fair value is equal to the carrying amounts, because the rates are affected in the short term by fluctuations in market interest rates, and because Epson’s credit status has not greatly changed since they were implemented. The fair values of non-current borrowings with fixed rates are calculated by the total sum of the principal and interest discounted using the interest rates that would be applied if similar new borrowings were conducted. (Bonds issued) The fair values of bonds issued are determined based on market prices. (Lease obligations) The fair values are calculated based on the present value of the total amount discounted by the interest rate corresponding to the period to maturity and the credit risk per each lease obligation classified per certain period. (Other) Other financial instruments are settled mainly on a short-term basis, and the fair values approximate the carrying amounts. 112 (B) Fair values of financial instruments The carrying amounts and the fair values of the financial instruments were as follows: Millions of yen March 31, 2015 2016 Thousands of U.S. dollars March 31, 2016 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value 3,181 19,639 3,181 19,639 1,383 16,060 1,383 16,060 12,273 142,527 12,273 142,527 245,330 167,482 108 5,960 245,330 167,482 108 5,960 230,498 151,660 88 6,104 230,498 151,660 88 6,104 2,045,598 1,345,935 780 54,181 2,045,598 1,345,935 780 54,181 259 259 823 823 7,303 7,303 140,047 140,047 130,624 130,624 1,159,247 1,159,247 85,966 99,831 180 1,973 86,118 100,466 180 1,973 81,604 59,917 233 1,641 81,728 60,297 233 1,641 724,209 531,744 2,067 14,583 725,310 535,117 2,067 14,583 Financial assets measured at fair value Derivative financial assets Equity securities Financial assets measured at amortised cost Cash and cash equivalents Trade and other receivables Bonds receivable Other Financial liabilities measured at fair value Derivative financial liabilities Financial liabilities measured at amortised cost Trade and other payables Interest-bearing debt Borrowings Bonds issued Lease obligations Other 113 (C) Fair value hierarchy The fair value hierarchy of financial instruments is categorized from Level 1 to Level 3 as follows: Level 1: Fair value measured at quoted prices in active markets for identical assets or liabilities Level 2: Fair value calculated using inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly Level 3: Fair value calculated using valuation techniques including inputs unobservable input for the assets and liabilities Epson does not have any financial instruments for which there is significant measurement uncertainty and subjectivity which needs to subdivide each level stated above for disclosure. The transfers between levels in the fair value hierarchy are deemed to have occurred at the end of the reporting period. Classification by hierarchy regarding financial assets and liabilities measured at fair value FY2014: As of March 31, 2015 Financial assets Derivative financial assets Equity securities Total Financial liabilities     Derivative financial liabilities Total FY2015: As of March 31, 2016 Financial assets Derivative financial assets Equity securities Total Financial liabilities     Derivative financial liabilities Total FY2015: As of March 31, 2016 Financial assets Derivative financial assets Equity securities Total Financial liabilities      Derivative financial liabilities Total Millions of yen Level 1 Level 2 Level 3 Total - 17,232 17,232 - - 3,181 - 3,181 259 259 - 2,406 2,406 - - 3,181 19,639 22,821 259 259 Millions of yen Level 1 Level 2 Level 3 Total - 14,006 14,006 - - 1,383 - 1,383 823 823 - 2,054 2,054 - - 1,383 16,060 17,444 823 823 Thousands of U.S. dollars Level 1 Level 2 Level 3 Total - 124,299 124,299 - - 12,273 - 12,273 7,303 7,303 - 18,228 18,228 - - 12,273 142,527 154,800 7,303 7,303 There were no transfers of financial instruments between Level 1 and Level 2 of the fair value hierarchy at the end of each reporting period. 114 Classification by hierarchy regarding financial assets and liabilities not measured at fair value FY2014: As of March 31, 2015 Millions of yen Level 1 Level 2 Level 3 Total Financial assets Bonds receivable Total Financial liabilities Borrowings Bonds issued Lease obligations Total FY2015: As of March 31, 2016 Level 1 - - - - - - - - - - - - 108 108 86,118 100,466 - 186,584 - - - - 180 180 108 108 86,118 100,466 180 186,765 Millions of yen Level 2 Level 3 Total 88 88 81,728 60,297 - 142,025 - - - - 233 233 88 88 81,728 60,297 233 142,259 Thousands of U.S. dollars Level 1 Level 2 Level 3 Total - - - - - - 780 780 725,310 535,117 - 1,260,427 - - - - 2,067 2,067 780 780 725,310 535,117 2,067 1,262,494 Financial assets Bonds receivable Total Financial liabilities Borrowings Bonds issued Lease obligations Total FY2015: As of March 31, 2016 Financial assets Bonds receivable Total Financial liabilities Borrowings Bonds issued Lease obligations Total The movement of financial instruments categorized within Level 3 of the fair value hierarchy was as follows: Balance as of April 1 Gains and losses Other comprehensive income Sales Other Balance as of March 31 Millions of yen Year ended March 31, 2015 2016 Thousands of U.S. dollars Year ended March 31, 2016 2,406 21,352 (319) (32) - 2,054 (2,841) (283) - 18,228 2,606 (174) (25) 0 2,406 115 36. Principal Subsidiaries Principal subsidiaries as of March 31, 2016 were as follows: Company name Location Main business Epson Sales Japan Corporation Epson Direct Corporation Shinjuku-ku, Tokyo Printing solutions, Visual communications, Wearable & Industrial products Matsumoto-shi, Nagano Printing solutions Orient Watch Co., Ltd. Shinjuku-ku, Tokyo Wearable & Industrial products Miyazaki Epson Corporation Tohoku Epson Corporation Akita Epson Corporation Epson Atmix Corporation Miyazaki-shi, Miyazaki Wearable & Industrial products Sakata-shi, Yamagata Yuzawa-shi, Akita Printing solutions, Wearable & Industrial products Printing solutions, Wearable & Industrial products Hachinohe-shi, Aomori Wearable & Industrial products U.S. Epson, Inc. Long Beach, U.S.A. Holding company Epson America, Inc. Long Beach, U.S.A. Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Epson Electronics America, Inc. San Jose, U.S.A. Wearable & Industrial products Epson Portland Inc. Portland, U.S.A. Printing solutions Epson El Paso, Inc. El Paso, U.S.A. Printing solutions Epson Europe B.V. Amsterdam, the Netherlands Epson (U.K.) Ltd. Hemel Hempstead, UK Epson Deutschland GmbH Epson Europe Electronics GmbH Dusseldorf, Germany Regional headquarters, Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications, Wearable & Industrial products Munich, Germany Wearable & Industrial products Epson France S.A. Levallois-Perret, France Epson Italia s.p.a. Milan, Italy Printing solutions, Visual communications Printing solutions, Visual communications For.Tex S.r.l. Como, Italy Printing solutions Epson Iberica, S.A. Cerdanyola, Spain Printing solutions, Visual communications Epson Telford Ltd. Telford, UK Printing solutions 116 Ownership percentage of voting rights (%) (Note) 100.0 100.0 (100.0) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) Company name Location Main business Ownership percentage of voting rights (%) (Note) Epson (China) Co., Ltd. Beijing, China Epson Korea Co., Ltd. Seoul, Korea Epson Hong Kong Ltd. Hong Kong, China Epson Taiwan Technology & Trading Ltd. Taipei, Taiwan Epson Singapore Pte. Ltd. Singapore P.T. Epson Indonesia Jakarta, Indonesia Epson (Thailand) Co., Ltd. Epson Australia Pty. Ltd. Bangkok, Thailand North Ryde, Australia Epson India Pvt. Ltd. Bangalore, India Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications, Wearable & Industrial products Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Tianjin Epson Co., Ltd. Tianjin, China Printing solutions Epson Precision (Hong Kong), Ltd. Epson Engineering (Shenzhen) Ltd. Epson Precision (Shenzhen) Ltd. Orient Watch (Shenzhen) Ltd. Singapore Epson Industrial Pte. Ltd. Hong Kong, China Shenzhen, China Printing solutions, Visual communications Printing solutions, Visual communications, Wearable & Industrial products Shenzhen, China Wearable & Industrial products Shenzhen, China Wearable & Industrial products Singapore Wearable & Industrial products P.T. Epson Batam Batam, Indonesia Printing solutions P.T. Indonesia Epson Industry Epson Precision (Philippines), Inc. Epson Precision Malaysia Sdn. Bhd. Epson Precision (Johor) Sdn. Bhd. Bekasi, Indonesia Printing solutions Lipa, Philippines Kuala Lumpur, Malaysia Printing solutions, Visual communications Wearable & Industrial products Johor, Malaysia Wearable & Industrial products 100.0 100.0 100.0 100.0 100.0 100.0 (100.0) 100.0 (100.0) 100.0 100.0 (100.0) 80.0 (80.0) 100.0 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 100.0 (100.0) 100.0 100.0 100.0 100.0 (100.0) (Note) Ownership percentage of voting rights indicated inside parentheses refers to indirect ownership percentage. 117 37. Related Parties Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated in consolidation and are not disclosed in this note. There were no significant transactions between the Company, its subsidiaries and other related parties. The remuneration of directors and other members of key management personnel was as follows: Short-term remuneration Millions of yen Year ended March 31, 2015 563 2016 550 Thousands of U.S. dollars Year ended March 31, 2016 4,881 (Note 1) Epson introduced a stock performance (stock-based) remuneration system to link remuneration more closely to share price, so a certain portion of short-term remuneration is allotted for the purchase of Epson Stock. (Note 2) A director who retired at the closing of the general shareholders’ meeting held on June 24, 2014 receipted a retirement benefit of ¥41 million based on the resolution of the general shareholders’ meeting held on June 23, 2006, on the payment of director retirement benefits. (Note 3) A statutory auditor (outside statutory auditor) who retired at the closing of the general shareholders’ meeting held on June 28, 2016 is going to receipt a retirement benefit of ¥15 million ($133 thousand) based on the resolution of the general shareholders’ meeting held on June 23, 2006, on the payment of director retirement benefits. 38. Commitments Commitments for the acquisition of assets were as follows: Acquisition of property, plant and equipment Acquisition of intangible assets Total Millions of yen March 31, 2015 2016 4,706 1,519 6,226 6,048 1,682 7,730 Thousands of U.S. dollars March 31, 2016 53,674 14,927 68,601 118 39. Contingencies Material litigation In general, litigation has uncertainties and it is difficult to make reliable judgments for the possibility of an outflow of resources embodying economic benefits and to estimate the financial effect. Provisions are not recognised either if an outflow of resources embodying economic benefits is not probable or to estimate the financial effect is not practicable. Epson was contending the following material actions. (1) The liquid crystal display price-fixing cartel The civil actions have been brought against the Company and certain of its consolidated subsidiaries by customers in the U.S., regarding allegations of involvement in a liquid crystal display price-fixing cartel. Moreover, the Company and certain of its consolidated subsidiaries are currently under investigation by a certain anti-monopoly-related authority. (2) The civil action on copyright fee of ink-jet printers In June 2010, Epson Europe B.V. (“EEB”), a consolidated subsidiary of the Company, brought a civil suit against La SCRL Reprobel (“Reprobel”), a Belgium-based group that collects copyright royalties, seeking restitution for copyright royalties for multifunction printers. After that, Reprobel also brought a civil suit against EEB. As a result, these two lawsuits were adjoined. EEB’s claims were rejected at the first trial, but EEB, dissatisfied with the decision, intends to appeal. Verwertungsgesellschaft Wort (“VG Wort”), the organization for collecting copyright fees on behalf of copyright holders in Germany, filed a civil lawsuit in January 2004 against Epson Deutschland GmbH (“EDG”), a consolidated subsidiary of the Company, seeking payment of copyright fees for single-function printers. While taking the court procedures, EDG had settlement discussions with VG Wort through Bundesverband Informationswirtschaft, Telekommunikation und neue Medien e.V. (“BITKOM”), a German business association of IT industry. Finally, BITKOM and VG Wort reached an agreement to settle, upon which the court dismissed the case and it was closed. 40. Subsequent Events Share repurchase The Company resolved at the meeting of its Board of Directors held on April 28, 2016 to repurchase its own shares pursuant to Article 156 of the Companies Act as applied by replacing the relevant terms pursuant to Article 165, Paragraph 3 of the Act. (1) Reason for the repurchase To optimize capital efficiency and to further enhance shareholder returns (2) Class of shares to be repurchased Ordinary shares (3) Total number of repurchasable shares 7 million shares (maximum) (1.95% of the total number of issued shares (excluding treasury stock)) (4) Total repurchase cost 10 billion yen (maximum) (5) Repurchase period May 2, 2016 - June 30, 2016 (6) Repurchase method Through securities company using discretionary transactions method 119 41. Approval of Consolidated Financial Statements The consolidated financial statements were approved by Minoru Usui (President and Representative Director) and Tatsuaki Seki (Director and General Administrative Manager, Management Control Division) on June 28, 2016. 120 Report of Independent Auditors 121 Additional Information 1. Principal subsidiaries and affiliates Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary (Consolidated subsidiaries) Epson Sales Japan Corporation * Shinjuku-ku, Tokyo 4,000 (million JPY) Printing solutions, Visual communications, Wearable & Industrial products 100.0 Sales of the Company’s products, Interlocking directors, Financial assistance, Rental of assets Epson Direct Corporation Matsumoto-shi, Nagano 150 (million JPY) Printing solutions 100.0 (100.0) Sales of PCs, etc., Rental of assets Orient Watch Co., Ltd. Shinjuku-ku, Tokyo 100 (million JPY) Wearable & Industrial products 100.0 Sales of watches, Interlocking directors, Financial assistance, Rental and borrowing of assets Miyazaki Epson Corporation Miyazaki-shi, Miyazaki 100 (million JPY) Wearable & Industrial products 100.0 Manufacture of crystal devices Tohoku Epson Corporation Sakata-shi, Yamagata 100 (million JPY) Akita Epson Corporation Yuzawa-shi, Akita 80 (million JPY) Printing solutions, Wearable & Industrial products Printing solutions, Wearable & Industrial products Epson Atmix Corporation Hachinohe-shi, Aomori 450 (million JPY) Wearable & Industrial products 100.0 100.0 Manufacture of printer components and semiconductors, Interlocking directors Manufacture of printer components and sensing systems, Financial assistance 100.0 Manufacture and sales of metal powders, etc., Rental of assets U.S. Epson, Inc. * Long Beach, U.S.A. 126,941 (thousand USD) Holding company 100.0 Epson America, Inc. * Long Beach, U.S.A. 40,000 (thousand USD) Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Epson Electronics America, Inc. Epson Portland Inc. Epson El Paso, Inc. San Jose, U.S.A. Portland, U.S.A. El Paso, U.S.A. 10,000 (thousand USD) Wearable & Industrial products 31,150 (thousand USD) Printing solutions 51,000 (thousand USD) Printing solutions 122 Holding company in Americas, Interlocking directors Regional headquarters in Americas, Sales of printers and other PC peripherals, and sales of factory automation products, Interlocking directors Sales of electronic devices Manufacture of printer consumables, Interlocking directors 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) Distribution of printer consumables, Interlocking directors Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary Epson Europe B.V. * Amsterdam, the Netherlands 95,000 (thousand EUR) Regional headquarters, Printing solutions, Visual communications Epson (U.K.) Ltd. Hemel Hempstead, UK 1,600 (thousand GBP) Printing solutions, Visual communications Epson Deutschland GmbH Dusseldorf, Germany 5,200 (thousand EUR) Printing solutions, Visual communications, Wearable & Industrial products 100.0 Regional headquarters in Europe, Sales of printers and other PC peripherals, Interlocking directors, Guaranty of liabilities 100.0 (100.0) Sales of printers and other PC peripherals, Guaranty of liabilities 100.0 (100.0) Sales of printers and other PC peripherals, and sales of factory automation products, Guaranty of liabilities Epson Europe Electronics GmbH Munich, Germany 2,000 (thousand EUR) Wearable & Industrial products 100.0 (100.0) Sales of electronic devices, Interlocking directors Epson France S.A. Levallois- Perret, France 4,000 (thousand EUR) Epson Italia s.p.a. For.Tex S.r.l. Milan, Italy Como, Italy 3,000 (thousand EUR) 80 (thousand EUR) Epson Iberica, S.A. Cerdanyola, Spain 1,900 (thousand EUR) Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions Printing solutions, Visual communications Epson Telford Ltd. Telford, UK 8,000 (thousand GBP) Printing solutions Epson (China) Co., Ltd. * Beijing, China 1,211 (million CNY) Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Epson Korea Co., Ltd. Seoul, Korea 1,466 (million KRW) Printing solutions, Visual communications Epson Hong Kong Ltd. Hong Kong, China 2,000 (thousand HKD) Epson Taiwan Technology & Trading Ltd. Taipei, Taiwan 25,000 (thousand TWD) Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications, Wearable & Industrial products 123 100.0 (100.0) Sales of printers and other PC peripherals 100.0 (100.0) Sales of printers and other PC peripherals, Guaranty of liabilities 100.0 (100.0) Sales of printer consumables, etc. 100.0 (100.0) Sales of printers and other PC peripherals, Guaranty of liabilities 100.0 (100.0) Manufacture of printer consumables, Interlocking directors 100.0 Regional headquarters in China, Sales of printers and other PC peripherals, and sales of factory automation products, Interlocking directors 100.0 Sales of printers and other PC peripherals 100.0 100.0 Sales of printers and other PC peripherals, and sales of watch movements, factory automation products and electronic devices Sales of printers and other PC peripherals, and sales of factory automation products and electronic devices, Guaranty of liabilities Company name Location Paid-in capital or amount invested Main business Epson Singapore Pte. Ltd. Singapore 200 (thousand SGD) P.T. Epson Indonesia Jakarta, Indonesia 918,000 (thousand IDR) Epson (Thailand) Co., Ltd. Bangkok, Thailand 103,000 (thousand THB) Epson Australia Pty. Ltd. North Ryde, Australia 1,000 (thousand AUD) Epson India Pvt. Ltd. Bangalore, India 108,628 (thousand INR) Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Tianjin Epson Co., Ltd. Tianjin, China 172,083 (thousand CNY) Printing solutions Epson Precision (Hong Kong), Ltd. * Epson Engineering (Shenzhen) Ltd. * Hong Kong, China 81,602 (thousand USD) Shenzhen, China 56,641 (thousand USD) Printing solutions, Visual communications Printing solutions, Visual communications, Wearable & Industrial products Epson Precision (Shenzhen) Ltd. Shenzhen, China 25,000 (thousand USD) Wearable & Industrial products Ownership percentage of voting rights (%) 100.0 Relationship between parent company and subsidiary Regional headquarters in Asia-Pacific, Sales of printers and other PC peripherals, and sales of electronic devices, Interlocking directors, Guaranty of liabilities 100.0 (100.0) Sales of printers and other PC peripherals 100.0 (100.0) Sales of printers and other PC peripherals 100.0 100.0 (100.0) Sales of printers and other PC peripherals, Guaranty of liabilities Sales of printers and other PC peripherals, Interlocking directors, Guaranty of liabilities 80.0 (80.0) Manufacture of printer consumables, Interlocking directors 100.0 Procurement of printer and 3LCD projector components 100.0 (100.0) Manufacture of printers, 3LCD projectors, liquid crystal panels and factory automation products, etc., Interlocking directors 100.0 (100.0) Manufacture of watches, etc., Interlocking directors Orient Watch (Shenzhen) Ltd. Shenzhen, China 37,748 (thousand CNY) Wearable & Industrial products 100.0 (100.0) Manufacture of watches, etc., Singapore Epson Industrial Pte. Ltd. Singapore 71,700 (thousand SGD) Wearable & Industrial products P.T. Epson Batam Batam, Indonesia 7,000 (thousand USD) Printing solutions 100.0 100.0 (100.0) P.T. Indonesia Epson Industry * Bekasi, Indonesia 23,000 (thousand USD Printing solutions 100.0 Manufacture of semiconductors, and surface finishing, Interlocking directors, Guaranty of liabilities Manufacture of printer consumables, Interlocking directors, Guaranty of liabilities Manufacture of printers, Interlocking directors, Guaranty of liabilities 124 Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary Epson Precision (Philippines), Inc. * Lipa, Philippines 157,533 (thousand USD) Printing solutions, Visual communications Epson Precision Malaysia Sdn. Bhd. Kuala Lumpur, Malaysia 16,000 (thousand MYR) Wearable & Industrial products Epson Precision (Johor) Sdn. Bhd. Johor, Malaysia 22,800 (thousand MYR) Wearable & Industrial products 100.0 Manufacture of printers and 3LCD projectors, Interlocking directors, Guaranty of liabilities 100.0 Manufacture of crystal devices, Interlocking directors 100.0 (100.0) Manufacture of watch components, Guaranty of liabilities 45 other companies – – – – – (Equity method affiliates) Three companies Notes 1. Ownership percentage of voting rights indicated inside parentheses refers to indirect ownership percentage. 2. * indicates a specified subsidiary (tokutei-kogaisha). 3. The revenue (excluding revenues among consolidated subsidiaries) of Epson Sales Japan Corporation and Epson America, Inc. each amounts to more than 10% of the consolidated revenue. Key information on the operations of these subsidiaries is as follows. Company name Revenue Profit before tax Profit for the period Total equity Total assets (Millions of yen) Epson Sales Japan Corporation Epson America, Inc. 190,144 312,612 4,256 1,886 3,179 165 15,287 65,503 32,398 125,839 The amounts for Epson America, Inc. are included in consolidated business results. 125 2. Distribution of ownership among shareholders Category Government and Japanese Japanese regional public financial securities bodies institutions companies Other Japanese corporations Foreign institutions and Japanese others individuals Total Institutions Individuals and others Shares less than one unit (Shares) Share ownership (100 shares per unit) As of March 31, 2016 Number of shareholders (Persons) Number of shares owned (Units) Percentage of shares owned (%) – 96 50 398 518 33 48,927 50,022 - – 1,041,043 124,539 573,930 1,026,714 229 1,228,587 3,995,042 130,578 – 26.05 3.12 14.37 25.70 0.01 30.75 100.00 - Notes 1. 41,860,396 shares of treasury stock are included as 418,603 units under “Japanese individuals and others” and 96 shares under “Shares less than one unit.” 2. Six units in the name of Japan Securities Depository Center, Inc. are included under “Other Japanese corporations.” 126 3. Major shareholders Name Address Number of shares held As of March 31, 2016 Shareholding ratio (%) Sanko Kigyo Kabushiki Kaisha Japan Trustee Services Bank, Ltd. (Trustee Account) The Master Trust Bank of Japan, Ltd. (Trust account) Seiko Holdings Corporation 6-1 Ginza 5-chome, Chuo-ku, Tokyo 8-11, Harumi 1-chome, Chuo-ku, Tokyo 11-3 Hamamatsu-cho 2-chome, Minato-ku, Tokyo 5-11 Ginza 4-chome, Chuo-ku, Tokyo Yasuo Hattori Minato-ku, Tokyo Noboru Hattori Minato-ku, Tokyo The Dai-ichi Life Insurance Company, Limited (Standing proxy: Trust & Custody Services Bank, Ltd.) Mizuho Trust & Banking Co., Ltd., Retirement benefit trust, Mizuho Bank, Ltd. account, Beneficiary of the re-trust, Trust & Custody Services Bank, Ltd. Seiko Epson Corporation Employees’ Shareholding Association NGK INSULATORS, LTD. 13-1, Yurakucho 1-chome, Chiyoda-ku, Tokyo (Harumi Island Triton Square Office Tower Z, 8-12, Harumi 1-chome, Chuo-ku, Tokyo) Harumi Island Triton Square Office Tower Z, 8-12, Harumi 1-chome, Chuo-ku, Tokyo 3-5, Owa 3-chome, Suwa-shi, Nagano 2-56, Suda-cho, Mizuho-ku, Nagoya-shi, Aichi Total - 20,000,000 16,635,900 16,440,000 12,000,000 11,932,612 11,199,936 5.00 4.16 4.11 3.00 2.98 2.80 8,736,000 2.18 8,153,800 2.04 7,677,116 1.92 6,900,000 119,675,364 1.72 29.94 Notes 1. Although the Company holds 41,860,396 shares of treasury stock, the Company is excluded from the above list of major shareholders. (The ratio of the treasury shares held by the Company to the total number of shares issued is 10.47%.) 2. The shares held by Mizuho Trust & Banking Co., Ltd., Retirement benefit trust, Mizuho Bank, Ltd. account, Beneficiary of the re-trust, Trust & Custody Services Bank, Ltd., were contributed by Mizuho Bank, Ltd. to the trust assets of the Retirement benefit trust. 127 4. Employee stock ownership plans On March 16, 2016, Epson’s Board of Directors resolved to introduce a transparent & fair performance-linked stock compensation plan for the Company’s directors and executive officers who have been engaged by the Company (collectively referred to hereafter as “Eligible Officers,” and excluding outside directors and persons such as Audit and Supervisory Committee members who are not directly engaged in the operations of the Company, and persons residing outside Japan). The Plan, details regarding which were resolved at a meeting of the Board of Directors on April 28, 2016, is intended to heighten directors’ sense of shared interest with shareholders and to show a commitment to sustaining growth and increasing corporate value over the mid- to long-term. The introduction of the Plan received approval at the 74th Ordinary General Meeting of Shareholders held on June 28, 2016. (1) Summary of the Plan The Plan employs a framework referred to as the officer compensation BIP (Board Incentive Plan) trust (hereinafter, the “BIP Trust”). The BIP Trust is an incentive plan for officers modeled on the U.S. Performance Share and Restricted Stock systems. The Plan provides the officers with Epson’s own shares, which will be acquired through the BIP Trust based on the levels of achievement of operating performance targets. f o t n e m e r i t e r d n a r e f s n a r t s i t a r G ) 7 ( s t e s s a l a u d i s e r f o y r e v i l e D ) 8 ( s e r a h s l a u d i s e r Trustor Epson s t s o c f o t n e m y a P ) 3 ( s d n e d i v i D ) 4 ( s e r a h s n o s p E ) 3 ( t n e m h s i l b a t s e t s u r T ) 2 ( Trustee (Planned) e r a h s f o t n e m h s i l b a t s E ) 1 ( s n o i t a l u g e r y r e v i l e d (6) Delivery of Epson shares and cash benefits (3) Epson shares (Joint trustee: The Master Trust Bank of Japan, Ltd.) Mitsubishi UFJ Trust and Banking Corp. Stock market BIP Trust Beneficiaries The Eligible Officers (3) Payment of costs (5) Instruction not to exercise voting rights Trust administrator 1) Epson will establish share delivery regulations related to the content of the Plan. 2) In accordance with the trust agreement, Epson contributes funds on the trustee’s behalf within the scope of approval by resolution at the General Meeting of Shareholders and establishes a trust with beneficiaries who are the Officers who satisfy the beneficiary requirements (hereinafter, the “Trust”). 3) According to the trust administrator’s instructions, the Trust uses funds contributed as in 2) above as the source of funds to acquire Epson shares from Epson (disposal of treasury shares) or in the stock market. 4) The allocation of surplus funds in the Trust for the Epson shares is handled in the same manner as for other Epson shares, and is appropriated for necessary expenses for the Plan. 5) Throughout the trust period, voting rights are not to be exercised on Epson shares within the Trust. 6) During the trust period, the Eligible Officers are awarded a specific number of points each year based on their position and other factors, in accordance with the share delivery regulations established in 1) above. Such points 128 fluctuate depending on the levels of achievement of the mid- to long-term operating performance targets of Epson. Furthermore, Epson shares, which correspond to a certain proportion of such points, will be delivered to the Eligible Officers, in principle, after the lapse of three years following the awarding of points. As regards Epson shares corresponding to the remaining portion of points, the Eligible Officers will receive cash equivalent to the amounts obtained through the conversion of such shares into cash within the Trust as prescribed in the trust agreement. 7) If residual shares remain in the Trust at the expiry of the trust period in the event that operating performance targets are not met during the trust period, Epson may continue to use the Trust by amending the trust agreement and making additional contribution. Otherwise, Epson will acquire such residual shares, through gratis transfer, and retire them by resolution of the Board of Directors. 8) Upon the termination of the Trust, residual assets remaining after allocation to beneficiaries are to be attributed to Epson within the scope of trust expense reserve after subtracting funds for acquiring shares from the trust money. The portion exceeding the trust expense reserve is planned to be donated to organization(s) having no interests with Epson and any of its officers. Note: The Trustor may continue the Plan by contributing additional money as funds for acquiring its own shares for the Trust within the scope of the funds for acquiring shares, of which the amount is subject to approval by resolution at the General Meeting of Shareholders. (2) Overview of the trust agreement 1) Type of Trust 2) Purpose of the Trust 3) Trustor 4) Trustee (planned) 5) Beneficiaries 6) Trust administrator 7) Date of trust agreement (planned) 8) Trust period (planned) 9) Plan launch date (planned) 10) Exercise of voting rights 11) Class of shares to be acquired 12) Planned amount of initial trust money 13) Maximum amount of trust money (planned) 14) Method of acquiring shares 15) Period for acquiring shares (planned) 16) Vested rightholder 17) Residual assets Monetary trust other than a designated individually operated monetary trust (third party benefit trust) Provide incentives to Eligible Officers Epson Mitsubishi UFJ Trust and Banking Corporation (Joint trustee: The Master Trust Bank of Japan, Ltd.) The Officers who meet the beneficiary requirements A third-party specialist without relationship with Epson August 2, 2016 August 2, 2016 through August 31, 2019 October 1, 2016 Voting rights not to be exercised Common stock of Epson 320 million yen (including trust fees and expenses) 500 million yen (including trust fees and expenses) Acquisition in the stock market August 4, 2016 through August 31, 2016 Epson Residual assets that Epson may receive as the vested rightholder shall be within the scope of trust expense reserve after subtracting funds for acquiring shares from the trust money. (3) Content of trust/stock related business 1) Trust-related business 2) Stock-related business Mitsubishi UFJ Trust and Banking Corporation and The Master Trust Bank of Japan, Ltd. will handle the trust-related business as trustees of the BIP Trust. Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. will handle the business related to the delivery of Epson shares to the beneficiaries in accordance with a business consignment agreement. 129 5. Epson stock price (1) High and low stock prices for the previous five years Year Fiscal year 70th year March 2012 71st year March 2013 72nd year March 2014 73rd year Mar 2015 74th year Mar 2016 High (¥) Low (¥) 1,499 881 1,183 431 3,390 795 5,970 □2,333 2,752 □2,120 2,357 1,492 Notes 1. High and low stock prices noted above are based on Tokyo Stock Exchange (First Section) data. 2. The □ mark indicates the highest and lowest ex-rights prices after a stock split (the 2-for-1 stock split implemented on April 1, 2015). (2) High and low stock prices for the previous six months Month October 2015 November December January 2016 February March High (¥) Low (¥) Note 2,143 1,681 1,966 1,804 2,021 1,747 1,907 1,492 2,000 1,526 2,099 1,763 High and low stock prices noted above are based on Tokyo Stock Exchange (First Section) data. 130 6. Corporate data and investor information (1) Company name Seiko Epson Corporation (2) Founded (3) Head office May 1942 3-5 Owa 3-chome, Suwa, Nagano 392-8502, Japan Tel: +81-266-52-3131(main) (4) Tokyo office JR Shinjuku Miraina Tower, 4-1-6 Shinjuku, Tokyo 160-8801 , Japan Tel: +81 3-5368-0700(main) (5) Investor information Closing of accounts Regular general shareholders’ meeting Date for confirmation to shareholders of March 31 June the cash dividend payment date March 31 Date for confirmation to shareholders of the interim cash dividend payment date September 30 Transfer agent Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo Agent’s business address Stock Transfer Agency Department Mitsubishi UFJ Trust and Banking Corporation 10-11, Higashisuna 7-chome, Koto-ku, Tokyo Tel: +81-3-6701-5000 http://www.tr.mufg.jp/english/ Intermediary offices Head Office and Branches of Mitsubishi UFJ Trust and Banking Corporation Posting of public notices Public notices will be posted electronically. In the event of accidents or other circumstances preventing the electronic posting of information, such information will be made available through the Nihon Keizai Shimbun newspaper (Japanese) Web address http://www.pronexus.co.jp/koukoku/6724/6724.html (Japanese) 131 3-3-5 Owa, Suwa, Nagano 392-8502, Japan TEL: +81-266-52-3131 http://global.epson.com

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