Financial Report 2017
For the year ended December 31, 2017
Management Discussion and Analysis
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Independent Auditor’s Report
1
14
19
64
Management Discussion and Analysis
In the fiscal year ended December 31, 2017 (fiscal 2017), the
The Kao Way is the corporate philosophy of the Kao Group.
Kao Group adopted International Financial Reporting
To implement the above policies, all members of the Kao
Standards (IFRS) 15, “Revenue from Contracts with
Group will share the Kao Way and put it into practice every
Customers” and its amendments early in tandem with a
day as the foundation of our approaches and actions.
revision of its sales system for the Consumer Products
Business in Japan. To facilitate comparison, growth adjusted
Management Metric Used as a Target
for the impact of these changes and excluding the effect of
As its principal management metric, the Kao Group uses
currency translation is presented as “like-for-like” below.
economic value added (EVA®*), which measures true profit by
Management Policies
Management Policies of the Kao Group
factoring in the cost of invested capital. This essentially takes
the perspective of shareholders and other asset owners to
deploy capital efficiently and generate profits. The Kao Group
believes that continuously increasing EVA will lead to
increases in corporate value and thus corresponds with long-
The Kao Group’s mission is to strive for the wholehearted
term benefits, not only for shareholders, but for all
satisfaction and enrichment of the lives of people globally and
stakeholders. The target of the Kao Group’s business activities
to contribute to the sustainability of the world, with products
is to increase EVA while expanding its business scale. The Kao
and brands of excellent value that are created from the
Group uses this metric to assess its businesses, to make
consumer’s and customer’s perspective. Under this mission,
evaluations on investment in facilities, acquisitions and other
the Kao Group considers its response to the environment,
items, and to develop performance targets for each fiscal year
society and governance (ESG) – three elements that
and for its compensation system.
contribute to the formation of a sustainable society – to be an
* EVA is a registered trademark of Stern Stewart & Co. EVA is defined as
investment in the future and will achieve “profitable growth”
by placing greater emphasis on this area.
This commitment is embraced by all members of the Kao
net operating profit after tax (NOPAT) less a charge for the cost of capital
employed in the business.
Group as we further promote efforts to fully utilize our assets
and work together with passion to share joy with consumers
Medium-to-long-term Management
Strategies of the Kao Group
and customers in our core domains of cleanliness, beauty,
health and chemicals.
The Kao Group aims to be a global company that is closest
Long-term Management Strategy
Long-term Targets
to the consumers and customers in each market, earning the
As its vision by 2030 based on the above management
respect and trust of its shareholders and all other stakeholders.
policies, the Kao Group aims to make Kao a company with a
The Kao Group views corporate governance as the
global presence by combining sustained “profitable growth,”
cornerstone of management for supporting management’s
and “contributions to the sustainability of the world” with
intentions and ambitions from both “proactive” and
proposals to resolve social issues and social contribution
“protective” aspects and for continuously increasing its
activities conducted through its business operations. To
corporate value. For this purpose, the Kao Group works for
achieve this vision, the Kao Group will promote the further
ongoing “Innovation”* and further enhances its internal
reinforcement of the existing businesses that are its strength
controls for the execution of management that is swift,
and the creation of new markets from a global perspective
efficient and sound, as well as impartial and transparent, with
utilizing the R&D capabilities that will create value for the
the aim of being a company with a global presence.
future, in addition to implementing basic measures to further
* Innovation is one of the values of the Kao Way, the corporate philosophy
of the Kao Group.
raise the level of safety and reliability.
1
Kao Corporation Financial Report 2017
It is becoming difficult to predict the various changes that
enhancing non-financial (ESG) activities. In addition, by taking
will occur throughout the world in all aspects, such as speed,
the full use of its assets to the next dimension, the Kao Group
size and direction. To deal with this situation, the Kao Group
will realize profitable growth at a high level of quality and
aims to achieve the above vision by fully embracing the slogan
create new assets to achieve the following goals.
of “Transforming Ourselves to Drive Change.”
The Kao Group has established “Kirei* – Making Life
The Kao Group’s Vision by 2030
Make Kao a company with a global presence that
• Has a distinctive corporate image
Become a company that is always by the consumer’s side
• Is a high-profit global consumer goods company that
exceeds:
Beautiful” as the key message for its ESG activities. The Kao
Group aims to create unique experiences and touch the hearts
of consumers through products filled with its passion.
* Kirei is a Japanese word that represents the concept of cleanliness,
beauty, health, purity, and fairness.
K20 Goals – Three Commitments
- ¥2.5 trillion in net sales (¥1.0 trillion outside Japan)
• Commitment to fostering a distinctive corporate image
- 17% operating margin
- 20% ROE
• Provides a high level of returns to stakeholders
Mid-term Business Plan
The Kao Group regards its mid-term business plan for the
period to 2020 as an important milestone toward achieving its
vision by 2030. To enhance corporate value, it established the
• Commitment to profitable growth
- Continue to set new record highs for profits
- Aim for like-for-like* net sales CAGR of +5%,
operating margin of 15%
- Three ¥100 billion brands (Merries baby diapers,
Attack laundry detergents, Bioré skin care products)
* Excluding the effect of currency translation, change of sales
system, etc.
• Commitment to returns to stakeholders
- Shareholders: Continuous cash dividend increases
Kao Group Mid-term Plan K20 targeting the four years from
(40% payout ratio target)
fiscal 2017 to fiscal 2020 and announced it publicly on
December 12, 2016.
- Employees: Continuous improvement in
compensation, benefits and health support
The Kao Group will thoroughly instill the “Integrity” set
- Customers: Maximization of win-win relationships
forth in the Kao Way, the Kao Group’s corporate philosophy, by
- Society: Advanced measures to address social issues
sharing and practicing it among all employees while further
Cash Dividends per Share
(Yen)
120
100
80
60
40
20
0
Increases in dividends for 28 consecutive periods
50
52
54
56
57
58
60
62
64
110
94
80
70
7.1 8.87 9.09 10.0 10.5 11.5 12.5 14
7.1
15
16
20
24
26
38
30
32
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Note: Impact of share splits is reflected retroactively.
Kao Corporation Financial Report 2017
2
The Kao Group must securely build this foundation under
promote both profitable growth and contributions to the
K20 to achieve its vision by 2030. This entails promoting the
sustainability of society through “Yoki-Monozukuri”* that is a
evolution of its post-deflation growth model of using proactive
half-step ahead of these changes. To that end, it will address
investments to generate earning power, thus achieving
and deal appropriately with the following issues.
profitable growth. Doing so will require drastically revising
current procedures, approaches and concepts to maximize
and make full use of Kao Group assets. While remaining
* The Kao Group defines Yoki-Monozukuri as a strong commitment by all
members to provide products and brands of excellent value for consumer
satisfaction. In Japanese, Yoki literally means “good/excellent,” and
Monozukuri means “development/manufacturing of products.”
committed to thoroughly instilling “Integrity,” the Kao Group
(1) To deal with changes in the risks entailed in its
will put into practice the K20 slogan of “Transforming
businesses, the Kao Group will define the serious
Ourselves to Drive Change.”
company-wide risks among its main risks as corporate
risks and work to prevent damage to the corporate value
of the Group as a whole by further enhancing its
Issues for Management
management system.
(2) Regarding brightening products containing the
With intensifying market competition, changing market
ingredient Rhododenol sold by Kanebo Cosmetics, for
structure and volatility in raw material market conditions and
which a voluntary recall was announced on July 4, 2013,
exchange rates, the operating environment remains uncertain.
Kanebo Cosmetics has been responding earnestly with
Changes in the attitudes of consumers regarding the
environment, health and other matters and associated
support for the recovery and compensation of people
who have experienced vitiligo-like symptoms. In addition,
changes in their purchasing attitudes, as well as the aging
the entire Kao Group is making efforts with a view of
society, hygiene and other social issues, are growing in
the tasks before it as working to prevent recurrence
significance. Moreover, amid the global expansion of business
while striving to ensure greater safety and reliability.
and the progress of structural changes in various fields,
(3) During fiscal 2017, a portion of cosmetics production at
companies must deal with changes in the risks entailed in
Kao Corporation’s Odawara Factory near Tokyo, Japan
their businesses. Under these conditions, the Kao Group will
was found to be non-compliant with the Fire Service
Net Sales / Gross Profit Ratio
Operating Income / Operating Margin
(Billions of yen)
1,500
1,315.2
1,401.7
1,471.8
1,474.6
1,457.6
1,489.4*
(%)
100
1,000
500
0
56.5
54.9
55.3
55.3
56.3
44.0*
2013
2014
2015
2015
2016
2017
80
60
40
20
0
(Billions of yen)
250
200
150
100
50
0
204.8
13.7
185.6
12.7
164.4
11.2
167.3
11.3
124.7
133.3
9.5
9.5
2013
2014
2015
2015
2016
2017
(%)
20
15
10
5
0
Japanese GAAP
IFRS
Japanese GAAP
IFRS
Net Sales (Left)
Gross Profit Ratio (Right)
Operating Income (Left)
Operating Margin (Right)
* In FY2017, the Kao Group adopted IFRS 15 early in tandem with a revision of
its sales system for the Consumer Products Business in Japan. As a result,
certain items formerly treated as SG&A expenses are accounted for as
reductions of net sales or cost of sales.
3
Kao Corporation Financial Report 2017
Management Discussion and Analysis
Costs, Expenses and Income as Percentages of Net Sales
Years ended December 31, 2017, 2016 and 2015
Cost of sales ...........................................................................
Gross profit .............................................................................
Selling, general and administrative expenses .........................
Operating income ...................................................................
Income before income taxes and minority interests ..............
Income before income taxes ..................................................
Net income .............................................................................
Net income attributable to owners of the parent ...................
2017
56.0%
44.0
30.4
13.7
—
13.7
—
9.9
IFRS
2016
43.7%
56.3
43.5
12.7
—
12.6
—
8.7
2015
44.7%
55.3
43.6
11.3
—
11.3
—
7.1
Japanese GAAP
2015
44.7%
55.3
44.1
11.2
11.0
—
6.7
—
Act. In addition to suspending that portion of production
and improving the production system to comply with
the Fire Service Act, Kao Corporation inspected the
Basic Approach to Selection of
Accounting Standards
status of compliance with said Act at each of its
Having decided that unifying accounting standards within the
locations, and confirmed that they are operating lawfully.
Kao Group will contribute to improving the quality of its
Kao Corporation will strengthen its management system
business management, the Kao Group has voluntarily adopted
to prevent a recurrence and promote thorough compliance
IFRS from the fiscal year ended December 31, 2016 (fiscal
with laws and regulations.
2016). This will enable management based on standardized
procedures and information for each Group company and
business, and the Kao Group intends to reinforce its
management foundation in order to increase its corporate
value as a global company. The Kao Group also believes that
Net Income Attributable to Owners of the Parent* /
Return on Net Sales
Basic Earnings per Share / ROE
(Billions of yen)
150
100
50
0
98.9
6.7
105.2
7.1
79.6
5.7
64.8
4.9
147.0
9.9
126.6
8.7
(%)
15
10
5
0
(Yen)
300
200
126.03
100
10.7
156.46
12.4
298.30
(%)
30
253.43
19.8
18.6
209.82
197.19
16.1
14.8
20
10
0
2013
2014
2015
2015
2016
2017
0
2013
2014
2015
2015
2016
2017
Japanese GAAP
IFRS
Japanese GAAP
IFRS
Net Income Attributable to Owners of the Parent (Left)
Return on Net Sales (Right)
Basic Earnings per Share (Left)
ROE (Right)
* Net income attributable to owners of the parent was reported as net
income under Japanese GAAP for the years ended December 31, 2013
to 2015.
Kao Corporation Financial Report 2017
4
the application of IFRS will facilitate the international
to changes in consumer needs based on its concept of “Yoki-
comparability of its financial statements in capital markets.
Monozukuri,” which emphasizes research and development
geared to consumers and customers. The Kao Group also
conducted cost reduction activities and other measures.
Overview of Consolidated Results
The Kao Group got off to a smooth start in fiscal 2017, the first
Analysis of Income Statement
fiscal year of the Kao Group Mid-term Plan K20 covering the
four years from 2017 to 2020. Consolidated operating results
Net sales increased 2.2% compared with the previous fiscal year
met the forecast announced on October 30, 2017, and the Kao
to ¥1,489.4 billion. On a like-for-like basis, net sales increased
Group was able to increase operating income and net income
5.6%. In the Consumer Products Business, sales increased in
for the eighth consecutive fiscal year and achieve record-high
Japan due to factors including market growth, launches of new
operating income for the fifth consecutive fiscal year.
and improved products, and further enhancement of sales
From January to December 2017, the markets for
promotion activities. Outside Japan, sales in Asia and the
household and personal care products and cosmetics in
Americas increased. In the Chemical Business, sales increased
Japan, which are key markets for the Kao Group, were in solid
as the Kao Group worked to adjust selling prices in response to
condition on a value basis according to retail sales and
increased costs for natural fats and oils.
consumer purchasing survey data. In particular, the
As for profits, although costs for natural fats and oils and
e-commerce channel grew substantially and inbound demand
other raw materials increased, due to the effect of increased
(demand from visitors to Japan) for cosmetics increased
sales in the Consumer Products Business in Japan and Asia,
significantly, mainly in the department store channel. Average
among other factors, operating income was ¥204.8 billion, an
unit prices for household and personal care products
increase of ¥19.2 billion compared with the previous fiscal
increased by one point.
year, the operating margin was 13.7% and income before
Under these circumstances, the Kao Group worked to
income taxes was ¥204.3 billion, an increase of ¥20.9 billion.
launch and nurture products with high added value in response
Net income was ¥148.6 billion, an increase of ¥20.7 billion.
Basic earnings per share were ¥298.30, an increase of
¥44.87, or 17.7%, from ¥253.43 in the previous fiscal year.
Net Sales / Operating Income
Consumer Products Business
Information by Segment
(Billions of yen)
1,400
(Billions of yen)
300
Consumer Products Business
1,091.9
1,154.5
1,222.8
1,225.6
1,219.8
1,216.0
Sales decreased 0.3% compared with the previous fiscal year to
134.2
137.4
155.1
103.0
111.3
200
172.3
172.3
172.3
¥1,216.0 billion. On a like-for-like basis, sales increased 4.4%.
In Japan, sales decreased 2.1% to ¥886.2 billion. On a like-
100
0
for-like basis, sales increased 2.6%. The Kao Group made efforts
that included launching numerous high-value-added products and
enhancing proposal-oriented sales activities, in addition to
strengthening its response to the e-commerce channel.
In Asia, sales increased 7.1% to ¥188.8 billion, with strong
2013
2014
2015
2015
2016
2017
Japanese GAAP
IFRS
growth centered on China, Indonesia and elsewhere. On a
Note: In FY2017, the Kao Group adopted IFRS 15 early in tandem with a
revision of its sales system for the Consumer Products Business in Japan.
like-for-like basis, sales increased 16.8%.
Net Sales (Left)
Operating Income (Right)
5
Kao Corporation Financial Report 2017
1,200
1,000
800
600
400
200
0
Management Discussion and Analysis
In the Americas, sales increased 5.5% to ¥77.3 billion. On
Beauty Care Business
a like-for-like basis, sales increased 3.5%. In Europe, sales
Sales decreased 2.6% compared with the previous fiscal year
decreased 1.5% to ¥63.8 billion. On a like-for-like basis, sales
to ¥586.0 billion. On a like-for-like basis, sales increased 2.1%.
decreased 4.1%.
Sales of cosmetics decreased 4.8% to ¥242.7 billion. On a
Operating income increased ¥17.2 billion compared with
like-for-like basis, sales increased 2.1%. Outside Japan, the
the previous fiscal year to ¥172.3 billion due to the effect of
Kao Group was able to substantially expand sales, with strong
increased sales in the Human Health Care Business.
performance in Asia, mainly in China. However, sales in Japan
Note: The Kao Group’s Consumer Products Business consists of the Beauty
Care Business, the Human Health Care Business, and the Fabric and
Home Care Business.
fell slightly short of the previous fiscal year on a like-for-like
Net Sales / EBITDA / Operating Income / Capital Expenditure
Beauty Care Business
Human Health Care Business
Fabric and Home Care Business
Chemical Business
(Billions of yen)
100
73.8
71.8
69.9
64.0
75.575.5
57.657.6
69.5
51.1
86.0
84.984.9
77.2
74.2
76.176.1
78.1
71.2 70.5
69.2
66.1
54.754.7
62.2
61.0
37.9
28.4
23.9
29.4
19.2
17.0
20.6
20.5
20.1
27.427.4
25.8
32.5
23.023.0
16.9
21.9
13.6
46.0
35.5
43.6
41.841.8
38.738.7
33.4
38.938.9
31.0
31.2
25.9
23.923.9
42.9
41.4 41.3
41.841.8
30.1 28.6 29.7
30.330.3
36.2
34.9
21.5 22.1
16.2
15.215.2
16.1 14.7
16.3
11.9
14.7 13.8
15.3 15.2 16.1
12.712.7
80
60
40
20
0
(Billions of yen)
700
600
500
400
300
200
100
0
589.9
607.7
608.6
601.6
586.0
570.3
280.7
280.7
281.7
281.7
273.1
273.1
294.3
240.1
240.1
210.6
311.0 324.5 334.4 335.3345.2
335.7
288.0
288.0 288.5
288.5 288.5
288.5
273.8
273.8
261.2
261.2
310.3
2013
2014 2015 2015
2016 2017
2013
2014 2015 2015
2016 2017
2013
2014 2015 2015
2016 2017
2013
2014 2015 2015
2016 2017
Japanese GAAP
IFRS
Japanese GAAP
IFRS
Japanese GAAP
IFRS
Japanese GAAP
IFRS
Notes: In FY2017, the Kao Group adopted IFRS 15 early in tandem with a revision of its sales system for the Consumer Products Business in Japan.
Figures for the Consumer Products Business present sales to external customers and figures for the Chemical Business include sales to the Consumer Products
Business in addition to external customers.
Net Sales (Left)
EBITDA (Right)
Operating Income (Right)
Capital Expenditure (Right)
Kao Corporation Financial Report 2017
6
basis. In addition to a decline in inbound sales, which grew
underway since fiscal 2016 and to increased shipments for
significantly in 2016, mid-price skin care brands faced an uphill
e-commerce. In Indonesia, sales of locally manufactured
battle. On the other hand, major reforms of the cosmetics
products targeting the middle-class consumer segment grew
business are progressing steadily, and SOFINA iP base
steadily. Sales of Laurier sanitary napkins increased. The
essence, which also started a rollout in Asia, performed well.
brand was hard pressed by fierce competition in Japan, while
The global brand KANEBO started a rollout in Europe, in
on the other hand, sales in Asia grew steadily.
addition to Japan and Asia. Sales of SUQQU, a prestige brand
Sales of personal health products increased. Sales of oral
available in the department store channel, and est the lotion,
care products increased with the launch of new products and
which was launched in fall 2017, grew strongly.
steady sales of high-performance products. Sales of
Sales of skin care and hair care products decreased 1.0%
MegRhythm Steam Eye Mask grew steadily as the Kao Group
to ¥343.3 billion. On a like-for-like basis, sales increased 2.1%.
cultivated new users in Japan, despite a decrease in inbound
In skin care products, sales of Bioré grew steadily, with good
demand compared with the previous fiscal year.
performance in Japan, Asia and the Americas, and a rollout in
Operating income increased ¥12.7 billion compared with
Europe. In addition, sales of Curél derma care products grew
the previous fiscal year to ¥38.7 billion, mainly due to the
strongly in Japan and Asia, due in part to the launch of new
effect of increased sales in Japan and Asia.
products for the aging care market and progress in building a
lineup in the cosmetics category. On the other hand, sales of
Fabric and Home Care Business
hair care products decreased in Japan due to the impact of
Sales decreased 2.7% compared with the previous fiscal year
the shrinking mass market. In Europe, sales of the John
to ¥335.7 billion. On a like-for-like basis, sales increased 1.5%.
Frieda hair care brand decreased, but sales of professional
In Japan, sales of fabric care products increased on a like-
hair care products were nearly on par with the previous
for-like basis. Sales of laundry detergents were nearly flat in a
fiscal year.
severe market environment, despite the launch of improved
In December 2017, the Kao Group announced the
Attack Neo Antibacterial EX W Power amid rising consumer
acquisition of Oribe Hair Care, LLC, which owns Oribe, a
awareness of bacteria. Sales of fabric softeners were steady.
super-premium-price brand in the United States for hair salons.
Growth in sales of home care products was firm due to
Operating income increased ¥6.5 billion compared with the
consumer acceptance of high-value-added products. Sales of
previous fiscal year to ¥57.6 billion.
CuCute dishwashing detergent grew with the market
Human Health Care Business
penetration of a spray foam-type product.
In Asia, although price competition in laundry detergents
Sales increased 7.8% compared with the previous fiscal year to
was severe in Thailand and Indonesia, sales were nearly on
¥294.3 billion. On a like-for-like basis, sales increased 13.0%.
par with the previous fiscal year.
Sales of food and beverage products faced an uphill battle
Operating income decreased ¥2.0 billion compared with
as the Kao Group was unable to sufficiently convey the value
the previous fiscal year to ¥76.1 billion due to factors including
of the functional drink Healthya, which has been approved as
the effects of increased raw material costs.
a Food for Specified Health Uses (FOSHU), due in part to
launches in numerous different fields of FOSHU products and
Chemical Business
Foods with Functional Claims related to body fat.
Sales increased 13.3% compared with the previous fiscal year
Sales of sanitary products increased. Sales of Merries baby
to ¥310.3 billion. On a like-for-like basis, sales increased 10.8%.
diapers grew substantially. In Japan, amid fierce competition,
Sales of oleo chemicals increased due to factors including
sales increased in the domestic market and cross-border
efforts to adjust selling prices globally in line with increased
e-commerce for the Chinese market also grew substantially.
raw material costs. Sales of performance chemicals
In China, sales grew substantially, due in part to good
increased, partly due to a market recovery trend in
progress in reforms of the sales structure that have been
infrastructure-related fields in Japan, in addition to an increase
7
Kao Corporation Financial Report 2017
Management Discussion and Analysis
in automobile production volume in Japan, China and
¥10.0 billion decrease in deferred tax assets.
elsewhere. Sales of specialty chemicals increased steadily
Total liabilities decreased ¥38.8 billion from December
with growth in demand for information material-related, hard
31, 2016 to ¥608.0 billion. The principal increase in
disk-related and other products. To expedite the development
liabilities was an ¥8.0 billion increase in trade and other
of water-based pigment inkjet ink that contributes to the
payables. The principal decrease in liabilities was a ¥30.1
mitigation of environmental impact and to accelerate the
billion decrease in retirement benefit liabilities.
global expansion of such business, the Kao Group acquired
Total equity increased ¥127.9 billion from December
companies in the United States and Europe and made them
31, 2016 to ¥819.4 billion. The principal increases in
consolidated subsidiaries as of July 2016 for the company
equity were net income totaling ¥148.6 billion and other
in the United States and as of April 2017 for the company
comprehensive income totaling ¥31.3 billion. The principal
in Europe.
decrease in equity was dividends totaling ¥50.6 billion.
Operating income increased ¥0.6 billion compared with the
As a result of the above factors, the ratio of equity
previous fiscal year to ¥30.3 billion, despite the impact of
attributable to owners of the parent to total assets was
sharp fluctuations in raw material costs.
56.5% compared with 50.8% at December 31, 2016.
In addition, Kao Corporation retired 9.0 million
treasury shares on March 1, 2017.
Financial Position
Total assets increased ¥89.1 billion from December 31, 2016
Cash Flows
to ¥1,427.4 billion. The principal increases in assets were a
¥40.0 billion increase in cash and cash equivalents, an ¥8.0
The balance of cash and cash equivalents at December 31,
billion increase in trade and other receivables, an ¥18.7 billion
2017 increased ¥40.0 billion compared with December 31,
increase in inventories and a ¥25.0 billion increase in property,
2016 to ¥343.1 billion, including the effect of exchange
plant and equipment. The principal decrease in assets was a
rate changes.
Equity Attributable to Owners of the Parent1 /
Financial Leverage2
(Billions of yen)
1,000
(Times)
4.0
806.4
800
600
400
200
0
628.7
658.2
675.6
681.0
679.8
1.8
1.8
1.9
1.9
2.0
1.8
2013
2014
2015
2015
2016
2017
3.0
2.0
1.0
0
Capital Expenditures
(Billions of yen)
100
80
60
40
20
0
83.4
82.8
89.9
79.4
68.5
63.7
2013
2014
2015
2015
2016
2017
Japanese GAAP
IFRS
Japanese GAAP
IFRS
Equity Attributable to Owners of the Parent (Left)
Financial Leverage (Right)
1. Equity attributable to owners of the parent is presented as net worth
under Japanese GAAP as of December 31, 2013 to 2015. Net worth is
equity, excluding minority interests and stock acquisition rights.
2. Financial Leverage = Total Assets ÷ Equity Attributable to Owners of the Parent
Kao Corporation Financial Report 2017
8
Cash Flows from Operating Activities
interests. The Kao Group repaid borrowings of ¥10.0 billion
Net cash flows from operating activities totaled ¥185.8
in March 2017 and ¥20.0 billion in September 2017 and
billion. The principal increases in net cash were income
borrowed the same amounts, respectively, in order to
before income taxes of ¥204.3 billion, depreciation and
maintain an appropriate capital cost ratio and strengthen its
amortization of ¥54.5 billion, increase in trade and other
financial base for growth investments.
payables of ¥14.6 billion, and other, which includes accrued
expenses, of ¥14.5 billion. The principal decreases in net
cash were increase in inventories of ¥15.3 billion, decrease in
retirement benefit liabilities of ¥30.9 billion and income taxes
Basic Policies Regarding Distribution of
Profits and Dividends for the Period
paid of ¥55.3 billion.
Cash Flows from Investing Activities
Net cash flows from investing activities totaled negative
¥96.1 billion. This primarily consisted of purchase of
From the standpoint of EVA, the Kao Group makes effective
use of its steadily generated operating cash flow for the
following purposes toward further growth.
property, plant and equipment of ¥83.7 billion and purchase
• Investment for future growth (capital expenditures,
of intangible assets of ¥6.3 billion.
M&A, etc.)
• Steady and continuous dividends (40% payout ratio
Free cash flow, the sum of net cash flows from operating
target)
activities and net cash flows from investing activities, was
• Share repurchases and early repayment of interest-
¥89.7 billion.
bearing debt including borrowings
Cash Flows from Financing Activities
Net cash flows from financing activities totaled negative
¥53.2 billion. This primarily consisted of ¥50.7 billion for
dividends paid to owners of the parent and non-controlling
In accordance with this policy, the Company announced
a year-end dividend for fiscal 2017 of ¥56.00 per share, an
increase of ¥2.00 per share from the forecast announced on
October 30, 2017 and an increase of ¥8.00 per share
Free Cash Flows*
(Billions of yen)
150
121.0
100
50
0
106.8
107.5
95.7
89.7
81.3
2013
2014
2015
2015
2016
2017
Japanese GAAP
IFRS
* Free cash flow is the sum of net cash flows from operating activities
and net cash flows from investing activities.
Total Dividend Payment / Share Repurchases* /
Net Income Attributable to Owners of the Parent
(Billions of yen)
150
147.0
100
50
0
105.2
126.6
98.9
50.0
46.8
54.3
40.2
40.2
50.0
79.6
35.5
64.8
30.0
32.8
2013
2014
2015
2015
2016
2017
Japanese GAAP
IFRS
Total Dividend Payment
Share Repurchases
Net Income Attributable to Owners of the Parent
* Excludes repurchase of shares of less than one trading unit
9
Kao Corporation Financial Report 2017
Management Discussion and Analysis
compared with the previous fiscal year. Consequently, cash
were ¥79.4 billion. In the Consumer Products Business, the
dividends for the fiscal year will increase ¥16.00 per share
Kao Group carried out activities including facility expansion,
compared with the previous fiscal year, resulting in a total of
streamlining, maintenance and renewal in each of its
¥110.00 per share. The consolidated payout ratio was 36.9%.
businesses. The Kao Group reinforced its supply system in the
For fiscal 2018, the Company plans to pay total cash
Human Health Care Business by expanding production
dividends of ¥120.00 per share (38.9% payout ratio), an
capacity at its factories for sanitary products inside and
increase of ¥10.00 per share compared with the previous
outside Japan, and completed the construction of a new
fiscal year. This plan is in accordance with the Company’s
production building in the Beauty Care Business to enhance
basic policies regarding distribution of profits, and free cash
production capacity in Taiwan. In the Chemical Business, the
flow and other factors have also been taken into
Kao Group expanded production capacity inside and outside
consideration. As a result, the Company is aiming for its 29th
Japan, in addition to conducting activities including
consecutive fiscal year of increases in dividends.
streamlining, maintaining and renewing facilities. The closing
EVA and Related Activities
for the acquisition of a hair salon business in the United
States that was announced in December 2017 took place in
January 2018. Research and development expenditures were
¥56.7 billion, which was the equivalent of 3.8% of net sales,
EVA for fiscal 2017 was ¥90.4 billion, an increase of ¥17.0 billion
remaining at a high level relative to net sales.
compared with the previous fiscal year due to a substantial
increase in net operating profit after tax (NOPAT), despite an
Increasing Profit: Costs for raw materials such as natural fats
increase in capital costs from the previous fiscal year.
The Kao Group conducted the following EVA-related
activities during the fiscal year.
and oils increased during fiscal 2017. However, due to efforts
to address this issue by working to adjust selling prices in the
Chemical Business, as well as market growth, launches of
new and improved products, stepped-up sales promotion
Investing for Growth: During fiscal 2017, the Kao Group
activities and other factors in the Consumer Products
invested aggressively for future growth. Capital expenditures
Business in Japan, the Kao Group continued to achieve
double-digit growth in operating income compared with the
previous fiscal year.
Financial Improvement: For fiscal 2017, Kao Corporation paid
annual dividends per share of ¥110.00, an increase of ¥2.00
per share from its initial forecast and a year-on-year increase
of ¥16.00, or 17%. As a result, Kao Corporation has achieved
28 consecutive fiscal periods of dividend growth, the longest
for a listed company in Japan.
90.490.490.4
70.6
58.6
73.4
50.8
53.3
55.1
54.8
56.4
59.1
Business Risks and Other Risks
2013
2014
2015
2015
2016
2017
Japanese GAAP
IFRS
Cost of Capital
EVA
Various risks arise in the course of a company’s business. The
Kao Group manages risks appropriately by identifying and
evaluating risks to formulate and implement necessary
countermeasures, among other activities. In addition, in the
event a risk manifests itself, the Kao Group sets up an
Kao Corporation Financial Report 2017
10
EVA / Cost of Capital
(Billions of yen)
150
47.6
39.8
100
50
0
emergency response organization and strives to minimize
(2) Chemical Business
damage and loss by responding promptly. However, in the
The Kao Group’s Chemical Business is affected by factors
event a major risk such as those described below manifests
including trends in customer demand and fluctuations in raw
itself, it may exert a significant impact on the Kao Group’s
material prices. The Chemical Business promotes creation of
business results and financial condition. The major risks
high-value-added products that match customer needs,
described below are not a comprehensive list of risks the Kao
conducts research and development of products in
Group faces. Other risks exist and may have an impact on
consideration of the environment, and provides such products
investment decisions. Any statements below concerning the
while working to reduce costs and deal with product prices.
future are judgments made by Kao Corporation as of the
However, as a consequence of uncertainties in these
submission of its securities report to the Ministry of Finance.
business activities due to various factors, the Chemical
Business may be unable to provide products that match
(1) Consumer Products Business
customer needs or respond to matters such as fluctuations in
1. Response to Changes in Consumer Needs
raw material prices. This could have an impact on the Kao
The Kao Group’s Consumer Products Business is affected by
Group’s business results and financial condition.
business cycles and changes in consumers’ values in the
market of each country. The Consumer Products Business
(3) Business Acquisitions, Business Alliances and Mergers
maintains and improves brand value by understanding
The Kao Group may implement business acquisitions,
changes in consumer needs and using the comprehensive
business alliances, mergers or other such measures. When
strength of the Kao Group’s product development and
implementing them, the Kao Group makes decisions after
manufacturing in working to create high-value-added products
thoroughly assessing economic value and its partner
and provide services through approaches in areas including
companies. However, due to various unforeseeable
the environment, health, the aging society and hygiene.
uncertainties in its business activities, the Kao Group may be
However, as a consequence of uncertainties in these
unable to produce the results it initially expected. This could
business activities due to various factors, the Consumer
have an impact on the Kao Group’s business results and
Products Business may be unable to provide products and
financial condition.
services that respond to changes in consumer needs and
brand value could decrease. This could have an impact on the
(4) Overseas Business Expansion
Kao Group’s business results and financial condition.
As one of its growth strategies, the Kao Group is conducting
operations in markets in Asia, the Americas, Europe and
2. Response to Changes in Retailing
elsewhere, with a particular emphasis on strengthening its
The Kao Group’s Consumer Products Business is affected by
operations in countries where higher economic growth rates
changes in the structure of retailing, including progress in the
and market expansion are forecast. However, the Kao Group
creation of new corporate groups through retail industry
may be unable to strengthen its operations as a consequence
mergers and integration in the market, and the emergence and
of uncertainties due to various factors in the course of
expansion of new retail channels. The Consumer Products
business including the occurrence of a slowdown in economic
Business conducts sales activities and makes new offerings
growth or uncertain political or social conditions, intensifying
that respond to these structural changes. However, as a
competition, the inability to conduct sufficient cost
consequence of uncertainties in these business activities due
management or the emergence of problems in relationships
to various factors, the Consumer Products Business may be
with retail outlets, sales agents or other trading partners. This
unable to conduct sales activities or make new offerings that
could have an impact on the Kao Group’s business results and
respond to these structural changes. This could have an impact
financial condition.
on the Kao Group’s business results and financial condition.
11
Kao Corporation Financial Report 2017
Management Discussion and Analysis
(5) Procurement of Raw Materials
due to problems in areas such as securing raw materials and
Market prices for natural fats and oils and petroleum-related
maintaining production, among other impediments, could
materials used as raw materials for products of the Kao Group
have a serious impact on the Kao Group’s business results
are affected by factors including geopolitical risks, the balance
and financial condition. In addition, the emergence of major
between supply and demand, abnormal weather and
changes in demand trends due to a worsening economic
exchange rate fluctuations. The Kao Group has moved to
environment associated with the earthquake could have a
reduce the effect of increases in raw material prices through
serious impact on the Kao Group’s business results and
measures including cost reductions and passing on increases
financial condition. Furthermore, the occurrence of an
in raw material costs into product prices. In addition, the Kao
explosion or fire at production facilities, information and control
Group is conducting development of substitute raw materials
system malfunction, problems at a supplier of raw materials,
for natural fats and oils through research into advanced
dysfunction of social infrastructures such as electric power
effective utilization of non-edible raw materials. However,
and water, environmental pollution from harmful substances,
unexpected radical changes in market prices could have an
the spread of infectious disease, terrorism, political change,
impact on the Kao Group’s business results and financial
riots and other incidents could hinder the supply of products
condition.
(6) Product Quality
to the market. This could have a serious impact on the Kao
Group’s reputation, business results and financial condition.
The Kao Group designs and manufactures products from the
(8) Currency Exchange Rate Fluctuations
viewpoint of consumers, in compliance with related laws and
Foreign currency-denominated transactions are affected by
regulations and voluntary standards. In the development
changes in currency exchange rates. The Kao Group hedges
stage prior to market launch, the Kao Group conducts
foreign exchange risk through various measures such as
thorough safety testing and survey research to confirm the
settlement of transactions through foreign currency accounts,
safety of products. After market launch, the Kao Group works
foreign exchange contracts, and currency swaps to mitigate
to further improve quality by incorporating the opinions and
the effect on business results. The Kao Group does not
desires of consumers through its consumer communication
engage in derivative transactions for the purpose of
centers. However, the unanticipated occurrence of a serious
speculation. However, because items on the financial
quality problem or concerns about product safety or reliability
statements of overseas consolidated subsidiaries are
resulting from new scientific knowledge would not only cause
translated into Japanese yen, substantial variance in the
difficulties for the relevant brand, but would also have a major
exchange rate from the expected rate at the time of
impact on the reputation of all of the Kao Group’s products.
conversion will have an impact on the Kao Group’s business
This could have an impact on the Kao Group’s business
results and financial condition.
results and financial condition.
(9) Impact of Deferred Tax Assets and Impairment
(7) Response to Natural Disasters, Accidents and Other
The Kao Group records various tangible fixed assets and
Incidents
intangible assets and deferred tax assets including assets
To deal with earthquakes and other natural disasters, the Kao
used in the course of business and goodwill incurred in
Group has formulated disaster countermeasures for its
corporate acquisitions. The Kao Group may not generate the
production facilities and primary offices and a business
expected cash flow due to divergence from planned future
continuity plan (BCP), and will continue to strengthen and
business results, a decline in market value or other factors.
reinforce them in the future. However, the occurrence and
This could have an impact on the Kao Group’s business
consequent damage of an earthquake on a scale exceeding
results and financial condition.
assumptions that hinder the supply of products to the market
Kao Corporation Financial Report 2017
12
Management Discussion and Analysis
(10) Securing Human Capital
(12) Information Management
The Kao Group strives to secure diverse, superior human
The Kao Group possesses confidential information related to
capital to achieve its business goals globally. Human capital
matters including research and development, production,
with advanced expertise in areas such as research and
marketing and sales, as well as the personal information of
development, production, marketing and sales is indispensable
numerous customers used for product development, sales
in aiming for the Yoki-Monozukuri (see note on page 3) that
promotion and other purposes. The Kao Group conducts
consumers support. However, an inability to secure the
thorough information management using guidelines for
necessary human capital due to changes in employment
handling information and implements appropriate security
conditions or other factors could have an impact on the Kao
measures for its information systems, including both
Group’s business results and financial condition.
hardware and software. However, a leak of confidential or
(11) Compliance with Laws and Regulations
attack on its server, unlawful access, a computer virus or
In the course of its business activities, the Kao Group must
other factor that exceeds expectations could have an impact
comply with a variety of laws and regulations concerning
on the Kao Group’s reputation, business results and financial
personal information held by the Kao Group resulting from an
areas such as standards for product quality and safety, the
condition.
environment and chemical substances, as well as accounting
standards, tax law and regulations related to labor and
(13) Litigation
transactions. The Kao Group has constructed a compliance
The Kao Group conducts diverse businesses globally, and
system and strives to comply with all related laws and
various types of litigation may be brought against it. The result
regulations. However, a serious legal violation by the Kao
of such litigation could have an impact on the Kao Group’s
Group or by a consignee or other party could have an impact
business results and financial condition.
on the Kao Group’s reputation, business results and financial
condition. Moreover, a change in current laws and regulations,
or new laws and regulations could restrict the Kao Group’s
business activities, require investment for compliance, or
otherwise affect the Kao Group. This could have an impact on
the Kao Group’s business results and financial condition.
13
Kao Corporation Financial Report 2017
Consolidated Statement of Financial Position
Kao Corporation and Consolidated Subsidiaries
As of December 31, 2017
Assets
Current assets
Cash and cash equivalents ................................................................................................
Trade and other receivables ..............................................................................................
Inventories ........................................................................................................................
Other financial assets .......................................................................................................
Income tax receivables .....................................................................................................
Other current assets .........................................................................................................
Subtotal .........................................................................................................................
Non-current assets held for sale .......................................................................................
Total current assets ....................................................................................................
Non-current assets
Property, plant and equipment ..........................................................................................
Goodwill ............................................................................................................................
Intangible assets ...............................................................................................................
Investments accounted for using the equity method .......................................................
Other financial assets .......................................................................................................
Deferred tax assets ...........................................................................................................
Other non-current assets ..................................................................................................
Total non-current assets .............................................................................................
Notes
2017
2016
(Millions of yen)
8, 35
9, 35
10
35
11
12
13
14
14
15
35
16
11, 20
343,076
216,507
183,921
14,914
2,653
28,162
789,233
147
789,380
395,800
138,735
16,829
7,682
27,345
40,918
10,686
637,995
303,026
208,459
165,200
13,038
1,462
23,812
714,997
344
715,341
370,835
137,783
14,689
4,701
25,473
50,939
18,548
622,968
Total assets ............................................................................................................
1,427,375
1,338,309
Liabilities and equity
Liabilities
Current liabilities
Trade and other payables ..................................................................................................
Bonds and borrowings ......................................................................................................
Other financial liabilities ....................................................................................................
Income tax payables .........................................................................................................
Provisions ..........................................................................................................................
Contract liabilities ..............................................................................................................
Other current liabilities ......................................................................................................
Total current liabilities ................................................................................................
Non-current liabilities
Bonds and borrowings ......................................................................................................
Other financial liabilities ....................................................................................................
Retirement benefit liabilities .............................................................................................
Provisions ..........................................................................................................................
Deferred tax liabilities .......................................................................................................
Other non-current liabilities ...............................................................................................
Total non-current liabilities .........................................................................................
Notes
2017
2016
19, 35
17, 35
18, 35
21
26
22
17, 35
18, 35
20
21
16
224,893
25,262
7,739
34,255
4,822
17,296
107,404
421,671
95,322
10,091
64,694
10,617
435
5,181
186,340
216,893
30,289
8,164
32,621
11,370
—
131,112
430,449
90,357
11,666
94,773
13,809
528
5,264
216,397
Total liabilities .........................................................................................................
608,011
646,846
Equity
Share capital .....................................................................................................................
Capital surplus ..................................................................................................................
Treasury shares .................................................................................................................
Other components of equity .............................................................................................
Retained earnings .............................................................................................................
Equity attributable to owners of the parent ...................................................................
Non-controlling interests ...................................................................................................
Total equity .............................................................................................................
23
23
23
23
23
85,424
107,980
(9,593)
(12,315)
634,885
806,381
12,983
819,364
85,424
107,648
(57,124)
(21,821)
565,715
679,842
11,621
691,463
Total liabilities and equity .......................................................................................
1,427,375
1,338,309
Kao Corporation Financial Report 2017
14
Consolidated Statement of Income
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2017
Net sales ....................................................................................................................
Cost of sales ..............................................................................................................
Gross profit ................................................................................................................
Notes
6, 26
10,13,14,20
Selling, general and administrative expenses ............................................................
Other operating income .............................................................................................
Other operating expenses .........................................................................................
Operating income ......................................................................................................
13,14,20,27
13,26,28
13,14,20,29
6
Financial income ........................................................................................................
Financial expenses .....................................................................................................
Share of profit in investments accounted for using the equity method .....................
Income before income taxes .....................................................................................
Income taxes .............................................................................................................
Net income ................................................................................................................
6,20,30
6,20,30
6,15
6
16
Attributable to:
Owners of the parent .................................................................................................
Non-controlling interests ............................................................................................
Net income ................................................................................................................
2017
1,489,421
(834,107)
655,314
(452,666)
14,909
(12,766)
204,791
1,452
(3,960)
2,007
(Millions of yen)
2016
1,457,610
(637,502)
820,108
(633,368)
13,677
(14,846)
185,571
1,389
(5,424)
1,894
204,290
183,430
(55,683)
148,607
(55,541)
127,889
147,010
1,597
148,607
126,551
1,338
127,889
Earnings per share
Basic (Yen) ..................................................................................................................
Diluted (Yen) ...............................................................................................................
31
31
298.30
298.09
253.43
253.18
15
Kao Corporation Financial Report 2017
Consolidated Statement of Comprehensive Income
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2017
Net income ..........................................................................................................................
Other comprehensive income
Items that will not be reclassified to profit or loss:
Notes
2017
148,607
(Millions of yen)
2016
127,889
Net gain (loss) on revaluation of financial assets measured
at fair value through other comprehensive income .....................................................
Remeasurements of defined benefit plans ...................................................................
32, 35
32
Share of other comprehensive income of investments
accounted for using the equity method ......................................................................
Total of items that will not be reclassified to profit or loss ............................................
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations ............................................
Share of other comprehensive income of investments
accounted for using the equity method ......................................................................
Total of items that may be reclassified subsequently to profit or loss ..........................
32
32
32
Other comprehensive income, net of taxes .....................................................................
Comprehensive income .....................................................................................................
Attributable to:
Owners of the parent ........................................................................................................
Non-controlling interests ...................................................................................................
Comprehensive income ....................................................................................................
1,166
21,260
317
22,743
(906)
(16,111)
(72)
(17,089)
8,541
(16,661)
(1)
8,540
31,283
179,890
178,020
1,870
179,890
(10)
(16,671)
(33,760)
94,129
93,284
845
94,129
Kao Corporation Financial Report 2017
16
Consolidated Statement of Changes in Equity
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2017
Equity attributable to owners of the parent
(Millions of yen)
Notes
Share
Capital
capital
surplus
85,424 107,648
—
—
Treasury
shares
(57,124)
—
Subscription
rights to
shares
911
—
Other components of equity
Net gain (loss) on
revaluation of
financial assets
measured at fair
value through other
compre hensive
income
7,025
—
Net gain (loss)
on derivatives
designated
as cash flow
hedges
4
—
Exchange
differences on
translation of
foreign
operations
(29,761)
—
Remeasurements
of defined
benefit plans
—
—
Total
(21,821)
—
Retained
earnings
565,715
147,010
Total
679,842
147,010
Non-
controlling
interests
11,621
1,597
Total
equity
691,463
148,607
1,472
1,472
21,317
21,317
31,010
31,010
—
147,010
31,010
178,020
273
1,870
31,283
179,890
January 1, 2017 ...............
Net income ....................
Other comprehensive
income .......................
Comprehensive income ....
Disposal of treasury
shares ........................
Purchase of treasury
shares ........................
Share-based payment
transactions ...............
Dividends ......................
Changes in the
ownership interest in
a subsidiary ................
Transfer from other
components of equity
to retained earnings ...
Other increase
(decrease) ..................
Total transactions with
the owners .................
December 31, 2017 .........
January 1, 2016 ...............
Net income ....................
Other comprehensive
income .......................
Comprehensive income ....
Disposal of treasury
shares ........................
Purchase of treasury
shares ........................
Share-based payment
transactions ...............
Dividends ......................
Changes in the
ownership interest in
subsidiaries ................
Transfer from other
components of equity
to retained earnings ...
Other increase
(decrease) ..................
Total transactions with
the owners .................
December 31, 2016 .........
23
23
34
25
23
23
34
25
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,221
8,221
— 49,373
(165)
— (1,842)
332
—
(0)
—
—
—
—
—
—
—
—
—
—
—
(15)
—
—
—
—
—
—
—
—
—
332
85,424 107,980
47,531
(9,593)
(180)
731
—
(21,540)
85,424 108,659
—
—
(8,202)
—
902
—
—
—
(13,513)
—
(16,248)
(16,248)
1,099
(189)
— (50,021)
—
—
—
—
—
—
—
—
—
—
—
— (1,011)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(29,761)
—
227
—
—
(29)
—
9
911
— (1,011)
85,424 107,648
(48,922)
(57,124)
(0)
(0)
—
—
—
—
—
—
—
—
4
(3)
—
7
7
—
—
—
—
—
—
—
—
4
—
—
—
—
—
(7)
—
(7)
8,490
8,430
—
(970)
(970)
—
—
—
—
—
—
(435)
7,025
(165)
(48,914)
294
—
(1,842)
—
—
294
(1,842)
—
(50,265)
332
(50,265)
—
(369)
332
(50,634)
—
(0)
—
—
—
—
(0)
—
(139)
(139)
(21,317)
(21,339)
21,339
—
—
—
(21,317)
—
(21,504)
(12,315)
(77,840)
634,885
(51,481)
806,381
(508)
12,983
(51,989)
819,364
—
—
(4,184)
—
499,299
126,551
680,996
126,551
10,991
1,338
691,987
127,889
(16,056)
(16,056)
(33,267)
(33,267)
—
126,551
(33,267)
93,284
(493)
845
(33,760)
94,129
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
227
—
(189)
(404)
506
—
(50,021)
—
—
506
(50,021)
—
(44,139)
227
(44,139)
—
(955)
227
(45,094)
—
—
(1,011)
1,007
(4)
—
—
—
(435)
16,056
15,592
(15,592)
—
—
—
—
(267)
(267)
16,056
—
15,630
(21,821)
(60,135)
565,715
(94,438)
679,842
(215)
11,621
(94,653)
691,463
17
Kao Corporation Financial Report 2017
Consolidated Statement of Cash Flows
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2017
Notes
2017
2016
(Millions of yen)
Cash flows from operating activities
Income before income taxes ............................................................................................
Depreciation and amortization ..........................................................................................
Interest and dividend income ............................................................................................
Interest expense ...............................................................................................................
Share of profit in investments accounted for using the equity method ............................
(Gains) losses on sale and disposal of property, plant and
equipment, and intangible assets .................................................................................
(Increase) decrease in trade and other receivables ...............................................................
(Increase) decrease in inventories.....................................................................................
Increase (decrease) in trade and other payables ...............................................................
Increase (decrease) in retirement benefit liabilities ..........................................................
Other .................................................................................................................................
Subtotal .........................................................................................................................
Interest received ...............................................................................................................
Dividends received ............................................................................................................
Interest paid ......................................................................................................................
Income taxes paid .............................................................................................................
Net cash flows from operating activities ...................................................................
Cash flows from investing activities
Payments into time deposits ............................................................................................
Proceeds from withdrawal of time deposits .....................................................................
Purchase of property, plant and equipment ......................................................................
Purchase of intangible assets ...........................................................................................
Acquisition of subsidiaries and businesses .......................................................................
Other .................................................................................................................................
Net cash flows from investing activities ....................................................................
Cash flows from financing activities
Increase (decrease) in short-term borrowings ..................................................................
Proceeds from long-term borrowings ...............................................................................
Repayments of long-term borrowings ..............................................................................
Purchase of treasury shares .............................................................................................
Dividends paid to owners of the parent ............................................................................
Dividends paid to non-controlling interests .......................................................................
Other .................................................................................................................................
Net cash flows from financing activities ....................................................................
Net increase (decrease) in cash and cash equivalents ....................................................
Cash and cash equivalents at the beginning of the year ................................................
Effect of exchange rate changes on cash and cash equivalents .....................................
Cash and cash equivalents at the end of the year ...........................................................
8
8
204,290
54,508
(1,295)
1,339
(2,007)
3,111
(3,464)
(15,349)
14,637
(30,886)
14,476
239,360
1,069
2,047
(1,329)
(55,302)
185,845
(26,673)
25,349
(83,663)
(6,273)
(2,906)
(1,980)
(96,146)
(59)
30,000
(30,090)
(1,842)
(50,299)
(369)
(585)
(53,244)
36,455
303,026
3,595
343,076
183,430
51,116
(1,247)
1,484
(1,894)
3,466
(4,049)
(17,450)
4,388
19,967
(7,175)
232,036
1,003
1,479
(1,503)
(48,708)
184,307
(11,570)
3,703
(74,637)
(5,060)
(3,659)
2,584
(88,639)
(44)
200
(317)
(50,021)
(44,188)
(955)
282
(95,043)
625
309,922
(7,521)
303,026
Kao Corporation Financial Report 2017
18
Notes to Consolidated Financial Statements
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2017
1
Reporting Entity
Kao Corporation (hereinafter the “Company”) is a corporation
established pursuant to the Companies Act of Japan (hereinafter
the “Companies Act”) with its headquarters in Chuo-ku, Tokyo.
The consolidated financial statements of the Company and its
subsidiaries (hereinafter the “Group”) have a closing date of
December 31 and comprise the financial statements of the Group
and the interests in associates of the Company.
The Group manufactures consumer products including
cosmetics, skin care products, hair care products, sanitary
products, fabric care products, and chemical products including
fatty alcohols and surfactants. The Group delivers its products to
customers through its sales companies and distributors in Japan
and other countries. Details of these principal business activities
of the Group are presented in Note 6 “Segment Information.”
2
Basis of Preparation
(1) Compliance with International Financial Reporting
Standards (hereinafter “IFRS”)
The Group’s consolidated financial statements have been
prepared in accordance with IFRS issued by the International
Accounting Standards Board, as permitted by the provision of
Article 93 of the Ordinance on Terminology, Forms, and
Preparation Methods of Consolidated Financial Statements
(Ordinance of the Ministry of Finance of Japan No. 28 of 1976), as
they satisfy the requirements for an “IFRS Specified Company” in
Article 1-2 of the same ordinance.
(2) Basis of Measurement
The Group’s consolidated financial statements have been
prepared on the historical cost basis, except for certain assets
and liabilities including financial instruments measured at fair value
as presented in Note 3 “Significant Accounting Policies.”
3
Significant Accounting Policies
(1) Basis of Consolidation
1) Subsidiaries
Subsidiaries refer to all business entities controlled by the
Company. The Company controls an entity when it has
exposure, or rights, to variable returns from involvement
with an investee and has the ability to affect those returns
through its power over the investee.
The financial statements of subsidiaries are included in the
consolidated financial statements of the Group from the
date the Company gains control until the date it loses
control of the subsidiary.
All intergroup balances, transactions, income and
expenses and unrealized gains and losses arising from
intergroup transactions are eliminated in preparing the
consolidated financial statements.
A change in the Company’s ownership interest in a
subsidiary, without a loss of control, is accounted for as an
equity transaction. Any difference between the amount by
which the non-controlling interests are adjusted and the fair
value of the consideration paid or received is recognized
directly in equity attributable to the Group.
Non-controlling interests in subsidiaries are identified
separately from the Group’s equity therein. Comprehensive
19
Kao Corporation Financial Report 2017
(3) Functional Currency and Presentation Currency
The Group’s consolidated financial statements are presented in
Japanese yen, which is the Company’s functional currency. All
financial information presented in Japanese yen is rounded to the
nearest million yen.
(4) Early Adoption of New or Revised Standards and
Interpretations
The Group has early adopted IFRS 9 “Financial Instruments”
(issued in November 2009, revised in July 2014) (hereinafter “IFRS
9”), and IFRS 15 “Revenue from Contracts with Customers”
(issued in May 2014) and “Clarifications to IFRS 15” (issued in
April 2016) (together, hereinafter “IFRS 15”) in preparing its
consolidated financial statements.
income of subsidiaries is attributed to owners of the parent
and to the non-controlling interests even if this results in the
non-controlling interests having a deficit balance.
All subsidiaries have the same closing date as the Company.
2) Associates
An associate is defined as an entity over which the
Company has significant influence on financial and operating
policy decisions but does not have control over the entity.
The Company is presumed to have significant influence over
another entity when it directly or indirectly holds at least
20%, but no more than 50% of the voting rights of that
entity. Entities over which the Company is able to exercise
significant influence on financial and operating policy
decisions are also included in associates, even if it holds
less than 20% of the voting rights.
Investments in associates are initially recognized at cost,
and are accounted for by the equity method from the date
the Company gains significant influence until the date it
loses that influence.
Goodwill recognized on acquisition of associates (less any
accumulated impairment losses) is included in investments
in associates.
The closing dates of some associates differ from that of
the Company. Associates with different closing dates
prepare additional financial closing as of the closing date of
the Company.
(2) Business Combinations
Business combinations are accounted for using the acquisition
method. The consideration of an acquisition is measured as the
aggregate of the acquisition-date fair value of the assets
transferred, liabilities assumed and equity securities issued by the
Company to the former owners of the acquiree in exchange for
control of the acquiree.
Identifiable assets and liabilities of the acquiree in business
combinations are measured at their acquisition-date fair value,
with the following exceptions:
• Deferred tax assets or liabilities and assets or liabilities related
to employee benefit arrangements are recognized and
measured in accordance with IAS 12 “Income Taxes” and IAS
19 “Employee Benefits”, respectively.
• Non-current assets and disposal groups that are classified as
held for sale in accordance with IFRS 5 “Non-current Assets
Held for Sale and Discontinued Operations” are measured in
accordance with that Standard.
• Liabilities or equity instruments related to share-based payment
transactions of the acquiree or share-based payment
transactions of the Company entered into to replace such
transactions of the acquiree are measured in accordance with
IFRS 2 “Share-based Payment.”
Any excess of the consideration over the net fair value of
identifiable assets acquired and liabilities assumed at the
acquisition date is recognized as goodwill in the consolidated
statement of financial position. Conversely, any deficit is
immediately recognized as income in the consolidated statement
of income.
Costs associated with business combinations, such as advisory
fees, attorney fees and due diligence costs, are expensed as
incurred.
The additional acquisition of non-controlling interests is
accounted for as an equity transaction, and therefore no goodwill
is recognized with respect to such a transaction.
Business combinations under common control are business
combinations in which all of the combining entities or combining
businesses are ultimately controlled by the same party or parties
both before and after the business combination, and that control
is not transitory. These business combinations are accounted for
based on the carrying amounts.
(3) Foreign Currency Translation
1) Functional currency and presentation currency
The presentation currency used in the Group’s consolidated
financial statements is Japanese yen, which is the Company’s
functional currency. Subsidiaries and associates in the Group
determine their own functional currencies and each entity’s
transactions are measured in its functional currency.
2) Foreign currency transactions
Foreign currency transactions are translated into the
functional currency at the spot exchange rate at the date of
the transaction, or an exchange rate that approximates the
spot rate.
At the end of each reporting period, foreign currency
monetary items are translated into the functional currency
using the rates at the end of each reporting period.
Non-monetary items that are measured in terms of
historical cost in foreign currencies are translated using the
exchange rates at the date of acquisition. Non-monetary
items that are measured at fair value in foreign currencies
are translated into the functional currency using the
exchange rates at the date when the fair value was
measured. Exchange differences arising from such
translations and settlements are recognized in profit or loss.
However, exchange differences arising from equity
instruments measured at fair value through other
comprehensive income and cash flow hedges are
recognized in other comprehensive income.
3) Financial statements of foreign operations
Assets and liabilities of foreign operations are translated at
the rates at the end of each reporting period. Income and
expenses are translated at the average exchange rates for
the period, provided that there were no significant
fluctuations in the exchange rates during the period.
Exchange differences arising from translation of the financial
statements of foreign operations are recognized in other
comprehensive income. On the disposal of a foreign
operation, the cumulative amount of exchange differences
relating to that foreign operation is reclassified from equity
to profit or loss when the gain or loss on disposal is
recognized.
(4) Financial Instruments
The Group has early adopted IFRS 9.
1) Financial assets
(i) Initial recognition and measurement
The Group initially recognizes trade and other receivables
at the date they are originated. Other financial assets are
initially recognized at the transaction date when the
Group becomes a party to the contractual provisions of
the financial instrument.
At initial recognition, all financial assets are measured at
fair value, but those that are not classified as financial
assets measured at fair value through profit or loss are
measured at fair value plus transaction costs directly
attributable to the acquisition of the financial asset.
Transaction costs of financial assets measured at fair value
through profit or loss are recognized in profit or loss.
(ii) Classification and subsequent measurement
The Group classifies the financial assets it holds as (a)
financial assets measured at amortized cost; (b) debt
instruments measured at fair value through other
Kao Corporation Financial Report 2017
20
comprehensive income; (c) equity instruments measured
at fair value through other comprehensive income; or (d)
financial assets measured at fair value through profit or
loss. This classification is determined at initial recognition,
and measurement of financial assets after initial recognition
is performed according to the classification of the financial
asset as follows:
(a) Financial assets measured at amortized cost
Financial assets held by the Group are measured at
amortized cost if both of the following conditions are met:
• The financial asset is held in a business model
whose objective is to hold financial assets in order to
collect contractual cash flows; and
• 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.
After initial recognition, the carrying amounts of
financial assets measured at amortized cost are
recognized using the effective interest method less
impairment loss, if any. Amortization using the
effective interest method and gains and losses on
derecognition are recognized in profit or loss for the
period.
(b) Debt instruments measured at fair value through other
comprehensive income
Financial assets held by the Group are classified as
debt instruments measured at fair value through other
comprehensive income if both of the following
conditions are met:
• The financial asset is held within a business model
whose objective is achieved by both collecting
contractual cash flows and selling the financial asset;
and
• 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.
Dividends from equity instruments measured at fair
value through other comprehensive income are
recognized as financial income in profit or loss.
(d) Financial assets measured at fair value through profit
or loss
Financial assets that are not classified as financial
assets measured at amortized cost, debt instruments
measured at fair value through other comprehensive
income, or equity instruments measured at fair value
through other comprehensive income are classified as
financial assets measured at fair value through profit
or loss. The Group’s financial assets that are measured
at fair value through profit or loss include certain short-
term investments and derivative assets. The Group has
not irrevocably designated any financial assets as
measured at fair value through profit or loss.
These financial assets are measured at fair value
after initial recognition, and changes in their fair value
are recognized in profit or loss. Gains and losses on
financial assets measured at fair value through profit
or loss are recognized in profit or loss.
(iii) Impairment of financial assets
With respect to impairment of financial assets measured
at amortized cost, the Group recognizes a loss allowance
for expected credit losses on such financial assets.
At each reporting date, the Group assesses whether
the credit risks on the financial assets have increased
significantly since initial recognition.
If credit risk on a financial instrument has not increased
significantly since initial recognition, the loss allowance
for that financial instrument is measured at an amount
equal to the 12-month expected credit losses. If credit
risk on a financial instrument has increased significantly
since initial recognition, the loss allowance is measured in
an amount equal to the lifetime expected credit losses.
However, the loss allowance on trade receivables and
others is always measured in an amount equal to the
lifetime expected credit losses.
The expected credit losses of financial assets are
estimated in a way that reflects the following:
(c) Equity instruments measured at fair value through
• An unbiased and probability-weighted amount
other comprehensive income
The Group has made an irrevocable election to present
subsequent changes in the fair value of certain equity
instruments in other comprehensive income, and
classifies them in equity instruments measured at fair
value through other comprehensive income.
These financial assets are measured at fair value
after initial recognition, and changes in the fair value
are included in other comprehensive income. If the
Group disposes of an investment, or if the fair value of
the investment declines significantly, the cumulative
gain or loss recognized in other comprehensive
income is reclassified from other components of
equity to retained earnings.
determined by evaluating a range of possible outcomes
• The time value of money
• Reasonable and supportable information about past
events, current conditions and forecasts of economic
conditions that is available without undue cost or effort
at the reporting date
The amounts of these measurements are recognized
in profit or loss.
If an event that reduces an impairment loss occurs
after the impairment loss has been recognized, the
impairment loss will be reversed to the extent of the
decrease and credited to profit or loss.
21
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
(iv) Derecognition of financial assets
4) Fair value of financial instruments
The Group derecognizes financial assets only when the
contractual rights to the cash flows from the financial
assets expire, or when the Group transfers financial
assets and substantially all the risks and rewards of
ownership of the financial assets.
2) Financial liabilities
(i) Initial recognition and measurement
The Group initially recognizes bonds and borrowings at
the date they are issued, and other financial liabilities at
the transaction date.
Upon initial recognition, all financial liabilities are
measured at fair value. However, financial liabilities
measured at amortized cost are measured in the full
amount after deducting directly attributable transaction
costs from the fair value.
Transaction costs of financial liabilities measured at fair
value through profit or loss are recognized in profit or loss.
(ii) Classification and subsequent measurement
The Group classifies financial liabilities as either financial
liabilities measured at fair value through profit or loss, or
financial liabilities measured at amortized cost. This
classification is determined at initial recognition.
Measurement of financial liabilities after initial recognition
is performed as follows, according to the classification of
the financial liability.
The Group’s financial liabilities measured at fair value
through profit or loss are derivative liabilities. The Group
has not irrevocably designated any financial liabilities as
measured at fair value through profit or loss at initial
recognition. Financial liabilities measured at fair value
through profit or loss are measured at fair value after
initial recognition, and any changes in their fair value are
recognized in profit or loss for the period.
Financial liabilities measured at amortized cost are
subsequently measured at amortized cost using the
effective interest method. Amortization using the
effective interest method and gains and losses on
derecognition are recognized in profit or loss for the
period.
(iii) Derecognition of financial liabilities
The Group derecognizes financial liabilities when they are
extinguished (i.e., when the obligation specified in the
contract is discharged or cancelled or expires).
3) Offsetting of financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net
amount is presented in the consolidated statement of
financial position only when the Group currently has a legally
enforceable right to set off the recognized amount and
intends either to settle on a net basis or realize the assets
and settle the liabilities simultaneously.
The Group recognizes the fair value of financial instruments
using various valuation methodologies and inputs. The fair
values recognized based on the observability of inputs into
the valuation methodologies are grouped into the following
three levels:
Level 1: Fair value measured with quoted prices in active
markets for identical assets or liabilities
Level 2: Fair value measured with inputs other than quoted
prices categorized within Level 1 that are
observable for the asset or liability, either directly
or indirectly
Level 3: Fair value measured with unobservable inputs for
the asset or liability
5) Hedge accounting
The Group uses interest rate swaps and other derivatives to
hedge interest rate risk. At the inception of a hedging
relationship, the Group formally designates and documents
the hedging relationship and the interest rate risk
management objective and strategy for undertaking the
hedge. The documentation includes identification of the
hedging instrument, the hedged item, the nature of the risk
being hedged, and the methods of assessing whether the
hedging relationship meets the hedge effectiveness
requirements. In addition, the Group assesses whether the
hedging relationship meets the hedge effectiveness
requirements, both at the inception and on an ongoing
basis. Ongoing assessments are conducted either at each
reporting date or upon a significant change in the
circumstances affecting the hedge effectiveness
requirements, whichever comes first.
In accordance with the Group’s risk management policy,
derivatives that meet the criteria for hedge accounting with
respect to interest rate risk are designated as cash flow
hedges and accounted for as follows.
Derivatives designated as hedging instruments in cash
flow hedges are interest rate swaps to convert floating-rate
financial liabilities to fixed-rate financial liabilities. The
effective portion of changes in the fair values of derivatives
designated as cash flow hedges is recognized in other
components of equity until the associated hedged
transactions are executed and profit or loss is recognized.
Gains or losses on derivatives recognized in other
components of equity are reclassified into profit or loss at
the time when the associated hedged transactions are
recognized in profit or loss. However, any ineffective portion
of the change in fair value of the derivatives is recognized
immediately in profit or loss.
Hedge accounting is discontinued prospectively only
when the hedging relationship ceases to meet the qualifying
criteria. This includes instances when the hedging
instrument expires or is sold, terminated or exercised.
The Group does not use fair value hedges or net
investment hedges in foreign operations.
Kao Corporation Financial Report 2017
22
(5) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand
deposits and short-term investments that are highly liquid and
readily convertible to known amounts of cash subject to an
insignificant risk of changes in value, and that mature or become
due within three months from the date of acquisition.
Cash and cash equivalents include certificates of deposit, time
deposits, commercial paper, public and corporate bonds in
investment trusts, and money in trust.
(6) Inventories
Inventories are measured at the lower of cost and net realizable
value. 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.
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, and are determined
principally by the weighted average method.
(7) Property, Plant and Equipment
Property, plant and equipment are measured using the cost model
and carried at cost less any accumulated depreciation and any
accumulated impairment losses.
The cost of an item of property, plant and equipment comprises
any costs directly attributable to acquisition of the asset and the
initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located.
Depreciation of assets other than land and construction in
progress is calculated on a straight-line basis over the estimated
useful lives of the assets.
The estimated useful lives of major asset items are as follows:
• Buildings and structures: 10 to 35 years
• Machinery and vehicles: 7 to 14 years
• Tools, furniture and fixtures: 3 to 10 years
The estimated useful lives, residual values and depreciation
method are reviewed at each fiscal year end, and any revisions are
applied prospectively as changes in accounting estimates.
(8) Goodwill and Intangible Assets
1) Goodwill
Goodwill arising from a business combination is not
amortized, and is carried at cost, determined at the
acquisition date, less any accumulated impairment losses.
In addition, goodwill is allocated to the cash generating
unit or group of cash-generating units that is expected to
benefit from the synergies of the business combination, and
is tested for impairment at least once a year by each fiscal
year end or if there are indications of impairment.
Impairment loss on goodwill is recognized in profit or loss
and is not reversed in subsequent periods.
Goodwill measurements at initial recognition are
presented in Note 3 “Significant Accounting Policies (2)
Business Combinations.”
2) Intangible assets
Intangible assets are measured using the cost model and
carried at cost less any accumulated amortization and any
accumulated impairment losses.
The costs of separately acquired intangible assets comprise
any costs directly attributable to acquisition of the assets.
The costs of intangible assets acquired in business
combinations are measured at fair value at the acquisition date.
Expenditures related to internally generated intangible
assets are recognized as expenses when incurred, with the
exception of development expenses that meet the criteria
for capitalization. Software development expense only
meets the criteria for capitalization.
After initial recognition, with the exception of intangible
assets with indefinite useful lives, intangible assets are
amortized on a straight-line basis over their estimated
useful lives.
The Group has no intangible assets with indefinite useful
lives. The estimated useful lives of major intangible assets
are as follows:
• Trademarks: 10 years
• Software: 5 years
The estimated useful lives, residual values and
amortization method are reviewed at each fiscal year end,
and any revisions are applied prospectively as changes in
accounting estimates.
3) Research and development expenses
Research expenditures are expensed as incurred. Development
expenditures are capitalized only if they can be measured
reliably, future economic benefits are probable, and the Group
intends to, and has sufficient resources to, complete
development and to use or sell the asset. If research
expenditures and development expenditures cannot be clearly
distinguished, they are expensed as incurred as research
expenditures.
(9) Leases
The Group classifies a lease that transfers substantially all the
risks and rewards incidental to ownership of an asset as a finance
lease and a lease other than a finance lease as an operating lease.
In finance lease transactions, leased assets and lease
obligations are initially recognized at the lower of the fair value of
leased property and the present value of the minimum lease
payments, each determined at the inception of the lease.
Leased assets are depreciated on a straight-line basis over the
shorter of their estimated useful lives and lease terms. Lease
payments are apportioned between the finance charges and the
reduction of the outstanding liability using the interest method.
Lease payments under operating leases are recognized as an
expense on a straight-line basis over the lease term.
Determination of whether an arrangement is, or contains, a
lease is based on the substance of the arrangement, in accordance
with IFRIC Interpretation 4 “Determining Whether an Arrangement
Contains a Lease.”
23
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
(10) Impairment of Non-financial Assets
Non-financial assets, excluding inventories, deferred tax assets,
non-current assets classified as held for sale and assets arising
from employee benefits, are assessed at the end of each
reporting period to determine whether there is any indication of
impairment. If there is an indication of impairment, the recoverable
amount of the asset is estimated. For goodwill, the recoverable
amount is estimated at least once a year by each fiscal year end,
irrespective of whether there is any indication of impairment.
The recoverable amount of an asset or a cash-generating unit is
the higher of its value in use and fair value less cost of disposal.
The discount rate used in calculating the asset’s value in use is a
pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the asset, for which the
future cash flow estimates have not been adjusted.
If it is not possible to estimate the recoverable amount of an
individual asset, the recoverable amount of the cash-generating
unit to which the asset belongs is measured. Goodwill acquired in
business combinations is allocated to each of the cash-generating
units or groups of cash-generating units of the Group that is
expected to benefit from synergies of the business combinations
after the acquisition date, and is tested for impairment.
Because corporate assets do not generate separate cash
inflows, the recoverable amount of individual corporate assets
cannot be measured unless management has decided to dispose
of the asset. If there is an indication that a corporate asset may be
impaired, the recoverable amount of the cash-generating unit or
group of cash-generating units to which the asset belongs is
measured and compared with the carrying amount.
Impairment losses are recognized in profit or loss whenever the
recoverable amount is less than the carrying amount. Such
impairment losses of the cash-generating unit or group of cash-
generating units are recognized by first reducing the carrying
amount of any goodwill allocated to the cash-generating unit or
group of cash-generating units, and then allocating the rest of the
losses to other assets of the unit pro rata on the basis of the
carrying amount of each asset in the unit.
The Group reviews assets other than goodwill at each fiscal
year end to determine whether there is any indication that
previously recognized impairment losses may no longer exist or
may have decreased. If there are any such indications, the Group
estimates the recoverable amount of the asset.
Impairment losses on assets other than goodwill that were
recognized in prior fiscal years are reversed only when there have
been changes in the estimates used to determine the recoverable
amount of the asset since the last impairment loss was recognized.
In this case, the carrying amount of the asset is increased as a
reversal of impairment loss to the recoverable amount.
Impairment losses are reversed up to the carrying amount, net
of amortization or depreciation, that would have been determined
had no impairment loss for the asset been recognized in prior
fiscal years.
(11) Employee Benefits
1) Post-employment benefits
The Group sponsors a defined benefit plan and a defined
contribution plan as post-employment benefit plans for
employees.
(i) Defined benefit plan
For the defined benefit plan, the projected unit credit
method is used to individually determine the present
value of defined benefit obligations, related current
service costs and past service costs of each plan.
The discount rate is determined by referring to market
yields at the end of the fiscal year on high quality
corporate bonds corresponding to the period until the
expected date of future benefit payment.
The net amount of the present value of defined benefit
obligations and the fair value of plan assets is accounted
for as a liability or asset. However, if the defined benefit
plan has surplus, the net defined benefit asset is limited
to the present value of any economic benefits available in
the form of refunds from the plan or reductions in the
future contributions to the plan. Net interest on the net
defined benefit liability (asset) is recognized in profit or
loss as financial expenses (income).
Remeasurements of the net defined benefit liability
(asset) are recognized in other comprehensive income
and immediately reclassified to retained earnings in the
period in which they occur.
Past service costs are recognized in profit or loss for
the period in which they are incurred.
(ii) Defined contribution plan
Payments to defined contribution plan are recognized as
expenses when employees have rendered services
entitling them to the contributions.
2) Other employee benefits
Short-term employee benefit obligations are measured on
an undiscounted basis, and are recognized as an expense
when the related services are rendered.
For bonuses, when there is a present legal or constructive
obligation to make payments of bonuses, and a reliable
estimate of the obligation can be made, the estimated
amount to be paid is accounted for as a liability.
For the paid absence expenses, when there is a legal or
constructive obligation with respect to accumulating paid
absence systems and a reliable estimate of the obligation
can be made, the estimated amount to be paid based on
those systems is accounted for as a liability.
Kao Corporation Financial Report 2017
24
(12) Share-based Payments
1) Stock option plan
with a customer, less discounts, rebates, returned products and
other items.
The Company has a stock option plan accounted for as an
equity-settled share-based payment plan. Due to the
introduction of a performance share plan from the fiscal year
ended December 31, 2017, the stock option plan has been
abolished except for the options already granted.
2) Performance share plan
In the fiscal year ended December 31, 2017, the Company
introduced a performance share plan accounted for as an
equity-settled share-based payment plan.
The performance share plan measures service received at
the fair value of the Company’s shares on the date of grant,
recognizing it as an expense from the date of grant through
the vesting period and recognizing the same amount as an
increase in capital surplus. The fair value of the Company’s
shares on the date of grant is determined by adjusting the
market price of the shares taking expected dividends into
account.
(13) Provisions
Provisions are recognized when the Group has a present
obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, and a reliable
estimate can be made of the amount of the obligation.
The amounts recognized as provisions are the best estimates of
necessary expenditures to settle the present obligation at the end
of the reporting period, taking into account the risks and
uncertainties associated with the obligation. When the effect of
the time value of money is material, the amount of provision is
measured at the present value of the expenditures expected to be
required to settle the obligation.
(14) Revenue
The Group has early adopted IFRS 15 effective from the fiscal year
ended December 31, 2017.
The Group recognizes revenue based on the following five-step
model:
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance
obligations in the contract
Step 5: Recognize revenue when the entity satisfies a
performance obligation
The Group sells consumer products including cosmetics, skin
care products, hair care products, sanitary products and fabric
care products, as well as chemical products including fatty
alcohols and surfactants. For sales of such products, because the
customer obtains control over the products upon delivery, the
performance obligation is judged to have been satisfied and
revenue is therefore recognized upon delivery of the products.
Revenue is measured at the consideration promised in a contract
(15) Income Taxes
Income taxes consist of current income taxes and deferred
income taxes. Income taxes are recognized as income or
expenses and included in profit or loss, except for taxes related to
business combinations and taxes related to items that are
recognized directly in equity or in other comprehensive income.
1) Current income taxes
Current income taxes are recognized in the amount of the
expected taxes payable to or receivable from the taxation
authorities. Calculation of the amount of tax is based on the
tax rates and tax laws enacted or substantively enacted by
the end of the reporting period in countries where the Group
conducts business and earns taxable income.
2) Deferred income taxes
Deferred tax assets and liabilities are recognized for
temporary differences between the carrying amounts of
assets or liabilities at the end of the reporting period and its
tax base, and for tax loss carryforwards and tax credits.
Deferred tax assets are recognized for deductible
temporary differences, the carryforwards of unused tax
losses and the carryforwards of unused tax credits to the
extent that it is probable that future taxable income will be
available against such deferred tax assets. Deferred tax
liabilities are recognized, in principle, for all taxable
temporary differences.
The carrying amount of deferred tax assets is reviewed
each period and reduced to the extent that it is no longer
probable that sufficient future taxable income will be
available to realize benefits from all or part of the assets.
Unrecognized deferred tax assets are reassessed each
period and are recognized to the extent that it has become
probable that future taxable income will allow the deferred
tax assets to be recovered.
Deferred tax assets and liabilities are not recognized for
the following temporary differences:
• Taxable temporary differences arising from initial
recognition of goodwill
• Temporary differences arising from initial recognition of
assets and liabilities from transactions that are not
business combinations and affect neither accounting
income nor taxable income
• Taxable temporary differences on investments in
subsidiaries and associates, when the timing of the
reversal of the temporary differences can be controlled and
it is probable that the temporary differences will not
reverse in the foreseeable future
• Deductible temporary differences on investments in
subsidiaries and associates, when it is probable that the
temporary differences will not reverse in the foreseeable
future
25
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply to the period when the
assets are realized or the liabilities are settled, based on the
tax rates and tax laws enacted or substantively enacted by
the end of the reporting period.
Deferred tax assets and liabilities are offset if the Group
has a legally enforceable right to set off current tax assets
against current tax liabilities and income taxes are levied by
the same taxation authority on the same taxable entity.
The Company and some of its subsidiaries have adopted
the consolidated tax system.
(16) Earnings per Share
Basic earnings per share are calculated by dividing net income
attributable to owners of the parent by the weighted average
number of ordinary shares outstanding during the period, adjusted
for treasury shares held. Diluted earnings per share are calculated
by adjusting the effects of all dilutive potential ordinary shares.
(17) Non-current Assets Held for Sale
A non-current asset or disposal group whose carrying amount is
expected to be recovered principally through a sale transaction
rather than through continuing use is classified as a non-current
asset or disposal group held for sale if it is highly probable that the
asset or disposal group will be sold within one year and is
available for immediate sale in its present condition, and the
Group’s management is committed to a plan to sell. Non-current
assets are not depreciated or amortized while they are classified
as held for sale or are part of a disposal group classified as held
for sale. Non-current assets or disposal groups classified as held
for sale are measured at the lower of the carrying amount and fair
value less costs to sell.
(18) Equity and Other Capital
1) Ordinary shares
Ordinary shares are recognized in share capital and capital
surplus at their issue price. Share issuance costs are
deducted from the issue price.
2) Treasury shares
Treasury shares are recognized at cost and deducted from
equity. No gain or loss is recognized on the purchase, sale or
retirement of the Company’s treasury shares. Any difference
between the carrying amount and consideration received on
the sale of treasury shares is recognized directly in equity.
(19) Dividends
Dividend distributions to shareholders of the Company are
recognized as liabilities in the period in which year-end dividends
are resolved upon by the General Meeting of Shareholders and
interim dividends are resolved upon by the Board of Directors.
(20) Changes in Significant Accounting Policies
(Revenue)
The Group has early adopted IFRS 15 from the fiscal year ended
December 31, 2017. As a transitional measure upon the early
adoption of IFRS 15, the Group applies this Standard
retrospectively with the cumulative effect of initially applying this
Standard recognized at the date of initial application.
In accordance with the adoption of IFRS 15, revenue is
recognized based on the following five-step model:
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance
obligations in the contract
Step 5: Recognize revenue when the entity satisfies a
performance obligation
The Group sells consumer products including cosmetics, skin
care products, hair care products, sanitary products and fabric
care products, as well as chemical products including fatty
alcohols and surfactants. For sales of such products, because the
customer obtains control over the products upon delivery, the
performance obligation is judged to have been satisfied and
revenue is therefore recognized upon delivery of the products.
Revenue is measured at the consideration promised in a contract
with a customer, less discounts, rebates, returned products and
other items.
Based on the above five-step model, as a result of identification
of performance obligations under contracts with customers, the
portion of sales promotion and other expenses that is
consideration paid by the Group to customers, which had
previously been accounted for as selling, general and
administrative expenses, is accounted for as reductions of net
sales from the fiscal year ended December 31, 2017. In addition,
freight/warehouse expenses, employee benefits and other
expenses necessary for satisfying performance obligations that
had previously been accounted for as selling, general and
administrative expenses are accounted for as cost of sales from
the fiscal year ended December 31, 2017.
As a result, compared with the application of the former
accounting standard, net sales decreased by 45,742 million yen,
selling, general and administrative expenses decreased by
174,999 million yen, and cost of sales increased by 129,257 million
yen in the consolidated statement of income for the fiscal year
ended December 31, 2017. These changes had no effect on
operating income or net income.
In addition, with the application of IFRS 15, refund liabilities for
rebates and other payments, which were previously included in
trade and other payables under current liabilities, liabilities for
returned products, which were previously included in provisions,
and refund liabilities for rebates and other payments and advances
received from customers, which were previously included in other
current liabilities, are presented as contract liabilities.
As a result, compared with the application of the former
accounting standard, as of the end of the fiscal year ended
December 31, 2017, trade and other payables under current
liabilities decreased by 2,279 million yen and as of the beginning
and end of the fiscal year ended December 31, 2017, provisions
under current liabilities decreased by 3,965 million yen and 3,049
million yen, respectively, and other current liabilities decreased by
12,582 million yen and 11,968 million yen, respectively, in the
consolidated statement of financial position.
Kao Corporation Financial Report 2017
26
4
Significant Accounting Estimates and Judgments
The Group’s consolidated financial statements include estimates
and assumptions made by management regarding income and
expenses, measurement of the carrying amounts of assets and
liabilities, and disclosure of contingencies and others at the end of
the reporting period. These estimates and assumptions are based
on management’s best judgment at the end of the reporting period,
and take into account historical experience and various other factors
that can be considered as reasonable. However, due to their nature,
actual results may differ from these estimates and assumptions.
The estimates and their underlying assumptions are reviewed
by management on an ongoing basis. The effects of revisions to
accounting estimates and assumptions are recognized in the
period when the estimates are revised and in future periods.
Estimates and assumptions that significantly affect the amounts
recognized in the Group’s consolidated financial statements are as
follows:
(1) Impairment of Property, Plant and Equipment, Goodwill
and Intangible Assets
The Group conducts impairment tests for property, plant and
equipment, goodwill and intangible assets when there is an
indication that the recoverable amount of the asset or cash-
generating unit is less than the carrying amount.
Triggering events for impairment testing include, for example,
significant changes with adverse effects on past or projected
business performance, significant changes in the use of acquired
assets, or changes in overall business strategy.
Furthermore, goodwill is tested for impairment at least once a
year by each fiscal year end, irrespective of indication of impairment,
to verify that the recoverable amount of the cash-generating unit to
which goodwill is allocated exceeds the carrying amount.
Impairment tests are performed by comparing the carrying
amount and the recoverable amount of the asset or cash-
generating unit. If the recoverable amount is less than the carrying
amount, the carrying amount is reduced to the recoverable amount
and the reduction is recognized as an impairment loss. The
recoverable amount is the higher of the value in use and the fair
value less cost of disposal of the asset or cash-generating unit.
In calculating the value in use, the Group makes certain
assumptions about the remaining useful life and future cash flows
of the asset, discount rate, growth rate and other factors. These
assumptions are based on management’s best estimates and
judgments, but may be affected by changes in future business
plans, economic conditions or other factors. If revisions to the
assumptions become necessary, such revisions could have a
material effect on the amounts recognized in the consolidated
financial statements in future periods.
Note 14 “Goodwill and Intangible Assets” presents the method
for measuring the recoverable amount and sensitivity associated
with goodwill.
(2) Post-employment Benefits
The Group provides a variety of post-retirement benefit plans that
include a defined benefit plan. The present value of defined
benefit obligations and related service costs are determined
based on actuarial assumptions.
Actuarial assumptions are based on management’s best
estimates and judgments, but may be affected by the revision of
inputs including the discount rate and mortality rate due to
changes in economic conditions. If revisions to the assumptions
become necessary, such revisions could have a material effect on
the amounts recognized in the consolidated financial statements
in future periods.
Note 20 “Employee Benefits” presents actuarial assumptions
and related sensitivity.
(3) Provisions
The Group has recognized a provision for loss related to
cosmetics, a provision for asset retirement obligations and other
provisions in the consolidated statement of financial position.
The amounts recognized are the best estimates of the
expenditures required to settle the present obligations, taking into
account historical experience and other factors at the end of the
reporting period.
The provision for loss related to cosmetics may be affected by
changes in compensation-related and other expenses.
The provision for asset retirement obligations and other
provisions may be affected by factors such as changes in future
business plans.
If the actual amounts paid differ from the estimates, such
differences could have a material effect on the amounts
recognized in the consolidated financial statements in future
periods.
Note 21 “Provisions” presents the nature and amounts of these
provisions.
(4) Income Taxes
The Group recognizes and measures income tax payables and
income taxes based on reasonable estimates of the amounts to
be paid to the taxation authorities in each country. Such estimates
are made using the tax rates and tax laws enacted or
substantively enacted by the end of the reporting period.
Calculating income tax payables and income taxes requires
estimates and judgments of various factors, including
interpretations of tax regulations by the Group and the taxation
authorities and the experience of past tax audits.
Therefore, if the final tax outcome is different from the amount
initially recognized, the difference is recognized in the period
when the tax outcome is finalized.
Deferred tax assets are recognized for deductible temporary
differences, the carryforwards of unused tax losses and the
carryforwards of unused tax credits to the extent that it is
27
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
probable that future taxable income will be available. The
realizability of deferred tax assets is assessed using the tax rates
that are expected to apply to the period when the asset is
realized, based on tax rates and tax laws enacted or substantively
enacted by the end of the reporting period.
Recognition and measurement of deferred tax assets are based
on management’s best estimates and judgments, but may be
affected by future changes in business plans or other conditions,
or by the amendment or promulgation of related laws. Any
revisions that become necessary could have a material effect on
the amounts recognized in the consolidated financial statements
in future periods.
Note 16 “Income Taxes” presents income taxes and amounts.
(5) Fair Value
The Group uses various inputs, including unobservable inputs, and
valuation methodologies to estimate the fair value of specific
assets and liabilities. When measuring fair value, the Group
maximizes the use of relevant observable inputs and minimizes
the use of unobservable inputs, and management’s best
estimates and judgments are required in that process.
The fair value of these assets and liabilities is based on
management’s best estimates and judgments, but could be
affected by factors including changes in inputs due to changes in
economic conditions. Any revisions that become necessary could
have a material effect on the amounts recognized in the
consolidated financial statements in future periods.
Note 35 “Financial Instruments” presents fair value
measurement methods and amounts for major financial assets
and liabilities measured at fair value.
(6) Contingencies
Contingencies are disclosed when there are items that could have
a material effect on future business after considering the
probability of occurrence and the amount of financial impact,
taking into account all available evidence at the end of the
reporting period.
5
New Standards and Interpretations Not Yet Adopted
New or revised major Standards and Interpretations that were issued by the date of approval presented in Note 40 “Approval of the
Consolidated Financial Statements,” but were not yet early adopted by the Group as of December 31, 2017 are as follows:
IFRS
Title
Mandatory adoption
(From the fiscal year beginning)
IFRS 16
Leases
January 1, 2019
Adoption by the Group
Fiscal year ending
December 31, 2019
Overview of new or revised
Standards and Interpretations
Revised lease definition,
accounting treatment and disclosure
The Group is currently evaluating the possible impacts on the consolidated financial statements resulting from the adoption of IFRS 16
“Leases” and the estimates are currently not available.
6
Segment Information
(1) Summary of Reportable Segments
The Group’s reportable segments are the components of the
Group for which discrete financial information is available and
which are regularly reviewed by the Board of Directors in deciding
how to allocate resources and in assessing their performance. Net
sales and operating income are the key measures used by the
Board of Directors to evaluate the performance of each segment.
The Group is an organization comprising four main business
units – the Beauty Care Business, the Human Health Care
Business, the Fabric and Home Care Business (collectively, the
“Consumer Products Business”) and the Chemical Business. In
each business unit, the Group plans comprehensive business
strategies and carries out business activities on a global basis.
Accordingly, the Group has four reportable segments: the
Beauty Care Business, the Human Health Care Business, the
Fabric and Home Care Business and the Chemical Business.
Information about major customers has been omitted as the
revenue from each customer is less than 10% of the Group’s net
sales.
Kao Corporation Financial Report 2017
28
Reportable segments
Major products
Beauty Care
Business
Consumer
Products
Business
Human Health Care
Business
Fabric and Home Care
Business
Cosmetics
Counseling cosmetics, self-selection cosmetics
Skin care products
Hair care products
Food and beverage
products
Soaps, facial cleansers, body cleansers
Shampoos, conditioners, hair styling agents, hair coloring agents
Beverages
Sanitary products
Sanitary napkins, baby diapers
Personal health products
Bath additives, oral care products, men’s products, thermo products
Fabric care products
Laundry detergents, fabric treatments
Home care products
Oleo chemicals
Kitchen cleaning products, house cleaning products, paper cleaning
products, commercial-use products
Fatty alcohols, fatty amines, fatty acids, glycerin, commercial-use
edible fats and oils
Surfactants, plastics additives, superplasticizers for concrete
admixtures
Chemical Business
Performance chemicals
Specialty chemicals
Toner and toner binder for copiers and printers, ink and colorants for
inkjet printers, fragrances and aroma chemicals
(2) Sales and Results of Reportable Segments
Fiscal year ended December 31, 2017
(Millions of yen)
Reportable segments
Consumer Products Business
Beauty Care
Business
Human Health
Care Business
Fabric and Home
Care Business
Subtotal
Chemical
Business
Total
Reconciliation1 Consolidated
585,995
294,292
335,709
1,215,996
273,425
1,489,421
—
1,489,421
—
585,995
57,596
—
294,292
38,661
—
335,709
76,057
— 36,860
310,285
30,299
1,215,996
172,314
36,860
1,526,281
202,613
(36,860)
(36,860)
2,178
—
1,489,421
204,791
1,452
(3,960)
2,007
204,290
17,855
27,422
16,031
23,892
8,883
12,675
42,769
63,989
11,479
15,245
54,248
79,234
260
121
54,508
79,355
Net sales
Sales to customers ...............
Intersegment sales and
transfers2 .............................
Total net sales ...........................
Operating income .....................
Financial income ...................
Financial expenses ................
Share of profit in investments
accounted for using the
equity method ......................
Income before income taxes .....
Other items
Depreciation and
amortization3 .......................
Capital expenditures4 ............
Notes: 1. The operating income reconciliation of 2,178 million yen includes corporate expenses not allocated to reportable segments, as well as elimination of
intersegment inventory transactions.
2. Intersegment sales and transfers are mainly calculated based on market price and manufacturing cost.
3. Note 13 “Property, Plant and Equipment” and Note 14 “Goodwill and Intangible Assets” present the details of depreciation and amortization.
4. Capital expenditures include investments in property, plant and equipment and intangible assets.
29
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
Fiscal year ended December 31, 2016
(Millions of yen)
Reportable segments
Consumer Products Business
Beauty Care
Business
Human Health
Care Business
Fabric and Home
Care Business
Subtotal
Chemical
Business
Total
Reconciliation1 Consolidated
601,620
273,067
345,163
1,219,850
237,760
1,457,610
—
1,457,610
—
601,620
51,086
—
273,067
25,948
—
345,163
78,099
—
1,219,850
155,133
36,025
273,785
29,683
36,025
1,493,635
184,816
(36,025)
(36,025)
755
—
1,457,610
185,571
1,389
(5,424)
1,894
183,430
18,399
20,135
12,930
41,752
7,876
16,050
39,205
77,937
11,650
11,877
50,855
89,814
261
86
51,116
89,900
Net sales
Sales to customers ..............
Intersegment sales and
transfers2 ............................
Total net sales ..........................
Operating income ....................
Financial income ..................
Financial expenses ...............
Share of profit in investments
accounted for using the
equity method ...................
Income before income taxes .....
Other items
Depreciation and
amortization3 ......................
Capital expenditures4 ...........
Notes: 1. The operating income reconciliation of 755 million yen includes corporate expenses not allocated to reportable segments, as well as elimination of
intersegment inventory transactions.
2. Intersegment sales and transfers are mainly calculated based on market price and manufacturing cost.
3. Note 13 “Property, Plant and Equipment” and Note 14 “Goodwill and Intangible Assets” present the details of depreciation and amortization.
4. Capital expenditures include investments in property, plant and equipment, intangible assets and other non-current assets.
(3) Geographical Information
Sales to customers and non-current assets (excluding financial assets, deferred tax assets and retirement benefit assets) by region
consist of the following:
Sales to Customers
Japan .........................................................................................................................................................
Asia ...........................................................................................................................................................
China ......................................................................................................................................................
Americas ....................................................................................................................................................
United States .........................................................................................................................................
Europe .......................................................................................................................................................
Total ....................................................................................................................................................
Note: Sales are classified by country or region based on the location of customers.
2017
938,074
288,087
134,751
134,219
102,763
(Millions of yen)
2016
964,904
251,284
103,346
120,782
93,148
129,041
1,489,421
120,640
1,457,610
Non-current Assets (excluding Financial Assets, Deferred Tax Assets and Retirement Benefit Assets)
(Millions of yen)
Japan .........................................................................................................................................................
Asia ............................................................................................................................................................
Americas ....................................................................................................................................................
Europe .......................................................................................................................................................
Total ....................................................................................................................................................
2017
431,673
85,290
22,610
28,935
568,508
2016
415,993
81,927
22,854
24,731
545,505
Kao Corporation Financial Report 2017
30
7
Business Combinations
(1) Acquisition of Ink Business of Chimigraf Holding, S.L. in Europe
1) Outline of Business Combination
Name of the acquired business and
the acquiree:
Business outline:
Acquisition date:
Acquisition method:
Business-related assets of Chimigraf Ibérica, S.L.U., the subsidiary of Chimigraf Holding,
S.L.; and Chimigraf France, S.A.S. and Chimigraf Italy, S.R.L.,the subsidiaries of Chimigraf
Holding, S.L. (collectively, “Chimigraf”)
Development, manufacturing and sales of flexographic ink and inkjet ink
April 1, 2017
Cash consideration to acquire assets and equity interests
Percentage of voting rights acquired:
100%
2) Primary Reason for Business Combination
Chimigraf is engaged in development, manufacturing and
sales of flexographic ink and inkjet ink for package printing.
With a wide range of product lineups and diverse ink
designing technologies, Chimigraf has developed its
business centered in Europe, and is expanding its sales
network globally. In particular, Chimigraf is focusing on
developing inkjet ink effective for various types of printing.
By taking advantage of newly acquired technologies,
manufacturing facilities and sales networks from Chimigraf
in addition to the Group’s technologies, the Group aims to
provide global customers with innovative products and
services that can contribute to the mitigation of
environmental impact.
3) Acquisition Cost of Acquired Business and Acquiree and Its Components
Acquisition cost of acquired business
and acquiree:
2,979 million yen
Components of acquisition cost:
Cash
2,979 million yen
4) Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
Current assets ................................................................
1,182 million yen
Non-current assets .........................................................
1,692 million yen
Total assets .................................................................
2,874 million yen
Current liabilities .............................................................
387 million yen
Non-current liabilities ......................................................
3 million yen
Total liabilities ..............................................................
390 million yen
5) Goodwill
Goodwill recognized:
Components of goodwill:
495 million yen
Goodwill recognized for this business
combination reflects excess earning powers
in future from using newly acquired
technologies, manufacturing facilities and
sales networks from Chimigraf in addition
to the Group’s technologies. There is an
immaterial amount of goodwill that is
deductible for tax purposes.
6) Net Sales and Income of Acquired Business
Information on income associated with this business combination after the acquisition date and information on income assuming
that the business combination took place on the date of January 1, 2017 are not presented because the impacts on the
consolidated statement of income are immaterial.
31
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
(2) Acquisition of Oribe Hair Care, LLC in the U.S.
1) Outline of Business Combination
On January 17, 2018, the Company completed the acquisition of Oribe Hair Care, LLC (location: New York State, U.S.A.) pursuant
to an acquisition agreement concluded through the Company’s U.S. subsidiary on December 19, 2017. Because initial accounting
for this business combination is incomplete at this time, detailed information on accounting is not presented.
Name of the acquiree:
Oribe Hair Care, LLC
Business outline:
Acquisition date:
Acquisition method:
Development, manufacturing and sales of hair care products for hair salons
January 17, 2018
Cash consideration to acquire equity interests
Percentage of voting rights acquired: 100%
2) Primary Reason for Business Combination
3) Fair Value of Assets Acquired, Liabilities Assumed and
The “Oribe,” a super-premium price brand for hair salons,
which is owned by Oribe Hair Care, LLC, has a substantial
presence in the top-class hair salon industry and among
major specialty retailers in the United States. By utilizing the
brand and products obtained through this acquisition, the
Group aims to expand its brand portfolio for hair salons and
to expand its customer base.
Goodwill Recognized at the Acquisition Date
Because the fair value of the assets acquired and liabilities
assumed at the acquisition date is being determined, it has
not been finalized at this time.
8
Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
Cash and deposits .....................................................................................................................................
Short-term investments .............................................................................................................................
Total ....................................................................................................................................................
2017
260,176
82,900
343,076
(Millions of yen)
2016
186,226
116,800
303,026
The balance of cash and cash equivalents presented in the consolidated statement of financial position is equal to the balance of cash
and cash equivalents presented in the consolidated statement of cash flows.
9
Trade and Other Receivables
Trade and other receivables consist of the following:
Trade receivables .......................................................................................................................................
Other receivables ......................................................................................................................................
Allowance for doubtful receivables ............................................................................................................
Total ....................................................................................................................................................
2017
211,990
5,915
(1,398)
216,507
(Millions of yen)
2016
205,099
4,546
(1,186)
208,459
Trade receivables are recognized when the Group’s products are
delivered because the Group’s right to consideration is unconditional
except for the passage of time from that point. Moreover, the Group
receives payment within a short period of time after satisfying its
performance obligation under separately determined payment
terms. Because the period from satisfaction of the performance
obligation to receipt of consideration is usually within one year or
less, as a practical expedient, the Group does not adjust the
promised amount of consideration for the effects of a significant
financing component for such receivables.
Kao Corporation Financial Report 2017
32
10
Inventories
Inventories consist of the following:
Merchandise and finished goods ...............................................................................................................
Work in progress .......................................................................................................................................
Materials and supplies ...............................................................................................................................
Total ....................................................................................................................................................
2017
136,795
12,723
34,403
183,921
(Millions of yen)
2016
122,479
12,253
30,468
165,200
The amount of inventories recognized as expenses and included in cost of sales for the fiscal years ended December 31, 2017 and
2016 were 714,981 million yen and 636,969 million yen, respectively.
Write-downs of inventories recognized as expenses for the fiscal years ended December 31, 2017 and 2016 were 5,093 million yen
and 4,534 million yen, respectively.
11 Other Assets
Other assets consist of the following:
Other current assets
(Millions of yen)
2017
2016
Insurance receivable ..............................................................................................................................
Prepaid expenses ...................................................................................................................................
Other ......................................................................................................................................................
Total ....................................................................................................................................................
Other non-current assets
Insurance receivable ..............................................................................................................................
Long-term prepaid lease payments .......................................................................................................
Long-term prepaid expenses .................................................................................................................
Other ......................................................................................................................................................
Total ....................................................................................................................................................
8,120
9,566
10,476
28,162
2,654
4,508
1,624
1,900
10,686
6,330
9,410
8,072
23,812
11,095
5,337
881
1,235
18,548
12 Non-current Assets Held for Sale
Certain assets including the buildings and land for sales offices
were classified as non-current assets held for sale in the fiscal
year ended December 31, 2017 and 2016 pursuant to the decision
in the fiscal year ended December 31, 2016 to sell these assets.
These assets were partially sold in the fiscal year ended
December 31, 2017.
The fair value of these assets was based on third-party appraisal
values using sales comparison and other approaches and sales
prices determined with reference to sales contracts, and was
categorized within Level 3 of the fair value hierarchy.
33
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
13
Property, Plant and Equipment
(1) Changes in Property, Plant and Equipment
The following tables present changes in acquisition costs, accumulated depreciation and accumulated impairment losses, and carrying
amounts of property, plant and equipment.
Acquisition Cost
(Millions of yen)
Buildings
and
structures
393,994
Machinery
and
vehicles
715,613
Tools,
furniture and
fixtures
115,639
Land
72,980
January 1, 2016............................................................
Additions ..................................................................
Acquisitions through business combinations ..........
Sales and disposals ..................................................
Reclassification ........................................................
Reclassification to assets held for sale ....................
Exchange differences on translation of
foreign operations ..................................................
313
272
(5,355)
24,591
(585)
245
175
(29,108)
39,877
(22)
(4,410)
(10,069)
4,490
31
(7,642)
9,055
(7)
(1,860)
(94)
36
126
(97)
384
(216)
(194)
(1)
Other ........................................................................
79
86
December 31, 2016 .....................................................
408,899
716,797
119,612
73,018
Additions ..................................................................
Acquisitions through business combinations ..........
Sales and disposals ..................................................
Reclassification ........................................................
566
697
(5,468)
18,605
230
100
4,762
48
(27,952)
(13,424)
36,152
7,464
13
83
(443)
370
Exchange differences on translation of
foreign operations ..................................................
Other ........................................................................
December 31, 2017 .....................................................
2,766
60
426,125
4,327
281
729,935
1,197
(315)
119,344
274
(0)
73,315
Accumulated Depreciation and Accumulated Impairment Losses
Buildings
and
structures
281,243
January 1, 2016............................................................
Machinery
and
vehicles
596,281
Depreciation1 ............................................................
11,934
22,448
Impairment losses2 ..................................................
Impairment losses reversed2 ..................................
Sales and disposals ..................................................
Reclassification to assets held for sale ....................
13
(0)
(4,990)
(497)
Tools,
furniture and
fixtures
91,118
10,396
—
(1)
—
—
(28,415)
(7,264)
(22)
(7)
Exchange differences on translation of
foreign operations ..................................................
(2,220)
(7,024)
(1,392)
Other ........................................................................
(23)
(66)
December 31, 2016 .....................................................
285,460
Depreciation1 ............................................................
13,036
Impairment losses2 ..................................................
Impairment losses reversed2 ...................................
—
(0)
583,202
25,133
18
—
51
92,901
11,323
1
(1)
Sales and disposals ..................................................
(5,132)
(27,219)
(13,185)
Exchange differences on translation of
foreign operations ..................................................
1,888
4,091
929
Land
10,321
—
96
—
(1)
—
—
—
10,416
—
—
—
(96)
—
Other ........................................................................
December 31, 2017 .....................................................
69
295,321
272
585,497
(291)
91,677
—
10,320
Construction
in
progress
18,734
79,781
14
(13)
(73,907)
—
(64)
(57)
24,488
67,471
—
(3)
(62,591)
359
172
29,896
Construction
in
progress
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
1,316,960
84,865
618
(42,215)
—
(830)
(16,597)
13
1,342,814
73,042
928
(47,290)
—
8,923
198
1,378,615
(Millions of yen)
Total
978,963
44,778
109
(1)
(40,670)
(526)
(10,636)
(38)
971,979
49,492
19
(1)
(45,632)
6,908
50
982,815
Notes: 1. Depreciation of property, plant and equipment is included in cost of sales, selling, general and administrative expenses and other operating expenses in
the consolidated statement of income.
2. Impairment losses on property, plant and equipment are included in other operating expenses and impairment losses reversed are recognized in other
operating income in the consolidated statement of income.
Kao Corporation Financial Report 2017
34
Carrying Amount
January 1, 2016............................................................
Buildings
and
structures
112,751
December 31, 2016 .....................................................
123,439
December 31, 2017 .....................................................
130,804
(Millions of yen)
Machinery
and
vehicles
119,332
133,595
144,438
Tools,
furniture and
fixtures
24,521
26,711
27,667
Land
62,659
62,602
62,995
Construction
in
progress
18,734
24,488
29,896
Total
337,997
370,835
395,800
(2) Leased Assets
The carrying amount of leased assets from finance leases included in property, plant and equipment is as follows:
January 1, 2016............................................................
December 31, 2016 .....................................................
December 31, 2017 .....................................................
(Millions of yen)
Buildings
and
structures
5,441
4,060
3,195
Other
83
54
58
Total
5,524
4,114
3,253
(3) Impairment Losses
The Group allocates property, plant and equipment into cash-
generating units based on the smallest identifiable group of
assets that generates cash inflows that are largely independent.
For idle assets, the Group evaluates whether to recognize
impairment losses for individual properties based on impairment
tests performed.
Impairment losses recognized for the fiscal years ended
December 31, 2017 and 2016 were 19 million yen and 109 million
yen, respectively.
(4) Commitments
Note 38 “Commitments” presents information on commitments
to acquire property, plant and equipment.
14 Goodwill and Intangible Assets
(1) Changes in Goodwill and Intangible Assets
The following tables present changes in acquisition costs, accumulated amortization and accumulated impairment losses, and carrying
amounts of goodwill and intangible assets.
Acquisition Cost
Intangible assets
(Millions of yen)
Goodwill
138,251
Software
24,824
Trademarks
133,523
January 1, 2016..................................................................................
Additions ........................................................................................
Acquisitions through business combinations ................................
Sales and disposals ........................................................................
Reclassification ..............................................................................
—
1,915
—
—
Exchange differences on translation of foreign operations ............
(2,383)
Other ..............................................................................................
—
85
4
(2,629)
5,122
(246)
124
December 31, 2016 ...........................................................................
137,783
27,284
Additions ........................................................................................
Acquisitions through business combinations ................................
Sales and disposals ........................................................................
Reclassification ..............................................................................
Exchange differences on translation of foreign operations ............
—
495
—
—
457
Other ..............................................................................................
December 31, 2017 ...........................................................................
—
138,735
84
11
(5,502)
5,194
134
(9)
27,196
Note: 1. Software in progress is included in other in intangible assets.
35
Kao Corporation Financial Report 2017
Other1
5,561
4,948
316
(361)
(5,115)
(164)
(22)
5,163
6,229
780
(870)
(5,188)
17
(11)
6,120
Total
163,908
5,033
320
(136,513)
7
(410)
102
32,447
6,313
793
(6,374)
6
151
(20)
33,316
—
—
(133,523)
—
—
—
—
—
2
(2)
—
—
—
—
Notes to Consolidated Financial Statements
Accumulated Amortization and Accumulated Impairment Losses
January 1, 2016..................................................................................
Amortization1 ..................................................................................
Sales and disposals ........................................................................
Exchange differences on translation of foreign operations ............
Other ..............................................................................................
December 31, 2016 ...........................................................................
Amortization1 ..................................................................................
Sales and disposals ........................................................................
Exchange differences on translation of foreign operations ............
Other ..............................................................................................
December 31, 2017 ...........................................................................
Intangible assets
(Millions of yen)
Goodwill
—
Software
13,045
Trademarks
132,196
—
—
—
—
—
—
—
—
—
—
4,650
(2,626)
(225)
71
14,915
4,839
(5,486)
117
(10)
14,375
1,327
(133,523)
—
—
—
—
—
—
—
—
Other
2,962
361
(346)
(135)
1
2,843
177
(857)
(51)
—
2,112
Total
148,203
6,338
(136,495)
(360)
72
17,758
5,016
(6,343)
66
(10)
16,487
Note: 1. Amortization of intangible assets is included in cost of sales, selling, general and administrative expenses and other operating expenses in the
consolidated statement of income.
Carrying Amount
January 1, 2016.................................................................................
December 31, 2016 ..........................................................................
December 31, 2017 ..........................................................................
Intangible assets
(Millions of yen)
Goodwill
138,251
137,783
138,735
Software
11,779
12,369
12,821
Trademarks
1,327
—
—
Other
2,599
2,320
4,008
Total
15,705
14,689
16,829
(2) Goodwill
The following table presents the carrying amount of goodwill
recognized in the Group’s consolidated statement of financial
position. Goodwill arising from business combinations is allocated
at the acquisition date to cash-generating units benefiting from
the business combination, and the goodwill belongs to the Beauty
Care Business and the Chemical Business. The goodwill primarily
relates to the acquisition of the Kanebo Cosmetics Group.
Beauty Care Business ...............................................................................................................................
Kanebo Cosmetics Group ......................................................................................................................
Molton Brown Group .............................................................................................................................
Other ......................................................................................................................................................
Chemical Business ....................................................................................................................................
Total ....................................................................................................................................................
2017
136,075
119,400
11,883
4,792
2,660
138,735
(Millions of yen)
2016
135,618
119,400
11,327
4,891
2,165
137,783
(3) Impairment Test for Goodwill
The Group tests goodwill for impairment at least once a year by
each fiscal year end or if there are indications of impairment.
The recoverable amount on the impairment test is measured
based on value in use. The majority of goodwill recognized at the
Group relates to the Kanebo Cosmetics Group.
For the goodwill associated with the Kanebo Cosmetics Group,
cash flow projections that are the basis for the value in use are
estimated using three-year medium-term plans that reflect past
year’s performance. The key assumptions used in formulating
these estimates include sales growth rates and discount rates and
the sales growth rates are consistent with the growth rate
projections of the markets in which the cash-generating units
operate. Estimated cash flows in years beyond the three-year
forecasts approved by management were calculated using an
annual growth rate of 0% and were discounted to present value
using a weighted average cost of capital (WACC) of 7.1% for the
fiscal year ended December 31, 2017 and 7.4% for the fiscal year
ended December 31, 2016. While the value in use exceeded
carrying amount at December 31, 2017, increasing the discount
rate by 2.9% would result in impairment. For the fiscal year ended
December 31, 2016, management assumed the probability that
material impairment would occur in this cash-generating unit was
low even in cases where the key assumptions used for the
impairment test changed within the reasonably possible ranges.
(4) Intangible Assets with Indefinite Useful Lives
The intangible assets above include no intangible assets with
indefinite useful lives.
(5) Commitments
Note 38 “Commitments” presents information on commitments
associated with the acquisition of intangible assets.
Kao Corporation Financial Report 2017
36
15
Investments Accounted for Using the Equity Method
Investments in associates are accounted for using the equity method in the Group’s consolidated financial statements. The carrying
amount of investments in associates that are not individually material is as follows:
Investments accounted for using the equity method ................................................................................
2017
7,682
(Millions of yen)
2016
4,701
Changes in the Group’s share of net income and other comprehensive income of associates that are not individually material are
as follows:
The Group’s share of net income ..............................................................................................................
The Group’s share of other comprehensive income ..................................................................................
The Group’s share of comprehensive income ...........................................................................................
2017
2,007
316
2,323
(Millions of yen)
2016
1,894
(82)
1,812
16
Income Taxes
(1) Deferred Tax Assets and Liabilities
Details of major causes of occurrence and changes in deferred tax assets and liabilities consist of the following:
Fiscal year ended December 31, 2017
(Millions of yen)
January 1,
2017
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Other
December 31,
2017
Deferred tax assets
Property, plant and equipment and
intangible assets ................................................
Retirement benefit liabilities ................................
Accrued expenses ...............................................
Unused tax losses ...............................................
Other ....................................................................
Total deferred tax assets .........................................
Deferred tax liabilities
Property, plant and equipment and
intangible assets ................................................
Financial assets ....................................................
Undistributed foreign earnings ............................
Other ....................................................................
Total deferred tax liabilities ......................................
Deferred tax assets, net ..........................................
18,316
27,847
11,927
1,240
15,841
75,171
7,945
2,764
12,730
1,321
24,760
50,411
384
(1,536)
(561)
866
(2,439)
(3,286)
(766)
—
(1,995)
(611)
(3,372)
86
—
(9,624)
—
—
—
(9,624)
—
509
—
—
509
(10,133)
35
50
65
(7)
(84)
59
(76)
(3)
—
19
(60)
119
18,735
16,737
11,431
2,099
13,318
62,320
7,103
3,270
10,735
729
21,837
40,483
37
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
Fiscal year ended December 31, 2016
(Millions of yen)
January 1,
2016
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Other
December 31,
2016
Deferred tax assets
Property, plant and equipment and
intangible assets ................................................
Retirement benefi t liabilities ................................
Accrued expenses ...............................................
Unused tax losses ...............................................
Other ....................................................................
Total deferred tax assets .........................................
Deferred tax liabilities
Property, plant and equipment and
intangible assets ................................................
Retirement benefi t assets ...................................
Financial assets ....................................................
Undistributed foreign earnings ............................
Other ....................................................................
Total deferred tax liabilities ......................................
Deferred tax assets, net ..........................................
19,570
22,708
13,040
1,385
17,739
74,442
7,959
(1)
3,649
12,390
1,309
25,306
49,136
(1,292)
(1,024)
(889)
(135)
(1,696)
(5,036)
92
1
—
340
45
478
(5,514)
—
6,298
—
—
—
6,298
—
—
(663)
—
—
(663)
6,961
38
(135)
(224)
(10)
(202)
(533)
(106)
—
(222)
—
(33)
(361)
(172)
Deferred tax assets and liabilities recognized in the consolidated statement of financial position are as follows:
Deferred tax assets .....................................................................................................................................
Deferred tax liabilities ..................................................................................................................................
Deferred tax assets, net ..............................................................................................................................
2017
40,918
435
40,483
Deductible temporary differences and unused tax losses for which no deferred tax asset is recognized are as follows:
Unused tax losses .......................................................................................................................................
Deductible temporary differences ...............................................................................................................
Total .........................................................................................................................................................
Unused tax losses for which no deferred tax asset is recognized will expire as follows:
Not later than 1 year ....................................................................................................................................
Later than 1 year and not later than 2 years ................................................................................................
Later than 2 years and not later than 3 years ..............................................................................................
Later than 3 years and not later than 4 years ..............................................................................................
Later than 4 years ........................................................................................................................................
Total .........................................................................................................................................................
2017
17,656
27,748
45,404
2017
507
3,426
7,007
5,336
1,380
17,656
18,316
27,847
11,927
1,240
15,841
75,171
7,945
—
2,764
12,730
1,321
24,760
50,411
(Millions of yen)
2016
50,939
528
50,411
(Millions of yen)
2016
35,274
21,091
56,365
(Millions of yen)
2016
10,974
4,132
5,551
7,320
7,297
35,274
The aggregate amounts of taxable temporary differences
associated with investments in subsidiaries and associates for
which deferred tax liabilities were not recognized at December 31,
2017 and 2016 were 15,835 million yen and 12,385 million yen,
respectively. The Group did not recognize deferred tax liabilities for
these temporary differences because it was able to control the
timing of the reversal of these temporary differences, and it was
probable that the temporary difference will not reverse in the
foreseeable future.
Kao Corporation Financial Report 2017
38
(2) Income Taxes
Income taxes consist of the following:
Current taxes .............................................................................................................................................
Deferred taxes1 ..........................................................................................................................................
Total .......................................................................................................................................................
2017
55,769
(86)
55,683
(Millions of yen)
2016
50,027
5,514
55,541
Note: 1. Deferred taxes include 160 million yen and 2,698 million yen for the fiscal years ended December 31, 2017 and 2016, respectively, due to tax rate changes.
(3) Reconciliation of Effective Tax Rate
The details of difference between the effective statutory tax rate and the Group’s average actual tax rate consist of the following:
Effective statutory tax rate ........................................................................................................................
Tax credit for experimental research costs and other ............................................................................
Different tax rates applied to subsidiaries ..............................................................................................
Reassessment of recoverability of unused tax losses and deferred tax assets ....................................
Change in tax rates ................................................................................................................................
Other ......................................................................................................................................................
Average actual tax rate ..............................................................................................................................
2017
30.86
(2.68)
(0.92)
0.48
0.08
(0.56)
27.26
(%)
2016
33.06
(3.00)
(2.06)
0.32
1.47
0.49
30.28
Note: The “Act for Partial Revision of the Income Tax Act, etc.” (Act No. 15 of 2016) and the “Act for Partial Revision of the Local Tax Act, etc.” (Act No. 13 of 2016)
enacted in Japan in the fiscal year ended December 31, 2016 reduced the income tax rate for fiscal years beginning on or after April 1, 2016. Accordingly,
the effective statutory tax rate has changed from 33.06% to 30.86%.
17
Bonds and Borrowings
Bonds and borrowings consist of the following:
Short-term borrowings .......................................................................
Current portion of long-term borrowings ............................................
Long-term borrowings ........................................................................
Current portion of bonds2 ..................................................................
Bonds2 ................................................................................................
Total .............................................................................................
2017
201
67
70,347
24,994
24,975
120,584
2016
220
30,069
40,410
—
49,947
120,646
Current liabilities
Bonds and borrowings ....................................................................
25,262
30,289
Non-current liabilities
Bonds and borrowings ....................................................................
Total .............................................................................................
95,322
120,584
90,357
120,646
Average interest
rate1 (%)
0.95
1.02
0.12
—
—
(Millions of yen)
Maturity
—
—
2019-2023
—
—
Notes: 1. The average interest rate is the weighted average interest rate on the balance of borrowings as of December 31, 2017.
2. Details of bonds issued are as follows:
Issuer
Bond name
Issue date
2017
2016
Interest rate (%)
Collateral Maturity date
The Company
3rd unsecured bonds
June 14, 2013
24,994
24,982
The Company
4th unsecured bonds
June 14, 2013
24,975
24,965
Total .....................................................................
49,969
49,947
0.39
0.62
None
June 20, 2018
None
June 19, 2020
(Millions of yen)
39
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
18
Leases
(1) Finance Lease Payables
As a lessee, the Group leases assets including buildings. Some lease contracts include renewal options. The Group has no lease
contracts with covenants such as restrictions on additional borrowings or additional leases.
The total of future minimum lease payments and the present value under finance lease contracts consist of the following:
Not later than 1 year ........................................................................
Later than 1 year and not later than 5 years ....................................
Later than 5 years ............................................................................
Total .............................................................................................
Financial charges .............................................................................
Present value of minimum lease payments .................................
(2) Non-cancellable Operating Leases
As a lessee, the Group leases assets including land.
Minimum lease payments
2016
2017
884
789
2,337
149
3,275
(97)
3,178
2,622
634
4,140
(140)
4,000
(Millions of yen)
Present value of minimum
lease payments
2017
755
2,276
147
3,178
—
3,178
2016
842
2,532
626
4,000
—
4,000
The total of future minimum lease payments under non-cancellable operating lease contracts consists of the following:
Not later than 1 year .................................................................................................................................
Later than 1 year and not later than 5 years ..............................................................................................
Later than 5 years .....................................................................................................................................
Total ......................................................................................................................................................
2017
8,414
16,347
6,917
31,678
(Millions of yen)
2016
8,808
16,660
7,627
33,095
The total of minimum lease payments under operating lease contracts recognized as expenses is as follows:
Total of minimum lease payments .............................................................................................................
(Millions of yen)
2017
10,080
2016
9,858
19
Trade and Other Payables
Trade and other payables consist of the following:
Trade payables ..........................................................................................................................................
Non-trade payables ...................................................................................................................................
Total ......................................................................................................................................................
2017
143,944
80,949
224,893
(Millions of yen)
2016
130,348
86,545
216,893
Kao Corporation Financial Report 2017
40
20
Employee Benefits
(1) Post-employment Benefits
The Company and most of its domestic subsidiaries have a cash
balance plan as a defined benefit plan and a defined contribution
plan as post-employment benefits (The cash balance plan is linked
to market interest rates). The defined benefit obligations held in
Japan account for a large proportion of the Group’s defined
benefit obligations.
Cash balance plan benefits are determined using points acquired
during the enrollment period and a multiplier based on the
enrollment period. The Group may also pay an early retirement bonus
allowance to employees who retire earlier than the retirement age.
In accordance with laws and regulations, the defined benefit
plan is operated as a pension fund that is legally separated from the
Group. The pension fund is managed by a Board of Representatives
composed of representatives elected by the participating companies
and the representatives of participating employees. Pension fund
management institutions manage the pension fund’s assets in
accordance with management policies specified by the Board
of Representatives. The Board of Representatives and the
pension fund management institutions are legally required to act
in the best interests of plan participants in executing their
responsibilities for managing the plan assets.
Certain foreign subsidiaries have defined benefit plans and/or
defined contribution plans as post-employment benefits.
The defined benefit plan is exposed to actuarial risk and to the
risk of fluctuation in the fair value of plan assets. Actuarial risk
primarily involves interest rate risk. Interest rate risk involves the
potential for an increase in defined benefit plan obligations if the
discount rate used to determine their present value decreases,
because this discount rate is based on market yields on
instruments including high-quality corporate bonds. The risk of
fluctuation in the fair value of plan assets involves underfunding if
actual interest rates are lower than the interest rate criteria for
managing the plan assets.
1) Defined benefit liabilities recognized in the consolidated statement of financial position
Net defined benefit liabilities and assets recognized in the consolidated statement of financial position, defined benefit obligations
and plan assets are as follows:
Present value of defined benefit obligations .............................................................................................
Fair value of plan assets ............................................................................................................................
Net defi ned benefi t liabilities ..............................................................................................................
Amounts recognized in consolidated statement of fi nancial position
Retirement benefi t liabilities ..................................................................................................................
Retirement benefi t assets1 ....................................................................................................................
Net defi ned benefi t liabilities ..............................................................................................................
Note: 1. Retirement benefit assets are included in other non-current assets in the consolidated statement of financial position.
2) Defined benefit obligations
Changes in the present value of defined benefit obligations are as follows:
The present value of the defined benefit obligations at beginning of year ................................................
Current service cost1..............................................................................................................................
Interest expense2 ...................................................................................................................................
Remeasurements
Actuarial (gains) losses arising from changes in demographic assumptions .....................................
Actuarial (gains) losses arising from changes in financial assumptions .............................................
Actuarial (gains) losses arising from experience adjustments ...........................................................
Past service cost and (gains) losses arising from settlements3 .............................................................
Benefits paid4 .........................................................................................................................................
Changes due to termination (curtailment and settlement) of defined benefit plans ........................
Exchange differences on translation of foreign operations and other ....................................................
The present value of the defined benefit obligations at end of year .........................................................
2017
333,614
(270,144)
63,470
64,694
(1,224)
63,470
2017
355,579
9,839
2,672
(31)
(20,245)
2,242
(407)
(12,015)
(4,738)
718
333,614
(Millions of yen)
2016
355,579
(261,857)
93,722
94,773
(1,051)
93,722
(Millions of yen)
2016
331,494
8,784
3,619
(2,374)
28,545
(1,245)
(33)
(10,964)
—
(2,247)
355,579
Notes: 1. Current service cost is recognized in profit or loss and included in
cost of sales, selling, general and administrative expenses and other
operating expenses in the consolidated statement of income.
2. Interest expense or interest income associated with the net of the
present value of the defined benefit obligations and the fair value of
plan assets is recognized in profit or loss and included in financial
expenses or financial income in the consolidated statement of income.
3. Past service cost and (gains) losses arising from settlements are
recognized in profit or loss and included in general and administrative
expenses in the consolidated statement of income.
4. The weighted average duration of the defined benefit obligations in
Japan was mainly 16.6 years at December 31, 2017 and 17.3 years at
December 31, 2016.
41
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
3) Plan assets
Changes in the fair value of plan assets are as follows:
The fair value of plan assets at beginning of year ......................................................................................
Interest income ......................................................................................................................................
Remeasurements
Return on plan assets (excluding amounts included in interest income) ...........................................
Contributions to the plan by the employer1 ............................................................................................
Payments from the plan .........................................................................................................................
Changes due to termination (curtailment and settlement) of defined benefit plans ........................
Exchange differences on translation of foreign operations and other ....................................................
The fair value of plan assets at end of year ...............................................................................................
2017
261,857
1,882
12,850
8,941
(10,624)
(4,738)
(24)
270,144
(Millions of yen)
2016
256,828
2,692
2,517
10,768
(9,752)
—
(1,196)
261,857
Note: 1. Pursuant to laws and regulations, the Group and the pension fund review the financial condition of the pension plan regularly and recalculate contributions
for allocating future benefits and maintaining the balance of pension financing when the plan is underfunded. The Group plans to contribute 8,808 million
yen to the defined benefit plan for the fiscal year ending December 31, 2018.
Plan assets consist of the following:
Equity securities ..........................
Japan .......................................
Overseas ..................................
Debt securities ............................
Japan .......................................
Overseas ..................................
Other ...........................................
Total ......................................
2017
Market price in an active market
Quoted
9,207
—
9,207
7,518
—
7,518
257
16,982
Unquoted
50,055
25,010
25,045
192,628
128,279
64,349
10,479
253,162
Total
59,262
25,010
34,252
200,146
128,279
71,867
10,736
270,144
(Millions of yen)
2016
Market price in an active market
Unquoted
51,195
24,704
26,491
180,216
116,734
63,482
14,997
246,408
Total
58,918
24,704
34,214
187,705
116,734
70,971
15,234
261,857
Quoted
7,723
—
7,723
7,489
—
7,489
237
15,449
Note: Plan assets invested in pooled funds of trust banks are classified without quoted market prices in active markets.
Pension assets in Japan account for a large proportion of
the Group’s plan assets. The objective in managing the
plan assets is to raise total returns to the greatest extent
possible in order to ensure stable benefits and lump-sum
payments for plan participants in the future and beneficiaries
with a long-term view under acceptable risks. Specifically,
the Group considers factors including expected rate of return
on investments in appropriate assets, risks of each asset,
and asset combinations to set an asset mix policy for an
appropriate basic portfolio in future years as the basis for
maintaining asset allocation. The Group reviews the basic
portfolio annually and realigns it as necessary if the asset
allocation conditions have changed since the asset mix
was set.
4) Significant actuarial assumptions and related sensitivity analysis
Significant actuarial assumptions are as follows:
Discount rate ............................................................................................................................................
Mainly 0.8%
Mainly 0.8%
2017
2016
Note: The above table presents the discount rate used by the Company and major domestic subsidiaries.
Sensitivity analysis of the effect of changes in the present value of the defined benefit obligations of the Company and major
domestic subsidiaries given changes in the discount rate used as a significant actuarial assumption is as follows:
The impact on defined benefit obligations
0.5% increase in discount rate ...........................................................................................................
0.5% decrease in discount rate ..........................................................................................................
(Millions of yen)
2017
2016
(23,414)
24,311
(25,807)
26,774
Note: This sensitivity analysis estimates the effect on the defined benefit obligations at the end of each reporting period from changes in the discount rate while all
of the other assumptions remain constant.
Kao Corporation Financial Report 2017
42
5) Defined contribution plans
Expenses related to the defined contribution plan recognized
in profit or loss were 3,873 million yen and 3,551 million yen
for the fiscal years ended December 31, 2017 and 2016,
respectively and included in cost of sales, selling, general
and administrative expenses and other operating expenses
in the consolidated statement of income.
(2) Other Employee Benefit Expenses
Other employee benefit expenses recognized in cost of sales,
selling, general and administrative expenses, and other operating
expenses in the consolidated statement of income for the fiscal
years ended December 31, 2017 and 2016 were 268,034 million
yen and 258,225 million yen, respectively.
21
Provisions
Components of and changes in provisions consist of the following:
January 1, 2017 .....................................................................................
Provision for
loss related
to cosmetics
13,710
Provision for
asset retirement
obligations
4,242
Other
provisions
3,262
Increase ............................................................................................
Interest expense on discounted provision .........................................
—
21
Decrease (provision used) ................................................................
(4,968)
Decrease (provision reversed) ..........................................................
Exchange differences on translation of
foreign operations .........................................................................
—
—
December 31, 2017 ..............................................................................
8,763
89
67
(89)
—
30
4,339
108
—
(415)
(668)
50
2,337
(Millions of yen)
Total
21,214
197
88
(5,472)
(668)
80
15,439
The effect of the adoption of IFRS 15 on provisions is presented in
Note 3 “Significant Accounting Policies (20) Changes in Significant
Accounting Policies.” As a result of this adoption, liabilities for
returned products, which had previously been presented as
provision for sales returns, are presented as contract liabilities.
(1) Provision for Loss Related to Cosmetics
The Group has recognized estimated compensation and other
expenses related to cosmetics for brightening products of Kanebo
Cosmetics containing the ingredient Rhododenol, for which a
voluntary recall was announced on July 4, 2013. The Group
expects its insurance policy to cover 4,663 million yen of the
estimated expenses.
(2) Provision for Asset Retirement Obligations
The Group recognizes asset retirement obligations principally
based on or pursuant to reasonably estimated future expenditures
using historical experience and other factors when the Group has
a legal or contractual obligation associated with the retirement of
property, plant and equipment and leased assets held for use.
These expenditures are generally expected to take place after a
year or more, but are affected by factors including future business
plans.
(3) Other Provisions
Other provisions consist of estimated expenses for business
transformation at European subsidiaries and other expenses.
22 Other Current Liabilities
Other current liabilities consist of the following:
Accrued expenses .....................................................................................................................................
Consumption tax payables ........................................................................................................................
Obligation for unused paid absences ........................................................................................................
Other .......................................................................................................................................................
2017
81,515
9,741
7,558
8,590
Total .......................................................................................................................................................
107,404
(Millions of yen)
2016
104,425
8,655
6,199
11,833
131,112
43
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
23
Equity and Other Equity Items
(1) Share Capital
The numbers of shares authorized and issued are as follows:
Authorized..................................................................................................................................................
Issued¹ .......................................................................................................................................................
(Shares)
2017
1,000,000,000
2016
1,000,000,000
Beginning balance ..................................................................................................................................
504,000,000
504,000,000
Change during the year2 .........................................................................................................................
(9,000,000)
—
Ending balance .......................................................................................................................................
495,000,000
504,000,000
Notes: 1. All of the issued shares of the Company are ordinary shares that have no par value and no limitations on rights. Issued shares are fully paid.
2. The number of issued shares during the fiscal year ended December 31, 2017 decreased by 9,000,000 shares due to the retirement of treasury shares
pursuant to the resolution of the Board of Directors.
(2) Capital Surplus
Capital surplus consists of capital reserve and other capital surplus.
The Companies Act stipulates that over half of the capital contributed from the issue of shares must be included in share capital and
that the remainder must be included in capital reserve. Moreover, capital reserve may be included in share capital by resolution of the
General Meeting of Shareholders.
(3) Treasury Shares
The changes in treasury shares are as follows:
Beginning balance¹ ....................................................................................................................................
2017
11,137,654
Increase² ................................................................................................................................................
263,176
(Shares)
2016
2,541,816
8,862,432
Decrease³ ..............................................................................................................................................
(9,175,269)
(266,594)
Ending balance4 .........................................................................................................................................
2,225,561
11,137,654
Notes: 1. 556,492 shares of treasury shares held by associates were included at December 31, 2017 and 2016.
2. The increase of 263,176 shares of treasury shares during the fiscal year ended December 31, 2017 resulted from the acquisition of 257,300 shares by
the Board Incentive Plan Trust (hereinafter “BIP Trust”) and the purchase of 5,876 fractional shares.
The increase of 8,862,432 shares of treasury shares during the fiscal year ended December 31, 2016 resulted from the acquisition of 8,858,700
shares by resolution of the Board of Directors and the purchase of 3,732 fractional shares.
3. The decrease of 9,175,269 shares of treasury shares during the fiscal year ended December 31, 2017 resulted from the retirement of 9,000,000 shares
by resolution of the Board of Directors, a decrease of 175,000 shares due to the exercise of stock options and the sale of 269 fractional shares.
The decrease of 266,594 shares of treasury shares during the fiscal year ended December 31, 2016 resulted from a decrease of 266,000 shares due
to the exercise of stock options, and the sale of 594 fractional shares.
4. 556,492 shares of treasury shares held by associates were included at December 31, 2017 and 2016. In addition, 257,300 shares held by the BIP Trust
were included at December 31, 2017.
(4) Other Components of Equity
1) Subscription rights to shares
The Company employs a stock option system and issues
subscription rights to shares in accordance with the
Companies Act; however, due to the introduction of a
performance share plan from the fiscal year ended
December 31, 2017, the stock option plan has been
abolished except for the options already granted.
Note 34 “Share-based Payments” presents information
including terms and conditions and amounts.
2) Exchange differences on translation of foreign
operations
Foreign currency translation differences arise from the
translation of financial statements of foreign operations
prepared in foreign currencies.
3) Net gain (loss) on derivatives designated as cash flow
hedges
The Group hedges its exposure to the risk of variability in
future cash flows. Net gain (loss) on derivatives designated
as cash flow hedges is the portion of the change in the fair
value of the hedging instrument that meets the hedge
effectiveness requirements under hedge accounting.
4) Net gain (loss) on revaluation of financial assets
measured at fair value through other comprehensive
income
This is the accumulated amount of changes in the fair value
of financial assets measured at fair value through other
comprehensive income. The Group reclassifies net gain
(loss) on revaluation of financial assets from other
components of equity to retained earnings when it disposes
of an investment or when fair value declines significantly.
Kao Corporation Financial Report 2017
44
5) Remeasurements of defined benefit plans
Remeasurements of defined benefit plans includes the
effect of any variances between actuarial assumptions at
the beginning of the year and actual results, the effects of
changes in actuarial assumptions, actual return on plan assets
and interest income on plan assets (excluding amounts
included in net interest on the net defined benefit liability
(asset)), and any change in the effect of the asset ceiling
(excluding amounts included in net interest on the net
defined benefit liability (asset)). Remeasurements of defined
benefit plans are recognized in other comprehensive income
and immediately reclassified from other components of
equity to retained earnings in the period when they occur.
(5) Retained Earnings
Retained earnings consist of legal reserve and other retained
earnings.
The Companies Act requires that an amount equal to one-tenth
of dividends must be appropriated as capital reserve or as legal
reserve until the total of the aggregate amount of capital reserve
and legal reserve equals a quarter of share capital. Legal reserve
may be appropriated to reduce a deficit, and also may be reversed
by resolution of the General Meeting of Shareholders.
24
Basic Strategy for Capital Policy
The Group’s capital policy follows a basic strategy of securing a
sound financial structure to make investments for sustainable
growth and tolerate the related risks, and to make stable,
continuous returns to shareholders. To realize this policy, the Group
uses Economic Value Added (hereinafter “EVA®¹”), a management
indicator that takes capital cost into account, as its main indicator
and works to enhance its corporate value by improving EVA.
The Group manages all equity and interest-bearing liabilities as
capital cost and intends to optimize capital cost from the
viewpoint of safety and capital efficiency. For equity, the Group
aims for a streamlined and sound structure from a medium- to
long-term perspective with efficiency in mind and, while
maintaining interest-bearing liabilities at a moderate level, aims to
obtain high credit ratings which will allow it to procure capital for
large-scale investments. The Group is not subject to significant
capital regulations except for general requirements under the
Companies Act and others.
Although the Group emphasizes shareholder returns, it realizes
that investments for growth will meet the expectations of its
stakeholders, and therefore prioritizes such investments. In
addition to providing stable dividends, the Group aims to
continuously increase dividends to reflect improvements in
business results. The Group also uses surplus funds to flexibly
conduct share repurchases.
In addition to making returns to shareholders, the Group retains
the capital necessary to conduct investments for growth in a
timely fashion and to ensure the appropriate resources to deal
with situations that exceed assumptions while improving EVA.
For the fiscal year ended December 31, 2017, EVA increased
17.0 billion yen compared with the previous fiscal year to 90.4
billion yen due to a substantial increase in net operating profit
after tax (hereinafter “NOPAT”).
Note: 1. EVA is a monetary metric defined as NOPAT less capital cost. EVA is a registered trademark of Stern Stewart & Co.
25 Dividends
Dividends paid are as follows:
Fiscal year ended December 31, 2017
Date of resolution
111th Annual General Meeting
of Shareholders held on
March 21, 2017
Board of Directors meeting held on
July 27, 2017
Total dividends¹
(Millions of yen)
Dividends per share
(Yen)
Record date
Effective date
23,657
26,608
48
54
December 31, 2016
March 22, 2017
June 30, 2017
September 1, 2017
Note: 1. Dividends on treasury shares held by associates accounted for using the equity method are deducted by an amount corresponding to the Group’s equity
in these associates. In addition, total dividends pursuant to the resolution of the Board of Directors held on July 27, 2017 are deducted by the amount of
dividends held by the BIP Trust.
The dividend resolved at the 111th Annual General Meeting of Shareholders held on March 21, 2017 was 23,684 million yen before the deduction. The
dividend resolved at the meeting of the Board of Directors held on July 27, 2017 was 26,652 million yen before the deduction.
45
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
Fiscal year ended December 31, 2016
Date of resolution
110th Annual General Meeting
of Shareholders held on
March 25, 2016
Board of Directors meeting held on
July 28, 2016
Total dividends¹
(Millions of yen)
Dividends per share
(Yen)
Record date
Effective date
21,061
23,077
42
46
December 31, 2015
March 28, 2016
June 30, 2016
September 1, 2016
Note: 1. Dividends on treasury shares held by associates accounted for using the equity method are deducted by an amount corresponding to the Group’s equity
in these associates.
The dividend resolved at the 110th Annual General Meeting of Shareholders held on March 25, 2016 was 21,085 million yen before the deduction. The
dividend resolved at the meeting of the Board of Directors held on July 28, 2016 was 23,103 million yen before the deduction.
Dividends with an effective date after the fiscal year end are as follows:
Fiscal year ended December 31, 2017
Date of Resolution
112th Annual General Meeting
of Shareholders held on
March 23, 2018
Fiscal year ended December 31, 2016
Date of Resolution
111th Annual General Meeting
of Shareholders held on
March 21, 2017
Total dividends
(Millions of yen)
Dividends per share
(Yen)
Record date
Effective date
27,641
56
December 31, 2017
March 26, 2018
Total dividends
(Millions of yen)
Dividends per share
(Yen)
Record date
Effective date
23,684
48
December 31, 2016
March 22, 2017
26
Revenue
(1) Disaggregation of Revenue
The Group is an organization comprising four main business units
– the Beauty Care Business, the Human Health Care Business,
the Fabric and Home Care Business and the Chemical Business.
Revenues of these four businesses are presented as net sales.
The Board of Directors of the Company reviews them regularly to
determine allocation of resources and to assess their performance.
Revenue of logistics services to third parties is included in other
operating income because it is not a part of the abovementioned
four main businesses.
The Group disaggregates revenue from contracts with
customers by separating the Consumer Products Business into
cosmetics and non-cosmetics based on contracts with customers,
with the Chemical Business as a separate division. Revenue by
geographic region is disaggregated based on the location of
revenue recognized. The relationship between disaggregated
revenue and net sales by segment is as follows:
Fiscal year ended December 31, 2017
Cosmetics
Skin care/hair care products
Beauty Care Business
Human Health Care Business
Fabric and Home Care Business
Consumer Products Business
Chemical Business
Elimination of intersegment
Consolidated
Japan
197,905
195,929
393,834
197,507
294,838
886,179
123,886
(31,833)
978,232
Asia
22,416
30,845
53,261
96,738
38,786
188,785
69,572
(3,352)
255,005
Americas
Europe
2,825
72,317
75,142
47
2,085
77,274
52,625
(99)
19,547
44,211
63,758
—
—
63,758
64,202
(1,576)
(Millions of yen)
Total
242,693
343,302
585,995
294,292
335,709
1,215,996
310,285
(36,860)
129,800
126,384
1,489,421
Revenue of logistics services to third parties
included in other operating income
8,619
—
—
—
8,619
Total revenue from contracts with customers
986,851
255,005
129,800
126,384
1,498,040
Note: Figures for the Consumer Products Business present sales to external customers and figures for the Chemical Business include sales to the Consumer
Products Business in addition to external customers.
Kao Corporation Financial Report 2017
46
1) Consumer Products Business
The Consumer Products Business sells consumer products
including cosmetics, skin care products, hair care products,
sanitary products and fabric care products. Its customers are
mainly retailers in Japan and retailers and wholesalers outside
Japan. Revenue from such sales is recognized when control
of a product is transferred to a customer, i.e., at the point in
time a product is delivered and handed over at the place
designated by a customer because legal title to the product,
physical possession and the significant risks and rewards of
ownership of the product are transferred to the customer and
the customer has the right to decide the method of sale and
selling price of the product.
In the Consumer Products Business, products may be
sold with a rebate conditional upon achievement of certain
targets such as the quantity or amount of sales (hereinafter
“Achievement Rebate”) or other payments. In such cases,
the transaction price is determined in an amount deducting
the estimated amount of the Achievement Rebate or other
payments from the consideration promised in the contract
with the customer. Estimates of Achievement Rebate or
other payment amounts use the most likely outcome method
based on historical experience and other factors, and revenue
is recognized only to the extent that it is highly probable that
a significant reversal will not occur.
In addition, in the event that the Group makes payments to
customers such as funding for sales promotions, if the
consideration paid to customers is payment for separate
goods or services from the customer and fair value cannot be
reasonably estimated, revenue is measured by deducting the
consideration from the transaction price.
Among the products in the Consumer Products Business,
cosmetics are composed of counseling cosmetics and self-
(2) Liabilities from Contracts with Customers
Liabilities from contracts with customers are as follows:
selection cosmetics. The Group may provide support to
customers when they sell counseling cosmetics through
counseling to final consumers.
In addition, when selling cosmetics, a certain level of
product returns from customers associated with the
termination of products is expected to occur. Because the
Group has an obligation to refund the consideration for a
product if a customer returns it, the Group recognizes a
liability for sales returns as a deduction from revenue for
projected refunds to customers. To estimate liabilities related
to such sales returns, the Group uses the most likely
outcome method based on historical experience and other
factors, and revenue is recognized only to the extent that it is
highly probable that a significant reversal will not occur. When
customers return products, the Group has the right to collect
the products from the customers, but because returned
goods are primarily the result of a product termination, the
products returned have no asset value and therefore such
assets are not recognized.
2) Chemical Business
The Chemical Business sells chemical products such as fatty
alcohols and surfactants. Its customers are mainly the users
and distributors of the products. Revenue from such sales is
recognized when control of a product is transferred to a
customer, i.e., at the point in time a product is delivered and
handed over at the place designated by a customer because
legal title to the product, physical possession and the
significant risks and rewards of ownership of the product are
transferred to the customer and the customer has the right to
decide the method of sale and selling price of the product.
Revenue from sales of products in the Chemical Business is
measured at transaction prices for contracts with customers.
Contract liabilities
Advances ...........................................................................................................................
Refund liabilities .................................................................................................................
Total ................................................................................................................................
2,501
14,046
16,547
392
16,904
17,296
January 1, 2017
December 31, 2017
(Millions of yen)
Among liabilities from contracts with customers, estimates of Achievement Rebates or other payment amounts expected to be paid
to customers related to sales by the end of the reporting period and liabilities for returned products are recognized as refund liabilities.
As of the beginning and end of the fiscal year ended December 31, 2017, 3,965 million yen and 3,049 million yen, respectively, of
liabilities for returned products previously included in provisions as provision for sales returns were included in the refund liabilities.
The balance of advances as of January 1, 2017 was fully recognized as revenue during the fiscal year ended December 31, 2017. The
amount of revenue recognized during the fiscal year ended December 31, 2017 from performance obligations satisfied in previous
periods was not material.
(3) Transaction Price Allocated to the Remaining Performance Obligations
The Group uses the practical expedient of omitting the disclosure of information on the remaining performance obligations because it
has no significant transactions with individual expected contractual terms exceeding one year. In addition, there are no significant
amounts in consideration from contracts with customers that are not included in transaction prices.
47
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
(4) Assets Recognized from the Costs of Obtaining or Fulfilling
Contracts with Customers
The amount of assets recognized from the costs of obtaining or
fulfilling contracts with customers during the fiscal year ended
December 31, 2017 was not material. In addition, if the
amortization period of the assets that the Group otherwise would
have recognized is one year or less, the Group uses the practical
expedient of recognizing the incremental costs of obtaining the
contract as an expense when incurred.
27
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of the following:
Freight/warehouse .....................................................................................................................................
Advertising .................................................................................................................................................
Sales promotion .........................................................................................................................................
2017
55
89,935
58,940
(Millions of yen)
2016
58,168
97,437
83,161
Employee benefi ts .....................................................................................................................................
147,007
191,122
Depreciation ..............................................................................................................................................
Amortization ..............................................................................................................................................
Research and development .......................................................................................................................
Other .........................................................................................................................................................
8,870
4,784
56,703
86,372
Total .......................................................................................................................................................
452,666
11,236
6,173
54,567
131,504
633,368
Note 3 “Significant Accounting Policies (20) Changes in
Accounting Policies” presents the impact on selling, general and
administrative expenses resulting from the adoption of IFRS 15.
As a transitional measure upon the adoption of IFRS 15, the Group
applies this Standard retrospectively with the cumulative effect of
initially applying this Standard recognized at the date of initial
application and thus has not adjusted the amounts for the
comparative period.
Expenses of 17,703 million yen, 1,344 million yen, 24,653
million yen and 2,042 million yen previously included in freight/
warehouse, advertising, sales promotion and other, respectively,
were accounted for as reductions of net sales. Expenses of
44,887 million yen, 3,106 million yen, 52,725 million yen, 2,874
million yen, 96 million yen and 25,569 million yen previously
included in freight/warehouse, sales promotion, employee
benefits, depreciation, amortization and other, respectively, were
accounted for as cost of sales. As a result, compared with the
application of the former accounting standard, selling, general and
administrative expenses decreased by 174,999 million yen.
Furthermore, as an additional item other than the adoption of
IFRS 15 impacting selling, general and administrative expenses, the
Group revised its sales system for the Consumer Products
Business in Japan in the fiscal year ended December 31, 2017.
Expenses of 1,735 million yen and 21,672 million yen previously
included in sales promotion and other, respectively, were accounted
for as reductions of net sales. As a result, selling, general and
administrative expenses decreased by 23,407 million yen.
28 Other Operating Income
Other operating income consists of the following:
Revenue of logistics services to third parties ............................................................................................
Royalty income ..........................................................................................................................................
Other .........................................................................................................................................................
2017
8,619
1,112
5,178
Total .......................................................................................................................................................
14,909
(Millions of yen)
2016
8,300
1,022
4,355
13,677
Kao Corporation Financial Report 2017
48
29 Other Operating Expenses
Other operating expenses consist of the following:
Expenses of logistics services to third parties ..........................................................................................
Losses on sale and disposal of property, plant and equipment .................................................................
Expenses for business transformation at European subsidiaries ..............................................................
Other¹ .......................................................................................................................................................
Total .......................................................................................................................................................
Note: 1. Note 13 “Property, Plant and Equipment” presents impairment losses included in other.
30
Financial Income and Financial Expenses
Financial income consists of the following:
2017
7,688
3,729
—
1,349
12,766
(Millions of yen)
2016
7,454
3,817
1,776
1,799
14,846
(Millions of yen)
2017
2016
Interest income
Financial assets measured at amortized cost ........................................................................................
Retirement benefit assets ...................................................................................................................
1,059
38
1,012
26
Dividend income
Financial assets measured at fair value through other comprehensive income
Financial assets derecognized during the year ...............................................................................
Financial assets held at year end .......................................................................................................
Financial assets measured at fair value through profi t or loss ...............................................................
Other .......................................................................................................................................................
0
224
12
119
9
205
21
116
Total ...............................................................................................................................................
1,452
1,389
Financial expenses consist of the following:
Foreign exchange loss¹ ..............................................................................................................................
Interest expenses²
Financial liabilities measured at amortized cost .....................................................................................
Retirement benefi t liabilities ..................................................................................................................
Other .......................................................................................................................................................
Total ................................................................................................................................................
2017
1,765
1,339
828
28
3,960
(Millions of yen)
2016
2,859
1,484
953
128
5,424
Notes: 1. Valuation gains or losses on currency derivatives that are not designated as hedges are included in foreign exchange loss.
2. Valuation gains or losses on interest rate derivatives that are not designated as hedges are included in interest expenses.
49
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
31
Earnings per Share
(1) The Basis for Calculating Basic Earnings per Share
Net income attributable to owners of the parent ......................................................................................
Amounts not attributable to ordinary shareholders of the parent ..............................................................
(Millions of yen, unless otherwise noted)
2017
147,010
—
2016
126,551
—
Net income used to calculate basic earnings per share ............................................................................
147,010
126,551
Weighted average number of ordinary shares (Thousands of shares) ..................................................
492,832
499,355
Basic earnings per share (Yen) ...................................................................................................................
298.30
253.43
(2) The Basis for Calculating Diluted Earnings per Share
Net income used to calculate basic earnings per share ............................................................................
Adjustments to net income .......................................................................................................................
(Millions of yen, unless otherwise noted)
2017
147,010
—
2016
126,551
—
Net income used to calculate diluted earnings per share ..........................................................................
147,010
126,551
Weighted average number of ordinary shares (Thousands of shares) ......................................................
492,832
499,355
Increase in ordinary shares
Subscription rights to shares (Thousands of shares)..........................................................................
337
Weighted average number of ordinary shares after dilution (Thousands of shares) ............................
493,170
483
499,838
Diluted earnings per share (Yen) ..............................................................................................................
298.09
253.18
Summary of potential ordinary shares not included in the calculation of diluted earnings per share
because they have no dilutive effect ......................................................................................................
—
—
32 Other Comprehensive Income
Amount arising during the fiscal year and tax effects for each component of other comprehensive income are as follows:
Fiscal year ended December 31, 2017
Gains (losses)
arising for the year
Tax effect
After tax effect
(Millions of yen)
Items that will not be reclassifi ed to profi t or loss
Net gain (loss) on revaluation of financial assets measured at fair value through
other comprehensive income ...................................................................................
1,675
Remeasurements of defined benefit plans ................................................................
30,884
Share of other comprehensive income of investments accounted for
using the equity method ...........................................................................................
Total of items that will not be reclassified to profit or loss .................................
457
33,016
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations .....................................
8,541
Share of other comprehensive income of investments accounted for
using the equity method ...........................................................................................
Total of items that may be reclassified subsequently to profit or loss ...............
(1)
8,540
(509)
(9,624)
(140)
(10,273)
—
0
0
1,166
21,260
317
22,743
8,541
(1)
8,540
Total .....................................................................................................................
41,556
(10,273)
31,283
Kao Corporation Financial Report 2017
50
Fiscal year ended December 31, 2016
Gains (losses)
arising for the year
Tax effect
After tax effect
(Millions of yen)
Items that will not be reclassifi ed to profi t or loss
Net gain (loss) on revaluation of financial assets measured at fair value through
other comprehensive income .................................................................................
Remeasurements of defined benefit plans ................................................................
Share of other comprehensive income of investments accounted for
using the equity method ...........................................................................................
(1,569)
(22,409)
(128)
Total of items that will not be reclassified to profit or loss .....................................
(24,106)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations .........................................
(16,661)
Share of other comprehensive income of investments accounted for
using the equity method ...........................................................................................
(7)
Total of items that may be reclassified subsequently to profit or loss ....................
(16,668)
663
6,298
56
7,017
—
(3)
(3)
(906)
(16,111)
(72)
(17,089)
(16,661)
(10)
(16,671)
Total .....................................................................................................................
(40,774)
7,014
(33,760)
33
Cash Flow Information
The major changes in liabilities arising from financing activities are changes from financing cash flows and there are no significant non-
cash changes.
34
Share-based Payments
(1) Stock Options
1) Outline of stock options
The Company issued the following two types of stock
options to directors, executive officers and employees of the
Group. Due to the introduction of a performance share plan
from the fiscal year ended December 31, 2017, the stock
option plan has been abolished except for the options
already granted.
(i) Stock options for share-based payment
Stock options for share-based payment were granted as
compensation for directors and executive officers who do
not concurrently serve as directors. These stock options
were intended to motivate and inspire recipients to
enhance the Company’s results and value of shares and
to further enhance corporate value by aligning the
interests of recipients with those of shareholders by
further increasing the linkage among the compensation of
recipients, the Company’s results and value of shares.
• Vesting conditions: Set on date of grant
• Settlement: Shares settled
• Exercise period: Five years from July 1 of two years
after the date the stock options were granted
(ii) Conventional stock options
Conventional stock options were granted to the
employees of the Company and the directors and
employees of its subsidiaries and associates as
incentives. These stock options were intended to further
enhance corporate value by aligning the interests of
recipients with those of shareholders.
• Vesting conditions: Set on date of grant
• Settlement: Shares settled
• Exercise period: Five years from September 1 of two
years after the date the stock options were granted
51
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
2) Number of stock options and weighted average exercise price
Beginning balance of outstanding .................................
Granted ......................................................................
Exercised ...................................................................
Expired at maturity .....................................................
Ending balance of outstanding ......................................
Ending balance of exercisable .......................................
2017
2016
Number of
shares
(Shares)
549,000
—
(175,000)
(61,000)
313,000
273,000
Weighted average
exercise price
(Yen)
1,331
—
1,672
2,190
973
1,115
Number of
shares
(Shares)
846,000
40,000
(266,000)
(71,000)
549,000
469,000
Weighted average
exercise price
(Yen)
1,654
1
1,886
2,355
1,331
1,558
Notes: 1. The weighted average share price on the date of exercise for the fiscal years ended December 31, 2017 and 2016 was 6,254 yen and 5,821 yen,
respectively.
2. The exercise price and the weighted average remaining contractual life for stock options outstanding at the end of the period are as follows:
Range of
exercise price
(Yen)
1
2,254
Total
2017
Number of
shares
(Shares)
178,000
135,000
313,000
Weighted average
remaining contractual life
(Years)
3.3
0.7
2.2
Range of
exercise price
(Yen)
1
2,190 - 2,254
Total
2016
Number of
shares
(Shares)
222,000
327,000
549,000
Weighted average
remaining contractual life
(Years)
4.0
1.4
2.4
(2) Performance Share Plan
1) Outline of performance share plan
In the fiscal year ended on December 31, 2017, the Company
introduced a performance share plan (hereinafter the “Plan”)
for the members of the Board of Directors (excluding
Outside Directors) and Executive Officers (collectively,
“Directors, etc.”) as a highly transparent and objective
compensation system that is closely linked to company
performance. The purpose of the Plan is to improve the
Company’s mid- and long-term performance as well as
increase the awareness of contributions to increasing
corporate value.
The Company has introduced the Plan using a structure
called a BIP Trust. A BIP Trust is designed as an executive
incentive plan based on the performance share plans and
restricted stock plans in the U.S. wherein the Company’s
shares that are acquired through the BIP Trust and the
amount equivalent to the converted value of such shares will
be vested or paid to Directors, etc. depending on their
executive positions and level of achievement of performance
targets in the mid-term plan and other factors. The shares
held by the BIP Trust are accounted for as treasury shares.
The Plan grants specified points (1 point = 1 share) to
Directors, etc. each year depending on their executive
positions and other factors on the condition that the
requirements of a designated beneficiary, such as holding
the office of Director, etc. on the last day of each fiscal year
during the eligibility period, have been satisfied. The
Company’s shares and cash in the amount of the converted
value of such Company’s shares equivalent to the number of
such points may be granted and paid following completion
of settlement procedures by the designated beneficiary,
after the end of the eligibility period in the case of
performance-linked points, and for a specified period each
year during the eligibility period in the case of fixed points.
The Plan is accounted for as an equity-settled share-based
payment transaction.
2) Number of points granted during the period and
weighted average fair value of points
The fair value of the points on the date of grant is determined
by adjusting the market price of the Company’s shares
taking expected dividends into account.
The number of points granted during the period and the weighted average fair value of the points are as follows:
2017
Number of points granted during the period ..................................................................................
Achievement-linked
points
34,125
Weighted average fair value (Yen) ..................................................................................................
6,821
Fixed points
14,625
6,767
(3) Share-based Payment Expenses
Share-based payment expenses recognized in the consolidated statement of income for the fiscal years ended December 31, 2017 and
2016 were 332 million yen and 227 million yen, respectively.
Kao Corporation Financial Report 2017
52
35
Financial Instruments
(1) Classification of Financial Instruments
The amounts of each classification of financial assets are as follows:
Financial assets measured at amortized cost
Financial assets
(Millions of yen)
2017
2016
Cash and cash equivalents (Note 8) .......................................................................................................
Trade and other receivables (Note 9) .....................................................................................................
Other ......................................................................................................................................................
Financial assets measured at fair value through profit or loss
Cash and cash equivalents (Note 8) .......................................................................................................
Derivatives .............................................................................................................................................
Other ......................................................................................................................................................
Financial assets measured at fair value through other comprehensive income
Equity securities ....................................................................................................................................
Total ................................................................................................................................................
Current assets
Cash and cash equivalents ....................................................................................................................
Trade and other receivables ...................................................................................................................
Other financial assets ............................................................................................................................
Subtotal ..............................................................................................................................................
Non-current assets
Other financial assets ............................................................................................................................
Total ................................................................................................................................................
313,176
216,507
24,639
29,900
602
2,926
14,092
601,842
343,076
216,507
14,914
574,497
27,345
601,842
268,126
208,459
22,404
34,900
791
2,888
12,428
549,996
303,026
208,459
13,038
524,523
25,473
549,996
Equity securities held by the Group are mainly issued by the entities that maintain business relationships with the Group and held for
the long-term without speculative purposes. The Group has designated such equity securities as financial assets measured at fair value
through other comprehensive income. Names of major equity securities and their fair values are as follows:
As of December 31, 2017
Company name
Seven & i Holdings Co., Ltd. ......................................................................................................................
(Millions of yen)
Fair value
3,011
Seven Bank, Ltd. ........................................................................................................................................
1,930
Livedo Corporation ....................................................................................................................................
Tokio Marine Holdings, Inc. .......................................................................................................................
The Nisshin OilliO Group, Ltd.¹ ..................................................................................................................
Saiwai Trading Co., Ltd. ..............................................................................................................................
Aeon Co., Ltd. ............................................................................................................................................
Izumi Co., Ltd. ...........................................................................................................................................
Japan Alcohol Trading Co., Ltd. ..................................................................................................................
Keytrading Co., Ltd. ...................................................................................................................................
981
978
962
956
799
700
552
373
Note: 1. The Settsu Oil Mill, Inc.’s shares were exchanged to the Nisshin OilliO Group, Ltd.’s shares through a share exchange on May 1, 2017.
53
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
As of December 31, 2016
Company name
Seven & i Holdings Co., Ltd. ......................................................................................................................
(Millions of yen)
Fair value
2,863
Seven Bank, Ltd. ........................................................................................................................................
1,675
Tokio Marine Holdings, Inc. .......................................................................................................................
Saiwai Trading Co., Ltd. ..............................................................................................................................
Livedo Corporation ....................................................................................................................................
Aeon Co., Ltd. ............................................................................................................................................
Settsu Oil Mill, Inc. ....................................................................................................................................
Izumi Co., Ltd. ...........................................................................................................................................
Japan Alcohol Trading Co., Ltd. ..................................................................................................................
Keytrading Co., Ltd. ...................................................................................................................................
913
863
835
687
533
502
462
359
The Group derecognizes some financial assets measured at fair value through other comprehensive income by sale for reasons
including asset efficiency and changes in business relationships. The total amounts of the fair value of such financial assets at the time
of sale and the cumulative gains or losses on sales are as follows:
Fair value ...................................................................................................................................................
Cumulative gains (losses) ..........................................................................................................................
2017
24
10
(Millions of yen)
2016
1,036
658
The Group transfers to retained earnings the cumulative gains or losses arising from changes in the fair value of financial assets
measured at fair value through other comprehensive income recognized as other components of equity when it disposes of an
investment or when fair value declines significantly. Cumulative gains or losses of other comprehensive income, net of taxes, that were
transferred to retained earnings for the fiscal years ended December 31, 2017 and 2016, were 7 million yen and 435 million yen,
respectively.
The amounts of each classification of financial liabilities are as follows:
Financial liabilities measured at amortized cost
Financial liabilities
(Millions of yen)
2017
2016
Trade and other payables (Note 19) ........................................................................................................
Bonds and borrowings (Note 17) ...........................................................................................................
Other ......................................................................................................................................................
Financial liabilities measured at fair value through profi t or loss
Derivatives .............................................................................................................................................
Total ................................................................................................................................................
224,893
120,584
16,804
1,026
363,307
Current liabilities
Trade and other payables .......................................................................................................................
224,893
Bonds and borrowings ...........................................................................................................................
Other fi nancial liabilities ........................................................................................................................
25,262
7,739
Subtotal .............................................................................................................................................
257,894
Non-current liabilities
Bonds and borrowings ...........................................................................................................................
Other financial liabilities .........................................................................................................................
Subtotal ..............................................................................................................................................
Total ................................................................................................................................................
95,322
10,091
105,413
363,307
216,893
120,646
19,057
773
357,369
216,893
30,289
8,164
255,346
90,357
11,666
102,023
357,369
There are no significant assets pledged for the above financial liabilities. The Group held deposits received, which is interest-bearing
liability in other financial liabilities, at December 31, 2017 and 2016 totaling 12,599 million yen and 13,275 million yen, respectively. The
average interest rate on deposits received as of December 31, 2017 was 0.12%.
Kao Corporation Financial Report 2017
54
(2) Risk Management on Financial Instruments
The Group manages financial instrument risk based on the
following policies to avoid and mitigate market risk, credit risk and
liquidity risk.
1) Market risk management
The Group is exposed to the risk of market variability such
as fluctuations in exchange rates, interest rates and share
prices. The Group appropriately manages market risk to
mitigate risk. In addition, the Group uses derivatives mainly
consisting of foreign exchange forward contracts, currency
swaps and interest rate swaps with the objective of
appropriately managing market risk. The Group executes and
manages derivatives in accordance with the internal policies
that define the objectives, position limit, scope, organizational
structure and others. The Group limits the use of derivatives
to actual risk mitigation needs, and does not use derivatives
for trading or speculative purposes. Therefore, as a rule,
changes in the fair value of derivative instruments that the
Group holds effectively offset changes in the fair value or
cash flows.
(i) Exchange rate risk
The Group also operates outside Japan, and therefore is
exposed to the risks of exchange rate fluctuations
associated with transactions conducted in foreign
currencies and with net investments in foreign operations.
The Group minimizes the effect of exchange rate
fluctuations on operating results by settling transactions
denominated in foreign currency through foreign currency
accounts, and by hedging the risk of exchange rate
fluctuations using derivative instruments such as foreign
exchange forward and currency swaps.
Details of foreign exchange forward contracts and
currency swaps between the Japanese yen, which is the
Group’s functional currency, and its main foreign
currencies including the U.S. dollar, the euro and the
Chinese yuan are as follows:
The Group did not apply hedge accounting for these
derivative transactions, but determined that these
transactions effectively offset the impact of fluctuations in
exchange rates.
Derivatives transactions
Foreign exchange forward contracts:
Selling
U.S. dollar ...........................................................
Euro ....................................................................
Chinese yuan ......................................................
Buying
Euro ....................................................................
Chinese yuan ......................................................
Currency swaps:
Receiving Japanese yen, paying U.S. dollar ..........
Receiving Japanese yen, paying Chinese yuan .....
Contract
amount
13,800
70
—
120
725
8,004
1,987
2017
Contract
amount over
1 year
Carrying
amount
(fair value)¹
Contract
amount
(Millions of yen)
2016
Contract
amount over
1 year
Carrying
amount
(fair value)1
7,280
—
—
—
—
2,339
—
135
1
—
(2)
(98)
(53)
(325)
16,308
74
1,065
151
701
—
2,279
7,280
—
—
—
701
—
2,279
60
3
(1)
(6)
(52)
—
(158)
Note: 1. Note 35 “Financial Instruments (3) Fair Value of Financial Instruments” presents the method of measuring the fair value of the above derivatives.
The above assets or liabilities related to derivative transactions are included in other financial assets or other financial
liabilities in the consolidated statement of financial position.
Net exposure to exchange rate risk consists of the following. Amounts hedged against exchange rate fluctuation risk with
derivatives are excluded.
As of December 31, 2017
Net exposure ..................................................................................................................
As of December 31, 2016
Net exposure ..................................................................................................................
U.S. dollar
8,713
U.S. dollar
2,210
Euro
161
Euro
707
(Millions of yen)
Chinese yuan
8,458
(Millions of yen)
Chinese yuan
5,342
The following table illustrates the impact on income
before income taxes in the consolidated statement of
income from foreign currency-denominated financial
instruments held by the Group at the end of each fiscal
year if the Japanese yen appreciated by 10% against the
U.S. dollar, the euro and the Chinese yuan.
55
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
The effects of translating financial instruments
denominated in the Group’s functional currency, and the
assets, liabilities, income and expenses of foreign
operations are not included in the analysis. The analysis
also assumes that currencies other than those used in
the calculation remain constant.
U.S. dollar ..................................................................................................................................................
Euro ...........................................................................................................................................................
Chinese yuan .............................................................................................................................................
(ii) Interest rate fluctuation risk
(ii) Short-term investments
2017
(871)
(16)
(846)
(Millions of yen)
2016
(221)
(71)
(534)
The Group obtains finances through long-term
borrowings and bonds for maintaining an appropriate cost
of capital and strengthening its financial base for
investment for growth. The Group considers interest rate
market movements and the balance between floating and
fixed interest rates in making decisions about long-term
funding. The Group’s short-term borrowings generally
have floating interest rates. The Group hedges interest
rate risk as necessary using derivative instruments such
as interest rate swaps, and therefore estimates its
exposure to interest rate fluctuation risk is limited.
(iii) Share price fluctuation risk
The Group held marketable equity securities, primarily
those of companies with which the Group has business
relationships, totaling 10,165 million yen and 8,956 million
yen at December 31, 2017 and 2016, respectively. These
equity securities are exposed to share price fluctuation
risk. However, the Group annually evaluates the rationale
and reviews ongoing advisability and position size of these
holdings. Fluctuations in their prices do not affect net
profit or loss because all of these equity securities are
designated as financial assets measured at fair value
through other comprehensive income.
2) Credit risk management
The Group is exposed to credit risk such as a counterparty’s
default on its contractual obligations resulting in financial
losses to the Group.
(i) Trade and other receivables
Notes and accounts receivable are trade receivables that
expose the Group to customer credit risk. The Group
manages that risk with an internal process for
investigating and approving customer credit on initial
transactions, and by obtaining deposits, collateral or other
guaranties as necessary. The Group also manages due
dates and outstanding balances by customer, and
periodically reconfirms the creditworthiness of major
customers. Non-trade receivables expose the Group to
business partner credit risk, but these receivables are
almost entirely settled in the short-term.
Short-term investments are recognized in cash and cash
equivalents and other financial assets. They are highly
safe and liquid financial instruments that include
commercial paper issued by entities with high bond
ratings, bond investment trusts, and money held in trust.
(iii) Loan receivables
Loan receivables expose the Group to borrower credit
risk. The Group manages this risk with an internal
process for investigating and approving borrower credit
on initial lending transactions, and by obtaining deposits,
collateral or other guaranties as necessary. The Group
also periodically reconfirms the creditworthiness of
borrowers.
(iv) Derivatives
The Group executes and manages derivatives in
accordance with the internal policies that define the
objectives, position limit, scope and organizational
structure. The Group limits the use of derivatives to
actual risk mitigation needs, and does not use derivatives
for trading or speculative purposes, and reduces credit
risk by limiting transactions to highly creditworthy
financial institutions.
The carrying amount after impairment of financial assets in
the consolidated statement of financial position represents
the Group’s maximum exposure to the credit risk of financial
assets. The Group is not exposed to excessive credit risk
associated with a particular customer that requires
exceptional management.
The Group recognizes an allowance for doubtful
receivables for trade receivables and other financial assets
measured at amortized cost by estimating future credit
losses in consideration of recoverability and significant
increases in credit risk. The Group determines if credit risk
has increased significantly by evaluating changes in default
risk with reference to factors including downgrading of
internal credit ratings, the decline of counterparty results,
and delinquency information.
Trade receivables are particularly important financial assets
for the Group. The Group collectively measures expected
credit losses of the financial assets for the entire period to
recognize the allowance for doubtful receivables. In the
following situations that would adversely affect future cash
Kao Corporation Financial Report 2017
56
flows, however, the Group measures expected credit losses
individually by treating each receivable as a credit-impaired
financial asset:
• Where the customer has serious financial difficulties
• Where the customer defaults or becomes delinquent in
accounts receivable payments despite repeated demands
for payment
• Where it is more likely that the customer will go into
bankruptcy or face a situation that forces it to reconstruct
its business
The Group directly writes down the carrying amount if it
does not reasonably expect to recover all or part of the trade
receivables, following an internal process of investigation
and approval.
The Group held security deposits for credit enhancement
totaling 6,463 million yen and 6,413 million yen at December
31, 2017 and 2016, respectively.
The carrying amount of trade receivables and changes in the related allowance for doubtful receivables are as follows:
Fiscal year ended December 31, 2017
(Millions of yen)
Trade receivables
Financial assets for which
loss allowances are always
measured at an amount
equal to expected credit
losses for the entire period
Credit-impaired
financial assets
January 1, 2017 ......................................................................
204,736
Change during the year
(Recognition and derecognition) .....................................
Transfer to credit-impaired financial assets ......................
Other changes ...................................................................
3,914
(99)
2,890
December 31, 2017 ...............................................................
211,441
363
45
99
42
549
Allowance for doubtful receivables
January 1, 2017 ......................................................................
Increase during the year ....................................................
Decrease during the year (charge-offs) ..............................
Decrease during the year (other) ......................................
Transfer to credit-impaired financial assets ......................
Other changes ...................................................................
December 31, 2017 ...............................................................
Financial assets for which
loss allowances are always
measured at an amount
equal to expected credit
losses for the entire period
Credit-impaired
financial assets
781
237
(69)
(77)
—
43
915
382
84
(34)
(10)
—
37
459
Total
205,099
3,959
—
2,932
211,990
(Millions of yen)
Total
1,163
321
(103)
(87)
—
80
1,374
Fiscal year ended December 31, 2016
(Millions of yen)
Trade receivables
Financial assets for which
loss allowances are always
measured at an amount
equal to expected credit
losses for the entire period
Credit-impaired
financial assets
January 1, 2016......................................................................
206,494
Change during the year
(Recognition and derecognition) .....................................
Transfer to credit-impaired fi nancial assets ........................
Other changes ...................................................................
2,472
28
(4,258)
December 31, 2016 ...............................................................
204,736
472
(36)
(28)
(45)
363
Total
206,966
2,436
—
(4,303)
205,099
57
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
Allowance for doubtful receivables
January 1, 2016......................................................................
Increase during the year ....................................................
Decrease during the year (charge-offs) ..............................
Decrease during the year (other) .......................................
Transfer to credit-impaired financial assets ........................
Other changes ...................................................................
December 31, 2016 ...............................................................
Financial assets for which
loss allowances are always
measured at an amount
equal to expected credit
losses for the entire period
Credit-impaired
financial assets
803
217
(85)
(72)
(6)
(76)
781
465
18
(28)
(36)
6
(43)
382
(Millions of yen)
Total
1,268
235
(113)
(108)
—
(119)
1,163
The following tables present an analysis of the carrying amount of trade receivables and the allowance for doubtful receivables
by days past due.
As of December 31, 2017
Trade receivables .......................................................
Allowance for doubtful receivables ...........................
Expected credit loss (%) ............................................
As of December 31, 2016
Trade receivables .......................................................
Allowance for doubtful receivables ...........................
Expected credit loss (%) ............................................
(Millions of yen unless otherwise noted)
Days past due
Not due
200,841
195
0.1
Less than 30
days
7,033
Over 30
days
1,441
135
1.9
55
3.8
Over 60
days
680
44
6.5
Over 90
days
1,995
945
47.4
Total
211,990
1,374
0.6
(Millions of yen unless otherwise noted)
Days past due
Not due
197,543
256
0.1
Less than 30
days
4,315
Over 30
days
1,248
82
1.9
30
2.4
Over 60
days
553
60
10.9
Over 90
days
1,440
735
51.0
Total
205,099
1,163
0.6
3) Liquidity risk management
Liquidity risk is the risk that the Group may not be able to
fulfill its obligation to pay financial liabilities that come due.
The Group uses methods such as scheduled medium- and
long-term financing plans to understand its liquidity and
consistently ensure the availability of sufficient funding.
The Group has also implemented the Global Cash
Management System to reduce liquidity risk through the
focused and efficient management of the Group’s capital in
Japan and overseas.
Financial liabilities including derivative instruments by maturity date consist of the following:
As of December 31, 2017
(Millions of yen)
Carrying
amount
Contract
amount
Not later
than 1 year
Later than
1 year but
not later than
2 years
Later than
2 years but
not later than
3 years
Later than
3 years but
not later than
4 years
Later than
4 years but
not later than
5 years
Later than 5
years
Non-derivative financial liabilities
Trade and other payables ............
224,893
224,893
224,892
1
—
—
Bonds and borrowings ...............
120,584
120,614
25,268
40,046
25,038
30,235
Lease obligations........................
Long-term deposits payable .......
3,178
6,463
3,275
6,463
Derivative financial liabilities
Currency related .........................
1,022
1,022
Interest rate related ....................
4
4
789
—
635
3
690
—
—
—
666
—
296
—
495
—
—
—
Total ........................................
356,144
356,271
251,587
40,737
26,000
30,730
—
21
486
—
91
1
599
—
6
149
6,463
—
—
6,618
Kao Corporation Financial Report 2017
58
As of December 31, 2016
(Millions of yen)
Carrying
amount
Contract
amount
Not later
than 1 year
Later than
1 year but
not later than
2 years
Later than
2 years but
not later than
3 years
Later than
3 years but
not later than
4 years
Later than
4 years but
not later than
5 years
Later than
5 years
Non-derivative financial liabilities
Trade and other payables ...........
216,893
216,893
216,869
24
—
—
Bonds and borrowings ...............
120,646
120,699
30,289
25,066
40,045
25,038
Lease obligations........................
Long-term deposits payable .......
4,000
6,413
4,140
6,413
Derivative financial liabilities
Currency related .........................
Interest rate related ....................
758
15
758
15
884
—
337
7
779
—
159
8
684
—
—
—
667
—
—
—
Total ........................................
348,725
348,918
248,386
26,036
40,729
25,705
—
235
492
—
262
—
989
—
26
634
6,413
—
—
7,073
(3) Fair Value of Financial Instruments
1) Fair value hierarchy levels
For financial instruments measured at fair value, the fair
values developed based on the observability of inputs into
the valuation techniques used in measurement are
categorized within the following three levels:
Level 1: Fair value measured with quoted prices in active
markets for identical assets or liabilities
Level 2: Fair value measured with inputs other than quoted
prices categorized within Level 1 that are observable
for the asset or liability, either directly or indirectly
Level 3: Fair value measured with inputs not based on
observable market data for the asset or liability
2) Financial instruments measured at fair value
The measurement methods for the main financial
instruments measured at fair value are as follows:
(i) Short-term investments (excluding short-term
investments measured at amortized cost)
Short-term investments are included in cash and cash
equivalents, and are designated as financial assets
measured at fair value through profit or loss. Short-term
investments primarily consist of bond investment trusts
and money held in trust, and are measured with a financial
model using observable inputs such as interest rates.
(ii) Derivative assets and derivative liabilities
Derivative assets and derivative liabilities are included in
other financial assets and other financial liabilities, and
are designated as financial assets and financial liabilities
measured at fair value through profit or loss. Consisting
of instruments including foreign exchange forward
contracts, currency swaps and interest rate swaps,
derivative assets and derivative liabilities are primarily
measured with a financial model using observable inputs
such as exchange rates and interest rates.
(iii) Equity securities
Equity securities are included in other financial assets, and
are designated as financial assets measured at fair value
through other comprehensive income. Equity securities
that are categorized within Level 1 are publicly listed and
traded in active markets, and are measured using market
prices on exchanges. Equity securities that are
categorized within Level 3 are unlisted, and are primarily
measured using a net asset valuation model, which
measures corporate value based on the net asset of the
issuing company with adjustments based on fair value.
59
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
The fair value hierarchy of financial instruments measured at fair value is shown below.
The Group recognizes transfers of financial instruments between levels of the fair value hierarchy at the end of each fiscal year.
No financial instruments were transferred between levels of the fair value hierarchy for the fiscal years ended December 31, 2017
or 2016.
As of December 31, 2017
Financial assets
Level 1
Level 2
Level 3
Total
(Millions of yen)
Financial assets measured at fair value through profi t or loss
Short-term investments ...........................................................
Derivative assets ......................................................................
Other .........................................................................................
Financial assets measured at fair value through other
comprehensive income
—
—
—
Equity securities ........................................................................
Total .......................................................................................
10,165
10,165
Financial liabilities
Financial liabilities measured at fair value through profi t or loss
Derivative liabilities ...................................................................
Total .......................................................................................
—
—
29,900
602
2,926
—
33,428
1,026
1,026
—
—
—
3,927
3,927
—
—
29,900
602
2,926
14,092
47,520
1,026
1,026
As of December 31, 2016
Financial assets
Level 1
Level 2
Level 3
Total
(Millions of yen)
Financial assets measured at fair value through profit or loss
Short-term investments ...........................................................
Derivative assets ......................................................................
Other .........................................................................................
Financial assets measured at fair value through other
comprehensive income
Equity securities .......................................................................
Total .......................................................................................
Financial liabilities
Financial liabilities measured at fair value through profit or loss
Derivative liabilities ...................................................................
Total .......................................................................................
—
—
—
8,956
8,956
—
—
34,900
791
2,888
—
38,579
773
773
Changes in financial instruments categorized within Level 3 are as follows:
Beginning balance .....................................................................................................................................
Gains (losses)¹ .......................................................................................................................................
Purchases ..............................................................................................................................................
Other changes .......................................................................................................................................
—
—
—
3,472
3,472
—
—
2017
3,472
454
—
1
34,900
791
2,888
12,428
51,007
773
773
(Millions of yen)
2016
3,212
231
30
(1)
Ending balance ..........................................................................................................................................
3,927
3,472
Note: 1. All gains and losses are associated with financial assets measured at fair value through other comprehensive income at the end of each reporting period.
These gains and losses are recognized in net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income in
the consolidated statement of comprehensive income.
Financial instruments categorized within Level 3 are primarily unlisted equity securities. Each responsible department of the Group
refers to the Group accounting policies in measuring the fair value of unlisted equity securities each quarter using recently available data,
and reports any changes in fair value and the reasons to the department manager, and to senior management as necessary.
Kao Corporation Financial Report 2017
60
3) Financial instruments measured at amortized cost
The following tables present the measurement techniques
for measuring the fair value of major financial instruments
measured at amortized cost. Financial instruments for which
carrying amounts are a reasonable approximation of fair
value or financial instruments that are not material are not
included in the tables.
(i) Cash and cash equivalents (excluding short-term
investments measured at fair value), trade and other
receivables, and trade and other payables
Carrying amounts approximate fair value because these
are settled in the short-term.
(ii) Bonds and borrowings
The fair value of bonds is based on market prices. The fair
value of borrowings is the present value of remaining
principal and interest discounted using a deemed interest
rate on equivalent new borrowings.
The carrying amount and fair value hierarchy of financial instruments measured at amortized cost are as follows:
As of December 31, 2017
Carrying amount
Level 1
Level 2
Level 3
Total
Fair value
(Millions of yen)
Financial liabilities
Financial liabilities measured at amortized cost
Bonds ............................................................
Borrowings ....................................................
49,969
70,615
—
—
50,345
70,946
—
—
50,345
70,946
As of December 31, 2016
Financial liabilities
Financial liabilities measured at amortized cost
Carrying amount
Level 1
Level 2
Level 3
Total
Fair value
(Millions of yen)
Bonds ............................................................
Borrowings ....................................................
49,947
70,699
—
—
50,548
71,084
—
—
50,548
71,084
61
Kao Corporation Financial Report 2017
Notes to Consolidated Financial Statements
36
Principal Subsidiaries
Principal subsidiaries consist of the following. Voting rights at December 31, 2017 did not significantly change from a year earlier.
Company name
Country
Principal businesses
Voting rights (%)
Kao Group Customer Marketing Co., Ltd.
Japan
Kao Customer Marketing Co., Ltd.
Kanebo Cosmetics Inc.
Kanebo Cosmetics Sales Inc.
Kao Transport & Logistics Co., Ltd.
Kao (China) Holding Co., Ltd.
Kao Corporation Shanghai
Kao (Hefei) Co., Ltd.
Kao Commercial (Shanghai) Co., Ltd.
Kanebo Cosmetics (China) Co., Ltd.
Kao (Shanghai) Chemical Industries Co., Ltd.
Japan
Japan
Japan
Japan
China
China
China
China
China
China
Kao (Taiwan) Corporation
Pilipinas Kao, Inc.
Taiwan
Philippines
Kao Industrial (Thailand) Co., Ltd.
Thailand
Kao Commercial (Thailand) Co., Ltd.
Fatty Chemical (Malaysia) Sdn. Bhd.
PT Kao Indonesia
Kao USA Inc.
Kao America Inc.
Kao Specialties Americas LLC
Kao Germany GmbH
Kao Manufacturing Germany GmbH
Kao Chemicals GmbH
Molton Brown Limited
Kao Chemicals Europe, S.L.
Kao Corporation S.A.
Thailand
Malaysia
Indonesia
U.S.A.
U.S.A.
U.S.A.
Germany
Germany
Germany
Control of sales companies and other subsidiaries
in Japan
Beauty Care
Human Health Care
Fabric and Home Care
Beauty Care
Beauty Care
Logistics and related services in Japan
Control of subsidiaries in China
Beauty Care
Beauty Care
Human Health Care
Fabric and Home Care
Human Health Care
Beauty Care
Human Health Care
Fabric and Home Care
Beauty Care
Chemical
Beauty Care
Human Health Care
Fabric and Home Care
Chemical
Chemical
Beauty Care
Human Health Care
Fabric and Home Care
Chemical
Beauty Care
Human Health Care
Fabric and Home Care
Chemical
Beauty Care
Human Health Care
Fabric and Home Care
Beauty Care
Corporate service to subsidiaries in the U.S.
Holding company for Chemical Business in the U.S.
Chemical
Beauty Care
Beauty Care
Chemical
U.K.
Beauty Care
Spain
Spain
Control of subsidiaries in Chemical Business in
Europe, etc.
Chemical
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
92.2
100.0
100.0
100.0
70.0
72.2
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Kao Corporation Financial Report 2017
62
Notes to Consolidated Financial Statements
37
Related Parties
(1) Transactions with Related Parties
Disclosure is omitted because there is no material related party
transaction.
(2) Primary Executive Management Compensation
Primary executive management compensation consists of the
following. The Group’s primary executive management includes
members of the Board of Directors and executive officers of the
Company for each fiscal year.
Short-term benefi ts....................................................................................................................................
Post-retirement benefi ts ............................................................................................................................
Share-based payments ..............................................................................................................................
Total .......................................................................................................................................................
2017
1,315
30
332
1,677
(Millions of yen)
2016
1,131
39
227
1,397
38
Commitments
Commitments to acquire property, plant and equipment and intangible assets after the end of each reporting period are as follows:
Acquisition of property, plant and equipment ............................................................................................
Acquisition of intangible assets .................................................................................................................
Total .......................................................................................................................................................
2017
37,906
1,237
39,143
(Millions of yen)
2016
27,100
1,306
28,406
39
Significant Subsequent Events
There were no significant subsequent events to present.
40 Approval of the Consolidated Financial Statements
The Consolidated Financial Statements were approved by Michitaka Sawada, President and Chief Executive Officer, and by Kenichi
Yamauchi, Executive Officer, Senior Vice President, Accounting and Finance, on March 20, 2018.
63
Kao Corporation Financial Report 2017
Independent Auditor’s Report
Kao Corporation Financial Report 2017
64
14-10, Nihonbashi Kayabacho 1-chome
Chuo-ku, Tokyo 103-8210, Japan
http://www.kao.com/global/en/
Investor Relations
E-mail: ir@kao.co.jp
Website: http://www.kao.com/global/en/investor-relations/