Financial Report 2018
For the year ended December 31, 2018
Management Discussion and Analysis
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Independent Auditor’s Report
1
14
19
66
Management Discussion and Analysis
Management Policies
Among the various elements of ESG, the Kao Group views
corporate governance as the cornerstone of management for
Management Policies of the Kao Group
supporting management’s intentions and ambitions from both
The Kao Group’s mission is to strive for the wholehearted
“proactive” and “protective” aspects and for continuously
satisfaction and enrichment of the lives of people globally and
increasing its corporate value. For this purpose, the Kao Group
to contribute to the sustainability of the world, with products
works for ongoing “Innovation”3 and will further enhance its
and brands of excellent value that are created from the
internal controls for the execution of management that is
consumer’s and customer’s perspective.
swift, efficient and sound, as well as impartial and transparent.
The Kao Way, which is the corporate philosophy of the Kao
1. Research that pursues the essence of things for both humans and
materials from a scientific standpoint.
Group, serves as the foundation of all our activities. All
2. Kirei is a Japanese word that represents the concept of cleanliness,
members of the Kao Group will share the Kao Way and put it
beauty, health, purity, and fairness.
3. Innovation is one of the values of the Kao Way, the corporate philosophy
into practice every day as the foundation of our approaches
of the Kao Group.
and actions. Moreover, this commitment is embraced by all
members of the Kao Group as we further promote efforts to
Management Metric Used as a Target
fully utilize our assets and work together with passion to
As its principal management metric, the Kao Group uses
continue to share joy with consumers and customers in our
economic value added (EVA®*), which measures true profit by
core domains of cleanliness, beauty, health and chemicals.
factoring in the cost of invested capital. This essentially takes
Social conditions and the natural environment are changing
the perspective of shareholders and other asset owners to
dramatically. For the Kao Group to continue to grow
deploy capital efficiently and generate profits. The Kao Group
sustainably, we must transform ourselves to drive change. We
believes that continuously increasing EVA will lead to
will deepen our Essential Research1 to proactively offer
innovations on a level that exerts an impact on society.
increases in corporate value and thus corresponds with long-
term benefits, not only for shareholders, but for all
In addition, the Kao Group considers non-financial as well
stakeholders. The target of the Kao Group’s business activities
as financial strategies and initiatives to be a top management
is to increase EVA while expanding its business scale. The Kao
priority, and will conduct more substantive ESG activities
Group uses this metric to assess its businesses, to make
globally under the name “Kirei2 Action.” To help create the
evaluations on investment in facilities, acquisitions and other
future that people worldwide envision, we will take an
items, and to develop performance targets for each fiscal year
approach unique to the Kao Group in squarely confronting the
and for its compensation system.
social issues raised by the Sustainable Development Goals
(SDGs) and addressing matters such as the strengthening of
environmental laws and regulations and the ethical concerns
of consumers. As we achieve profitable growth and a high
level of returns to stakeholders, we will become a corporate
group with a global presence by 2030.
* EVA is a registered trademark of Stern Stewart & Co. EVA is defined as
net operating profit after tax (NOPAT) less a charge for the cost of capital
employed in the business.
1
Kao Corporation Financial Report 2018
Medium-to-long-term Management
Strategies of the Kao Group
Long-term Management Strategy
Long-term Targets
As its vision by 2030 based on the above management
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
policies, the Kao Group aims to make Kao a company with a
exceeds:
global presence by combining sustained “profitable growth,”
- ¥2.5 trillion in net sales (¥1.0 trillion outside Japan)
and “contributions to the sustainability of the world” with
- 17% operating margin
proposals to resolve social issues and social contribution
- 20% ROE
activities conducted through its business operations. To
• Provides a high level of returns to stakeholders
achieve this vision, the Kao Group will promote the further
reinforcement of the existing businesses that are its strength
and the creation of new markets from a global perspective
utilizing the R&D capabilities that will create value for the
future, in addition to implementing basic measures to further
raise the level of safety and reliability.
It is becoming difficult to predict the various changes that
will occur throughout the world in all aspects, such as speed,
size and direction. To deal with this situation, the Kao Group
aims to achieve the above vision by fully embracing the slogan
of “Transforming Ourselves to Drive Change.”
Net Sales / Operating Margin
ROE
(Billions of yen)
1,600
1,401.7
1,471.8
1,474.6
1,457.6 1,489.4*
1,508.0
1,200
800
400
0
13.7
13.8
12.7
11.2
11.3
9.5
2014
2015
2015
2016
2017
2018
(%)
20
15
10
5
0
(%)
25
20
15
10
5
0
18.6
19.8
18.9
16.1
14.8
12.4
2014
2015
2015
2016
2017
2018
Japanese GAAP
IFRS
Japanese GAAP
IFRS
Net Sales (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.
Kao Corporation Financial Report 2018
2
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
Kao Group Mid-term Plan 2020 “K20” targeting the four years
from fiscal 2017 to fiscal 2020 and announced it publicly on
December 12, 2016.
K20 Goals – Three Commitments
• Commitment to fostering a distinctive corporate image
• 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%
To further enhance its ESG activities, the Kao Group will
- Three ¥100 billion brands (Merries baby diapers,
thoroughly instill the Integrity set forth in the Kao Way, the
Kao Group’s corporate philosophy, by sharing and practicing it
Attack laundry detergents, Bioré skin care products)
* Excluding the effect of currency translation, change of sales
system, etc.
among all employees while deepening Essential Research. In
• Commitment to returns to stakeholders
July 2018, we established a new ESG Division to set up a
- Shareholders: Continuous cash dividend increases
structure for promoting ESG activities globally. In addition, by
(40% payout ratio target)
utilizing artificial intelligence, the Internet of Things, robotics
- Employees: Continuous improvement in
and other cutting-edge technologies to take the full use of its
assets to the next dimension, the Kao Group will realize
profitable growth at a high level of quality and create new
assets to achieve the following goals.
compensation, benefits and health support
- Customers: Maximization of win-win relationships
- Society: Advanced measures to address social issues
The Kao Group must securely build this foundation under
K20 to achieve its vision by 2030. This entails promoting the
evolution of its post-deflation growth model of using proactive
investments to generate earning power, thus achieving
profitable growth. Doing so will require drastically revising
current procedures, approaches and concepts to maximize
Cash Dividends per Share
(Yen)
120
100
80
60
40
20
0
Increases in dividends for 29 consecutive periods
7.1 7.1 8.87 9.09 10.0 10.5 11.5 12.5 14
15
16
20
24
26
38
30
32
54
56
57
58
60
62
64
52
50
120
110
94
80
70
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 2018
Note: Impact of share splits is reflected retroactively.
3
Kao Corporation Financial Report 2018
Management Discussion and Analysis
Costs, Expenses and Income as Percentages of Net Sales
Years ended December 31, 2018, 2017 and 2016
Cost of sales ............................................................................................................
Gross profit ..............................................................................................................
Selling, general and administrative expenses ..........................................................
Operating income ....................................................................................................
Income before income taxes ...................................................................................
Net income attributable to owners of the parent ....................................................
2018
56.6%
43.4
29.5
13.8
13.7
10.2
IFRS
2017
56.0%
44.0
30.4
13.7
13.7
9.9
2016
43.7%
56.3
43.5
12.7
12.6
8.7
and make full use of Kao Group assets. While remaining
significance. Moreover, amid the global expansion of business
committed to thoroughly instilling Integrity, the Kao Group will
and the progress of structural changes in various fields,
put into practice the K20 slogan of “Transforming Ourselves
companies must deal with changes in the risks entailed in
to Drive Change.”
their businesses. Under these conditions, the Kao Group will
Issues for Management
promote both profitable growth and contributions to the
sustainability of society through Yoki-Monozukuri* that is a
half-step ahead of these changes. To that end, it will address
With intensifying market competition, changing market
and deal appropriately with the following issues.
structure and volatility in raw material market conditions and
* The Kao Group defines Yoki-Monozukuri as a strong commitment by all
exchange rates, the operating environment remains uncertain.
Changes in the attitudes of consumers regarding the
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.”
environment, health and other matters and associated
(1) To deal with changes in the risks entailed in its
changes in their purchasing attitudes, as well as the aging
businesses, the Kao Group will define risks that have a
society, hygiene and other social issues, are growing in
particularly large impact on management and for which it
Payout Ratio
44.7
40.6
(%)
50
40
30
20
10
0
must enhance its response as corporate risks and work
to prevent damage to the corporate value of the Group as
a whole by further enhancing its management system.
(2) Given the current rapid progress of factors such as the
diversification of values brought on by technology
innovations and the accompanying changes in
purchasing behavior and the structure of retailing, our
38.1
37.1
36.9
38.238.238.2
business model targeting the mass market, which could
2014
2015
2015
2016
2017
2018
Japanese GAAP
IFRS
formerly be conducted efficiently, must be reconsidered
from all aspects, including research and development,
production, logistics, sales and marketing. To resolve
these issues, the Kao Group will proactively promote
the enhancement of Essential Research and the use of
artificial intelligence, the Internet of Things, robotics and
other cutting-edge technologies.
(3) To sustainably enhance its corporate value, the Kao
Group must appropriately address social issues in the
areas of environmental preservation and resource
conservation such as problems with marine plastic and
Kao Corporation Financial Report 2018
4
other kinds of trash, depletion of water resources,
Overview of Consolidated Results
sustainable and responsible procurement, as well as
safety and human rights, among others. Therefore, the
Conditions in the global economy are unclear due to factors
Kao Group will globally roll out and accelerate the ESG-
including trends in trade issues, the economic outlook for
related initiatives it has been conducting, primarily
China and other emerging countries in Asia and the impact of
through the ESG Division, and enhance its management
uncertainty about the policies of the Americas and Europe.
system for conducting checks and administering these
From January to December 2018, the markets for household
initiatives. In October 2018, the Kao Group announced
and personal care products and cosmetics in Japan, which are
“Our Philosophy & Action on Plastic Packaging.”
key markets for the Kao Group, were in solid condition according
Basic Approach to Selection of
Accounting Standards
to retail sales and consumer purchasing survey data. In every
product category, the share of the e-commerce channel
increased further and average unit prices for household and
personal care products increased by 1 percentage point
compared with the same period a year earlier.
Having decided that unifying accounting standards within the
Under these circumstances, the Kao Group completed the
Kao Group will contribute to improving the quality of its
business management, the Kao Group has voluntarily adopted
International Financial Reporting Standards (IFRS) from fiscal
second fiscal year of the Kao Group Mid-term Plan “K20”
covering the four years from 2017 to 2020. With technology
innovations such as artificial intelligence and the Internet of
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
the application of IFRS will facilitate the international
comparability of its financial statements in capital markets.
Things, the structure of retailing and purchasing behavior and
other factors are changing rapidly worldwide and consumer
values are diversifying. The Kao Group invested proactively for
the future and made efforts that included enhancing new and
improved product launches, marketing and sales activities that
address these changes. As a result, in its consolidated operating
results the Kao Group increased operating income and net income
Basic Earnings per Share
Net Sales / Operating Margin
(Yen)
400
300
200
100
0
Consumer Products Business
(Billions of yen)
1,500
314.25
298.30
253.43
197.19
209.82
156.46
2014
2015
2015
2016
2017
2018
1,000
500
0
1,222.8
1,225.6
1,219.8
1,216.0
1,232.9
11.0
11.2
12.7
14.2
14.3
1,154.5
9.6
2014
2015
2015
2016
2017
2018
Japanese GAAP
IFRS
Japanese GAAP
IFRS
(%)
25
20
15
10
5
0
Net Sales (Left)
Operating Margin (Right)
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.
In FY 2018, due to the reorganization of the sales organization of the
Consumer Products Business in Japan, operating income for the previous
fiscal year has been restated.
5
Kao Corporation Financial Report 2018
Management Discussion and Analysis
for the ninth consecutive fiscal year and achieved record-high
2. The Curél derma care brand, which formerly had been
operating income for the sixth consecutive fiscal year. The Kao
classified as skin care and hair care products, has been
Group did not reach its forecast of consolidated operating results,
included in the Cosmetics Business, and the Success men’s
but the entire Group will continue to work to achieve “K20.”
products brand, which formerly had been classified in the
Analysis of Income Statement
Human Health Care Business, has been included in the Skin
Care and Hair Care Business. Net sales and operating income
for the previous fiscal year have been restated accordingly.
3. Due to the reorganization of the sales organization of the
Net sales increased 1.2% compared with the previous fiscal
Consumer Products Business in Japan, operating income
year to ¥1,508.0 billion. On a like-for-like basis, net sales
for the previous fiscal year has been restated.
increased 1.3%. In the Consumer Products Business in Japan,
the Kao Group made efforts including launches of new and
Consumer Products Business
improved products and further enhancement of its sales
Sales increased 1.4% compared with the previous fiscal year to
promotion activities, but sales decreased slightly. Outside
¥1,232.9 billion. On a like-for-like basis, sales increased 1.6%.
Japan, sales increased. The Chemical Business was impacted
The Kao Group worked for more effective marketing and
by factors including selling price adjustments associated with
sales activities, including launching new and improved
a drop in prices for natural fats and oils, but sales increased
products that address the diversification of consumer values
due to promotion of high-value-added products.
and enhancing activities in the e-commerce channel in line
As for profits, depreciation expenses and other costs
with changes in purchasing behavior.
increased, but due to more efficient deployment of marketing
In Japan, sales decreased slightly by 0.3% to ¥883.9 billion.
expenses and the effect of increased sales in the Consumer
In Asia, sales were steady, increasing 5.3% to ¥198.7
Products Business in Asia, among other factors, operating
billion. On a like-for-like basis, sales increased 6.3%.
income was ¥207.7 billion, an increase of ¥2.9 billion
In the Americas, sales increased 10.0% to ¥85.0 billion. On
compared with the previous fiscal year, the operating margin
a like-for-like basis, sales increased 12.1%. In Europe, sales
was 13.8% and income before income taxes was ¥207.3
increased 2.3% to ¥65.2 billion. On a like-for-like basis, sales
billion, an increase of ¥3.0 billion. Net income was ¥155.3
increased 0.1%.
billion, an increase of ¥6.7 billion.
Operating income increased ¥2.7 billion compared with the
Basic earnings per share were ¥314.25, an increase of
previous fiscal year to ¥175.7 billion.
¥15.95, or 5.3%, from ¥298.30 in the previous fiscal year.
Note: The Kao Group’s Consumer Products Business consists of the
To improve capital efficiency and further increase
shareholder returns, Kao Corporation (the Company) resolved
Cosmetics Business, the Skin Care and Hair Care Business, the Human
Health Care Business, and the Fabric and Home Care Business.
at a meeting of its Board of Directors held on April 27, 2018 to
Cosmetics Business
repurchase its own shares, and repurchased shares totaling
Sales increased 5.0% compared with the previous fiscal year
¥50.0 billion. The Company retired 6.3 million treasury shares
to ¥279.6 billion. On a like-for-like basis, sales increased 5.0%.
on September 14, 2018.
Information by Segment
As of the fiscal year ended December 31, 2018, the following
changes have been made.
1. The Beauty Care Business has been divided into the Cosmetics
Business and the Skin Care and Hair Care Business, changing
the four former reportable segments into five.
The Kao Group announced a new growth strategy in May
2018, and was able to achieve some success from optimizing
the brand portfolio, enhancing marketing and other measures.
The Kao Group determined key strategic brands to promote
selection and concentration, and enhanced digital marketing
in response to changes in consumer purchasing behavior.
Counseling cosmetics SUQQU and RMK, which are
available in the department store channel, and in self-selection
cosmetics, freeplus, which is hypoallergenic and contains
Japanese and Chinese botanical extracts, and the Curél derma
Kao Corporation Financial Report 2018
6
care brand sold strongly. SOFINA iP base essence was
growing premium market and the impact of the shrinking
improved in September 2018, and sales grew steadily as it
mass market. In Europe, the John Frieda hair care brand was
gained acceptance among an increasing number of
affected by intense market competition.
consumers. Sales increased substantially in the strongly
In January 2018, U.S.-based Oribe Hair Care, LLC, which
growing Asian region, led by China. The Kao Group will further
owns Oribe, a super-premium-price brand for hair salons,
develop the Cosmetics Business by executing its new growth
became a consolidated subsidiary and its sales were strong.
strategy as it steadily implements structural reforms.
Operating income decreased ¥0.5 billion compared with
Operating income was ¥27.7 billion, a substantial
the previous fiscal year to ¥48.8 billion due to factors
improvement of ¥14.7 billion from the previous fiscal year,
including expenses incurred for structural reforms in the
due to the effects of increased sales of strongly performing
Americas and Europe, despite the effect of increased sales of
brands and the Asia business, among other factors.
skin care products in Japan and in Asia.
Skin Care and Hair Care Business
Human Health Care Business
Sales increased 2.6% compared with the previous fiscal year
Sales decreased 4.8% compared with the previous fiscal year
to ¥341.4 billion. On a like-for-like basis, sales increased 2.7%.
to ¥267.7 billion. On a like-for-like basis, sales decreased 4.4%.
In skin care products, sales of the Bioré brand grew
For Merries baby diapers, sales in Japan decreased. The
steadily in Japan and Asia, but were impacted by stiff
Kao Group gained greater consumer support in Japan by
competition in the Americas. Jergens hand and body lotions
conducting product improvements and enhancing sampling
performed steadily in the Americas.
and other sales promotion activities, but due to factors
In hair care products in Japan, the Kao Group launched
including the impact of the new e-commerce law in China,
Rerise, an innovative next-generation brand for gray hair care,
which came into effect as of January 2019, there was a
and its performance was strong but sales of shampoos and
substantial downturn in demand for the purpose of resale in
conditioners decreased due to a delayed response to the
China. Sales in China also decreased due to factors including
Net Sales / Operating Margin
Cosmetics
Business
Skin Care and
Hair Care Business
Human Health
Care Business
Fabric and
Home Care Business
Chemical
Business
(Billions of yen)
400
300
200
100
0
341.4
332.9
14.8
14.3
240.1
240.1
280.7 281.7
280.7
281.7 273.1
273.1 281.2
281.2 267.7
267.7
324.5 334.4 335.3 345.2
335.7
344.1
20.7 19.7
18.8
22.6 22.7
20.7
288.0 288.5
288.0
288.5
288.5 288.5
273.8
273.8
310.3 312.8
12.7 11.8
12.3
10.4
9.5
9.1
10.4
9.9
10.8
9.8
9.8
7.7
279.6
266.2
9.9
4.9
2017
2018
2017
2018
2014
2015 2015 2016
2017 2018
2014
2015 2015 2016
2017 2018
2014
2015 2015 2016
2017 2018
IFRS
IFRS
Japanese
GAAP
IFRS
Japanese
GAAP
IFRS
Japanese
GAAP
IFRS
Net Sales (Left)
Operating Margin (Right)
(%)
40
30
20
10
0
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.
In FY 2018, due to the reorganization of the sales organization of the Consumer Products Business in Japan, operating income for the previous fiscal year has been restated.
The Beauty Care Business has been divided into the Cosmetics Business and the Skin Care and Hair Care Business, changing the four former reportable segments into five.
The Curél derma care brand, which formerly had been classified as skin care and hair care products, has been included in the Cosmetics Business, and the Success men’s
products brand, which formerly had been classified in the Human Health Care Business, has been included in the Skin Care and Hair Care Business. Net sales and operating
income for the previous fiscal year have been restated accordingly.
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.
7
Kao Corporation Financial Report 2018
Management Discussion and Analysis
intensifying price competition and aggressive activities by
the impact of increased costs for petrochemicals and other
local manufacturers. On the other hand, locally produced
raw materials in a severe competitive environment.
products targeting the middle-class consumer segment
performed well in Indonesia and market share grew in Russia
Chemical Business
and neighboring countries as the products gained broad
Sales increased 0.8% compared with the previous fiscal year
acceptance among consumers.
to ¥312.8 billion. On a like-for-like basis, sales increased 0.5%.
For Laurier sanitary napkins, high-value-added products
Sales of oleo chemicals decreased due to the impact of
performed strongly in Japan, China and elsewhere, and
selling price adjustments associated with a drop in prices for
among adult incontinence products, sales grew steadily in
natural fats and oils, although demand outside Japan was firm.
Japan for a line of Relief ultra-thin pants-type diapers
Sales of performance chemicals increased, due in part to the
designed to be like regular underwear.
contribution from growth in sales volume in infrastructure-
Sales of personal health products were steady. In oral care
related fields. In specialty chemicals, sales of hard disk-related
and bath additives, high-performance products sold steadily.
products were steady, despite the impact of a decrease in
Sales of MegRhythm thermo products grew as the Kao Group
customer demand for toner and toner binder.
increased the number of loyal users through measures such
Operating income increased ¥0.3 billion compared with the
as launching improved items and enhancing digital marketing.
previous fiscal year to a record high of ¥30.6 billion due to
In food and beverage products, the Kao Group conducted
growth in sales of oleo chemicals outside Japan and
business reforms and the profit structure improved.
promotion of high-value-added products.
Operating income decreased ¥6.5 billion compared with
the previous fiscal year to ¥27.9 billion, due to the decrease in
sales of baby diapers, higher raw material costs, increased
Financial Position
depreciation expenses and other factors.
Fabric and Home Care Business
Total assets increased ¥33.6 billion from December 31, 2017
to ¥1,461.0 billion. The principal increases in assets were a
Sales increased 2.5% compared with the previous fiscal year
¥13.7 billion increase in inventories, a ¥23.1 billion increase in
to ¥344.1 billion. On a like-for-like basis, sales increased 2.6%.
property, plant and equipment, a ¥41.6 billion increase in
Sales of fabric care products were firm amid an
goodwill and a ¥29.7 billion increase in intangible assets. The
environment of severe competition in Japan. The Kao Group
principal decrease in assets was a ¥77.1 billion decrease in
worked to enhance communication of the value of Attack
cash and cash equivalents.
laundry detergent in “changing tap water for washing to
Total liabilities increased ¥17.5 billion from December 31,
antibacterial water” and increased the market share of fabric
2017 to ¥625.5 billion. The principal increase in liabilities was a
softeners by improving Flair Fragrance amid the ongoing
¥19.9 billion increase in retirement benefit liabilities.
expansion of the market for high-value-added products.
Total equity increased ¥16.1 billion from December 31,
Sales of home care products were firm. In Japan, the Kao
2017 to ¥835.5 billion. The principal increase in equity was net
Group cultivated new users by improving foam spray-type
income totaling ¥155.3 billion. The principal decreases in
CuCute dishwashing detergent, and sales grew steadily.
equity were purchase of treasury shares from the market
Sales were firm in Asia as the Kao Group launched high-value-
totaling ¥50.0 billion, dividends totaling ¥57.5 billion and other
added products and enhanced in-store merchandising in Thailand
comprehensive income totaling ¥32.1 billion.
and other countries. In addition, to strengthen its commercial-
As a result of the above factors, the ratio of equity
use products business outside Japan, the Kao Group completed
attributable to owners of the parent to total assets was 56.3%
the acquisition of U.S.-based Washing Systems, LLC and made it
compared with 56.5% at December 31, 2017. The Kao Group
a consolidated subsidiary in August 2018.
maintained return on equity at the high level of 18.9%.
Operating income decreased ¥5.0 billion compared with
In addition, the Company retired 6.3 million treasury shares
the previous fiscal year to ¥71.2 billion due to factors including
on September 14, 2018.
Kao Corporation Financial Report 2018
8
Cash Flows
activities and net cash flows from investing activities, was
¥37.7 billion.
The balance of cash and cash equivalents at December 31, 2018
decreased ¥77.1 billion compared with December 31, 2017 to
Cash Flows from Financing Activities
¥266.0 billion, including the effect of exchange rate changes.
Net cash flows from financing activities totaled negative ¥108.6
billion. The Company emphasizes steady and continuous
Cash Flows from Operating Activities
dividends and flexibly repurchases and retires treasury shares to
Net cash flows from operating activities totaled ¥195.6 billion.
improve capital efficiency from the perspective of EVA. During
The principal increases in net cash were income before income
fiscal 2018, this primarily consisted of ¥57.6 billion for dividends
taxes of ¥207.3 billion, depreciation and amortization of ¥60.7
paid to owners of the parent and non-controlling interests and
billion and increase in retirement benefit liabilities of ¥20.7
¥50.0 billion for purchase of treasury shares. In addition, to
billion. The principal decreases in net cash were increase in trade
reinforce its financial base in order to maintain an appropriate
and other receivables of ¥12.6 billion, increase in inventories of
capital cost rate and to invest for growth, the Kao Group issued
¥15.7 billion and income taxes paid of ¥51.7 billion.
and redeemed corporate bonds, which resulted in ¥25.1 billion in
proceeds from issuance of bonds and payments totaling ¥24.9
Cash Flows from Investing Activities
billion for redemption of bonds.
Net cash flows from investing activities totaled negative ¥157.9
billion. This primarily consisted of purchase of property, plant and
equipment of ¥80.3 billion for capacity expansion at production
bases in Japan and proactive capital investments in Asia, where
growth is notable, and payments for business combinations of
¥73.9 billion for businesses for hair salons, commercial-use
products and other purposes where synergies with existing
Basic Policies regarding Distribution of
Profits and Dividends for the Fiscal Years
Ended December 31, 2018 and Ending
December 31, 2019
business are expected.
The Kao Group uses economic value added (EVA) as its
Free cash flow, the sum of net cash flows from operating
principal management metric and clearly sets the uses of its
Net Cash Flows from Operating Activities /
Capital Expenditures
Free Cash Flows*
180.9
181.7
184.3
185.8
195.6
(Billions of yen)
150
(Billions of yen)
200
150
145.1
100
50
0
83.4
82.8
89.9
89.1
79.4
68.5
2014
2015
2015
2016
2017
2018
100
50
0
106.8
107.5
95.7
89.7
81.3
37.7
2014
2015
2015
2016
2017
2018
Japanese GAAP
IFRS
Japanese GAAP
IFRS
Net Cash Flows from Operating Activities
Capital Expenditures
* Free cash flow is the sum of net cash flows from operating activities
and net cash flows from investing activities.
9
Kao Corporation Financial Report 2018
Management Discussion and Analysis
steadily generated cash flow as shown below from that
EVA and Related Activities
viewpoint. Shareholder returns are one such use, and they are
implemented after considering future demand for funds and
EVA for fiscal 2018 was ¥93.5 billion, an increase of ¥3.1
the situation in financial markets.
billion compared with the previous fiscal year due to growth in
Use of cash flow:
net operating profit after tax (NOPAT) that exceeded the
increase in capital costs from the previous fiscal year.
• Investment for future growth (capital expenditures,
The Kao Group conducted the following EVA-related
M&A, etc.)
activities during the fiscal year.
• Steady and continuous dividends (40% payout ratio target)
• Share repurchases and early repayment of interest-
Investing for Growth: During fiscal 2018, the Kao Group
bearing debt including borrowings
invested aggressively for future growth. Capital expenditures
were ¥89.1 billion. In the Consumer Products Business, the
In accordance with these policies, the Company plans to
Kao Group carried out activities including facility expansion,
pay a year-end dividend for fiscal 2018 of ¥60 per share, an
streamlining, maintenance and renewal in each of its
increase of ¥4 per share compared with the previous fiscal
businesses. The Kao Group reinforced its supply system in the
year. Consequently, annual cash dividends will increase ¥10 per
Skin Care and Hair Care Business by constructing a new
share compared with the previous fiscal year, resulting in a total
building on the grounds of the Toyohashi Plant for efficient
of ¥120 per share. The consolidated payout ratio will be 38.2%.
production of premium products, and in the Human Health
For fiscal 2019, the Company plans to pay total cash dividends
Care Business by expanding production capacity at its factories
of ¥130 per share (39.1% payout ratio), an increase of ¥10 per share
for sanitary products inside and outside Japan. In the Chemical
compared with the previous fiscal year. This plan is in accordance
Business, the Kao Group expanded production capacity inside
with the Company’s basic policies regarding distribution of
and outside Japan and conducted activities including
profits, and free cash flow and other factors have also been
streamlining, maintaining and renewing facilities. Expenditures
taken into consideration. As a result, the Company is aiming
for business combinations with a hair salon business, a
for its 30th consecutive fiscal year of increases in dividends.
commercial-use products business and other businesses with
Total Dividend Payment / Share Repurchases* /
Net Income Attributable to Owners of the Parent
Cost of Capital / EVA
(Billions of yen)
150
153.7
147.0
(Billions of yen)
150
90.4
93.593.593.5
100
50
0
105.2
126.6
98.9
50.0
46.8
40.2
40.2
50.0
79.6
35.5
54.3
58.5
2014
2015
2015
2016
2017
2018
50.050.050.0
100
47.6
70.6
58.6
73.4
50
0
53.3
55.1
54.8
56.4
59.1
62.7
2014
2015
2015
2016
2017
2018
Japanese GAAP
IFRS
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
Cost of Capital
EVA
Kao Corporation Financial Report 2018
10
the expectation of synergy with existing businesses totaled
comprehensive list of risks the Kao Group faces. Other risks
¥73.9 billion. Research and development expenditures were
exist and may have an impact on investment decisions. Any
¥57.7 billion, which was the equivalent of 3.8% of net sales,
statements below concerning the future are judgments made
remaining at a high level relative to net sales.
by the Company as of the submission of its securities report
to the Ministry of Finance.
Increasing Profit: The Kao Group increased operating income
in the Consumer Products Business by launching new and
(1) Consumer Products Business
improved products, further enhancing sales promotion
1. Response to Changes in Consumer Needs
activities and promoting a shift to digital marketing in Japan.
The Kao Group’s Consumer Products Business is affected by
In the Chemical Business, the Kao Group achieved record-high
business cycles and changes in consumers’ values in the
operating income from growth in sales of oleo chemicals
market of each country. The Consumer Products Business
outside Japan and promotion of high-value-added products.
maintains and improves brand value by understanding
changes in consumer needs and using the comprehensive
Financial Improvement: For fiscal 2018, the Company paid
strength of the Kao Group’s product development and
annual dividends per share of ¥120.00, a year-on-year increase
manufacturing in working to create high-value-added products
of ¥10.00, or 9%, as announced in its forecast at the
and provide services through approaches in areas including
beginning of the fiscal year. As a result, the Company has
the environment, health, the aging society and hygiene.
achieved 29 consecutive fiscal periods of dividend growth. In
However, as a consequence of uncertainties in these
addition, the Kao Group repurchased ¥50.0 billion of its own
business activities due to various factors, the Consumer
shares to improve capital efficiency.
Products Business may be unable to provide products and
R&D Expenses
services that respond to changes in consumer needs and
(Billions of yen)
brand value could decrease. This could have an impact on the
Cosmetics Business ..........................................
Skin Care and Hair Care Business ...................
Human Health Care Business .........................
Fabric and Home Care Business .....................
Chemical Business ..........................................
2018
10.5
16.0
11.3
9.8
10.2
Business Risks and Other Risks
Kao Group’s business results and financial condition.
2. Response to Changes in Retailing
The Kao Group’s Consumer Products Business is affected by
changes in the structure of retailing, including progress in the
creation of new corporate groups through retail industry
mergers and integration in the market, and the emergence and
expansion of new retail channels. The Consumer Products
Business conducts sales activities and makes new offerings
that respond to these structural changes. However, as a
Various risks arise in the course of a company’s business. The
consequence of uncertainties in these business activities due
Kao Group manages risks appropriately by identifying and
to various factors, the Consumer Products Business may be
evaluating risks to formulate and implement necessary
unable to conduct sales activities or make new offerings that
countermeasures, among other activities. In addition, in the
respond to these structural changes. This could have an impact
event a risk manifests itself, the Kao Group sets up an
on the Kao Group’s business results and financial condition.
emergency response organization and strives to keep the
extent of injury and damage as small as possible by
(2) Chemical Business
responding promptly. However, in the event a major risk such
The Kao Group’s Chemical Business is affected by factors
as those described below manifests itself, it may exert a
including trends in customer demand and fluctuations in raw
significant impact on the Kao Group’s business results and
material prices. The Chemical Business promotes creation of
financial condition. The major risks described below are not a
high-value-added products that match customer needs,
11
Kao Corporation Financial Report 2018
Management Discussion and Analysis
conducts research and development of products in
material costs into product prices. In addition, the Kao Group
consideration of the environment, and provides such products
is conducting development of substitute raw materials for
while working to reduce costs and deal with product prices.
natural fats and oils through research into advanced effective
However, as a consequence of uncertainties in these
utilization of non-edible raw materials. However, unexpected
business activities due to various factors, the Chemical
radical changes in market prices could have an impact on the
Business may be unable to provide products that match
Kao Group’s business results and financial condition.
customer needs or respond to matters such as fluctuations in
raw material prices. This could have an impact on the Kao
(6) Product Quality
Group’s business results and financial condition.
The Kao Group designs and manufactures products from the
viewpoint of consumers, in compliance with related laws and
(3) Business Acquisitions, Business Alliances and Mergers
regulations and voluntary standards. In the development
The Kao Group may implement business acquisitions, business
stage prior to market launch, the Kao Group conducts
alliances, mergers or other such measures. When implementing
thorough safety testing and survey research to confirm the
them, the Kao Group makes decisions after thoroughly
safety of products. After market launch, the Kao Group works
assessing economic value and its partner companies. However,
to further improve quality by incorporating the opinions and
due to various unforeseeable uncertainties in its business
desires of consumers through its consumer communication
activities, the Kao Group may be unable to produce the results it
centers. However, the unanticipated occurrence of a serious
initially expected. This could have an impact on the Kao Group’s
quality problem or concerns about product safety or reliability
business results and financial condition.
resulting from new scientific knowledge would not only cause
difficulties for the relevant brand, but would also have a major
(4) Overseas Business Expansion
impact on the reputation of all of the Kao Group’s products.
As one of its growth strategies, the Kao Group is conducting
This could have an impact on the Kao Group’s business
operations in markets in Asia, the Americas, Europe and
results and financial condition.
elsewhere, with a particular emphasis on strengthening its
operations in countries where higher economic growth rates
(7) Response to Natural Disasters Associated with Events
and market expansion are forecast. However, the Kao Group
Such as Large-scale Earthquakes or Climate Change,
may be unable to strengthen its operations as a consequence
Accidents and Other Incidents
of uncertainties due to various factors in the course of business
To deal with earthquakes and other natural disasters, the Kao
including the occurrence of a slowdown in economic growth or
Group has formulated disaster countermeasures for its
uncertain political or social conditions, intensifying competition,
production facilities and primary offices and a business
the inability to conduct sufficient cost management or the
continuity plan (BCP), and will continue to strengthen and
emergence of problems in relationships with retail outlets, sales
reinforce them in the future. However, natural disasters
agents or other trading partners. This could have an impact on
associated with events such as a large-scale earthquake or
the Kao Group’s business results and financial condition.
climate change that hinder the supply of products to the market
due to problems in areas such as securing raw materials and
(5) Procurement of Raw Materials
maintaining production, among other impediments, could have
Market prices for natural fats and oils and petroleum-related
a serious impact on the Kao Group’s business results and
materials used as raw materials for products of the Kao Group
financial condition. In addition, the emergence of major changes
are affected by factors including geopolitical risks, the balance
in demand trends due to a worsening economic environment
between supply and demand, abnormal weather and exchange
associated with the earthquake could have a serious impact on
rate fluctuations. The Kao Group has moved to reduce the
the Kao Group’s business results and financial condition.
effect of increases in raw material prices through measures
Furthermore, the occurrence of an explosion or fire at production
including cost reductions and passing on increases in raw
facilities, information or control system malfunction, problems at
Kao Corporation Financial Report 2018
12
Management Discussion and Analysis
a supplier of raw materials, dysfunction of social infrastructure
(11) Compliance with and Response to Laws and
such as electric power and water, environmental pollution from
Regulations, Etc.
harmful substances, the spread of infectious disease, terrorism,
In the course of its business activities, the Kao Group must
political change, riots and other incidents could hinder the supply
comply with a variety of laws and regulations concerning
of products to the market. This could have a serious impact on the
areas such as standards for product quality and safety, the
Kao Group’s reputation, business results and financial condition.
environment and chemical substances, as well as accounting
standards, tax law and regulations related to labor and
(8) Currency Exchange Rate Fluctuations
transactions. It will also be required to respond to policies and
Foreign currency-denominated transactions are affected by
tightening of legal and regulatory systems in various countries
changes in currency exchange rates. The Kao Group hedges
for mitigating climate change. The Kao Group has constructed
foreign exchange risk through various measures such as
a compliance system, among other measures, and strives to
settlement of transactions through foreign currency accounts,
comply with and respond to all related laws, regulations,
foreign exchange contracts, and currency swaps to mitigate
policies and systems. However, a serious legal violation by the
the effect on business results. The Kao Group does not
Kao Group or by a consignee or other party could have an
engage in derivative transactions for the purpose of
impact on the Kao Group’s reputation, business results and
speculation. However, because items on the financial
financial condition. Moreover, a change in current laws and
statements of overseas consolidated subsidiaries are
regulations, or new laws and regulations could restrict the
translated into Japanese yen, substantial variance in the
Kao Group’s business activities, require investment for
exchange rate from the expected rate at the time of
compliance, or otherwise affect the Kao Group. This could
conversion will have an impact on the Kao Group’s business
have an impact on the Kao Group’s business results and
results and financial condition.
financial condition.
(9) Impact of Deferred Tax Assets and Impairment
(12) Information Management
The Kao Group records various tangible fixed assets and
The Kao Group possesses confidential information related to
intangible assets and deferred tax assets including assets
matters including research and development, production,
used in the course of business and goodwill incurred in
marketing and sales, as well as the personal information of
corporate acquisitions. The Kao Group may not generate the
numerous customers used for product development, sales
expected cash flow due to divergence from planned future
promotion and other purposes. The Kao Group conducts
business results, a decline in market value or other factors.
thorough information management using guidelines for
This could have an impact on the Kao Group’s business
handling information and implements appropriate security
results and financial condition.
measures for its information systems, including both hardware
and software. However, a leak of confidential or personal
(10) Securing Human Capital
information held by the Kao Group resulting from an attack on
The Kao Group strives to secure diverse, superior human
its server, unlawful access, a computer virus or other factor
capital to achieve its business goals globally. Human capital
that exceeds expectations could have an impact on the Kao
with advanced expertise in areas such as research and
Group’s reputation, business results and financial condition.
development, production, marketing and sales is
indispensable in aiming for the Yoki-Monozukuri (see note on
(13) Litigation
page 4) that consumers support. However, an inability to
The Kao Group conducts diverse businesses globally, and
secure the necessary human capital due to changes in
various types of litigation may be brought against it. The result
employment conditions or other factors could have an impact
of such litigation could have an impact on the Kao Group’s
on the Kao Group’s business results and financial condition.
business results and financial condition.
13
Kao Corporation Financial Report 2018
Consolidated Statement of Financial Position
Kao Corporation and Consolidated Subsidiaries
As of December 31, 2018
Assets
Current assets
Notes
2018
2017
(Millions of yen)
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 .........................................................................................
8, 35
9, 35
10
35
11
12
13
14
14
15
35
16
11, 20
265,978
223,102
197,571
15,146
2,066
22,449
726,312
—
726,312
418,935
180,286
46,549
7,931
23,540
49,158
8,275
734,674
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
Total assets .........................................................................................................
1,460,986
1,427,375
Liabilities and equity
Liabilities
Current liabilities
Notes
2018
2017
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 ......................................................................................
19, 35
17, 35
18, 35
21
26
22
17, 35
18, 35
20
21
16
225,560
40,488
6,880
34,198
2,873
18,387
102,452
430,838
80,339
9,506
84,552
12,175
2,864
5,203
194,639
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
Total liabilities......................................................................................................
625,477
608,011
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
108,245
(11,282)
(30,029)
670,002
822,360
13,149
835,509
85,424
107,980
(9,593)
(12,315)
634,885
806,381
12,983
819,364
Total liabilities and equity ....................................................................................
1,460,986
1,427,375
Kao Corporation Financial Report 2018
14
Consolidated Statement of Income
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2018
Net sales ....................................................................................................................
Cost of sales .............................................................................................................. 10, 13, 14, 20
Gross profit ................................................................................................................
6, 26
Notes
Selling, general and administrative expenses ............................................................ 13, 14, 20, 27
Other operating income .............................................................................................
Other operating expenses ......................................................................................... 13, 14, 20, 29
Operating income ......................................................................................................
13, 26, 28
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 ................................................................................................................
2018
1,508,007
(853,989)
654,018
(444,845)
14,288
(15,758)
207,703
1,717
(4,251)
2,082
(Millions of yen)
2017
1,489,421
(834,107)
655,314
(452,666)
14,909
(12,766)
204,791
1,452
(3,960)
2,007
207,251
204,290
(51,920)
155,331
(55,683)
148,607
153,698
1,633
155,331
147,010
1,597
148,607
Earnings per share
Basic (Yen) ..................................................................................................................
Diluted (Yen) ...............................................................................................................
31
31
314.25
314.12
298.30
298.09
15
Kao Corporation Financial Report 2018
Consolidated Statement of Comprehensive Income
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2018
Net income ..........................................................................................................................
Other comprehensive income
Items that will not be reclassified to profit 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 .....................................................................
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 ..........................
Other comprehensive income, net of taxes .....................................................................
Comprehensive income .....................................................................................................
Attributable to:
Owners of the parent ........................................................................................................
Non-controlling interests ...................................................................................................
Comprehensive income ....................................................................................................
Notes
2018
155,331
(Millions of yen)
2017
148,607
32, 35
32
32
32
32
(2)
(15,524)
(345)
(15,871)
1,166
21,260
317
22,743
(16,140)
8,541
(73)
(16,213)
(32,084)
123,247
(1)
8,540
31,283
179,890
122,324
923
123,247
178,020
1,870
179,890
Kao Corporation Financial Report 2018
16
Consolidated Statement of Changes in Equity
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2018
Equity attributable to owners of the parent
(Millions of yen)
Other components of equity
Net gain (loss) on
revaluation of
financial assets
measured at fair
value through other
compre hensive
income
8,490
—
Net gain (loss)
on derivatives
designated
as cash flow
hedges
4
—
Exchange
differences on
translation of
foreign
operations
(21,540)
—
Subscription
rights to
shares
731
—
Notes
Share
Capital
capital
surplus
85,424 107,980
—
—
Treasury
shares
(9,593)
—
Remeasurements
of defined
benefit plans
—
—
Total
(12,315)
—
Retained
earnings
634,885
153,698
Total
806,381
153,698
Non-
controlling
interests
12,983
1,633
Total
equity
819,364
155,331
—
—
—
—
—
—
(15,492)
(15,492)
(338)
(338)
(15,539)
(15,539)
(31,374)
(31,374)
— (31,374)
122,324
153,698
(710)
923
(32,084)
123,247
23
23
34
25
23
23
34
25
January 1, 2018 ...............
Net income ....................
Other comprehensive
income .......................
Comprehensive income ....
Disposal of treasury
shares ........................
Purchase of treasury
shares ........................
Share-based payment
transactions..............
Dividends ......................
Transfer from other
components of equity
to retained earnings ...
Other increase
(decrease) ..................
Total transactions with
the owners .................
December 31, 2018 .........
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 .........
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
265
85,424 108,245
(1,689)
(11,282)
85,424 107,648
—
—
(57,124)
—
(99) 48,345
(167)
— (50,034)
364
—
—
—
—
—
—
—
—
—
—
—
— (1,842)
332
—
(0)
—
—
—
—
—
—
—
—
—
—
(18)
—
(185)
546
911
—
—
—
—
—
—
—
(15)
—
(180)
731
— 49,373
(165)
—
—
—
—
—
—
—
(37,032)
(29,761)
—
8,221
8,221
—
—
—
—
—
—
—
—
(21,540)
(5)
(5)
—
—
—
—
—
—
—
(1)
4
—
(0)
(0)
—
—
—
—
—
—
—
—
4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(167)
(47,961)
118
— (50,034)
—
—
118
(50,034)
—
(56,793)
364
(56,793)
—
(746)
364
(57,539)
(1,694)
15,539
13,827
(13,827)
—
—
—
—
—
—
(11)
—
(11)
—
(1,694)
6,458
7,025
—
1,472
1,472
—
—
—
—
—
(7)
—
15,539
—
13,660
(30,029)
(118,581)
670,002
(106,345)
822,360
(757)
13,149
(107,102)
835,509
—
—
(21,821)
—
565,715
147,010
679,842
147,010
11,621
1,597
691,463
148,607
21,317
21,317
31,010
31,010
—
147,010
31,010
178,020
273
1,870
31,283
179,890
(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
—
—
—
—
—
—
—
—
332 47,531
(9,593)
85,424 107,980
(7)
8,490
(21,317)
—
(21,504)
(12,315)
(77,840)
634,885
(51,481)
806,381
(508)
12,983
(51,989)
819,364
17
Kao Corporation Financial Report 2018
Consolidated Statement of Cash Flows
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2018
Notes
2018
2017
(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 ...........................................................................................
Payments for business combinations ...............................................................................
Other .................................................................................................................................
Net cash flows from investing activities ....................................................................
33
Cash flows from financing activities
Increase (decrease) in short-term borrowings ..................................................................
Proceeds from long-term borrowings ...............................................................................
Repayments of long-term borrowings ..............................................................................
Proceeds from issuance of bonds ....................................................................................
Redemption of bonds .......................................................................................................
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
207,251
60,662
(1,578)
1,256
(2,082)
4,531
(12,591)
(15,677)
3,951
20,740
(21,437)
245,026
1,273
2,312
(1,293)
(51,708)
195,610
(26,768)
26,987
(80,295)
(7,703)
(73,915)
3,799
(157,895)
230
—
(67)
25,060
(24,939)
(50,035)
(56,838)
(745)
(1,245)
(108,579)
(70,864)
343,076
(6,234)
265,978
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
Kao Corporation Financial Report 2018
18
Notes to Consolidated Financial Statements
Kao Corporation and Consolidated Subsidiaries
Year ended December 31, 2018
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 2018
(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) Changes in Presentation
(Consolidated Statement of Cash Flows)
“Acquisition of subsidiaries and businesses,” which was presented
in cash flows from investing activities for the fiscal year ended
December 31, 2017, has been presented as “Payments for
business combinations” to appropriately reflect the substance of
the transactions for the fiscal year ended December 31, 2018.
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 closings 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.
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
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.
(3) Foreign Currency Translation
1) Functional currency and presentation currency
(ii) Classification and subsequent measurement
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.
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
comprehensive income; (c) equity instruments measured
at fair value through other comprehensive income; or (d)
financial assets measured at fair value through profit or
Kao Corporation Financial Report 2018
20
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.
(c) Equity instruments measured at fair value through
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.
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:
• An unbiased and probability-weighted amount
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 2018
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.
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:
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.
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.
The Group does not use cash flow hedges, fair value
hedges or net investment hedges in foreign operations.
(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 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.
Kao Corporation Financial Report 2018
22
(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 material intangible assets with
indefinite useful lives. The estimated useful lives of major
intangible assets are as follows:
• Trademarks: 20 years
• Customer relationships: 15 or 20 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.”
(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
23
Kao Corporation Financial Report 2018
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).
Notes to Consolidated Financial Statements
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 the 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.
(12) Share-based Payments
1) Stock option plan
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, the stock option plan
has been abolished except for the options already granted.
2) Performance share plan
The Company introduced a performance share plan
accounted for as an equity-settled share-based payment plan.
The performance share plan measures services received
at the fair value of the Company’s shares on the date of
grant, recognizing them 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.
Kao Corporation Financial Report 2018
24
(14) Revenue
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
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
obligations in the contract
recognition of goodwill
Step 5: Recognize revenue when the entity satisfies a
• Temporary differences arising from initial recognition of
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.
(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.
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
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.
25
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
(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.
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.
Kao Corporation Financial Report 2018
26
(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
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, 2018 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
IFRS 16 “Leases” replaces IAS 17 “Leases” and others. As a
result of this adoption, due to its single lessee accounting model,
right-of-use assets representing the right to use an underlying
asset and lease liabilities representing the obligation to make
lease payments are required to be recognized for all leases, in
principle, on the consolidated statement of financial position. After
recognition of right-of-use assets and lease liabilities, depreciation
of the right-of-use assets and interest on the lease liabilities are
recognized on the consolidated statement of income. The main
impact of this adoption on the Group’s consolidated financial
statements is expected to be increases of approximately 160
billion yen in right-of-use assets and lease liabilities on the
consolidated statement of financial position at the beginning of
the fiscal year ending December 31, 2019. Cash flows from
operating activities on the consolidated statement of cash flows
are expected to increase by approximately 20 billion yen and cash
flows from financing activities are expected to decrease by the
same amount. The impact on the consolidated statement of
income will be immaterial.
27
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
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 organized on the basis of five businesses: the four
business areas that constitute the Consumer Products Business
(the Cosmetics Business, the Skin Care and Hair Care Business,
the Human Health Care Business, and the Fabric and Home Care
Business) and the Chemical Business. In each business, the
Group plans comprehensive business strategies and carries out
business activities on a global basis.
Accordingly, the Group has five reportable segments: the
Cosmetics Business, the Skin Care and Hair Care Business, the
Human Health Care Business, the Fabric and Home Care
Business and the Chemical Business.
Due to a change in organization as of January 1, 2018, in the
fiscal year ended December 31, 2018 the Group reclassified its
four former reportable segments (the Beauty Care Business, the
Human Health Care Business, the Fabric and Home Care Business
and the Chemical Business) into five (the Cosmetics Business,
the Skin Care and Hair Care Business, the Human Health Care
Business, the Fabric and Home Care Business and the Chemical
Business). Segment information for the fiscal year ended
December 31, 2017 has been restated to reflect the reclassification.
Information about major customers has been omitted as the
revenue from each customer is less than 10% of the Group’s net
sales.
Reportable segments
Major products
Consumer
Products
Business
Cosmetics
Business
Skin Care and
Hair Care Business
Human Health Care
Business
Fabric and Home Care
Business
Chemical Business
Performance chemicals
Cosmetics
Counseling cosmetics, self-selection cosmetics
Skin care products
Soaps, facial cleansers, body cleansers
Hair care products
Food and beverage
products
Shampoos, conditioners, hair styling agents, hair coloring agents,
men’s products
Beverages
Sanitary products
Sanitary napkins, baby diapers
Personal health products
Bath additives, oral care 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
Specialty chemicals
Toner and toner binder for copiers and printers, ink and colorants for
inkjet printers, fragrances and aroma chemicals
Kao Corporation Financial Report 2018
28
(2) Sales and Results of Reportable Segments
Fiscal year ended December 31, 2018
(Millions of yen)
Reportable segments
Consumer Products Business
Cosmetics
Business
Skin Care
and Hair Care
Business
Human
Health Care
Business
Fabric and
Home Care
Business
Subtotal
Chemical
Business
Total
Reconciliation1 Consolidated
Net sales
Sales to customers ............... 279,635
Intersegment sales and
transfers2 .............................
—
Total net sales ........................... 279,635
Operating income .....................
27,710
Financial income ...................
Financial expenses ................
Share of profit in investments
accounted for using the
equity method ......................
Income before income taxes .....
341,419
267,702
344,105 1,232,861 275,146
1,508,007
—
1,508,007
—
341,419
48,827
—
267,702
27,907
—
— 37,661
344,105 1,232,861 312,807
30,631
175,693
71,249
37,661
1,545,668
206,324
(37,661)
(37,661)
1,379
—
1,508,007
207,703
1,717
(4,251)
2,082
207,251
Other items
Depreciation and
amortization3 .......................
Capital expenditures4 ............
10,908
11,597
9,593
17,021
17,602
19,259
10,299
18,107
48,402
65,984
12,000
23,032
60,402
89,016
260
81
60,662
89,097
Notes: 1. The operating income reconciliation of 1,379 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.
Fiscal year ended December 31, 2017
(Millions of yen)
Reportable segments
Consumer Products Business
Cosmetics
Business
Skin Care
and Hair Care
Business
Human
Health Care
Business
Fabric and
Home Care
Business
Subtotal
Chemical
Business
Total
Reconciliation1 Consolidated
Net sales
Sales to customers ............... 266,214
Intersegment sales and
transfers2 .............................
—
Total net sales ........................... 266,214
Operating income .....................
12,989
Financial income ...................
Financial expenses ................
Share of profit in investments
accounted for using the
equity method ......................
Income before income taxes .....
332,872
281,201
335,709 1,215,996 273,425 1,489,421
—
1,489,421
—
332,872
49,329
—
281,201
34,453
—
— 36,860
36,860
335,709 1,215,996 310,285 1,526,281
203,317
173,018 30,299
76,247
(36,860)
(36,860)
1,474
—
1,489,421
204,791
1,452
(3,960)
2,007
204,290
Other items
Depreciation and
amortization3 .......................
Capital expenditures4 ............
10,333
11,267
7,730
16,450
15,822
23,596
8,884
12,676
42,769 11,479
63,989 15,245
54,248
79,234
260
121
54,508
79,355
Notes: 1. The operating income reconciliation of 1,474 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 2018
Notes to Consolidated Financial Statements
(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.
2018
939,463
295,714
135,629
140,637
110,783
(Millions of yen)
2017
938,074
288,087
134,751
134,219
102,763
132,193
1,508,007
129,041
1,489,421
Non-current Assets (excluding Financial Assets, Deferred Tax Assets and Retirement Benefit Assets)
(Millions of yen)
Japan .........................................................................................................................................................
Asia ............................................................................................................................................................
Americas ....................................................................................................................................................
Europe .......................................................................................................................................................
Total ....................................................................................................................................................
2018
448,357
88,843
96,426
27,184
660,810
2017
431,673
85,290
22,610
28,935
568,508
7
Business Combinations
(1) Acquisition of Oribe Hair Care, LLC in the U.S.
1) Outline of Business Combination
Name of the acquired business and
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
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.
3) Acquisition Cost of Acquired Business and Acquiree and Its Components
Acquisition cost of acquired business
and acquiree:
45,633 million yen
Components of acquisition cost:
Cash
45,633 million yen
Kao Corporation Financial Report 2018
30
4) Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
Current assets ................................................................
4,074 million yen
Trademarks .....................................................................
14,232 million yen
Other non-current assets ................................................
4,151 million yen
Total assets..................................................................
22,457 million yen
Current liabilities .............................................................
1,090 million yen
Total liabilities ..............................................................
1,090 million yen
5) Goodwill
Goodwill recognized:
Components of goodwill:
24,266 million yen
Goodwill recognized for this business
combination reflects excess earning
powers in future from using newly
acquired brands, products and sales
networks from Oribe Hair Care, LLC.
Goodwill recognized is expected to be
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, 2018 are not presented because the impacts on the
consolidated statement of income are immaterial.
(2) Acquisition of Washing Systems Intermediate Holdings, Inc. in the U.S.
1) Outline of Business Combination
Name of the acquiree:
Washing Systems Intermediate Holdings, Inc. (hereinafter “Washing Systems”)
Business outline:
Acquisition date:
Acquisition method:
Development and sales of detergents and other products and provision of
consulting and other services to the commercial laundry market
August 9, 2018
Cash consideration to acquire shares
Percentage of voting rights acquired: 100%
2) Primary Reason for Business Combination
Washing Systems has earned substantial market support by
developing and selling industry-leading cleaning agents and
by providing integrated supply systems for cleaning agents
and best-in-class customer service to commercial laundry
companies, mainly in North America. The Group develops
professional-use products, primarily in Japan, through Kao
Professional Services Company, Ltd. (hereinafter “KPS”) The
mission of KPS is to maintain people’s safety, security, and
comfort through support for cleaning applications, hygiene
management and other measures in a variety of fields
including food service, food processing, hospitals and
cleaning. With this acquisition, the Company will promote
global development of its professional-use products.
3) Acquisition Cost of Acquired Business and Acquiree and Its Components
Acquisition cost of acquired
business and acquiree:
Components of acquisition cost:
30,706 million yen
Cash
30,706 million yen
4) Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
Current assets ................................................................
2,609 million yen
Customer relationships ...................................................
9,291 million yen
Other non-current assets ................................................
4,630 million yen
Total assets .................................................................
16,530 million yen
Current liabilities ............................................................
1,672 million yen
Non-current liabilities .....................................................
2,752 million yen
Total liabilities ..............................................................
4,424 million yen
31
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
5) Goodwill
Goodwill recognized:
Components of goodwill:
18,600 million yen
Goodwill recognized for this business
combination reflects excess earning
powers in future from using newly
acquired products and sales networks
from Washing Systems. A portion of
goodwill recognized is expected to be
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, 2018 are not presented because the impacts on the
consolidated statement of income are immaterial.
8
Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
Cash and deposits .....................................................................................................................................
Short-term investments .............................................................................................................................
Total ....................................................................................................................................................
2018
206,078
59,900
265,978
(Millions of yen)
2017
260,176
82,900
343,076
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 ....................................................................................................................................................
2018
217,594
7,073
(1,565)
223,102
(Millions of yen)
2017
211,990
5,915
(1,398)
216,507
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 2018
32
10
Inventories
Inventories consist of the following:
Merchandise and finished goods ...............................................................................................................
Work in progress .......................................................................................................................................
Materials and supplies ..............................................................................................................................
Total ....................................................................................................................................................
2018
146,684
14,875
36,012
197,571
(Millions of yen)
2017
136,795
12,723
34,403
183,921
The amount of inventories recognized as expenses and included in cost of sales for the fiscal years ended December 31, 2018 and 2017
were 733,108 million yen and 714,981 million yen, respectively.
Write-downs of inventories recognized as expenses for the fiscal years ended December 31, 2018 and 2017 were 5,044 million yen
and 5,093 million yen, respectively.
11 Other Assets
Other assets consist of the following:
Other current assets
(Millions of yen)
2018
2017
Insurance receivable ..............................................................................................................................
Prepaid expenses ...................................................................................................................................
Other ......................................................................................................................................................
Total ....................................................................................................................................................
Other non-current assets
Insurance receivable ..............................................................................................................................
Long-term prepaid lease payments .......................................................................................................
Long-term prepaid expenses .................................................................................................................
Retirement benefit assets .....................................................................................................................
Other ......................................................................................................................................................
Total ....................................................................................................................................................
2,886
9,538
10,025
22,449
2,109
4,060
435
1,166
505
8,275
8,120
9,566
10,476
28,162
2,654
4,508
1,624
1,224
676
10,686
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 pursuant to the decision to sell these assets. These assets were sold in the fiscal year ended December 31, 2018.
33
Kao Corporation Financial Report 2018
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
January 1, 2017 ............................................................
Additions ..................................................................
Acquisitions through business combinations ..........
Sales and disposals ..................................................
Reclassification ........................................................
Exchange differences on translation of
foreign operations ..................................................
Other ........................................................................
Buildings
and
structures
408,899
Machinery
and
vehicles
716,797
566
697
(5,468)
18,605
2,766
60
230
100
(27,952)
36,152
4,327
281
Tools,
furniture and
fixtures
119,612
4,762
48
(13,424)
7,464
1,197
(315)
December 31, 2017 .....................................................
426,125
729,935
119,344
Additions ..................................................................
Acquisitions through business combinations ..........
327
46
331
1,649
Sales and disposals ..................................................
(6,808)
(26,497)
Reclassification ........................................................
20,519
41,311
1,433
181
(8,457)
10,773
Construction
in
progress
24,488
67,471
—
(3)
(62,591)
359
172
29,896
76,545
129
—
Land
73,018
13
83
(443)
370
274
(0)
73,315
2,749
—
(226)
34
(72,637)
(Millions of yen)
Total
1,342,814
73,042
928
(47,290)
—
8,923
198
1,378,615
81,385
2,005
(41,988)
—
Exchange differences on translation of
foreign operations ..................................................
(4,207)
(8,474)
(1,389)
(189)
(538)
(14,797)
Other ........................................................................
December 31, 2018 .....................................................
(231)
435,771
162
738,417
(334)
121,551
0
75,683
1,148
34,543
745
1,405,965
Accumulated Depreciation and Accumulated Impairment Losses
Buildings
and
structures
285,460
January 1, 2017 ............................................................
Machinery
and
vehicles
583,202
Depreciation1 ............................................................
13,036
25,133
Impairment losses2 ..................................................
Impairment losses reversed2 ...................................
—
(0)
18
—
Tools,
furniture and
fixtures
92,901
11,323
1
(1)
Sales and disposals ..................................................
(5,132)
(27,219)
(13,185)
Exchange differences on translation of
foreign operations ..................................................
Other ........................................................................
1,888
69
4,091
272
December 31, 2017 .....................................................
295,321
585,497
Depreciation1 ............................................................
13,739
28,209
929
(291)
91,677
11,683
Sales and disposals ..................................................
(6,315)
(25,663)
(8,270)
Exchange differences on translation of
foreign operations ..................................................
(2,199)
(5,737)
Other ........................................................................
December 31, 2018 .....................................................
(113)
300,433
132
582,438
(1,042)
(209)
93,839
Land
10,416
—
—
—
(96)
—
—
10,320
—
—
—
—
10,320
Construction
in
progress
—
—
—
—
—
—
—
—
—
—
—
—
—
(Millions of yen)
Total
971,979
49,492
19
(1)
(45,632)
6,908
50
982,815
53,631
(40,248)
(8,978)
(190)
987,030
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 2018
34
Carrying Amount
January 1, 2017 ............................................................
Buildings
and
structures
123,439
Machinery
and
vehicles
133,595
December 31, 2017 .....................................................
130,804
144,438
December 31, 2018 .....................................................
135,338
155,979
(Millions of yen)
Tools,
furniture and
fixtures
26,711
27,667
27,712
Construction
in
progress
24,488
29,896
34,543
Land
62,602
62,995
65,363
Total
370,835
395,800
418,935
(2) Leased Assets
The carrying amount of leased assets from finance leases included in property, plant and equipment is as follows:
January 1, 2017 ............................................................
December 31, 2017 .....................................................
December 31, 2018 .....................................................
(Millions of yen)
Buildings
and
structures
4,060
3,195
2,419
Other
54
58
45
Total
4,114
3,253
2,464
(4) Commitments
Note 38 “Commitments” presents information on commitments
to acquire property, plant and equipment.
(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.
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
(Millions of yen)
January 1, 2017 ............................................................
Additions ..................................................................
Acquisitions through business combinations ..........
Sales and disposals ..................................................
Reclassification ........................................................
Exchange differences on translation of
foreign operations ..................................................
Other ........................................................................
Goodwill
137,783
Software
27,284
—
495
—
—
457
—
84
11
(5,502)
5,194
134
(9)
December 31, 2017 .....................................................
138,735
27,196
Additions ..................................................................
—
Acquisitions through business combinations ..........
42,866
Sales and disposals ..................................................
Reclassification ........................................................
—
—
110
5
(5,640)
7,495
Exchange differences on translation of
foreign operations ..................................................
(1,315)
(127)
(68)
Other ........................................................................
December 31, 2018 .....................................................
—
180,286
281
29,320
—
14,710
Note: 1. Software in progress is included in other in intangible assets.
35
Kao Corporation Financial Report 2018
Intangible assets
Customer
relationships
Trademarks
—
—
2
(2)
—
—
—
—
—
—
—
768
(63)
—
72
—
777
—
14,778
13,115
—
—
—
—
(153)
—
13,739
Other1
5,163
6,229
12
(807)
(5,188)
(55)
(11)
5,343
7,602
1,525
(143)
(7,495)
(72)
(25)
6,735
Total
32,447
6,313
793
(6,374)
6
151
(20)
33,316
7,712
29,423
(5,783)
—
(420)
256
64,504
Notes to Consolidated Financial Statements
Accumulated Amortization and Accumulated Impairment Losses
(Millions of yen)
January 1, 2017 ............................................................
Amortization1 ............................................................
Sales and disposals ..................................................
Exchange differences on translation of
foreign operations ..................................................
Other ........................................................................
December 31, 2017 .....................................................
Amortization1 ............................................................
Sales and disposals ..................................................
Exchange differences on translation of
foreign operations ..................................................
Other ........................................................................
December 31, 2018 .....................................................
Goodwill
—
—
—
—
—
—
—
—
—
—
—
Software
14,915
4,839
(5,486)
117
(10)
14,375
5,397
(5,500)
(105)
228
14,395
Intangible assets
Customer
relationships
—
Trademarks
—
—
—
—
—
—
737
—
(1)
—
736
120
(63)
1
—
58
619
—
(11)
—
666
Other
2,843
57
(794)
(52)
—
2,054
278
(135)
(52)
13
2,158
Total
17,758
5,016
(6,343)
66
(10)
16,487
7,031
(5,635)
(169)
241
17,955
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, 2017 ............................................................
Goodwill
137,783
December 31, 2017 .....................................................
138,735
December 31, 2018 .....................................................
180,286
(Millions of yen)
Intangible assets
Customer
relationships
Trademarks
—
—
—
719
13,974
13,073
Software
12,369
12,821
14,925
Other
2,320
3,289
4,577
Total
14,689
16,829
46,549
(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
Cosmetics Business, the Skin Care and Hair Care Business, the
Fabric and Home Care Business and the Chemical Business. The
goodwill primarily relates to the acquisition of the Kanebo
Cosmetics Group.
Cosmetics Business ..................................................................................................................................
Kanebo Cosmetics Group ......................................................................................................................
Molton Brown Group .............................................................................................................................
Skin Care and Hair Care Business .............................................................................................................
Oribe Hair Care and other ......................................................................................................................
Other ......................................................................................................................................................
Fabric and Home Care Business ..............................................................................................................
Chemical Business ....................................................................................................................................
Total ....................................................................................................................................................
2018
130,455
119,400
11,055
28,831
24,908
3,923
18,423
2,577
180,286
(Millions of yen)
2017
131,283
119,400
11,883
4,792
779
4,013
—
2,660
138,735
(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 two-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 two-year
forecasts approved by management were calculated using an
annual growth rate of 0% and were discounted to present value
Kao Corporation Financial Report 2018
36
using a weighted average cost of capital (WACC) of 8.2% for the
fiscal year ended December 31, 2018 and 7.1% for the fiscal year
ended December 31, 2017. For the fiscal year ended December
31, 2018, 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. While the value in
use exceeded carrying amount at December 31, 2017, increasing
the discount rate by 2.9% would result in impairment.
(4) Intangible Assets with Indefinite Useful Lives
The intangible assets above include no material intangible assets
with indefinite useful lives.
(5) Commitments
Note 38 “Commitments” presents information on commitments
associated with the acquisition of intangible assets.
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 ................................................................................
2018
7,931
(Millions of yen)
2017
7,682
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 ...........................................................................................
2018
2,082
(418)
1,664
(Millions of yen)
2017
2,007
316
2,323
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, 2018
(Millions of yen)
January 1,
2018
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Other
December 31,
2018
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 ..........................................
18,735
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 2018
559
589
(998)
(1,065)
2,593
1,678
776
—
426
52
1,254
424
—
7,011
—
—
—
7,011
—
121
—
—
121
6,890
(77)
(244)
13
366
(45)
13
2,309
(756)
—
(37)
1,516
(1,503)
19,217
24,093
10,446
1,400
15,866
71,022
10,188
2,635
11,161
744
24,728
46,294
Notes to Consolidated Financial Statements
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
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 ............................................................................................................................
2018
49,158
2,864
46,294
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 .........................................................................................................................................................
2018
2,664
11,981
14,645
2018
210
353
472
297
1,332
2,664
18,735
16,737
11,431
2,099
13,318
62,320
7,103
3,270
10,735
729
21,837
40,483
(Millions of yen)
2017
40,918
435
40,483
(Millions of yen)
2017
17,656
19,967
37,623
(Millions of yen)
2017
507
3,426
7,007
5,336
1,380
17,656
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,
2018 and 2017 were 11,512 million yen and 15,835 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 2018
38
(2) Income Taxes
Income taxes consist of the following:
Current taxes .............................................................................................................................................
Deferred taxes1 ..........................................................................................................................................
Total .......................................................................................................................................................
2018
52,344
(424)
51,920
(Millions of yen)
2017
55,769
(86)
55,683
Note: 1. Deferred taxes include 385 million yen and 160 million yen for the fiscal years ended December 31, 2018 and 2017, 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 ..............................................................................................................................
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 .............................................................................................
2018
430
40,046
30,299
12
50,040
120,827
2017
201
67
70,347
24,994
24,975
120,584
Current liabilities
Bonds and borrowings ....................................................................
40,488
25,262
Non-current liabilities
Bonds and borrowings ....................................................................
Total .............................................................................................
80,339
120,827
95,322
120,584
2018
30.86
(3.80)
(1.64)
(0.30)
0.19
(0.26)
25.05
(%)
2017
30.86
(2.68)
(0.92)
0.48
0.08
(0.56)
27.26
Average interest
rate1 (%)
1.18
0.13
0.11
—
—
(Millions of yen)
Maturity
—
—
2021-2023
—
—
Notes: 1. The average interest rate is the weighted average interest rate on the balance of borrowings as of December 31, 2018.
2. Details of bonds issued are as follows:
Issuer
Bond name
Issue date
2018
2017
Interest rate (%)
Collateral Maturity date
The Company
3rd unsecured bonds
June 14, 2013
—
24,994
The Company
4th unsecured bonds
June 14, 2013
24,985
24,975
The Company
5th unsecured bonds
June 19, 2018
24,947
Subsidiaries
Other bonds
—
120
—
—
Total .................................................................................
50,052
49,969
0.39
0.62
0.08
—
None
June 20, 2018
None
June 19, 2020
None
June 20, 2023
—
—
(Millions of yen)
39
Kao Corporation Financial Report 2018
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
2017
2018
789
689
1,769
25
2,483
(64)
2,419
2,337
149
3,275
(97)
3,178
(Millions of yen)
Present value of minimum
lease payments
2018
663
1,731
25
2,419
—
2,419
2017
755
2,276
147
3,178
—
3,178
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 .......................................................................................................................................................
2018
8,622
15,539
6,381
30,542
(Millions of yen)
2017
8,414
16,347
6,917
31,678
The total of minimum lease payments under operating lease contracts recognized as expenses is as follows:
Total of minimum lease payments .............................................................................................................
19
Trade and Other Payables
Trade and other payables consist of the following:
Trade payables ...........................................................................................................................................
Non-trade payables ....................................................................................................................................
Total ......................................................................................................................................................
2018
9,829
(Millions of yen)
2017
10,080
2018
145,603
79,957
225,560
(Millions of yen)
2017
143,944
80,949
224,893
Kao Corporation Financial Report 2018
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 defined benefit liabilities .............................................................................................................
Amounts recognized in consolidated statement of fi nancial position
Retirement benefit liabilities ..................................................................................................................
Retirement benefit assets .....................................................................................................................
Net defined benefit liabilities .............................................................................................................
2) Defined benefit obligations
Changes in the present value of defined benefit obligations are as follows:
The present value of the defi ned benefi t 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 defi ned benefi t obligations at end of year ..........................................................
2018
342,130
(258,744)
83,386
84,552
(1,166)
83,386
2018
333,614
9,376
2,569
6,755
1,376
1,748
107
(11,865)
—
(1,550)
342,130
(Millions of yen)
2017
333,614
(270,144)
63,470
64,694
(1,224)
63,470
(Millions of yen)
2017
355,579
9,839
2,672
(31)
(20,245)
2,242
(407)
(12,015)
(4,738)
718
333,614
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 cost of sales and general
and administrative expenses in the consolidated statement of income.
4. The weighted average duration of the defined benefit obligations in
Japan was mainly 17.4 years at December 31, 2018 and 16.6 years at
December 31, 2017.
41
Kao Corporation Financial Report 2018
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 ...............................................................................................
2018
270,144
1,927
(12,656)
10,292
(10,249)
—
(714)
258,744
(Millions of yen)
2017
261,857
1,882
12,850
8,941
(10,624)
(4,738)
(24)
270,144
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 13,661 million
yen to the defined benefit plan for the fiscal year ending December 31, 2019.
Plan assets consist of the following:
Equity securities
Japan ......................................
Overseas .................................
Debt securities ...........................
Japan ......................................
Overseas .................................
Other ..........................................
Total .....................................
2018
Market price in an active market
Quoted
8,830
—
8,830
6,640
—
6,640
352
15,822
Unquoted
43,962
21,502
22,460
188,425
126,940
61,485
10,535
242,922
Total
52,792
21,502
31,290
195,065
126,940
68,125
10,887
258,744
(Millions of yen)
2017
Market price in an active market
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
Quoted
9,207
—
9,207
7,518
—
7,518
257
16,982
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%
2018
2017
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)
2018
2017
(25,292)
26,314
(23,414)
24,311
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 2018
42
5) Defined contribution plans
Expenses related to the defined contribution plan recognized
in profit or loss were 4,176 million yen and 3,873 million yen
for the fiscal years ended December 31, 2018 and 2017,
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, 2018 and 2017 were 272,234 million
yen and 268,034 million yen, respectively.
21
Provisions
Components of and changes in provisions consist of the following:
January 1, 2018 ....................................................................................
Provision for
loss related
to cosmetics
8,763
Provision for
asset retirement
obligations
4,339
Other
provisions
2,337
Increase ............................................................................................
2,732
Interest expense on discounted provision .........................................
7
Decrease (provision used) ................................................................
(3,334)
Decrease (provision reversed) ..........................................................
Exchange differences on translation of
foreign operations ...........................................................................
—
—
December 31, 2018 ..............................................................................
8,168
174
62
(139)
—
(22)
4,414
1,383
—
(1,002)
(181)
(71)
2,466
(Millions of yen)
Total
15,439
4,289
69
(4,475)
(181)
(93)
15,048
(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 2,521 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 subsidiaries in Europe and the Americas 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 .........................................................................................................................................................
2018
77,530
8,808
7,865
8,249
(Millions of yen)
2017
81,515
9,741
7,558
8,590
Total .......................................................................................................................................................
102,452
107,404
43
Kao Corporation Financial Report 2018
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)
2018
1,000,000,000
2017
1,000,000,000
Beginning balance ..................................................................................................................................
495,000,000
504,000,000
Change during the year2 .........................................................................................................................
(6,300,000)
(9,000,000)
Ending balance .......................................................................................................................................
488,700,000
495,000,000
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, 2018 and 2017 decreased by 6,300,000 shares and 9,000,000 shares
respectively 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 ....................................................................................................................................
Increase2 ................................................................................................................................................
(Shares)
2018
2,225,561
6,237,461
2017
11,137,654
263,176
Decrease3 ...............................................................................................................................................
(6,419,750)
(9,175,269)
Ending balance4 .........................................................................................................................................
2,043,272
2,225,561
Notes: 1. 556,492 shares of treasury shares held by associates were included at December 31, 2018 and 2017.
257,300 shares held by the Board Incentive Plan Trust (hereinafter “BIP Trust”) were included at December 31, 2018.
2. The increase of 6,237,461 shares of treasury shares during the fiscal year ended December 31, 2018 resulted from the acquisition of 6,233,200 shares
by resolution of the Board of Directors and the purchase of 4,261 fractional shares.
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
BIP Trust and the purchase of 5,876 fractional shares.
3. The decrease of 6,419,750 shares of treasury shares during the fiscal year ended December 31, 2018 resulted from the retirement of 6,300,000 shares
by resolution of the Board of Directors, a decrease of 105,000 shares due to the exercise of stock options, a decrease of 14,625 shares due to the grant
to the Board of Directors by the BIP trust and the sale of 125 fractional shares.
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.
4. 556,492 shares of treasury shares held by associates were included at December 31, 2018 and 2017.
In addition, 242,675 shares and 257,300 shares held by the BIP Trust were included at December 31, 2018 and 2017, respectively.
(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, 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
Associates hedge their 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 2018
44
5) Remeasurements of defined benefit plans
Remeasurements of defined benefit plans include 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.
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. Guided by EVA management, which places
importance on both continuous enhancements in corporate value
and long-term profits for all stakeholders, the Group develops its
business strategy and business plan.
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
maintain high credit ratings which will allow it to procure capital
for large-scale investments. The Group is not subject to significant
(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.
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, 2018, EVA increased
3.1 billion yen compared with the previous fiscal year to 93.5
billion yen due to an 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, 2018
Date of resolution
112th Annual General Meeting
of Shareholders held on
March 23, 2018
Board of Directors meeting held on
July 26, 2018
Total dividends¹
(Millions of yen)
Dividends per share
(Yen)
Record date
Effective date
27,595
29,197
56
60
December 31, 2017
March 26, 2018
June 30, 2018
September 3, 2018
Note: 1. Total dividends are reduced by dividends on treasury shares held by associates accounted for using the equity method and dividends on shares of the
Company held by the BIP Trust.
The dividend resolved at the 112th Annual General Meeting of Shareholders held on March 23, 2018 was 27,641 million yen before the deduction. The
dividend resolved at the meeting of the Board of Directors held on July 26, 2018 was 29,245 million yen before the deduction.
45
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
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 on shares of the Company 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.
Dividends with an effective date after the fiscal year end are as follows:
Fiscal year ended December 31, 2018
Date of Resolution
113th Annual General Meeting
of Shareholders held on
March 26, 2019
Fiscal year ended December 31, 2017
Date of Resolution
112th Annual General Meeting
of Shareholders held on
March 23, 2018
Total dividends
(Millions of yen)
Dividends per share
(Yen)
Record date
Effective date
29,247
60
December 31, 2018
March 27, 2019
Total dividends
(Millions of yen)
Dividends per share
(Yen)
Record date
Effective date
27,641
56
December 31, 2017
March 26, 2018
26
Revenue
(1) Disaggregation of Revenue
The Group is organized on the basis of five businesses: the four
business areas that constitute the Consumer Products Business
(the Cosmetics Business, the Skin Care and Hair Care Business,
the Human Health Care Business, and the Fabric and Home Care
Business), and the Chemical Business.
Revenues of these five 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
five main businesses.
The Group disaggregates revenue from contracts with customers
by separating the Consumer Products Business into the Cosmetics
Business and non-Cosmetics Businesses 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:
Due to a change in organization as of January 1, 2018, in the fiscal
year ended December 31, 2018 the Group reclassified its reportable
segments and disaggregation of revenue for the fiscal year ended
December 31, 2017 has been restated to reflect the reclassification.
Changes in segment classification are presented in Note 6
“Segment Information (1) Summary of Reportable Segments.”
Kao Corporation Financial Report 2018
46
Fiscal year ended December 31, 2018
Cosmetics Business
Skin Care and Hair Care Business
Human Health Care Business
Fabric and Home Care Business
Consumer Products Business
Chemical Business
Elimination of intersegment transactions
Consolidated
Revenue of logistics services to third parties
included in other operating income
Japan
217,726
195,821
171,633
298,712
883,892
126,550
(32,864)
977,578
Asia
34,667
28,513
95,971
39,558
198,709
67,480
(3,088)
263,101
Americas
6,397
72,804
98
5,723
85,022
51,846
(87)
Europe
20,845
44,281
—
112
65,238
66,931
(1,622)
(Millions of yen)
Total
279,635
341,419
267,702
344,105
1,232,861
312,807
(37,661)
136,781
130,547
1,508,007
8,548
—
—
—
8,548
Total revenue from contracts with customers
986,126
263,101
136,781
130,547
1,516,555
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.
Fiscal year ended December 31, 2017
Cosmetics Business
Skin Care and Hair Care Business
Human Health Care Business
Fabric and Home Care Business
Consumer Products Business
Chemical Business
Elimination of intersegment transactions
Consolidated
Revenue of logistics services to third parties
included in other operating income
Japan
215,035
191,853
184,453
294,838
886,179
123,886
(31,833)
978,232
Asia
25,356
27,942
96,701
38,786
188,785
69,572
(3,352)
255,005
Americas
6,276
68,866
47
2,085
77,274
52,625
(99)
Europe
19,547
44,211
—
—
63,758
64,202
(1,576)
(Millions of yen)
Total
266,214
332,872
281,201
335,709
1,215,996
310,285
(36,860)
129,800
126,384
1,489,421
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.
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-
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
47
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
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.
January 1, 2018
December 31, 2018
(Millions of yen)
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) Liabilities from Contracts with Customers
Liabilities from contracts with customers are as follows:
Fiscal year ended December 31, 2018
Contract liabilities
Advances ...........................................................................................................................
Refund liabilities .................................................................................................................
Total ................................................................................................................................
392
16,904
17,296
181
18,206
18,387
Fiscal year ended December 31, 2017
Contract liabilities
January 1, 2017
December 31, 2017
(Millions of yen)
Advances ...........................................................................................................................
Refund liabilities .................................................................................................................
Total ................................................................................................................................
2,501
14,046
16,547
392
16,904
17,296
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.
The balances of advances as of January 1, 2018 and 2017 were recognized as revenue during the fiscal years ended December 31, 2018
and 2017, respectively. The amount of revenue recognized during the fiscal year ended December 31, 2018 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.
(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, 2018 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.
Kao Corporation Financial Report 2018
48
27
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of the following:
Advertising .................................................................................................................................................
Sales promotion .........................................................................................................................................
2018
80,274
55,308
(Millions of yen)
2017
89,935
58,940
Employee benefi ts .....................................................................................................................................
148,220
147,007
Depreciation ..............................................................................................................................................
Amortization ..............................................................................................................................................
Research and development .......................................................................................................................
Other .........................................................................................................................................................
9,186
6,860
57,673
87,324
8,870
4,784
56,703
86,427
Total .......................................................................................................................................................
444,845
452,666
28 Other Operating Income
Other operating income consists of the following:
Revenue of logistics services to third parties ............................................................................................
Royalty income ..........................................................................................................................................
Other .........................................................................................................................................................
2018
8,548
1,039
4,701
(Millions of yen)
2017
8,619
1,112
5,178
Total .......................................................................................................................................................
14,288
14,909
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 subsidiaries in Europe and the Americas .................................
Other1 ........................................................................................................................................................
2018
7,667
4,769
1,516
1,806
Total .......................................................................................................................................................
15,758
Note: 1. Note 13 “Property, Plant and Equipment” presents impairment losses included in other.
(Millions of yen)
2017
7,688
3,729
27
1,322
12,766
49
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
30
Financial Income and Financial Expenses
Financial income consists of the following:
(Millions of yen)
2018
2017
Interest income
Financial assets measured at amortized cost ........................................................................................
Retirement benefi t assets .....................................................................................................................
1,320
30
1,059
38
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 .........................................................................................................................................................
78
171
8
110
0
224
12
119
Total ................................................................................................................................................
1,717
1,452
Financial expenses consist of the following:
Foreign exchange loss1 ..............................................................................................................................
Interest expenses2
Financial liabilities measured at amortized cost .....................................................................................
Retirement benefi t liabilities ..................................................................................................................
Other ...............................................................................................................................................
Total ................................................................................................................................................
2018
2,304
1,256
672
19
4,251
(Millions of yen)
2017
1,765
1,339
828
28
3,960
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.
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)
2018
153,698
—
2017
147,010
—
Net income used to calculate basic earnings per share ............................................................................
153,698
147,010
Weighted average number of ordinary shares (Thousands of shares) ..................................................
489,089
492,832
Basic earnings per share (Yen) ...................................................................................................................
314.25
298.30
Kao Corporation Financial Report 2018
50
(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)
2018
153,698
—
2017
147,010
—
Net income used to calculate diluted earnings per share ..........................................................................
153,698
147,010
Weighted average number of ordinary shares (Thousands of shares) ......................................................
489,089
492,832
Increase in ordinary shares
Subscription rights to shares (Thousands of shares) ....................................................................
199
Weighted average number of ordinary shares after dilution (Thousands of shares) ..........................
489,289
337
493,170
Diluted earnings per share (Yen) ......................................................................................................
314.12
298.09
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, 2018
Items that will not be reclassifi ed to profi t or loss
Gains (losses)
arising for the year
Tax effect
After tax effect
(Millions of yen)
Net gain (loss) on revaluation of fi nancial assets measured at fair value through
other comprehensive income ...................................................................................
119
(121)
(2)
Remeasurements of defi ned benefi t plans .................................................................
(22,535)
7,011
(15,524)
Share of other comprehensive income of investments accounted for
using the equity method ...........................................................................................
(497)
Total of items that will not be reclassifi ed to profi t or loss ......................................
(22,913)
152
7,042
(345)
(15,871)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations .........................................
(16,140)
Share of other comprehensive income of investments accounted for
using the equity method ...........................................................................................
(75)
Total of items that may be reclassifi ed subsequently to profi t or loss ....................
(16,215)
—
2
2
(16,140)
(73)
(16,213)
Total .....................................................................................................................
(39,128)
7,044
(32,084)
51
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
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 fi nancial assets measured at fair value through
other comprehensive income ...................................................................................
Remeasurements of defi ned benefi t plans .................................................................
Share of other comprehensive income of investments accounted for
using the equity method ...........................................................................................
Total of items that will not be reclassifi ed to profi t or loss ......................................
1,675
30,884
457
33,016
Items that may be reclassifi ed subsequently to profi t 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 reclassifi ed subsequently to profi t 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
33
Cash Flow Information
(1) Payments for Business Combinations
Payments for business combinations consist of the following:
Cash and cash equivalents paid for acquisition .........................................................................................
Cash and cash equivalents held by the acquiree at the time of acquisition ..............................................
Payments for business combinations ........................................................................................................
(Millions of yen)
2018
76,387
(2,472)
73,915
(2) Changes in Liabilities Arising from Financing Activities
The major changes in liabilities arising from financing activities are changes from financing cash flows and there are no significant non-
cash changes.
Kao Corporation Financial Report 2018
52
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,
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.
2) Number of stock options and weighted average exercise price
• 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
Beginning balance of outstanding .................................
Granted ......................................................................
Exercised ...................................................................
Expired at maturity .....................................................
Ending balance of outstanding ......................................
Ending balance of exercisable .......................................
2018
2017
Number of
shares
(Shares)
313,000
—
(105,000)
(83,000)
125,000
125,000
Weighted average
exercise price
(Yen)
973
—
1,117
2,254
1
1
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
Notes: 1. The weighted average share price on the date of exercise for the fiscal years ended December 31, 2018 and 2017 was 7,877 yen and 6,254 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:
Exercise price
(Yen)
1
—
Total
2018
Number of
shares
(Shares)
125,000
—
125,000
Weighted average
remaining contractual life
(Years)
Exercise price
(Yen)
2.8
—
2.8
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
53
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
(2) Performance Share Plan
1) Outline of performance share plan
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 or paid following completion of
settlement procedures by the designated beneficiary, after
the end of the eligibility period in the case of performance-
linked points, or 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:
Number of points granted during the period ...................
Achievement-linked
points
37,625
Weighted average fair value (Yen) ...................................
6,821
Fixed points
16,125
6,659
Achievement-linked
points
34,125
6,821
Fixed points
14,625
6,767
2018
2017
(3) Share-based Payment Expenses
Share-based payment expenses recognized in the consolidated statement of income for the fiscal years ended December 31, 2018 and
2017 were 364 million yen and 332 million yen, respectively.
Kao Corporation Financial Report 2018
54
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)
2018
2017
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 fi nancial assets ............................................................................................................................
Subtotal ..............................................................................................................................................
Non-current assets
Other fi nancial assets ............................................................................................................................
Total ................................................................................................................................................
236,078
223,102
23,495
29,900
1,068
2,983
11,140
527,766
265,978
223,102
15,146
504,226
23,540
527,766
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
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, 2018
Company name
Seven & i Holdings Co., Ltd. .....................................................................................................................
Saiwai Trading Co., Ltd. .............................................................................................................................
Livedo Corporation ....................................................................................................................................
Aeon Co., Ltd. ...........................................................................................................................................
Tokio Marine Holdings, Inc. ......................................................................................................................
Japan Alcohol Trading Co., Ltd. .................................................................................................................
Izumi Co., Ltd. ..........................................................................................................................................
Keytrading Co., Ltd. ..................................................................................................................................
The Yamagata Bank, Ltd. ..........................................................................................................................
Inageya Co., Ltd. .......................................................................................................................................
(Millions of yen)
Fair value
3,076
1,191
1,122
905
889
622
511
389
237
225
55
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
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. ..................................................................................................................
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
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 values 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) ..........................................................................................................................
2018
3,077
2,451
(Millions of yen)
2017
24
10
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, 2018 and 2017, were 1,694 million yen and 7 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)
2018
2017
Trade and other payables (Note 19) ........................................................................................................
Bonds and borrowings (Note 17) ...........................................................................................................
Other ......................................................................................................................................................
225,560
120,827
16,178
Financial liabilities measured at fair value through profi t or loss
Derivatives .............................................................................................................................................
208
Total ................................................................................................................................................
362,773
Current liabilities
Trade and other payables .......................................................................................................................
225,560
Bonds and borrowings ...........................................................................................................................
Other fi nancial liabilities .........................................................................................................................
40,488
6,880
Subtotal ..............................................................................................................................................
272,928
Non-current liabilities
Bonds and borrowings ...........................................................................................................................
Other fi nancial liabilities .........................................................................................................................
Subtotal ..............................................................................................................................................
80,339
9,506
89,845
Total ................................................................................................................................................
362,773
224,893
120,584
16,804
1,026
363,307
224,893
25,262
7,739
257,894
95,322
10,091
105,413
363,307
There are no significant assets pledged for the above financial liabilities. The Group held deposits received, which are interest-bearing
liabilities in other financial liabilities, at December 31, 2018 and 2017 totaling 12,380 million yen and 12,599 million yen, respectively. The
average interest rate on deposits received as of December 31, 2018 was 0.13%.
Kao Corporation Financial Report 2018
56
(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 currencies 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
2018
Contract
amount over
1 year
Contract
amount
Carrying
amount
(fair value)¹
Contract
amount
(Millions of yen)
2017
Contract
amount over
1 year
Carrying
amount
(fair value)1
U.S. dollar ...........................................................
Euro ....................................................................
14,583
—
Buying
Euro ....................................................................
Chinese yuan ......................................................
Currency swaps:
Receiving Japanese yen, paying U.S. dollar ..........
Receiving Japanese yen, paying Chinese yuan .....
—
212
7,343
—
—
—
—
—
7,343
—
116
—
—
(1)
(15)
—
13,800
70
120
725
8,004
1,987
7,280
—
—
—
2,339
—
135
1
(2)
(98)
(53)
(325)
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, 2018
Net exposure ..................................................................................................................
As of December 31, 2017
Net exposure ..................................................................................................................
U.S. dollar
2,801
U.S. dollar
8,713
Euro
1,930
Euro
161
(Millions of yen)
Chinese yuan
10,766
(Millions of yen)
Chinese yuan
8,458
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.
57
Kao Corporation Financial Report 2018
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 ...........................................................................................................................................................
2018
(280)
(193)
Chinese yuan .............................................................................................................................................
(1,077)
(Millions of yen)
2017
(871)
(16)
(846)
(ii) Interest rate fluctuation risk
(ii) Short-term investments
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 that 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 6,640 million yen and 10,165 million
yen at December 31, 2018 and 2017, 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 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
Kao Corporation Financial Report 2018
58
following situations that would adversely affect future cash
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 6,782 million yen and 6,463 million yen at December
31, 2018 and 2017, respectively.
The carrying amount of trade receivables and changes in the related allowance for doubtful receivables are as follows:
Fiscal year ended December 31, 2018
(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, 2018 .....................................................................
211,441
Change during the year
(Recognition and derecognition) ...................................
Transfer to credit-impaired fi nancial assets ........................
Other changes ...................................................................
December 31, 2018 ............................................................
10,605
(84)
(4,944)
217,018
549
(16)
84
(41)
576
Allowance for doubtful receivables
January 1, 2018 .....................................................................
Increase during the year ....................................................
Decrease during the year (charge-offs) ..............................
Decrease during the year (other) .......................................
Transfer to credit-impaired fi nancial assets ........................
Other changes ...................................................................
December 31, 2018...............................................................
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
915
238
(78)
(86)
(4)
(28)
957
459
98
(19)
(0)
4
(51)
491
Total
211,990
10,589
—
(4,985)
217,594
(Millions of yen)
Total
1,374
336
(97)
(86)
—
(79)
1,448
59
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
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 fi nancial 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 fi nancial 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
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, 2018
Trade receivables .......................................................
Allowance for doubtful receivables ...........................
Expected credit loss (%) ............................................
As of December 31, 2017
Trade receivables .......................................................
Allowance for doubtful receivables ...........................
Expected credit loss (%) ............................................
(Millions of yen unless otherwise noted)
Days past due
Not due
204,308
164
0.1
Less than 30
days
7,453
Over 30
days
2,021
129
1.7
37
1.8
Over 60
days
1,197
53
4.4
Over 90
days
2,615
1,065
40.7
Total
217,594
1,448
0.7
(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
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.
Kao Corporation Financial Report 2018
60
Financial liabilities including derivative instruments by maturity date consist of the following:
As of December 31, 2018
(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 ...........
225,560
225,560
225,560
—
—
Bonds and borrowings ...............
120,827
120,895
40,488
25,050
30,247
Lease obligations........................
Long-term deposits payable .......
2,419
6,782
2,483
6,782
Derivative financial liabilities
Currency related .........................
208
208
689
—
50
666
—
54
494
—
—
Total ........................................
355,796
355,928
266,787
25,770
30,741
—
32
485
—
104
621
—
25,018
124
—
—
25,142
—
60
25
6,782
—
6,867
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
(3) Fair Value of Financial Instruments
1) Fair value hierarchy levels
and money held in trust, and are measured with a financial
model using observable inputs such as interest rates.
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
(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.
61
Kao Corporation Financial Report 2018
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, 2018
or 2017.
As of December 31, 2018
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 .......................................................................................
Financial liabilities
Financial liabilities measured at fair value through profi t or loss
Derivative liabilities ...................................................................
Total .......................................................................................
—
—
—
6,640
6,640
—
—
29,900
1,068
2,983
—
33,951
208
208
—
—
—
4,500
4,500
—
—
29,900
1,068
2,983
11,140
45,091
208
208
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
Changes in financial instruments categorized within Level 3 are as follows:
Beginning balance .....................................................................................................................................
Gains (losses)¹ .......................................................................................................................................
Sales ......................................................................................................................................................
Other changes .......................................................................................................................................
—
—
—
3,927
3,927
—
—
2018
3,927
574
(0)
(1)
Ending balance ..........................................................................................................................................
4,500
29,900
602
2,926
14,092
47,520
1,026
1,026
(Millions of yen)
2017
3,472
454
—
1
3,927
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 2018
62
3) Financial instruments measured at amortized cost
(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 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.
The carrying amount and fair value hierarchy of financial instruments measured at amortized cost are as follows:
As of December 31, 2018
Carrying amount
Level 1
Level 2
Level 3
Total
Fair value
(Millions of yen)
Financial liabilities
Financial liabilities measured at amortized cost
Bonds ............................................................
Borrowings ....................................................
50,052
70,775
—
—
50,338
70,985
—
—
50,338
70,985
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
63
Kao Corporation Financial Report 2018
Notes to Consolidated Financial Statements
36
Principal Subsidiaries
Principal subsidiaries consist of the following. Voting rights at December 31, 2018 did not significantly change from a year earlier.
Company name
Kao Group Customer Marketing Co., Ltd.
Country
Japan
Kanebo Cosmetics Inc.
Kao Transport & Logistics Co., Ltd.
Kao (China) Holding Co., Ltd.
Kao Corporation Shanghai
Kao (Hefei) Co., Ltd.
Kao Commercial (Shanghai) Co., Ltd.
Japan
Japan
China
China
China
China
Kanebo Cosmetics (China) Co., Ltd.
Kao (Shanghai) Chemical Industries Co., Ltd.
Kao (Taiwan) Corporation
China
China
Taiwan
Pilipinas Kao, Inc.
Kao Industrial (Thailand) Co., Ltd.
Philippines
Thailand
Kao Commercial (Thailand) Co., Ltd.
Thailand
Fatty Chemical (Malaysia) Sdn. Bhd.
PT Kao Indonesia
Malaysia
Indonesia
Kao USA Inc.
Oribe Hair Care, LLC
Washing Systems, LLC
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.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
Germany
Germany
Germany
U.K.
Spain
Spain
Principal businesses
Control of sales companies and other subsidiaries
in Japan
Cosmetics
Skin Care and Hair Care
Human Health Care
Fabric and Home Care
Cosmetics
Logistics and related services in Japan
Control of subsidiaries in China
Cosmetics
Cosmetics
Skin Care and Hair Care
Human Health Care
Fabric and Home Care
Human Health Care
Cosmetics
Skin Care and Hair Care
Human Health Care
Fabric and Home Care
Cosmetics
Chemical
Cosmetics
Skin Care and Hair Care
Human Health Care
Fabric and Home Care
Chemical
Chemical
Skin Care and Hair Care
Human Health Care
Fabric and Home Care
Chemical
Cosmetics
Skin Care and Hair Care
Human Health Care
Fabric and Home Care
Chemical
Skin Care and Hair Care
Human Health Care
Fabric and Home Care
Cosmetics
Skin Care and Hair Care
Skin Care and Hair Care
Fabric and Home Care
Corporate service to subsidiaries in the U.S.
Holding company for Chemical Business in the U.S.
Chemical
Cosmetics
Skin Care and Hair Care
Skin Care and Hair Care
Chemical
Cosmetics
Control of subsidiaries in Chemical Business
in Europe, etc.
Chemical
Voting rights (%)
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
100.0
100.0
Kao Corporation Financial Report 2018
64
Notes to Consolidated Financial Statements
37
Related Parties
(1) Transactions with Related Parties
Disclosure is omitted because there are no material related party
transactions.
(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 .......................................................................................................................................................
2018
1,161
28
364
1,553
(Millions of yen)
2017
1,315
30
332
1,677
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 .......................................................................................................................................................
2018
30,751
1,188
31,939
(Millions of yen)
2017
37,906
1,237
39,143
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 25, 2019.
65
Kao Corporation Financial Report 2018
Independent Auditor’s Report
Kao Corporation Financial Report 2018
66
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Chuo-ku, Tokyo 103-8210, Japan
https://www.kao.com/global/en/
Investor Relations
E-mail: ir@kao.co.jp
Website: https://www.kao.com/global/en/investor-relations/