Annual Financial Report KONAMI HOLDINGS CORPORATION and its subsidiaries Consolidated Financial Statements For the fiscal year ended March 31, 2019 KONAMI HOLDINGS CORPORATION TABLE OF CONTENTS 1. Consolidated Financial Statements ....................................................................................................... - 1 - (1) Consolidated Statement of Financial Position ................................................................ - 1 - (2) Consolidated Statements of Profit or Loss and Comprehensive Income ......... - 3 - (3) Consolidated Statement of Changes in Equity ................................................................ - 5 - (4) Consolidated Statement of Cash Flows .............................................................................. - 6 - Notes to Consolidated Financial Statements ................................................................................ - 7 - Independent Auditors' Report ..................................................................................................................... - 62 - 2. Business Review ........................................................................................................................................... - 63 - 3. Risk Factors ..................................................................................................................................................... - 68 - Responsibility Statement ............................................................................................................................... - 72 - As used in this annual report, references to “the Company” and “the parent” are to KONAMI HOLDINGS CORPORATION and references to “Konami Group,” “the Group,” “we,” “our” and “us” are to KONAMI HOLDINGS CORPORATION and its subsidiaries, unless the context otherwise requires. “U.S. dollar” or “$” means the lawful currency of the United States of America, “€” or “Euro” means the lawful currency of the member states of the European Union and “yen” or “¥” means the lawful currency of Japan. “IFRS” means International Financial Reporting Standards and “Japanese GAAP” means accounting principles generally accepted in Japan. 1. Consolidated Financial Statements Consolidated Financial Statements (1) Consolidated Statement of Financial Position Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Income tax receivables Total current assets Other current assets Non-current assets Property, plant and equipment, net Goodwill and intangible assets Investments accounted for using the equity method Other investments Other financial assets Deferred tax assets Other non-current assets Total assets Total non-current assets Note As of March 31, 2018 Millions of Yen As of March 31, 2019 5,22 6,22,23 7 13,22 8,10 9 11 12,22 13,22 18 ¥154,485 26,092 6,840 714 7,541 195,672 79,077 36,870 3,034 1,313 22,578 21,951 2,613 167,436 ¥363,108 ¥159,242 32,475 8,315 339 7,350 207,721 82,241 38,080 3,233 1,220 22,038 21,143 2,361 170,316 ¥378,037 - 1 - Liabilities and equity Liabilities Current liabilities Note As of March 31, 2018 Millions of Yen As of March 31, 2019 Bonds and borrowings Other financial liabilities Trade and other payables Income tax payables Other current liabilities Total current liabilities Non-current liabilities 14,22,29 10,17,22,29 15,22 16,19,23 Bonds and borrowings Other financial liabilities Provisions Other non-current liabilities Total liabilities Total non-current liabilities 14,22,29 10,17,22,29 16 19,23 Equity Share capital Share premium Treasury shares Other components of equity Retained earnings Total equity attributable to owners of the parent Total equity Non-controlling interests Total liabilities and equity 20 20 20 27 20 ¥11,903 3,876 31,252 7,599 14,660 69,290 14,744 13,105 9,109 2,321 39,279 108,569 47,399 74,426 (21,321) 610 152,668 253,782 757 254,539 ¥363,108 ¥10,547 4,323 31,530 4,771 19,660 70,831 9,803 9,922 9,182 1,895 30,802 101,633 47,399 74,426 (21,325) 1,583 173,544 275,627 777 276,404 ¥378,037 The accompanying notes are an integral part of these financial statements. - 2 - (2) Consolidated Statements of Profit or Loss and Comprehensive Income Consolidated Statement of Profit or Loss Note Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 Revenue Product sales revenue Service and other revenue Total revenue Cost of revenue Cost of product sales revenue Cost of service and other revenue Total cost of revenue Gross profit Selling, general and administrative expenses Other income and other expenses, net Operating profit Finance income Finance costs Profit from investments accounted for using the equity method Profit before income taxes Income taxes Profit for the year Profit attributable to: Owners of the parent Non-controlling interests Earnings per share (attributable to owners of the parent) Basic Diluted 4,23 24 24 25 26 26 18 Note 28 28 ¥89,606 149,891 239,497 (42,415) (99,810) (142,225) 97,272 (49,025) (3,066) 45,181 153 (917) 292 44,709 (14,203) 30,506 30,507 ¥(1) ¥74,724 187,825 262,549 (36,166) (119,192) (155,358) 107,191 (52,631) (4,038) 50,522 326 (817) 279 50,310 (16,093) 34,217 34,196 ¥21 Fiscal year ended March 31, 2018 Fiscal year ended March 31, 2019 Yen ¥225.59 ¥222.21 ¥252.86 ¥249.02 - 3 - Consolidated Statement of Comprehensive Income Profit for the year Other comprehensive income Items that will not be reclassified to profit or loss: Net change in fair value of equity financial assets measured at fair value through other comprehensive income Share of other comprehensive income of entity accounted for using the equity method Total items that will not be reclassified to profit or loss Items that may be reclassified to profit or loss: Exchange differences on foreign operations Net change in fair values of available-for-sale financial assets Share of other comprehensive income of entity accounted for using the equity method Total items that may be reclassified to profit or loss Total comprehensive income for the Total other comprehensive income year Comprehensive income attributable to: Owners of the parent Non-controlling interests Note Fiscal year ended March 31, 2018 ¥30,506 Millions of Yen Fiscal year ended March 31, 2019 ¥34,217 27 27 27 27 27 - - - (68) (0) (68) (1,612) 1,040 66 (1) (1,547) (1,547) 28,959 28,960 ¥(1) - - 1,040 972 35,189 35,169 ¥20 The accompanying notes are an integral part of these financial statements. - 4 - (3) Consolidated Statement of Changes in Equity Balance at April 1, 2017 Profit for the year Other comprehensive income Total comprehensive income for the year Purchase of treasury shares Disposal of treasury shares Dividends Increase of a subsidiary Total transactions with Balance at March 31, the owners 2018 Profit for the year Other comprehensive income Total comprehensive income for the year Purchase of treasury shares Disposal of treasury shares Dividends Total transactions with the owners Balance at March 31, 2019 Equity attributable to owners of the parent Note Share capital Share premium Treasury shares Other components of equity Retained earnings Total Millions of Yen Total equity Non- controlling interests ¥47,399 ¥74,426 ¥(21,304) ¥2,157 ¥131,763 ¥234,441 ¥751 ¥235,192 30,507 30,507 (1) 30,506 (1,547) (1,547) (0) (1,547) - - 0 - (1,547) 30,507 28,960 (1) 28,959 (17) 0 (17) 0 (17) 0 (9,602) (9,602) (9,602) - 0 (17) - (9,602) (9,619) 7 7 7 (9,612) 47,399 74,426 (21,321) 610 152,668 253,782 757 254,539 34,196 34,196 21 34,217 973 973 (1) 972 - - - 0 0 - 973 34,196 35,169 20 35,189 (4) 0 (4) 0 (4) 0 (13,320) (13,320) (13,320) (4) - (13,320) (13,324) - (13,324) 20 20 21 20 20 21 ¥47,399 ¥74,426 ¥(21,325) ¥1,583 ¥173,544 ¥275,627 ¥777 ¥276,404 The accompanying notes are an integral part of these financial statements. - 5 - (4) Consolidated Statement of Cash Flows Operating activities Profit for the year Depreciation and amortization Impairment losses Interest and dividends income Interest expense Loss on sale or disposal of property, plant and equipment Profit from investments accounted for using the equity method Income taxes Increase in trade and other receivables Decrease (increase) in inventories Increase in trade and other payables Increase in prepaid expense Increase in deferred revenue Increase in contract liabilities Other, net Interest and dividends received Interest paid Income taxes paid Investing activities Net cash provided by operating activities Capital expenditures Payments for lease deposits Collection of lease deposits Payments into time deposits Proceeds from withdrawal of time deposits Net cash used in investing activities Other, net Financing activities Decrease in short-term (within 3 months) borrowings, net Proceeds from short-term (more than 3 months) borrowings Repayments of short-term (more than 3 months) borrowings Redemption of bonds Principal payments under capital lease and financing obligations Dividends paid Other, net Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at the end of the Cash and cash equivalents at the beginning of year the year Note Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥30,506 12,490 3,132 (149) 824 62 (292) 14,203 (731) 610 2,542 (379) 1,449 - (783) 151 (811) (8,844) 53,980 (17,631) (419) 812 (2,500) 1,205 49 (18,484) (1,121) 12,894 (10,098) (5,000) (1,866) (9,590) (17) (14,798) (956) 19,742 134,743 ¥154,485 29 29 29 14, 29 29 21 5 5 ¥34,217 14,093 3,290 (306) 797 428 (279) 16,093 (5,816) (964) 1,329 (413) - 5,152 (254) 282 (774) (17,744) 49,131 (23,809) (614) 621 (1) 1,282 (6) (22,527) - 12,177 (13,826) (5,000) (2,460) (13,303) (4) (22,416) 569 4,757 154,485 ¥159,242 The accompanying notes are an integral part of these financial statements. - 6 - Notes to Consolidated Financial Statements 1. Reporting Entity KONAMI HOLDINGS CORPORATION (the “Company”) is a public company located in Japan. The accompanying consolidated financial statements consist of the Company and its consolidated subsidiaries (collectively, “Konami Group”) as well as equity interests in its associates. Konami Group engages in the following four business operations: Digital Entertainment, Amusement, Gaming & Systems, and Sports businesses. The operations of each business segment are presented in Note 4 “Segment Information”. 2. Basis of Preparation (1) Compliance with IFRS The Company prepares consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board. The Company meets the requirements set out under Article 1-2 of the “Ordinance on Terminology, Forms and Preparation Methods of Consolidated Financial Statements” under which the Company is qualified as a “specified company” and duly adopted the provisions of Article 93 of the foregoing rules. (2) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for certain financial assets and liabilities measured at their fair values, as stated in Note 3 "Significant Accounting Policies." Functional currency and presentation currency (3) The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (“functional currency”). The 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) Use of estimates and judgments In preparing IFRS-compliant consolidated financial statements, management uses estimates and judgments. Judgments made by management, assumptions about the future and uncertainty in estimates may affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of income and expenses as of the reporting date of the consolidated financial statements. The estimates and underlying assumptions are reviewed on an ongoing basis. The impacts from revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods that are affected. - 7 - Information about estimates and judgments made by management that would have significant effects on the amounts recognized in the consolidated financial statements is • included in the following notes: • • Revenue recognition: Note 3 “Significant Accounting Policies- (14) Revenue” and Note 23 “Revenue”. Recognition of deferred tax assets: Note 18 “Deferred Taxes and Income Tax Expense”. Impairment losses for property, plant and equipment, goodwill and intangible assets: Note 3 “Significant Accounting Policies- (9) Impairment (ii) Non-financial assets”, Note 8 “Property, Plant and Equipment, net” and Note 9 “Goodwill and Intangible Assets”. (5) Changes in Accounting Policies Adoption of IFRS 9 “Financial Instruments” Konami Group has adopted IFRS 9 “Financial Instruments” from the fiscal year ended March 31, 2019. The new standard replaces IAS 39 “Financial Instruments: Recognition and Measurement”. The standard deals with the classification, recognition and measurement (including impairment) of financial instruments. Konami Group takes advantage of the exemption allowing it not to restate comparative information for prior periods with respect to classification and measurement changes. There is no material impact on Konami Group’s consolidated financial statements from the application of IFRS 9. The classification and carrying amount of the financial assets in accordance with IAS 39 and Carrying IFRS 9 as of the start date to adopt IFRS 9 are as follows: amount Carrying amount IAS 39 IFRS 9 Cash and cash equivalents ¥154,485 Cash and cash equivalents ¥154,485 Loans and receivables Financial assets measured at amortized cost Trade and other receivables 26,092 Trade and other receivables 26,092 Other financial assets 23,657 Other financial assets 23,657 Available-for-sale investments Equity financial assets measured at fair value through other comprehensive income Other investments 1,313 Other investments 1,300 Financial assets measured at fair value through profit or loss Other investments 13 Total ¥205,547 Total ¥205,547 The classification and carrying amount of the financial liabilities have no change. IFRS 15 “Revenue from Contracts with Customers” Konami Group has adopted IFRS 15 “Revenue from Contracts with Customers” (issued in May 2014) and “Clarifications to IFRS 15” (issued in April 2016) (collectively, “IFRS 15”) from the fiscal year ended March 31, 2019. Konami Group recognizes the cumulative effect of applying - 8 - the new standard at the date of initial application, with no restatement of the comparative periods presented. Konami Group recognizes revenue from contracts with customers based on the following five step approach, (excluding interest, dividend and other such income from financial instruments recognized in accordance with IFRS 9 and insurance revenues recognized in accordance with IFRS 4.) Step 1: Step 2: Step 3: Step 4: Step 5: Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognize revenue when (or as) the entity satisfies a performance obligation Revenue is recognized at the amount of consideration promised in the contract with the customer after deduction of refund liabilities, including returned goods, trade discounts, and rebates. Konami Group reviewed the performance obligation in the case where other concerned parties are involved in providing goods or services to customers under the newly stipulated application guidelines in accordance with the adoption of IFRS 15. This review included whether the nature of an entity’s promise represents a performance obligation of providing specified goods or services to customers by the entity itself (that is, the entity is a principal) or a performance obligation of making arrangements for these goods or services to be provided by the other concerned parties (that is, the entity is an agent). Based on the review, recognition of revenue for some transactions has been changed from “net base” to “gross base.” As a result, “Revenue” and “Cost of revenue” increased by ¥5,738 million, respectively, for the fiscal year ended March 31, 2019 in the consolidated statement of profit or loss compared to what the figures would be under the prior accounting standard. As a result of reviewing the classification of the revenue under the newly stipulated application guidelines by IFRS 15, ¥26,774 million of revenue where the performance obligations is satisfied over time is recorded as “Service and other revenue” for the year ended March 31, 2019, which was included in “Product sales revenue” under the prior classification. Early application of new accounting standards (6) There were no new accounting standards applied earlier than required. (7) New accounting standards and interpretations issued but not yet applied New or revised accounting standards and interpretations that were issued by the date of approval of the consolidated financial statements but have not yet been applied by the Company as of March 31, 2019, are as shown in the table below. Standards and Title Date of mandatory application (fiscal year beginning on or after) Reporting periods of application by the Company (End date of the reporting period) Overview of new/revised Standards and Interpretations Interpretations IFRS 16 Leases January 1, 2019 March 31, 2020 Revision of lease accounting With the application of IFRS 16, in principle, lessees are required to recognize all leases as assets representing the right to use and a liability to make lease payments. In applying the standard, Konami Group intends to apply an approach that recognizes the cumulative effect of the application at the commencement date (a modified retrospective approach). - 9 - Upon the adoption of this standard to the consolidated financial statement, Konami Group expects to recognize increases mainly in total assets by approximately ¥40,400 million and in total liabilities by approximately ¥45,500 million, respectively, at the beginning of the fiscal year ending March 31, 2020 in the consolidated statement of financial position. 3. Significant Accounting Policies (1) Basis of consolidation Subsidiaries “Subsidiaries” are entities that are controlled by Konami Group. Konami Group controls entities where it is exposed, or has rights, to variable returns from its involvement with those entities and has the ability to affect the amount of returns through its power over those entities. A subsidiary’s financial statements are incorporated into the Company’s consolidated financial statements from the date when the Company obtains control of the subsidiary until the date when the Company loses control of the subsidiary. Appropriate adjustments are made to the subsidiary’s accounting policies as necessary to ensure the conformity with Konami Group’s accounting policies. Changes in the Company’s ownership interest in a subsidiary that do not result in the Company losing control of the subsidiary are accounted for as equity transactions. Any difference between the amount by which the non-controlling interests are adjusted and the amount of the fair value of the consideration paid or received is recognized directly in equity as equity attributable to owners of the parent. If the Company loses control of a subsidiary, the Company recognizes the gain or loss associated with the loss of control in profit or loss. All inter-group balances and transactions as well as unrealized gains or losses arising from intergroup transactions are eliminated. Associates Associates are entities over which the Company does not have control or joint control but has significant influence over the financial and operating or business policies. Significant influence is the power to participate in the financial and operating policy decisions of the investee but which does not amount to control or joint control over those policies. Investments in associates are accounted for using the equity method and initially recognized at acquisition cost as of the date of acquisition. These investments include goodwill recognized at the date of acquisition. The Company’s consolidated financial statements include the Company’s share of income, expense and other comprehensive income of the associate accounted for under the equity method from the date when the Company obtains significant influence over the associate until the date when such significant influence is lost. Appropriate adjustments are made to the associate’s accounting policies as necessary to ensure conformity with the Company’s accounting policies. Unrealized gains arising from transactions with an entity accounted for under the equity method are deducted from to value of the investment in proportion to the Company’s interest in the investee. - 10 - (2) Business combinations A business combination is accounted for using the acquisition method. Goodwill is measured as the excess of the total amount of the consideration transferred, the amount of any non-controlling interests in the acquiree and, if a business combination is achieved in stages, the amount of the fair value at the date of acquisition of the Company’s previously held equity interest in the acquiree over the net amounts recognized in respect of the identifiable acquired assets and assumed liabilities (which are primarily measured at fair value). If the amount determined by this calculation is negative (consideration is less than net assets acquired – i.e. a bargain purchase) the associated difference is recognized immediately as a credit to profit or loss. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are measured at the fair value or at the proportionate share of the non-controlling interests in the recognized amounts of the acquiree’s identifiable net assets on an acquisition-by-acquisition basis. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the business combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. During the measurement period, which may not exceed one year from the acquisition date, the Company retrospectively adjusts provisional amounts recognized as at the acquisition date. Acquisition-related costs are recognized as expenses in the period in which they are incurred. A business combination of entities under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. Such transactions are accounted for based on the carrying amounts. Foreign currency transactions (3) Foreign currency transactions Foreign currency transactions are translated into the functional currencies of each of Konami Group companies using the appropriate exchange rate at the date of the transactions. At the end of each reporting period, foreign currency monetary assets and liabilities are retranslated into the functional currencies using the prevailing exchange rates at that date. Non-monetary assets and liabilities measured at fair value in foreign currencies are retranslated into the functional currencies using the exchange rates at the date the fair value was determined. Exchange differences arising from the re-measurement and the settlement of such items are recognized in profit or loss in the period in which they arise. However, exchange differences arising from the financial assets measured through other comprehensive income are recognized in other comprehensive income. Foreign operations Assets and liabilities of foreign operations, including goodwill arising from acquisitions and fair value adjustments, are translated into Japanese yen using the exchange rate at the reporting date. Income and expenses are translated into Japanese yen using the average exchange rate for the period, unless exchange rates fluctuate significantly. - 11 - Exchange differences arising from translating the financial statements of foreign operations are recognized in other comprehensive income, and included in "other components of equity" as exchange differences on translating foreign operations. On the disposal of the entire or a partial interest in a foreign operation involving loss of control, significant influence or joint control, the cumulative amount of the exchange differences relating to that foreign operation is reclassified to profit or loss, as a part of gain or loss on disposal. (4) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits at call with banks, and other short- term highly liquid investments with maturities of three months or less from the date they are acquired, that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. Inventories (5) Inventories consist of merchandise for resale, finished products, work-in-process, raw materials and supplies. Inventories are measured at the lower of cost or net realizable value; the company uses the weighted average method to determine the cost of inventories. Net realizable value is the estimated selling price of inventories in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (6) Property, plant and equipment, net Recognition and measurement Property, plant and equipment are recognized at cost less any accumulated depreciation and any accumulated impairment losses. The cost includes any costs directly attributable to the acquisition of the assets, the initial estimate of the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs eligible for capitalization. If components of an item of property, plant and equipment have different useful lives, each component is recognized as a separate item of property, plant and equipment. Subsequent expenditures Subsequent expenditures on property, plant and equipment for the ordinary repairs and maintenance are recognized as expenses when incurred. Expenditures on major replacements or improvements are capitalized only if it is probable that future economic benefits associated with such expenditures will flow to Konami Group. Depreciation Depreciation of property, plant and equipment is calculated based on the depreciable amount. Depreciable amount is calculated as the cost of an asset less its residual value. Depreciation of an asset is principally computed under the straight-line method, spread over the estimated useful life of each component of the asset. The straight-line method is adopted - 12 - because the method is considered to best approximate the expected pattern of consumption of the future economic benefits generated by the asset. Equipment leased under a finance lease is depreciated over the shorter of the lease term or its estimated useful life, unless there is reasonable certainty that ownership will transfer to the Konami Group at the end of the lease term. Land is not depreciated. The estimated useful lives range from 10 to 50 years for buildings and structures and from 2 to 20 years for tools, furniture and fixtures. The depreciation method, estimated useful life and residual value are reviewed at each financial year end, and amended as necessary. (7) Goodwill and intangible assets Goodwill (i) Initial recognition Goodwill arising from acquisition of subsidiaries is included in "Goodwill and intangible assets" in the accompanying consolidated statement of financial position. Measurement of goodwill at the time of initial recognition is described in “(2) Business combinations” as above. (ii) Measurement after initial recognition Goodwill is measured at its cost less any accumulated impairment losses. Goodwill is not amortized but is tested for impairment annually at a consistent time in the year, and whenever there is any indicator of impairment. Intangible assets acquired in business combinations Intangible assets, such as trademarks, memberships, patents and other merchandising contracts, acquired in business combinations and recognized separately from goodwill are initially recognized at fair value as at the acquisition date. Subsequently, such intangible assets are measured at their cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets arising from development Expenditures on research activities to obtain new scientific or technical knowledge and understanding are recognized as an expense as incurred. Expenditures related to development activities are capitalized only if it is technically feasible to complete the assets, it is probable that future economic benefits will be generated, expenditures are reliably measurable, and the Company has the intention, ability and adequate resources to use or sell them after completion. The costs of internally generated intangible assets arising from the development are initially recognized at the sum of expenditures incurred from the date when they first meet all of the aforementioned criteria until the day the development is completed. Subsequent to the initial recognition, internally generated intangible assets arising from development are measured at their costs less any accumulated amortization and any impairment losses. - 13 - Other intangible assets Other intangible assets with finite useful lives are measured at their costs less any accumulated amortization and any accumulated impairment losses. Amortization Amortization charge is calculated based on the acquisition cost of an asset less its residual value. Intangible assets with finite useful lives are amortized over their respective estimated useful lives using the straight-line method. They are tested for impairment when there is any indication that they may be impaired. The straight-line method is adopted because this method best reflects the expected pattern of consumption of the future economic benefits generated by the asset. The estimated useful lives of the main intangible assets with finite useful lives are as follows: • • Internally generated intangible assets arising from development Less than 5 years Patents and merchandising rights 3 to 20 years The amortization method, the estimated useful life and the residual value are reviewed at each financial year end, and amended as necessary. Intangible assets with indefinite useful lives, including trademarks and memberships, or intangible assets that are not yet available for use are not amortized. They are tested for impairment annually at a consistent time in the year, and whenever there is any indicator of impairment. Leases (8) At the inception of a lease arrangement, Konami Group determines whether the arrangement is, or contains, a lease. The substance of the arrangement is determined based on whether the fulfillment of the arrangement depends on the use of a specific asset or group of assets and whether the arrangement conveys the right to such an asset or group of assets. Finance leases Leases are classified as finance leases when substantially all the risks and rewards incidental to ownership in a lease arrangement are transferred to Konami Group. Finance leases are recognized at amounts equal to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. After initial recognition, leased assets are accounted for according to the accounting policies applicable to the category of assets. Minimum lease payments are apportioned between finance charges and the reduction of the outstanding liability. Finance charges are allocated to each period during the lease term so as to produce a constant rate of interest on the remaining balance of the liability. Contingent rents are recognized as expenses in the period in which they are incurred. Operating leases All leases other than finance leases are classified as operating leases. Such leased assets are not recorded in the accompanying consolidated statement of financial position. Lease payments made under operating leases are recognized in profit or loss on a straight- line basis over the lease term. - 14 - Contingent rents are recognized as expenses in the period in which they are incurred. Impairment (9) Impairment of non-derivative financial assets Investment in entities accounted for using the equity method Goodwill arising from an acquisition of interest in associates is included in the carrying amount of the investment, and the entire carrying amount of the investments accounted for using the equity method is tested for impairment. Konami Group assesses whether there is any objective evidence of an indication that an investment in an associate may be impaired at the end of each reporting period. If there is objective evidence that the investment is impaired, the investment is tested for impairment by comparing its recoverable amount (higher of value in use or fair value less costs of disposal) of the investment with its carrying amount. Previously recognized impairment losses are reversed only if there is a change in the estimates used to determine the recoverable amount of the investment after the impairment losses were recorded. In such a case, the reversal of the impairment loss is recognized to the extent that the recoverable amount of the net investment subsequently increases. Impairment of non-financial assets The carrying amounts of Konami Group’s non-financial assets, excluding inventories and deferred tax assets, are reviewed to determine whether there is any indication of impairment at the end of each reporting period. If there is any indication of impairment, the asset is tested for impairment based on its recoverable amount. Goodwill, intangible assets with indefinite useful lives are tested for impairment based on the recoverable amount annually at a consistent time in the year, and whenever there is any indicator of impairment. The recoverable amount of an asset or cash-generating unit (“CGU”) is the higher of value in use or fair value less costs of disposal. In determining value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects the time value of money and the risks specific to the asset which are not considered in estimating the future cash flows. If it is not possible to estimate the recoverable amount of each asset individually for the impairment test, such assets are integrated into the smallest CGU that generates cash inflows from continuing use that are largely independent of cash inflows from other assets or groups of assets. Goodwill acquired in a business combination is allocated to the CGUs that are expected to benefit from the synergies of the business combination, and these CGUs represent the lowest level within the entity at which the goodwill is monitored for internal management purposes, and are not larger than an operating segment. Since corporate assets do not generate separate cash inflows, if there is an indication that corporate assets may be impaired, the corporate assets are tested for impairment based on the recoverable amount of the CGU to which the corporate assets belong. If the carrying amount of an asset or a CGU exceeds the recoverable amount, an impairment loss is recognized in profit or loss for the period. Impairment losses recognized in relation to a CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amount of the other assets of the CGU on a pro rata basis. An impairment loss related to goodwill cannot be reversed in a subsequent period. Previously recognized impairment losses on other assets are assessed at the end of each reporting period as to whether there is any indication that the losses may no longer exist or - 15 - may have decreased. Such impairment losses are reversed if there have been any indications of the reversal of the impairment and a change in estimates used to determine the recoverable amount of the asset. The carrying amount of the asset after the reversal cannot exceed the carrying amount less depreciation or amortization, which would have been recorded had no impairment loss been recognized for the asset in prior years. (10) Employee benefits The Company and certain subsidiaries offer the opportunity to participate in defined contribution plans to employees. Defined contribution plans are post-employment benefit plans in which the employer pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further contributions. The contributions under the defined contribution plans are recognized as expenses during the period in which an employee rendered services. For short-term employee benefits including salaries, bonuses and paid annual leave, the amounts expected to be paid in exchange for those services are recognized as expenses in the period when the employees render related services. (11) Provisions Provisions are recognized when Konami Group has a present legal or constructive obligation arising from past events where it is probable that outflows of resources embodying economic benefits will be required to settle the obligations, and reliable estimates can be made of the amount of the obligations. Where the effect of the time value of money is material, a provision is calculated as the present value of the expenditures discounted at a rate that reflects the risks specific to the liability. Asset retirement obligations are recognized as provisions for the costs of dismantling and removing the assets and restoring the site, and they are included in the acquisition costs of the assets. The estimated future costs and the discount rates applied are annually reviewed and accounted for as a change in accounting estimates, if an adjustment is determined to be necessary. (12) Financial instruments Konami Group has adopted IFRS 9 from the fiscal year ended March 31, 2019 and the accounting policies are as follows. Financial assets (i) Initial recognition and measurement Konami Group initially recognizes financial assets when it becomes a party to the contract, and classifies them into the following categories: financial assets measured at amortized cost, financial assets measured at fair value through other comprehensive income, and financial assets measured at fair value through profit or loss. At initial recognition, all financial assets are measured at fair value. However, in the case of a financial asset that is not classified as a financial asset measured at fair value through profit or loss, it is measured at the fair value plus any transaction costs directly attributable to the acquisition of the financial asset. The transaction costs of financial assets measured at fair value through profit or loss are recognized in profit or loss. - 16 - Financial assets measured at amortized cost Of the financial assets held by Konami Group, those that meet both of the following conditions are classified as financial assets measured at amortized cost: The financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows. The contractual terms of the financial asset give rise on specified dates to cash flows. Financial assets measured at fair value through other comprehensive income • • Equity instruments such as shares held mainly for the purpose of maintaining or strengthening business relationships with investees are designated at initial recognition as financial assets measured at fair value through other comprehensive income. Subsequent to initial recognition, the financial assets are measured at fair value and changes in the fair value are recognized in other comprehensive income. Debt instruments, which are held to achieve an objective by both collecting contractual cash flows and selling and those contractual cash flows represent solely payments of principal and interest, are designated as financial assets measured at fair value through other comprehensive income. Financial assets measured at fair value through profit or loss Financial assets other than (a) and (b) as above are classified as financial assets measured at fair value through profit or loss. (ii) Subsequent measurement after initial recognition Based on the classifications, subsequent measurement of financial assets after initial recognition are as follows. Financial assets measured at amortized cost Financial assets measured at amortized cost are measured at amortized cost using the effective interest method subsequent to the initial recognition. Financial assets measured at fair value through other comprehensive income As for financial assets measured at fair value through other comprehensive income, changes in the fair value are recognized in other comprehensive income subsequent to the initial recognition. In the event of derecognition of equity instruments, the cumulative amount of gains or losses recognized through other comprehensive income is directly transferred from other component of equity to retained earnings. Dividends from the relevant financial asset are recognized in profit or loss for the reporting period. In the event of derecognition of debt instruments, the cumulative amount of gains or losses recognized through other comprehensive income is transferred to profit or loss. Financial assets measured at fair value through profit or loss As for financial assets measured at fair value through profit or loss, changes in the fair value are recognized in profit or loss subsequent to the initial recognition. Dividends from the relevant financial asset are recognized in profit or loss for the reporting period. (iii) Impairment of financial assets For financial assets measured at amortized cost and debt instruments measured at fair value through other comprehensive income, Konami Group records allowance for expected credit - 17 - losses. Konami Group evaluates at the end of each reporting period whether there is a significant increase in credit risk of financial assets since initial recognition. When there is a significant increase in credit risk since initial recognition, the amount equal to expected credit losses for the remaining life of the financial assets are measured as allowance for expected credit losses. When there is no significant increase in the credit risk since initial recognition, the amount equal to expected credit losses for 12 months are measured as allowance for expected credit losses. For trade and other receivables, allowance for expected credit losses are always measured at the amount equal to expected credit losses for the remaining life of the assets. Expected credit losses are measured based on the present value of the difference between all contractual cash flows to be paid to Konami Group and all cash flows expected to be received by Konami Group, and are recognized in profit or loss. If the amount of impairment losses decreased due to any event that occurred after the initial recognition of the impairment losses, the previously recognized impairment losses are reversed and recognized in profit or loss. If there is any objective evidence of credit impairment for financial assets such as significant financial difficulty of a debtor, and a contract violation, including a default or delinquency in payment, interest income is measured at the amount calculated by multiplying the carrying amount less the loss allowance by the effective interest rate. If the recovery of all or part of the contractual cash flows of a certain financial asset cannot be reasonably estimated, the carrying amount is directly reduced in the total amount of financial assets. (iv) Derecognition of financial assets Konami Group derecognizes a financial asset only if the contractual rights to the cash flows from the financial asset expire or if it transfers the contractual rights to receive the cash flows of the financial asset in a transaction where it transfers substantially all risks and rewards of ownership of the financial asset. If Konami Group continues to control the transferred assets, it recognizes retained interests in the financial assets and liabilities that might be payable in association therewith, to the extent of its continuing involvement in the financial assets. Financial liabilities (i) Initial recognition and measurement Konami Group initially classifies financial liabilities into either a financial liability measured at amortized cost or a financial liability measured at fair value through profit or loss. This classification is determined at initial recognition of the financial liabilities. While financial liabilities measured at fair value through profit or loss are measured at fair value at initial recognition, financial liabilities measured at amortized cost are measured at the amount less directly attributable transaction costs. (ii) Subsequent measurement after initial recognition Based on the classifications, subsequent measurement of financial liabilities after initial recognition are as follows. Financial liabilities measured at amortized cost Financial liabilities measured at amortized cost are measured at amortized cost using the effective interest method subsequent to the initial recognition. - 18 - Amortization by the effective interest method, as well as gains and losses associated with the derecognition shall be measured in profit or loss for the reporting period. Financial liabilities measured at fair value through profit or loss As for financial liabilities measured at fair value through profit or loss, changes in the fair value are recognized in profit or loss for the reporting period subsequent to the initial recognition. (iii) Derecognition of financial liabilities Konami Group derecognizes financial liabilities when it is extinguished, that is, when the obligation specified in the contract is discharged, cancelled or expires. Offsetting financial assets and liabilities Financial assets and liabilities are offset, with the net amount presented in the consolidated statements of financial position, only if Konami Group holds a legal right to set off the balance, and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Compound financial instruments The liability component of a compound financial instrument is initially recognized at the fair value of a similar liability that does not have an equity conversion option. The equity component is initially recognized at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the equity and liability components of the compound financial instrument in proportion to their initial carrying values. Subsequently, the liability component of the compound financial instrument is measured at amortized cost using the effective interest method; the equity component is not remeasured. Interest related to the financial liability is recognized as financial expense in profit or loss. On conversion, the financial liability is reclassified to equity and no gain or loss is recognized. Derivatives and hedge accounting Derivatives are initially recognized at fair value on the date when the derivative contracts are entered into, and are subsequently remeasured to their fair value at the end of each reporting period. Konami Group uses derivatives such as forward exchange contracts to determine cash flows related to recognized financial asset and liabilities and the future transactions. Interest rate swaps have also agreed with as hedging instruments against foreign exchange risk and interest rate risk. Hedge accounting is not applied to the above derivatives. (The previous accounting policies adopted on or before Mach 31, 2018) Konami Group has applied IFRS 9 retrospectively and has determined not to restate the comparative information for the fiscal year ended March 31, 2018. As a result, the comparative information is prepared based on the Konami Group’s previous accounting policies. The accounting policies Konami Group adopted on or before Mach 31, 2018 are as follows. - 19 - Konami Group classifies non-derivative financial assets in two categories: loans and receivables, and available-for-sale financial assets. Non-derivative financial liabilities are classified as financial liabilities measured at amortized cost. Non-derivative financial assets - recognition and derecognition Konami Group initially recognizes loans and receivables when they occur. All other financial assets are initially recognized on the relevant transaction date. Konami Group derecognizes a financial asset only if the contractual rights to the cash flows from the financial asset expire or if Konami Group transfers the contractual rights to receive the cash flows of the financial asset in a transaction where the Group transfers substantially all risks and rewards of ownership of the financial asset. Non-derivative financial assets- measurement (i) Loans and receivables Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are initially recognized at fair values plus transaction costs which are directly attributable to the acquisition of the financial assets. After initial recognition, such financial assets are measured at amortized cost using the effective interest method, less impairment, and amortization is recognized as finance income in profit or loss. (ii) Available-for-sale financial assets Non-derivative financial assets that are designated as available-for-sale or are not classified in other categories are classified as available-for-sale financial assets. Available-for-sale financial assets are initially recognized at fair values plus transaction costs which are directly attributable to the acquisition of the financial assets. After initial recognition, such financial assets are measured at their fair values at the end of each reporting period with changes in fair value recognized in “net change in fair values of available-for-sale financial assets” in other comprehensive income. When available-for-sale financial assets are derecognized, the cumulative gains or losses previously recognized in other comprehensive income are reclassified from equity to profit or loss. Impairment of Non-derivative financial assets Financial assets not classified as “financial assets at fair value through profit or loss” are assessed at the end of each reporting period to consider whether there is any objective evidence of impairment. A financial asset is determined to be impaired only when there is objective evidence of impairment that loss events have occurred after the initial recognition of the asset and when there is a negative impact on the estimated future cash flows of the financial asset from those events that can be reliably estimated. Examples of objective evidence that a financial asset is impaired include a default or delinquency by the borrower, granting to the borrower a concession that Konami Group would not otherwise consider any indication that the borrower or issuer will enter bankruptcy, or the disappearance of an active market. For available-for-sale financial assets, a significant or prolonged decline in the fair value of an asset below its historical cost should also be included as objective evidence of impairment. - 20 - (i) Financial assets measured at amortized cost Konami Group assesses whether objective evidence of impairment exists individually for financial assets that are individually significant or collectively for financial assets that are not individually significant. For financial assets measured at amortized cost, the amount of the impairment loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows discounted at the original effective interest rate of the financial asset, and is recognized in profit or loss in an allowance account. If the asset is subsequently determined to be uncollectible, the allowance account is directly applied to the carrying amount. If in a subsequent period there is objective evidence that the amount of the impairment loss has decreased, the previously recognized impairment loss is reversed and the reversal is recognized in profit or loss. (ii) Available-for-sale financial assets Impairment losses on available-for-sale financial assets are recognized by reclassifying the cumulative losses previously recognized in “net change in fair values of available-for-sale financial assets”, a component of equity, to profit or loss. The amount of cumulative losses reclassified from comprehensive income to profit or loss is the difference between the acquisition cost and the present fair value less the impairment losses previously recognized in profit or loss. Regarding debt instruments, if in a subsequent period the amount of the impairment loss previously recognized decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed and the reversal is recognized in profit or loss. (13) Equity Ordinary shares Issuance costs directly relating to equity instruments issued by Konami Group are recognized, net of tax, as a deduction from equity. Treasury shares When the Company repurchases treasury shares, the consideration paid, including transaction costs, net of tax, directly arising from the repurchase, is recognized as a deduction from equity. No gain or loss is recognized in profit or loss on the purchase, disposal, issuance or cancellation of Konami Group’s own equity instruments. Any difference between the carrying amount and the consideration given is recognized in share premium. (14) Revenue Konami Group recognizes revenue from contracts with customers based on the following five step approach, (excluding interest, dividend and other such income from financial instruments recognized in accordance with IFRS 9 and insurance revenues recognized in accordance with IFRS 4.) Step 1: Step 2: Step 3: Step 4: Step 5: Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognize revenue when (or as) the entity satisfies a performance obligation - 21 - Revenue is recognized at the amount of consideration promised in the contract with the customer after deduction of refund liabilities, including returned goods, trade discounts, and rebates. (15) Finance income and finance costs Finance income mainly consists of interest income, dividend income, foreign currency exchange gains and gains on sales of equity financial assets. Interest income is recognized using the effective interest method as incurred. Dividend income is recognized on the date when the right of Konami Group to receive the dividend is established. Finance costs mainly consist of interest expenses, foreign currency exchange losses and losses on sales of equity financial assets. Interest expenses are recognized using the effective interest method as incurred. (16) Income tax expense Income tax expenses consist of current taxes and deferred taxes. These are recognized in profit or loss, except to the extent that the taxes arise from items which are recognized either in other comprehensive income or directly in equity, or from business combinations. Current taxes are measured at the amount expected to be recovered from or paid to the tax authorities, using the tax rates and tax laws that have been enacted or substantially enacted at the reporting date. Deferred tax assets and liabilities are recognized for temporary differences between the tax base and the carrying amounts of assets and liabilities, the carryforward of unused tax losses and the unused tax credits, 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 tax rates and the tax laws that have been enacted or substantially enacted by the end of the reporting period. Deferred • tax assets and liabilities are not recognized if: • taxable temporary differences arise from the initial recognition of goodwill, temporary differences arise from the initial recognition of an asset or liability in a transaction which is not a business combination and, at the time of transaction, affects neither accounting profit or taxable profit (tax loss), or • Konami Group is able to control the timing of the reversal of the temporary differences which are associated with investments in subsidiaries and associates, and it is probable that such differences will not be reversed in the foreseeable future. Deferred tax assets and liabilities are offset if Konami Group has a legally enforceable right to offset current tax assets against current tax liabilities, and income taxes are levied by the same taxation authority on the same taxable entity. Deferred tax assets are recognized only for the deductible temporary differences, the carryforward of unused tax losses and the unused tax credits, to the extent that it is probable that future taxable profit will be available against which they can be utilized. The carrying amount of deferred tax assets are reviewed at the end of each reporting period, and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of those deferred tax assets to be utilized. - 22 - (17) Earnings per share Basic earnings per share are calculated by dividing profit for the year attributable to owners of the parent, by the weighted average number of ordinary shares outstanding during the period that is adjusted for the number of treasury shares. Diluted earnings per share are calculated and adjusted for full effect of potentially dilutive ordinary shares. 4. Segment Information Konami Group’s reportable segments constitute units of the Konami Group for which separate financial information is available. The Chief Operating Decision Maker regularly conducts deliberations to determine the allocation of management resources and to assess performance of each segment. Operating segments are components of business activities from which Konami Group may earn revenues and incur expenses, including revenues and expenses relating to transactions with other operating segments. The operating segments are managed separately as each segment represents a strategic business unit that offers different products and serves different markets. Konami Group operates on a worldwide basis principally with the following four business segments: 1. Digital Entertainment: Production, manufacture and sale of digital content and related products including mobile games, card games and computer and video games. 2. Amusement: Production, manufacture and sale of amusement machines. 3. Gaming & Systems: Production, manufacture, sale and service of gaming machines and casino management systems for overseas markets. 4. Sports: Operation of fitness activities and sports classes, including swimming, gymnastics, dance, soccer, tennis, and golf, and production and sale of sports related goods. Segment profit (loss) is determined by deducting “Cost of revenue” and “Selling, general and administrative expenses” from “Revenue.” This does not include corporate expenses, finance income and finance costs, and certain non-regular expenses associated with each segment such as impairment losses on property, plant and equipment, goodwill and intangible assets. Corporate expenses primarily consist of administrative expenses not directly associated with specific segments. Intersegment eliminations primarily consist of eliminations of intercompany sales. Assets of each segment including investments in associates and deferred tax assets are measured in the same manner as those included in the accompanying consolidated statements of financial position. Segment assets are based on those directly associated with each segment. Assets not directly associated with specific segments, except those of - 23 - corporate assets, are allocated in a consistent manner which management believes to be reasonable. Intersegment sales and revenues are generally recognized at values that represent arm’s- length fair value. Neither Konami Group nor any of its segments depended on any single customer for more than 10% of Konami Group's revenues for the years ended March 31, 2018 and 2019. Starting from the fiscal year ended March 31, 2019, the name of a reporting segment previously stated as “Health & Fitness” business has been changed to “Sports” business. This change is limited to the name only, hence there is no impact to its segment information. (1) Operating segment information Revenue: Digital Entertainment – External customers Intersegment Amusement – External customers Intersegment Gaming & Systems – External customers Intersegment Sports – External customers Intersegment Total Total Total Total Intersegment eliminations Consolidated Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥119,548 702 ¥120,250 ¥24,629 549 ¥25,178 ¥29,628 - ¥29,628 ¥65,692 312 ¥66,004 ¥(1,563) ¥239,497 ¥140,955 744 ¥141,699 ¥27,249 588 ¥27,837 ¥31,170 - ¥31,170 ¥63,175 312 ¥63,487 ¥(1,644) ¥262,549 - 24 - Segment profit: Digital Entertainment Amusement Gaming & Systems Sports Total segment profit Corporate expenses and eliminations Other income and other expenses, net Finance income and finance costs, net Profit from investments accounted for using the equity method Profit before income taxes Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥37,405 7,493 4,366 3,253 52,517 (4,270) (3,066) (764) 292 ¥44,709 ¥43,833 8,434 4,723 2,243 59,233 (4,673) (4,038) (491) 279 ¥50,310 Corporate expenses primarily consist of personnel costs, advertising expenses and rental expenses, which substantially relate to our administrative department. Segment assets: Digital Entertainment Amusement Gaming & Systems Sports Total Corporate assets Consolidated As of March 31, 2018 Millions of Yen As of March 31, 2019 ¥166,811 56,015 34,106 68,880 325,812 37,296 ¥363,108 ¥174,027 62,430 37,180 73,620 347,257 30,780 ¥378,037 1) 2) 3) Corporate assets primarily consist of cash and cash equivalents, financial assets, and property, plant and equipment. Investments accounted for using the equity method in the Sports segment are discussed in Note 11” Investments Accounted for Using the Equity Method”. Impairment losses for property, plant and equipment, goodwill and intangible assets included in each segment asset are shown in the table below. Also, impairment losses for property, plant and equipment, goodwill and intangible asset are further discussed in Note 8 "Property, Plant and Equipment, net" and Note 9 "Goodwill and Intangible Assets". Impairment losses: Digital Entertainment Amusement Sports Total Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥1,972 1,158 2 ¥3,132 ¥2,903 387 - ¥3,290 - 25 - Depreciation and amortization: Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 Digital Entertainment Amusement Gaming & Systems Sports Total Corporate assets Consolidated ¥3,876 2,722 1,239 3,367 11,204 1,286 ¥12,490 ¥4,416 3,289 1,594 3,256 12,555 1,538 ¥14,093 Investments in non-financial assets: Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 Digital Entertainment Amusement Gaming & Systems Sports Total Corporate assets Consolidated ¥8,010 3,849 1,510 2,993 16,362 4,710 ¥21,072 ¥8,814 3,180 2,002 2,790 16,786 5,210 ¥21,996 Investments in non-financial assets include expenditures for acquisitions of property, plant and equipment, net and intangible assets used in operations of each segment. (2) Geographic Information Revenue from external customers Revenue: Japan United States Europe Asia/Oceania Consolidated Non-current assets: Japan United States Europe Asia/Oceania Consolidated Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥183,222 38,168 11,067 7,040 ¥239,497 ¥201,775 40,347 12,890 7,537 ¥262,549 As of March 31, 2018 Millions of Yen As of March 31, 2019 ¥105,177 10,061 268 441 ¥115,947 ¥109,106 10,549 255 411 ¥120,321 Non-current assets consist of property and plant and equipment and intangible assets including goodwill. - 26 - For the purpose of presenting its operations in the geographic areas above, Konami Group attributes revenues from external customers to individual countries in each area based on where Konami Group sold products or rendered services, and attributes assets based on where assets are located. Information about sales by product and service category. (3) Since the reporting segment is determined to be by product and service, this information is not reproduced again here. 5. Cash and Cash Equivalents The breakdown of cash and cash equivalents is as follows: Cash and cash equivalents: As of March 31, 2018 Millions of Yen As of March 31, 2019 Cash and deposits Short-term deposits with maturities of three months or less Total cash and cash equivalents on the consolidated statements of financial position ¥151,077 ¥153,336 3,408 5,906 ¥154,485 ¥159,242 The balances of cash and cash equivalents on the consolidated statements of financial position agreed with the respective balances in consolidated statements of cash flows as of March 31, 2018 and 2019. 6. Trade and Other Receivables The breakdown of trade and other receivables is as follows: Notes receivables Accounts receivables Other receivables Less: allowance for doubtful accounts / allowance for expected credit losses Total As of March 31, 2018 ¥579 25,521 49 (57) ¥26,092 Millions of Yen As of March 31, 2019 ¥881 31,649 109 (164) ¥32,475 - 27 - 7. Inventories The breakdown of inventories is as follows: Finished products Work in process Raw materials and supplies Total As of March 31, 2018 ¥2,443 82 4,315 ¥6,840 Millions of Yen As of March 31, 2019 ¥2,896 158 5,261 ¥8,315 Inventories recognized as an expense for the fiscal years ended March 31, 2018 and 2019 were ¥27,818 million and ¥26,175 million, respectively. Loss on valuation recognized as an expense for the fiscal years ended March 31, 2018 and 2019 were ¥1,214 million and ¥250 million, respectively. 8. Property, Plant and Equipment, net (1) Reconciliations Changes in acquisition cost, accumulated depreciation, accumulated impairment loss and the carrying amount on property, plant and equipment are as follows: Acquisition cost Balance as of March 31, 2017 Acquisitions Sales and disposal Transfer from construction in progress Effect of foreign currency Balance as of March 31, 2018 Others Acquisitions Sales and disposal Transfer from construction in progress Effect of foreign currency Balance as of March 31, 2019 Others Land Buildings and structures Tools, furniture and fixtures Construction in progress Total Millions of Yen ¥34,866 252 - ¥109,154 1,250 (1,380) ¥32,720 3,792 (2,790) - (23) - 35,095 - - 94 (340) 1,102 109,880 1,365 (395) - 19 - ¥35,114 315 273 72 ¥111,510 (1,503) (469) (74) 31,676 3,583 (3,291) (632) 353 1 ¥31,690 ¥651 3,858 - (272) (8) 69 4,298 4,516 - ¥177,391 9,152 (4,170) (1,681) (840) 1,097 180,949 9,464 (3,686) (796) 5 44 ¥8,067 (1,113) 650 117 ¥186,381 - 28 - Accumulated depreciation and impairment losses Land Buildings and structures Tools, furniture and fixtures Construction in progress Total Millions of Yen Balance as of March 31, 2017 Depreciation expenses Sales and disposal Impairment losses Transfer from construction in progress Effect of foreign currency Balance as of March 31, 2018 Others Depreciation expenses Sales and disposal Impairment losses Transfer from construction in progress Effect of foreign currency Balance as of March 31, 2019 Others ¥(141) - - - - - - (141) - - - - - - ¥(141) ¥(73,855) (3,498) 1,349 - ¥(27,797) (2,384) 2,745 - - 28 (71) (76,047) (3,630) 357 - 1,360 351 41 (25,684) (2,531) 3,272 - - (31) (30) ¥(79,381) 756 (263) (168) ¥(24,618) - - - - - - - - - - - - - - - ¥(101,793) (5,882) 4,094 - 1,360 379 (30) (101,872) (6,161) 3,629 - 756 (294) (198) ¥(104,140) Millions of Yen Carrying amount Land Buildings and structures Tools, furniture and fixtures Construction in progress Total Balance as of March 31, 2018 Balance as of March 31, 2019 ¥34,954 ¥34,973 ¥33,833 ¥32,129 ¥5,992 ¥7,072 ¥4,298 ¥8,067 ¥79,077 ¥82,241 Depreciation expenses on property, plant and equipment are included in “Costs of revenue” and “Selling, general and administrative expenses”. Impairment losses (2) Konami Group componentizes its property, plant and equipment into groups which are considered to be the smallest cash-generating unit (“CGU”) that generates largely independent cash inflows. Idle assets for which no future use is anticipated are considered individually as CGUs. For the fiscal years ended March 31, 2018 and 2019, no impairment loss was recognized (3) Borrowing costs During the fiscal years ended March 31, 2018 and 2019, Konami Group capitalized borrowing costs amounting to ¥69 million and ¥44 million, respectively. Borrowing costs on qualifying assets were capitalized at the weighted average rate for general borrowings of 0.57% and 0.62%, respectively. - 29 - 9. Goodwill and Intangible Assets (1) Reconciliations Changes in the acquisition cost, accumulated amortization, accumulated impairment losses and the carrying amounts of goodwill and intangible assets are as follows: Acquisition cost Balance as of March 31, 2017 Acquisitions Internally generated development costs Sales and disposal Effect of foreign currency Balance as of March 31, 2018 Others Acquisitions Internally generated development costs Sales and disposal Effect of foreign currency Balance as of March 31, 2019 Others Goodwill Internally generated intangible assets Trademarks Memberships Others Total Millions of Yen ¥22,024 ¥46,414 ¥50,561 ¥6,640 ¥8,648 ¥134,287 - - - (29) - 1,085 10,700 (10,912) (39) (176) - - - - - - - - - - 135 1,220 - 10,700 (1,011) (11,923) (174) (34) (242) (210) 21,995 47,072 50,561 6,640 7,564 133,832 - - - 23 - 1,030 11,363 (7,708) 46 345 - - - - - - - - - - 139 1,169 - 11,363 (3) (7,711) 125 (168) 194 177 ¥22,018 ¥52,148 ¥50,561 ¥6,640 ¥7,657 ¥139,024 Internally Millions of Yen Accumulated amortization and impairment losses Goodwill generated intangible assets Trademarks Memberships Others Total Balance as of March 31, 2017 Amortization expenses Sales and disposal Impairment losses Effect of foreign currency Balance as of March 31, 2018 Others Amortization expenses Sales and disposal Impairment losses Effect of foreign currency Balance as of March 31, 2019 Others ¥(4,127) - - - - - (4,127) - - - - - ¥(4,127) ¥(40,675) (6,061) 10,909 (2,996) 39 192 (38,592) (7,395) 7,337 (3,290) (45) (118) ¥(42,103) ¥(41,712) (11) - (136) - - (41,859) - - - - - ¥(41,859) ¥(6,640) - - - - - (6,640) - - - - - ¥(6,640) ¥(6,359) (536) 1,011 - 118 22 (5,744) (537) 3 - (101) 164 ¥(99,513) (6,608) 11,920 (3,132) 157 214 (96,962) (7,932) 7,340 (3,290) (146) 46 ¥(6,215) ¥(100,944) - 30 - Carrying amount Goodwill Internally generated intangible assets Trademarks Memberships Others Total Millions of Yen Balance as of March 31, 2018 Balance as of March 31, 2019 ¥17,868 ¥17,891 ¥8,480 ¥10,045 ¥8,702 ¥8,702 - - ¥1,820 ¥1,442 ¥36,870 ¥38,080 The amortization expenses for intangible assets are included in “Costs of revenue” or “Selling, general and administrative expenses” in the accompanying consolidated statement of profit or loss. Intangible assets with indefinite useful lives (2) At March 31, 2018 and 2019, the carrying amounts of intangible assets with indefinite useful lives included in above were ¥8,996 million and ¥8,985 million, respectively. Since those identifiable intangible assets primarily consist of trademarks acquired in businesses combinations which will not expire for as long as the business continues, the Company determined that such assets have indefinite useful lives as of March 31, 2019. Impairment losses allocated to cash-generating units including goodwill (3) In an impairment-test, goodwill and intangible assets with an indefinite life are allocated to respective cash-generating units. The carrying amounts of goodwill and intangible assets with an indefinite life allocated to respective cash-generating units are as follows: Goodwill Digital Entertainment Gaming & Systems Sports Total Intangible assets with an indefinite life Gaming & Systems Sports Total As of March 31, 2018 Millions of Yen As of March 31, 2019 ¥15,302 125 2,441 ¥17,868 ¥294 8,702 ¥8,996 ¥15,325 125 2,441 ¥17,891 ¥283 8,702 ¥8,985 Intangible assets with an indefinite useful life mainly consist of trademarks attributable to the Sports segment. Impairment tests for major goodwill and intangible assets with an indefinite life are performed as follows: Digital Entertainment segment In the Digital Entertainment segment, the recoverable amount is measured on the basis of its value in use based on the medium-term management plans approved by management. For subsequent periods, the value in use is estimated in reference to the long-term anticipated growth rate of the market or the country the CGU belongs to, based on management’s historical experiences and other available relevant external information. Even if the key assumptions used in the impairment test have changed within a reasonably predictable range, Konami Group concluded that it was unlikely to result in a significant impairment because the value in use calculated showed sufficient headroom over the carrying amount. - 31 - Sports segment In Sports operations, the goodwill and intangible assets are grouped into the smallest CGU, which generates largely independent cash inflows. The recoverable amount of a CGU is calculated on the basis of its fair value less disposal costs. The fair value less disposal costs is determined to consider the results of multiple valuation techniques, including discounted cash flow method and comparable listed company comparison method, and the relevant fair value is categorized as Level 3. Discounted cash flow method uses the discounted present value of the future cash flows based on the medium-term management plans approved by management based on the historical experiences and other available relevant external information. For subsequent periods, the value in use is calculated using a growth rate that does not exceed the long-term anticipated growth rate of the market or the country the CGU belongs to. The discount rate is calculated based on the weighted average capital cost of the relevant CGU. For the fiscal year ended March 31, 2018 and 2019, the discount rates are 6.5% and 7.1%, respectively. For the fiscal year ended March 31, 2019, the total recoverable amount exceeded its carrying amount. If the discount rate would increase by 3.4% points, the recoverable amount and the carrying amount are equal. Impairment of internally generated intangible assets (4) Internally generated intangible assets are grouped at the individual title level to determine the CGU, and tested at each reporting date to determine whether there is any indicator of impairment. If any indication of impairment is identified, including if estimated earnings fall below zero, or if the market value of the title’s assets decline significantly below their carrying amounts, those internally generated intangible assets are tested for impairment. Impairment losses were recognized on certain internally generated intangible assets where the recoverable amounts fell below their carrying amounts. The recoverable amount of internally generated intangible assets is determined based on their value in use, which is calculated by using the estimated future cash flows expected to be generated from the future earnings of the titles. Impairment losses recognized and included in the line item “Other income and other expenses, net” in the consolidated statement of profit or loss for the fiscal years ended March 31, 2018 and 2019 were as follows: Digital Entertainment Amusement Sports Total (5) Research and development costs Fiscal year ended March 31, 2018 ¥1,972 1,022 2 ¥2,996 Millions of Yen Fiscal year ended March 31, 2019 ¥2,903 387 - ¥3,290 Expenditure on research that does not meet the criteria for capitalization is recognized as an expense in the period in which the expenditure is incurred. For the fiscal years ended March 31, 2018 and 2019, research and development costs recognized as expense incurred were ¥3,131million and ¥3,253 million, respectively. - 32 - 10. Leases Lessee (1) Finance leases The Company leases, as lessee, certain buildings and structures and tools, furniture and fixtures under finance leases. The carrying amounts (less cumulative amount of depreciation expenses and impairment losses) of assets leased under finance leases, which were included in property, plant and equipment in the accompanying consolidated statement of financial position, at March 31, 2018 and 2019 were as follows: Buildings and structures Tools, furniture and fixtures As of March 31, 2018 ¥7,163 ¥19 Millions of Yen As of March 31, 2019 ¥5,418 ¥1 Future minimum lease payments under finance leases at March 31, 2018 and 2019 were as follows: Less than 1 year More than 1 year and less than 5 years More than 5 years Total Less: future financial expenses The present value of future minimum lease payments As of March 31, 2018 ¥2,341 7,664 7,394 17,399 (2,505) Millions of Yen As of March 31, 2019 ¥2,602 6,983 4,427 14,012 (1,952) ¥14,894 ¥12,060 The present value of future minimum lease payments under finance leases at March 31, 2018 and 2019 were as follows: Less than 1 year More than 1 year and less than 5 years More than 5 years Total As of March 31, 2018 ¥1,790 6,208 6,896 ¥14,894 Millions of Yen As of March 31, 2019 ¥2,138 5,770 4,152 ¥12,060 Certain lease contracts include renewal or purchase options. Contingent rents recognized as an expense were not material during the fiscal years ended March 31, 2018 and 2019. - 33 - (2) Operating leases Konami Group occupies certain offices and lease equipment under operating lease arrangements. Konami Group has obligations arising from non-cancelable operating leases. Future minimum lease payments under noncancelable operating leases at March 31, 2018 and 2019 were as follows: Less than 1 year More than 1 year and less than 5 years More than 5 years Total As of March 31, 2018 ¥14,517 30,665 14,839 ¥60,021 Millions of Yen As of March 31, 2019 ¥14,228 23,471 11,752 ¥49,451 Certain lease contracts include renewal or purchase options. Lease payments under operating leases recognized as an expense for the fiscal years ended March 31, 2018 and 2019 totaled ¥16,695 million and ¥19,857 million, respectively. Contingent rents recognized as expenses were not material during the fiscal years ended March 31, 2018 and 2019. 11. Investments Accounted for Using the Equity Method At March 31, 2018 and 2019, Konami Group held the following investments accounted for Name using the equity method: Relationship Location Description of business Acquisition Date Ownership % RESOL HOLDINGS Co., Ltd. Japan Management of resort facilities Investment at Sports segment Certain directors or officers of the Company concurrently serve as directors or officers March 2006 20.4% At March 31, 2018 and 2019, the carrying amount and fair value of investments accounted for using the equity method with quoted prices published in active markets, are as follows: Millions of Yen Carrying amount Fair value As of March 31, 2018 ¥3,034 ¥4,911 As of March 31, 2019 ¥3,233 ¥4,532 Summarized financial information is omitted since it is not material to the consolidated financial statements. - 34 - 12. Other Investments The breakdown of other investments is as follows: As of March 31, 2018 Millions of Yen As of March 31, 2019 Equity financial assets measured at fair value through other comprehensive income Securities Other investments Financial assets measured at fair value through profit or loss Other investments Available-for-sale investments Securities Other investments Total 13. Other Financial Assets - - - ¥1,227 86 ¥1,313 The breakdown of other financial assets is as follows: ¥1,128 72 20 - - ¥1,220 As of March 31, 2018 Millions of Yen As of March 31, 2019 Financial assets measured at amortized cost Loans receivable Lease deposits Other financial assets Less: allowance for expected credit losses Loans and receivables Loans receivable Lease deposits Other financial assets Less: allowance for doubtful accounts Total Current Non-current - - - - ¥345 21,955 1,519 (162) ¥23,657 1,079 ¥22,578 ¥288 22,467 1,140 (162) - - - - ¥23,733 1,695 ¥22,038 Other financial assets (current) are included in “Other current assets” in the accompanying consolidated statements of financial position. 14. Bonds and Borrowings At March 31, 2018 and 2019, the breakdown of short-term borrowings is as follows: Unsecured short-term borrowings from banks Total As of March 31, 2018 ¥6,906 ¥6,906 Millions of Yen As of March 31, 2019 ¥5,550 ¥5,550 Weighted-average interest rates on short-term borrowings were 2.09% and 3.24% at March 31, 2018 and 2019, respectively. In addition, unsecured short-term borrowings from banks - 35 - included $65,000 thousand (¥6,906 million) and $50,000 thousand (¥5,550 million) of loans denominated in foreign currencies at March 31, 2018 and 2019, respectively. At March 31, 2018 and 2019, the breakdown of bonds is as follows: As of March 31, 2018 Millions of Yen As of March 31, 2019 Unsecured 0.53% per annum bonds due in September 2018 Unsecured 0.66% per annum bonds due in September 2019 -% per annum euro-yen convertible bond- type bonds with subscription rights to shares due in December 2022 Total Less: current portion Long-term debt, non-current portion ¥4,997 4,993 9,751 19,741 (4,997) ¥14,744 - ¥4,997 9,803 14,800 (4,997) ¥9,803 At March 31, 2018 and 2019, Konami Group did not have any assets pledged as collateral for any of the debt obligations. 15. Trade and Other Payables The breakdown of trade and other payables is as follows: Notes payables Accounts payables Accrued expenses Refund liabilities Other payables Total As of March 31, 2018 ¥419 10,208 18,717 - 1,908 ¥31,252 Millions of Yen As of March 31, 2019 ¥691 12,167 15,392 1,035 2,245 ¥31,530 - 36 - 16. Provisions The changes in provisions during the year ended March 31, 2019 were as follows: Millions of Yen Balance as of March 31, 2018 Adjustment amount for adopting IFRS 15 Beginning balance after adjusting Additional provisions Amounts utilized Unused amounts reversed Discounted interest costs and effect of change in discount rate. Others Balance as of March 31, 2019 Effect of foreign currency Current liabilities Non-current liabilities Asset retirement obligations ¥9,205 - 9,205 67 (62) (61) 25 - (1) ¥9,173 7 ¥9,166 Others ¥558 (371) 187 149 (108) (81) - 1 8 ¥156 140 ¥16 Total ¥9,763 (371) 9,392 216 (170) (142) 25 1 7 ¥9,329 147 ¥9,182 Konami Group recognizes asset retirement obligations arising from the contractual requirements to perform certain asset retirement activities in case it disposes certain lease assets primarily relating to the office and the Sports facilities. The liability is measured using the best estimate of expenditures for the future asset retirements. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related non-current asset and depreciated over the asset’s estimated useful life. While these costs are expected to be paid after a period of more than one year has passed, this may be changed due to future changes in management plans. Those provisions (current) are included in “Other current liabilities” in the accompanying consolidated statements of financial position. 17. Other Financial Liabilities The breakdown of trade and other payables are as follows: As of March 31, 2018 Millions of Yen As of March 31, 2019 Financial liabilities measured at amortized cost Capital lease and financing obligations Other financial liabilities Financial liabilities measured at fair value through profit or loss Other financial liabilities Total Current liabilities Non-current liabilities ¥14,894 2,087 - ¥16,981 3,876 ¥13,105 ¥12,060 2,185 0 ¥14,245 4,323 ¥9,922 - 37 - 18. Deferred Taxes and Income Tax Expense Main components of deferred tax assets and liabilities are as follows: Deferred tax assets: As of April 1, 2017 Recognized through profit (Note) or loss Recognized in other comprehensive income Recognized in equity directly As of March 31, 2018 Millions of Yen Accrued expenses ¥4,327 ¥178 Inventories 2,170 (704) Net operating loss carryforwards 2,968 Property, plant and equipment basis differences Asset retirement obligations Intangible assets Deferred revenue Investments in associates Others 2,728 1,157 9,930 1,180 1,109 2,442 11 34 103 (225) 194 0 56 Deferred tax liabilities: Total ¥28,011 ¥(353) Intangible assets ¥(3,555) ¥113 Investments in subsidiaries Others Deferred tax assets, net Total (1,107) (1,014) ¥(5,676) (28) (139) ¥(54) ¥22,335 ¥(407) - - - - - - - - ¥(9) ¥(9) - - ¥32 ¥32 ¥23 - - - - - - - - - - - - - - - ¥4,505 1,466 2,979 2,762 1,260 9,705 1,374 1,109 2,489 ¥27,649 ¥(3,442) (1,135) (1,121) ¥(5,698) ¥21,951 Note) The difference between the total amount of “recognized through profit or loss” in the above and the total amount of deferred tax expenses is due to foreign exchange fluctuations. - 38 - Deferred tax assets: As of April 1, 2018 Recognized through profit (Note) or loss Recognized in other comprehensive income Recognized in equity directly As of March 31, 2019 Millions of Yen Accrued expenses ¥4,505 ¥282 Inventories 1,466 (165) Net operating loss carryforwards 2,979 (1,840) Property, plant and equipment basis differences Asset retirement obligations Intangible assets Deferred revenue Investments in associates Others 2,762 1,260 9,705 1,374 1,109 2,489 (791) 138 635 1,296 0 (111) Deferred tax liabilities: Total ¥27,649 ¥(556) Intangible assets ¥(3,442) Investments in subsidiaries (1,135) ¥70 (70) Others (1,121) (258) Deferred tax assets, net Total ¥(5,698) ¥(258) - - - - - - - - ¥6 ¥6 - - - - ¥21,951 ¥(814) ¥6 - - - - - - - - - - - - - - - ¥4,787 1,301 1,139 1,971 1,398 10,340 2,670 1,109 2,384 ¥27,099 ¥(3,372) (1,205) (1,379) ¥(5,956) ¥21,143 Note) The difference between the total amount of “recognized through profit or loss” in the above and the total amount of deferred tax expenses is due to foreign exchange fluctuations. Deferred tax assets and deferred tax liabilities included in the accompanying consolidated financial statements are as follows: Deferred tax assets Deferred tax liabilities As of March 31, 2018 ¥21,951 - Millions of Yen As of March 31, 2019 ¥21,143 - When recognizing deferred tax assets, Konami Group considers whether it is probable that future taxable profit will be available against which a portion or all of the deductible temporary differences or the carryforward of unused tax losses can be utilized. Konami Group considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in the reassessment of recoverability of deferred tax assets. Based upon the level of historical taxable income and projections for future taxable - 39 - income over the periods in which the deferred tax assets can be recognized, Konami Group determines it is probable that deferred tax assets recognized relating to tax benefits will be realized. However, the amount of deferred tax assets recognized will be decreased if future taxable income decreases during the periods in which those tax benefits can be utilized. At March 31, 2018 and 2019, the amount of deferred tax assets attributable to tax entities which had recognized losses in the previous fiscal year and the current year were ¥277 million and ¥273 million, respectively. Konami Group recognized these deferred tax assets after considering their recoverability including whether it is probable that future taxable profit will be available based on the nature of the tax entity’s businesses or expiry date of unused tax losses carryforwards in the country where the entity is located. The amounts of deductible temporary differences and unused tax losses for which deferred tax assets have not been recognized are as follows: Deductible temporary differences Unused tax losses carryforwards Total As of March 31, 2018 ¥20,886 33,660 ¥54,546 Millions of Yen As of March 31, 2019 ¥22,873 22,634 ¥45,507 The expiry dates of unused tax losses for which deferred tax assets have not been recognized are as follows: First year Second year Third year Fourth year Fifth year and thereafter Total As of March 31, 2018 ¥8,803 1,457 7,524 1,022 14,854 ¥33,660 Millions of Yen As of March 31, 2019 ¥1,806 5,546 1,022 430 13,831 ¥22,634 Konami Group recognized assets or liabilities for the effect of uncertainty in income taxes based on a reasonable estimate. The amounts of unrecognized tax benefits at March 31, 2018 and 2019, which would affect the effective tax rate, are not material. The Company is not able to predict whether the total amount of unrecognized tax benefits will significantly increase or decrease during the next twelve months. - 40 - The breakdown of current and deferred tax expenses are as follows: Income taxes: Current tax expense Deferred tax expense Current tax on profits for the year Total current tax expense Origination and reversal of temporary difference Changes in tax rates Reassessment of recoverability of deferred tax assets Total income tax expense Total deferred tax expense Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥13,849 13,849 2,320 662 (2,628) 354 ¥14,203 ¥15,283 15,283 2,912 - (2,102) 810 ¥16,093 Current tax expense includes tax losses used to reduce tax expense for which tax effects were not recognized previously, or benefits arising from temporary differences in past years. The resulting decreases in current tax expense were ¥2,075 million and ¥4,078 million in the fiscal years ended March 31, 2018 and 2019, respectively. The Company and its domestic subsidiaries were subject to various taxes on their income, and its foreign subsidiaries are subject to income taxes in the countries in which they operate. Following the enactment of the Tax Cuts and Jobs Act in the U.S. on December 22, 2017, the federal tax rate used in the calculation of deferred tax assets and deferred tax liabilities of U.S. subsidiaries decreased from 35.0% to 21.0% from January 1, 2018. Konami Group recognized deferred tax assets and liabilities based on the enacted tax rates that will be applied when temporary differences and loss and credit carryforwards are expected to reverse. Reconciliations between the statutory income tax rates and the effective tax rates are as follows: Statutory income tax rate Increase (reduction) in taxes resulting from: Non-deductible expenses Non-taxable income Changes of unrecognized deferred tax assets in previous years Adjustment of estimated income tax accruals Tax credit, principally research Effect of tax law changes Non-deductible local taxes Effective income tax rate Other, net Fiscal year ended March 31, 2018 30.9% Fiscal year ended March 31, 2019 30.6% 0.2 (0.2) (5.9) 1.5 (0.8) 1.5 0.5 4.1 0.3 (0.0) (4.2) 3.2 (1.0) - 0.5 2.6 31.8% 32.0% - 41 - 19. Employee Benefits (1) Defined contribution plans The Company and its domestic subsidiaries have adopted defined contribution plans. Certain domestic subsidiaries began to offer participation in defined contribution plans to employees from the fiscal year ended March 31, 2012 and the Company and other domestic subsidiaries offered participation in defined contribution plans from the fiscal year ended March 31, 2014. Certain domestic subsidiaries terminated existing defined benefit plans and made a transition to defined contribution plans. Benefit obligations to be contributed to the defined contribution plans following this transition were determined to be ¥1,759 million and were completed to be settled by the end of the fiscal year ended March 31, 2019. At March 31, 2018 and 2019, benefit obligations were included in “Other current liabilities” and “Other non-current liabilities” in the accompanying consolidated statements of financial position as follows: Other current liabilities Other non-current liabilities Total As of March 31, 2018 ¥59 11 ¥70 Millions of Yen As of March 31, 2019 - - - The Company and certain domestic subsidiaries’ contributions to the defined contribution plans amounted to ¥3,397 million and ¥3,547 million for the fiscal years ended March 31, 2018 and 2019, respectively. The expenses were reported as “Cost of revenue” and “Selling, general and administrative expenses” in the accompanying consolidated statement of profit or loss. These expenses include the amount recognized as expenses for the public pension plan. (2) Accrued pension and severance costs The Company has accrued a liability for retirement benefits for directors and corporate auditors in the amount of ¥1,050 million and ¥1,050 million at March 31, 2018 and 2019, respectively, which are included in “Other non-current liabilities” in the accompanying consolidated statements of financial position. - 42 - 20. Shareholders’ Equity (1) Share capital The total number of ordinary shares authorized to be issued and issued shares at March 31, 2018 and 2019 were as follows: Ordinary shares authorized to be issued: Issued shares: Ordinary share, no-par-value Balance at beginning of year Balance at end of year Change during the year Fiscal year ended March 31, 2018 Number of shares Fiscal year ended March 31, 2019 450,000,000 450,000,000 143,500,000 - 143,500,000 143,500,000 - 143,500,000 Note) Shares issued by the Company are ordinary shares without par value. Treasury shares (2) The following table summarizes treasury shares activities for the fiscal years ended March 31, 2018 and 2019: Balance as of March 31, 2017 Number of shares Millions of Yen Balance as of March 31, 2018 Acquisition through purchase of odd-lot shares Sell upon request for purchase of odd-lot shares Balance as of March 31, 2019 Acquisition through purchase of odd-lot shares Sell upon request for purchase of odd-lot shares 8,263,356 3,007 (104) 8,266,259 725 (25) 8,266,959 ¥21,304 17 (0) 21,321 4 (0) ¥21,325 (3) Share premium and retained earnings Share premium The Companies Act of Japan (the “Companies Act”) requires in principle that the amount of payment for shares and assets delivered shall be the amount of share capital. However, the Companies Act permits, as an exception, that an amount not exceeding 50% of such payments and assets to be incorporated into share premium. Retained earnings The Companies Act requires that an amount equal to 10% of dividends to be paid from retained earnings shall be appropriated and set aside as legal reserve until the total of share premium and legal reserve amounts to 25% of the share capital amount. The Companies Act provides that a company may transfer amounts between share capital, reserves and surpluses, subject to certain conditions, such as a resolution at the shareholders' meeting. At March 31, 2018 and 2019, retained earnings available for dividends recorded on the Company’s books of account were ¥130,745 million and ¥139,281 million, respectively. - 43 - 21. Dividends (1) Dividends paid Resolution Class of shares Amount of dividend (Millions of Yen) Dividend per share (Yen) Record date Effective date Board of Directors' meeting held on May 18, 2017 Board of Directors' meeting held on October 31, 2017 Board of Directors' meeting held on May 17, 2018 Board of Directors' meeting held on October 31, 2018 Ordinary shares Ordinary shares Ordinary shares Ordinary shares 5,545 41.00 March 31, 2017 June 7, 2017 4,057 30.00 September 30, 2017 November 21, 2017 5,139 38.00 March 31, 2018 June 6, 2018 8,181 60.50 September 30, 2018 November 20, 2018 Note) Dividends per share resolved on October 31, 2018, include a commemorative dividend of 25 yen for the 50th anniversary of the Company’s founding. (2) Dividends whose record date is in the fiscal year under review but whose effective date is in the following fiscal year Resolution Class of shares Source of dividend Amount of dividend (Millions of Yen) Dividend per share (Yen) Record date Effective date Board of Directors' meeting held on May 28, 2019 Ordinary shares Retained earnings 8,858 65.50 March 31, 2019 June 12, 2019 Note) Resolved dividends per share include a commemorative dividend of 25 yen for the 50th anniversary of the Company’s founding. 22. Financial Instruments (1) Categories of financial instruments Financial assets As of March 31, 2018 Millions of Yen As of March 31, 2019 Financial assets measured at amortized cost Cash and cash equivalents Trade and other receivables Other financial assets Equity financial assets measured at fair value through other comprehensive income Other investments Financial assets measured at fair value through profit or loss Other investments Cash and cash equivalents Loans and receivables Trade and other receivables Other financial assets Available-for-sale investments Other investments Total - - - - - ¥154,485 26,092 23,657 1,313 ¥205,547 - 44 - ¥159,242 32,475 23,733 1,200 20 - - - - ¥216,670 Equity financial assets measured at fair value through other comprehensive income In light of the purpose of holding, equity instruments such as shares held mainly for the purpose of maintaining or strengthening business relationships with investees are designated at initial recognition as equity financial assets measured at fair value through other comprehensive income. The securities’ names and fair values of equity financial assets measured at fair value through other comprehensive income mainly are as follows. TV TOKYO Holdings Corporation Gamecard-Joyco Holdings, Inc Financial liabilities Financial liabilities measured at amortized cost Trade and other payables Bonds and borrowings Other financial liabilities Financial liabilities measured at fair value through profit or loss Other financial liabilities Total (2) Capital management As of March 31, 2018 ¥332 ¥318 Millions of Yen As of March 31, 2019 ¥277 ¥274 As of March 31, 2018 Millions of Yen As of March 31, 2019 ¥31,252 26,647 16,981 - ¥74,880 ¥31,530 20,350 14,245 0 ¥66,125 Konami Group's basic policy of capital management is to establish and maintain financial strength in order to sustain growth and maximize corporate value and shareholder return. Capital earned by carrying out this policy is used for investments in businesses and returned to shareholders through dividends. The key metrics Konami Group uses for its capital management are as follows: Millions of Yen except percentage Cash and cash equivalents Interest-bearing borrowings Capital Net debt-to-equity ratio (%) Interest-bearing borrowings: Total of long-term debt, short-term borrowings and capital lease As of March 31, 2018 ¥154,485 41,541 253,782 69.9% As of March 31, 2019 ¥159,242 32,410 275,627 72.9% Capital: Total equity attributable to owners of the parent. Capital ratio: Capital / Total liabilities and equity and financing obligations. Konami Group is not subject to any externally imposed capital requirement, excluding general regulations including the Companies Act. - 45 - (3) Financial risk management Konami Group conducts its business on a global scale, and is therefore exposed to credit risk, liquidity risk, foreign currency risk and interest rate risk. In order to avoid and reduce these financial risks, Konami Group conducts risk management according to certain policies. (4) Credit risk management Financial assets included in trade and other receivables are exposed to the credit risks of customers. Lease deposits included in other financial assets are exposed to the credit risks of depositors. With respect to these risks, the due dates and outstanding balances are managed for each business partner. Past due receivables are periodically reported and individually monitored according to internal rules corresponding to internal ratings and the amount of credit. Konami Group intends to mitigate credit risks by conducting regular monitoring of the companies with which it does business for early detection of any worsening of their financial health. It also requires collateral or a guarantee depending on the credit profile of the counterparty. Konami Group’s standard policy is to enter into derivative transactions only with high rated financial institutions pursuant to the Company's risk management policies to hedge specific risks The maximum exposure to credit risks of financial assets is the carrying value of financial assets after impairment presented in the consolidated financial statement of financial position. When Konami Group initiates transactions where receivables will be generated on an ongoing basis, the finance department manages its risk exposure by setting credit limits and credit periods, as considered appropriate. It determines an amount of allowance for expected credit losses (for fiscal year ended March 31, 2018: allowance for doubtful accounts) based upon factors surrounding the collection history and length of the period past due. Konami Group also collectively evaluates some receivables and determines an amount of allowance for expected credit losses (for fiscal year ended March 31, 2018: allowance for doubtful accounts) based on past actual rates of credit losses, probability of future default and other information. The changes in allowance for expected credit losses (for fiscal year ended March 31, 2018: allowance for doubtful accounts) for the fiscal years ended March 31, 2018 and 2019 are as follows: Balance at beginning of year Allowance for doubtful accounts / Allowance for expected credit losses Utilization of allowance Reversal Effect of foreign currency Balance at end of year Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥344 51 (34) (137) (5) ¥219 ¥219 124 (9) (10) 2 ¥326 - 46 - The balances of trade and other receivables and the corresponding allowance for expected credit losses for the fiscal year ended March 31, 2019 are as follows. Millions of Yen, except percentages Trade and other receivables Not past due Within 30 days Over 30 days through 180 days Over 180 days through 1 year Over 1 year Total Doubtful accounts receivable Total 0.02% - 2.97% 47.77% 47.33% 0.50% 100.00% 0.99% ¥30,627 ¥983 ¥741 ¥157 ¥131 ¥32,639 ¥162 ¥32,801 ¥5 - ¥22 ¥75 ¥62 ¥164 ¥162 ¥326 Expected credit loss rates Trade and other receivables Allowance for expected credit losses The following is an analysis of the age of receivables that are past due but not impaired individually at March 31, 2018. Within 30 days Over 30 days through 180 days Over 180 days through 1 year Over 1 year Total Millions of Yen As of March 31, 2018 ¥742 479 347 69 ¥1,637 At March 31, 2018 and 2019, the balances of trade and other receivables impaired individually were ¥51 million and ¥112 million, respectively, and the corresponding allowance for expected credit losses (for fiscal year ended March 31, 2018: allowance for doubtful accounts) amounted to ¥51 million and ¥112 million, respectively. Liquidity risk management (5) Since Konami Group’s sources of funds for operating transactions and capital expenditures include borrowings from banks and issuance of bonds, it is exposed to liquidity risks (the failure to make payments on due dates) due to deterioration in the financial environment. In order to mitigate liquidity risks, Konami Group has entered into commitment line contracts with large, reputable banks, and prepares and updates monthly cash planning analyses. - 47 - The breakdown of financial liabilities by due date at March 31, 2018 and 2019 is as follows: Balance at March 31, 2018 Carrying amount Contractual cash flows Within 1 year Millions of Yen More than 1 year but within 2 years More than 2 years but within 3 years More than 3 years but within 4 years More than 4 years but within 5 years Over 5 years Bonds ¥19,741 ¥20,063 ¥5,046 ¥5,017 6,906 6,950 6,950 - - - - - ¥10,000 - - - Borrowings Capital lease and financing obligations Trade and other payables Other financial liabilities 14,894 17,399 2,341 2,178 ¥1,952 ¥1,792 1,742 ¥7,394 31,252 31,252 31,252 2,087 2,087 2,087 - - - - - - - - - - Total ¥74,880 ¥77,751 ¥47,676 ¥7,195 ¥1,952 ¥1,792 11,742 ¥7,394 Balance at March 31, 2019 Carrying amount Contractual cash flows Within 1 year Millions of Yen More than 1 year but within 2 years More than 2 years but within 3 years More than 3 years but within 4 years More than 4 years but within 5 years Over 5 years Bonds ¥14,800 ¥15,017 ¥5,017 Borrowings Capital lease and 5,550 5,603 5,603 - - - - ¥10,000 - - - - - financing obligations 12,060 14,012 2,602 ¥1,796 ¥1,756 1,746 ¥1,685 ¥4,427 Trade and other payables Other financial liabilities 31,530 31,530 31,530 2,185 2,185 2,185 - - - - - - - - - - Total ¥66,125 ¥68,347 ¥46,937 ¥1,796 ¥1,756 ¥11,746 ¥1,685 ¥4,427 While Konami Group has committed lines of credit with large, reputable banks available for immediate borrowing in the amount of ¥25,000 million, no amount had been drawn down under any of these agreements as of March 31, 2018 and 2019. (6) Market risk management Foreign currency risk (i) Foreign currency risk management Konami Group conducts its business on a global scale, and is exposed to foreign currency risk mainly arising from trade receivables and payables denominated in currencies other than Japanese yen. For the purpose of migrating the risks of foreign currency fluctuations on trade receivables and payables denominated in foreign currencies, Konami Group in principle - 48 - hedges risk by using foreign currency forward contracts and other instruments. Konami Group manages derivative transactions according to transaction authorization limits contained in internal finance policies. The balance of financial assets and liabilities denominated in foreign currencies, including inter-group-company transactions, at March 31, 2018 and 2019 was as follows: Financial assets denominated in foreign currencies Financial liabilities denominated in foreign currencies As of March 31, 2018 ¥12,838 ¥1,878 Millions of Yen As of March 31, 2019 ¥11,920 ¥2,594 (ii) Foreign currency sensitivity analysis Below is an analysis of the impact a 1% increase in the value of the yen against the United States dollar and the Euro would have on Konami Group’s income before income taxes for the fiscal years ended March 31, 2018 and 2019. In calculating these effects of amount, the corresponding financial assets and financial liabilities in foreign currency and the respective currency’s fluctuation range are used. These calculations assume no changes in the value of other foreign currencies not included herein. Fiscal year ended March 31, 2018 ¥53 ¥30 Millions of Yen Fiscal year ended March 31, 2019 ¥36 ¥29 United States dollar Euro Interest rate risk (i) Interest rate risk management Konami Group’s interest-bearing borrowings are mainly bonds, borrowings and capital lease and financing obligations with fixed interest rates, but the balance of cash and cash equivalents held exceeds the outstanding balance of its interest-bearing borrowings. Accordingly, its current level of interest rate risk is not material, and Konami Group has not performed any interest rate sensitivity analysis. There were no interest-bearing borrowings with variable rates at March 31, 2018 and 2019. (7) Fair value of financial instruments Measuring fair value of financial instruments Methods for measuring the fair value of financial assets and liabilities are as follows: (i) Financial assets and liabilities measured at amortized cost The fair values of cash and cash equivalents, trade and other receivables, and trade and other payables approximate their carrying amounts because they have short term maturities. The fair values of lease deposits and other financial assets are calculated as the present value of the total principal and interest discounted at interest rates reflecting the credit risks estimated by Konami Group, and categorized as Level 2. - 49 - The fair values of bonds and borrowings, capital lease and financing obligations, and other financial liabilities are calculated as the present value of the total principal and interest, discounted at interest rates that would be applied to new borrowings of Konami Group with similar terms and the same remaining maturity, and categorized as Level 2. (ii) Equity financial assets measured at fair value through other comprehensive income With regards to equity instruments included in other investments, the fair values of marketable securities are measured based on quoted market prices on equity markets of identical assets, and categorized as Level 1. The fair values of unlisted securities are determined based on an approach using observable inputs such as the comparable company's share prices and unobservable inputs, and categorized as Level 3. (iii) Financial assets and liabilities measured at fair value through profit or loss The fair values of foreign exchange contracts are measured using valuation provided by financial institutions based on observable market data at the end of each reporting period, and categorized as Level 2. The fair values of debt instruments included in other investments are determined based on an approach using observable inputs such as the comparable company's share prices and unobservable inputs, and categorized as Level 3. Fair value hierarchy Fair values are categorized within the fair value hierarchy as follows: Level 1: Level 2: Level 3: Fair values measured at a price quoted in an active market. Fair values calculated directly or indirectly using an observable price except for level 1. Fair values calculated through valuation techniques, including inputs that are not based on observable market data. - 50 - Fair value of financial instruments The table is a breakdown of financial instruments showing carrying amounts and fair values as at March 31, 2018 and 2019. Financial assets: Financial assets measured at amortized cost Loans receivable Lease deposits Other financial assets Equity financial assets measured at fair value through other comprehensive income Securities Other investments Financial assets measured at fair value through profit or loss Other investments Loans and receivables Loans receivable Lease deposits Other financial assets Available-for-sale investments Financial liabilities: Securities Other investments As of March 31, 2018 Fair value Carrying amount Millions of Yen As of March 31, 2019 Fair value Carrying amount - - - - - - - - - - - - ¥288 22,467 978 ¥330 22,750 844 1,128 72 1,128 72 20 20 ¥345 21,955 1,357 1,227 86 ¥386 22,145 1,335 1,227 86 - - - - - - - - - - Financial liabilities measured at amortized cost Bonds and borrowings Capital lease and financing obligations Other financial liabilities ¥26,647 14,894 2,087 ¥26,407 16,956 2,087 ¥20,350 12,060 2,185 ¥20,151 13,857 2,185 Financial liabilities measured at fair value through profit or loss Other financial liabilities - - 0 0 Other financial assets, bonds and borrowings and other financial liabilities are categorized as Level 2. Other investments are categorized as Level 1 and Level 3. - 51 - Fair values measured and disclosed on the consolidated statements of financial position The following is a breakdown of financial assets that are measured at fair value on a recurring basis at March 31, 2018 and 2019. Balance at March 31, 2018 Millions of Yen Financial assets: Level 1 Level 2 Level 3 Total Available-for-sale investments Securities Other investments Total Balance at March 31, 2019 Financial assets: Equity financial assets measured at fair value through other comprehensive income Securities Other investments Financial assets measured at fair value through profit or loss Other investments Total ¥650 - ¥650 - - - ¥577 86 ¥663 ¥1,227 86 ¥1,313 Level 1 Level 2 Level 3 Total Millions of Yen ¥551 - - ¥551 - - - - ¥577 72 20 ¥669 ¥1,128 72 20 ¥1,220 Securities and other investments, which are classified as Level 3, have no significant changes for the fiscal year ended March 31, 2018 and 2019. 23. Revenue (1) Disaggregated revenue information The following is a breakdown of the reportable segment revenues from external customers to the areas where Konami Group sells products and/or renders services. For the fiscal year ended March 31, 2019 Japan United States Europe Asia/Oceania Total revenue Millions of Yen Digital Entertainment Amusement Gaming & Systems Sports ¥12,958 - 27,389 - Total revenue ¥40,347 Note) Revenues from contracts with customers show revenues from external customers. ¥111,800 26,800 - 63,175 ¥201,775 ¥12,890 - - - ¥12,890 ¥3,307 449 3,781 - ¥7,537 ¥140,955 27,249 31,170 63,175 ¥262,549 Digital Entertainment segment In the Digital Entertainment segment, Konami Group mainly distributes mobile games and sells card games and computer and video games. With respect to products that we determine the performance obligations are satisfied at the time when they are delivered to customers, we recognize the revenue at the time. - 52 - In terms of games with online functionality, the revenue is recognized at a predetermined amount over the estimated usage period because the performance obligations, such as online play functions, are continuously provided after sales. Revenue from the sale of virtual items within games is recognized at the time they are consumed or over the estimated usage period of the items, depending on the nature of the items, when the performance obligation is determined to have been completed. Amusement segment With respect to amusement machines, we determine that the performance obligations are satisfied at the time when the products are delivered to customers, and we recognize the revenue at the time. In addition, Konami Group renders services where we interface with amusement machines and multiple amusement arcades online and share user playing fees with customers (amusement facility operators). As these performance obligations are satisfied at the time when the user plays the game, the revenue is recognized at the time. Gaming & Systems segment With respect to the sale of gaming machines, we determine that the performance obligations are satisfied at the time when the products are delivered to customers, and we recognize the revenue at the time. In addition, Konami Group renders services where we share user playing fees with customers (casino facility operators). As this performance obligation is satisfied at the time when the user plays the game, the revenue is recognized at the time. Sports segment In the Sports segment, Konami Group operates mainly fitness activities and exercise schools and sells sports related goods. Revenue from fitness activities and exercise schools consists primarily of membership fees received from members, and is recognized over periods when the services are rendered. In terms of sports related goods, we determine that the performance obligations are satisfied at the time when they are delivered to customers, and we recognize the revenue at the time. Konami Group recognizes revenues whose performance obligations are satisfied at one time are mainly recorded as “Product sales revenue” in revenue and revenues whose performance obligations are satisfied over the period of time are mainly recorded as “Service and other revenue” in revenue. (2) Contract balances Details of receivables-contracts from customers and contract liabilities are as follows: Receivables-contracts from customers Contract liabilities As of April 1, 2018 ¥26,100 ¥8,353 Millions of Yen As of March 31, 2019 ¥32,530 ¥13,092 Receivables-contracts from customers are included in “Trade and other receivables” and contract liabilities are included in “Other non-current assets” in the accompanying consolidated statements of financial position. - 53 - The balance of contract liabilities as of April 1, 2018 included the revenue of ¥8,305 million for the fiscal year ended March 31, 2019. Contract liabilities mainly consist of advances received from customers. For the fiscal year ended March 31, 2019, the change in contract liabilities is mainly due to a temporary increase in advances received from customers at the Sports segment. Transaction price allocated to the remaining performance obligations (3) There is no significant transaction of which individual contracts exceed one year. There is no significant amount of considerations from the contract with the customers which are not included in the transaction price. (4) Assets recognized in respect of the costs to obtain or fulfil a contract with customers For the fiscal year ended March 31, 2019, there is no significant amount of assets recognized in respect of the costs to obtain or fulfil a contract with customers. In some cases, when the depreciation period of an asset to be recognized is within one year, the incremental cost of obtaining the contract is recognized as an expense at the time it incurs by optionally applying practical expedients to each contract. 24. Cost of Revenue and Selling, General and Administrative Expenses Details of cost of revenue, selling and general and administrative expenses by nature are as follows: Employee benefit expenses Commission paid Rental expenses Royalties Depreciation and amortization expenses Fiscal year ended March 31, 2018 ¥54,593 ¥23,811 ¥18,545 ¥14,256 ¥12,490 Millions of Yen Fiscal year ended March 31, 2019 ¥56,122 ¥32,394 ¥22,423 ¥16,494 ¥14,093 - 54 - 25. Other Income and Other Expenses The breakdown of other income and other expenses is as follows: Other income Gain on sale of property, plant and equipment, net Reversal of compensation for damage Other expenses Total Impairment losses Loss on sale of property, plant and equipment, net Others Total Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥4 236 ¥240 ¥3,132 66 108 ¥3,306 ¥0 - ¥0 ¥3,290 428 320 ¥4,038 Impairment losses are further discussed in Note 8 “Property, Plant and Equipment, net” and Note 9 “Goodwill and Intangible Assets”. 26. Finance Income and Finance Cost The breakdowns of finance income and finance costs are as follows: Finance income Dividend income Equity financial assets measured at fair value through other comprehensive income Available-for-sale financial assets Interest income Financial assets measured at amortized cost Loans and receivables Foreign exchange gains Others Finance costs Total Interest expenses Financial liabilities measured at amortized cost Foreign exchange losses Others Total Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 - ¥28 - 121 - 4 ¥153 ¥824 47 46 ¥917 ¥28 - 278 - 16 4 ¥326 ¥797 - 20 ¥817 - 55 - 27. Other Components of Equity and Other Comprehensive Income (1) Other components of equity Changes in other components of equity consist of the following: Millions of Yen Exchange differences on translation of foreign operations Net change in fair values of available-for- sale financial assets Net change in fair value of equity financial assets measured at fair value through other comprehensive income Share of other comprehensive income of entity accounted for using the equity method ¥2,044 (1,612) - 432 - 1,041 - ¥1,473 ¥112 66 - 178 ¥(178) - - - - - - - ¥178 (68) - ¥110 ¥1 (1) - (0) - (0) - ¥(0) Total ¥2,157 (1,547) - 610 - 973 - ¥1,583 Balance as of March 31, 2017 Net change during the year Balance as of March 31, 2018 Transfer to retained earnings Effect of accounting standards Net change during the year Balance as of March 31, 2019 Transfer to retained earnings - 56 - (2) Other comprehensive income Each component of other comprehensive income and allocated tax effects are shown below: Millions of Yen Exchange differences on translation of foreign operations Net unrealized gains (losses) during the year Reclassification adjustments to profit for the year Fiscal year ended March 31, 2018 Tax (expense) or benefit Pretax amount Net of tax amount Pretax amount Fiscal year ended March 31, 2019 Tax (expense) or benefit Net of tax amount ¥(1,621) ¥9 ¥(1,612) ¥1,046 ¥(6) ¥1,040 - - - - - - Net change during the year Fair values of available-for-sale financial assets (1,621) 9 (1,612) 1,046 (6) 1,040 Net unrealized gains (losses) during the year 98 (32) 66 Reclassification adjustments to profit for the year - - - Fair value of equity financial assets Net change during the year measured at fair value through other comprehensive income 98 (32) 66 - - - - - - - - - Net unrealized gains (losses) during the year Share of other comprehensive income Net change during the year of entity accounted for using the equity method Net unrealized gains (losses) during the year Reclassification adjustments to profit for the year Net change during the year Total other comprehensive income - - (1) - (1) - - - - - - - (100) (100) 32 32 (68) (68) (1) (0) - - (1) (0) - - - (0) - (0) ¥(1,524) ¥(23) ¥(1,547) ¥946 ¥26 ¥972 - 57 - 28. Earnings per Share The breakdown of the basic and diluted earnings per share attributable to owners of the parent for the fiscal years ended March 31, 2018 and 2019 is as follows: Fiscal year ended March 31, 2018 Fiscal year ended March 31, 2019 Profit attributable to owners of the parent 30,507 million yen 34,196 million yen Adjustments for profit used in the calculation of diluted earnings per share Profit used in the calculation of diluted earnings per share Basic weighted average ordinary shares outstanding Adjustments for convertible bond-type bonds with subscription rights to shares Basic weighted average ordinary shares outstanding used in the calculation of diluted earnings per share Earnings per share attributable to owners of the parent for the period Basic Diluted 36 million yen 36 million yen 30,543 million yen 34,232 million yen 135,234,933 shares 135,233,307 shares 2,215,379 shares 2,233,788 shares 137,450,312 shares 137,467,095 shares 225.59 yen 222.21 yen 252.86 yen 249.02 yen - 58 - 29. Cash Flow Information (1) Liabilities for financing activities For the fiscal year ended March 31, 2018, changes in liabilities for financing activities are as follows: Balance as of April 1, 2017 Cash flows Exchange differences on foreign operations Millions of Yen Balance as of March 31, 2018 Others Short-term borrowings ¥5,610 ¥1,675 ¥(379) - ¥6,906 Bonds 24,675 (5,000) Capital lease and financing obligations 16,423 (1,866) - - ¥66 337 19,741 14,894 Total ¥46,708 ¥(5,191) ¥(379) ¥403 ¥41,541 For the fiscal year ended March 31, 2019, changes in liabilities for financing activities are as follows: Millions of Yen Balance as of April 1, 2018 Cash flows Exchange differences on foreign operations Others Balance as of March 31, 2019 Short-term borrowings ¥6,906 ¥(1,649) ¥293 - ¥5,550 Bonds 19,741 (5,000) Capital lease and financing obligations 14,894 (2,460) - - ¥59 14,800 (374) 12,060 Total ¥41,541 ¥(9,109) ¥293 ¥(315) ¥32,410 (2) Non-cash Transactions The components of the principal non-cash transactions are as follows: Increase in property, plant and equipment related to recognition of asset retirement obligations 30. Related Party Disclosures Fiscal year ended March 31, 2018 Millions of Yen Fiscal year ended March 31, 2019 ¥1,142 ¥67 For the fiscal years ended March 31, 2018 and 2019, the amounts of directors' remuneration were ¥333 million and ¥357 million, respectively. There was not any payment of remuneration other than basic remuneration to directors. - 59 - 31. Major Subsidiaries Subsidiaries Major subsidiaries and associates of Konami Group are as follows: Name Location Principal business Ownership interest Voting rights (%) Konami Digital Entertainment Co., Ltd. Minato-ku, Tokyo, JAPAN Digital Entertainment Business 100 Konami Amusement Co., Ltd. KPE, Inc. Konami Sports Co., Ltd. Konami Sports Life Co., Ltd. Konami Real Estate, Inc. Internet Revolution, Inc. Ichinomiya, Aichi, JAPAN Minato-ku, Tokyo, JAPAN Shinagawa-ku, Tokyo, JAPAN Zama, Kanagawa, JAPAN Minato-ku, Tokyo, JAPAN Amusement Business Amusement Business Sports Business Sports Business Intersegment Minato-ku, Tokyo, JAPAN Digital Entertainment Business and Amusement Business Konami Corporation of America California, U.S.A Intersegment Konami Digital Entertainment, Inc. California, U.S.A Digital Entertainment Business and Amusement Business 100 100 100 100 100 70 100 100 Konami Cross Media NY, Inc. New York, U.S.A Digital Entertainment Business 100 Konami Gaming, Inc. Nevada, U.S.A Gaming & Systems Business Konami Digital Entertainment B.V. Konami Digital Entertainment Limited Konami Amusement (Thailand) Co., Ltd. Berkshire, U.K. Digital Entertainment Business and Amusement Business Hong Kong, PRC Digital Entertainment Business 100 Bangkok, Thailand Amusement Business 49 100 100 Konami Australia Pty Ltd New South Wales, Australia Gaming & Systems Business 100 Associates Name Location Principal business Ownership interest Voting rights (%) RESOL HOLDINGS Co., Ltd. Shinjuku-ku, Tokyo, JAPAN Sports Business 20 Although less than 50% of the voting rights of Konami Amusement (Thailand) Co., Ltd. are held by Konami Group, it is determined to be a subsidiary due to Konami Group’s ability to substantially control the entity’s decision-making board. - 60 - 32. Commitments (Commitment for purchases of property, plant and equipment) Konami Group has placed firm orders for purchases of property, plant and equipment and other assets amounting to approximately ¥7,635 million and ¥4,106 million as of March 31, 2018 and 2019, respectively. 33. Contingencies Konami Group is subject to pending claims and litigation. After review and consultation with counsel, management considered that any liability that may result from the disposition of such lawsuits would not be material. 34. Subsequent Events There have been no events after March 31, 2019 that would require adjustments to the consolidated financial statements or disclosures in the notes to the consolidated financial statements. 35. Approval of Consolidated Financial Statements The consolidated financial statements were approved by Representative Director, President, Takuya Kozuki, on June , 2019. 24 - 61 - 2. Business Review (1) Business Overview For the fiscal year ended March 31, 2019, the Japanese economy has been gradually recovering with continuing improvements in corporate earnings and employment environment. On the other hand, the global economy continues to remain uncertain due to concerns about the declining global economy, including U.S.-China trade frictions, instability in the Middle East and the Brexit impasse. Under such circumstances, in terms of the business results of Konami Group for the fiscal year ended March 31, 2019, both total revenue and operating profit exceeded those for the previous fiscal year because various series titles continued to perform strongly, mainly including our soccer and baseball series titles in the Digital Entertainment business. In terms of the consolidated results for the fiscal year ended March 31, 2019, total revenue amounted to ¥262,549 million (a year-on-year increase of 9.6%), operating profit was ¥50,522 million (a year-on-year increase of 11.8%), profit before income taxes was ¥50,310 million (a year-on-year increase of 12.5%), and profit attributable to owners of the parent was ¥34,196 million (a year-on-year increase of 12.1%). (2) Performance by Business Segment Summary of total revenue by business segment: Total revenue: Year ended March 31, 2018 Year ended March 31, 2019 Millions of Yen % change Digital Entertainment Amusement Gaming & Systems Sports Intersegment eliminations Total revenue ¥120,250 25,178 29,628 66,004 (1,563) ¥239,497 ¥141,699 27,837 31,170 63,487 (1,644) ¥262,549 17.8 10.6 5.2 (3.8) - 9.6 Digital Entertainment In the entertainment market, future development of game contents is expected through the functional enhancement of various devices, including mobile devices and video game consoles, and the standardization of next generation communication systems. In conjunction with the changing times, the preference for enriching daily life through full and abundant experiences in personal spending has been strengthened. In the game industry, new experiences through game content are being offered in various ways, including eSports, which is regarded as a form of sports competition and is becoming well-known to a wide range of users and attracting more and more fans. - 63 - Yu-Gi-Oh! DUEL LINKS Under such circumstances, as for mobile games in the Digital Entertainment segment, Winning Eleven 2019 , which is now celebrating its second anniversary since its release and has surpassed PRO EVOLUTION SOCCER 2019 90 million downloads, has led our revenue in the global market. In addition, (known overseas as of TV commercials. In the domestic market, PAWAFURU PUROYAKYU continued to perform well, as it did in the third quarter, and various other titles such as PROFESSIONAL BASEBALL SPIRITS A (Ace) ) has increased its revenue through a variety JIKKYOU has also continued to perform strongly. Furthermore, as part of our continued active efforts in eSports, we announced that we would be co-hosting the “eJ.LEAGUE Winning Eleven 2019 Season” in cooperation with the Japan Professional Football League (J.LEAGUE) with our mobile game Winning Eleven 2019 as the competition title. Yu-Gi-Oh! TRADING CARD GAME As for card games, February 2019 marks the 20th anniversary since first went on sale. It has received favorable reviews through various marketing efforts to Monsters 20th ANNIVERSARY LEGEND COLLECTION celebrate this milestone, including the sale of a commemorative product, Yu-Gi-Oh! OCG Duel . We continue to revitalize the contents Winning Eleven 2019 further. myClub PRO EVOLUTION SOCCER 2019 Winning Eleven 2019 , the online mode of As for computer and video games, overseas as ), has performed well through running promotions along with its mobile version. As part of our continued active efforts in eSports, we hosted the qualifying rounds in various regions for the world championship “PES LEAGUE WORLD TOUR 2019” for ). In regard to baseball contents, we hosted the “eBASEBALL PAWAPURO Pro League 2018-19 SMBC eNippon Series,” which decided who the first best players were at the “eBASEBALL PAWAPURO Pro League” in Japan, that we organized along with Nippon Professional Baseball (NPB). PRO EVOLUTION SOCCER 2019 (known overseas as (known In terms of financial performance, total revenue for the fiscal year ended March 31, 2019 in this segment amounted to ¥141,699 million (a year-on-year increase of 17.8%) and segment profit for the fiscal year ended March 31, 2019 amounted to ¥43,833 million (a year-on-year increase of 17.2%). Amusement There are signs of recovery in the amusement industry market owing to measures taken by the industry as a whole, including increases in users with families at arcade game areas in shopping malls and senior users who play medal games since amusement facilities are becoming more recognized from a wide range of users as a place where anyone can play. Furthermore, following the spread and development of eSports in recent years, various experiences through amusement games are being offered, such as numerous tournaments held not only in Japan but also all over the world. MAH-JONG FIGHT CLUB MAH-JONG FIGHT CLUB GRAND MASTER BOMBER GIRL Under such circumstances, in regard to our video games, the latest title of the online versus mah- Bomberman , continued to jong game , perform strongly. has also continued to perform well. This title features fun online battles with added team-battle elements where teams try to occupy the home bases of their opponents. Furthermore, a full-scale , which is based on the popular video game series series, - 64 - BASEBALL COLLECTION DanceDanceRevolution 20th anniversary model DanceDanceRevolution professional baseball card game, also launched anniversary of the Big Tree of Clouds pusher medal game upgraded for better performance and gameplay, and . As for the medal games, , has been launched sequentially. We GRANDCROSS LEGEND in celebration of the 20th Anima Lotta: Anima and , a large , a lottery medal game, were released. In addition, the machines, which we THE MEDAL and ColorCoLotta: The Sun and the Secret Island launched in the second quarter, have continued to sell well. These titles include SENGOKU COLLECTION! Ieyasu Tokugawa . We also launched BOMBERMAN G1 Derby Club 2 following was made in accordance with the new regulations. , which was the latest title in the series and In terms of financial performance, total revenue for the fiscal year ended March 31, 2019 in this segment amounted to ¥27,837 million (a year-on-year increase of 10.6%) and segment profit for the fiscal year ended March 31, 2019 amounted to ¥8,434 million (a year-on-year increase of 12.6%). Gaming & Systems The gaming market is continuing to see growth with the worldwide development mainly in Europe and opening of new casino facilities and integrated resorts (IR) which include casinos. Furthermore, measures to revitalize the industry were implemented mainly targeting young people. Concerto Under such circumstances, with respect to our slot machines, the sales of the latest cabinet in the TM , series, including Concerto Crescent Concerto Stack Concerto Opus and TM TM TM which features a 4K Ultra HD 65-inch display, continued to perform strongly. In addition, we . We also enhanced the product range by introduction of the new upright cabinet, Cup promoted market revitalization by providing new entertainments with the installation of TM Fortune TM mainly in the North America and Asia, which is a horserace betting station with a model , as well as KX 43 track and leveraged our expertise and technology accumulated through Konami Group’s amusement machines. In regard to participation agreements (in which profits are shared with Opus casino operators), we expanded our lineup of game content, including a key product, the Triple Sparkle Treasure Ball Concerto TM TM , and linked progressive machine with mystery trigger, SYNKROSⓇ which is compatible with any video game platform. The continued to be introduced steadily into major casino operators, including casinos at large cruise ships in service overseas. casino management system In terms of financial performance, total revenue for the fiscal year ended March 31, 2019 in this segment amounted to ¥31,170 million (a year-on-year increase of 5.2%) and segment profit for the fiscal year ended March 31, 2019 amounted to ¥4,723 million (a year-on-year increase of 8.2%). Sports In connection with the sports industry, we continue to see a growing awareness of sports throughout society, including the government’s efforts to achieve a “sports society of all 100 - 65 - million citizens,” which aims to increase the number of people that participate in sports, by formulating the second phase of their “Basic Sports Plan.” With the holding of the world's largest sports event, further activation and growth of the sports market is also expected. BeautyHip Under such circumstances, as for fitness programs, we increased the number of facilities to 57 that offer the personal program, , our new in-house development program, and made efforts to enhance our member support and fitness services that help members achieve longer, more sustainable fitness. For example, we launched a membership plan, the “U-39 Plan,” which allows members, from teenagers to those in their 30s to use the facilities at reasonable price. As for the operation of our school programs, we have moved forward with the further expansion of our classes by opening our Table Tennis School at 17 facilities and Trampoline School at 3 facilities. As for products relating to sports, we continued to expand our specially selected lineup of “Konami Sports Club Selection” brand products as well as our “Konami Sports Club Original” Konami Sports Club brand products and redesigned our online shop to improve usability and service. For the year ended March 31, 2019, total revenue and segment profit from this business decreased due to closing of the directly-managed facilities, the effects of repeated natural disasters, and prior investments of renovations of existing facilities including fitness machine renewals and launch of the new school programs. In terms of financial performance, total revenue for the fiscal year ended March 31, 2019 in this segment amounted to ¥63,487 million (a year-on-year decrease of 3.8%) and segment profit for the fiscal year ended March 31, 2019 amounted to ¥2,243 million (a year-on-year decrease of 31.1%). - 66 - (3) Cash Flows Cash flow summary: Fiscal year ended March 31, 2018 Fiscal year ended March 31, 2019 Millions of Yen Change Net cash provided by operating activities ¥53,980 ¥49,131 ¥(4,849) (4,043) (7,618) 1,525 (14,985) Net cash used in investing activities (18,484) (22,527) Net cash used in financing activities (14,798) (22,416) Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at end of the year (956) 19,742 569 4,757 ¥154,485 ¥159,242 ¥4,757 Comparison of fiscal year ended March 31, 2019 with fiscal year ended March 31, 2018 Cash and cash equivalents (hereafter, referred to as “Net cash”), as of March 31, 2019, amounted to ¥159,242 million, an increase of ¥4,757 million compared to the year ended March 31, 2018. Net cash provided by operating activities amounted to¥49,131 million for the year ended March 31, 2019, a year-on-year decrease of 9.0%. This primarily resulted from an increase in income taxes paid despite an increase in contract liabilities. Net cash used in investing activities amounted to ¥22,527 million for the year ended March 31, 2019, a year-on-year increase of 21.9%. This mainly resulted from an increase in capital expenditures for property, plant and equipment despite a decrease in payments into time deposits. Net cash used in financing activities amounted to ¥22,416 million for the year ended March 31, 2019, a year-on-year increase of 51.5%. This primarily resulted from an increase in dividends paid and repayment of short-term borrowings for the year ended March 31, 2019. - 67 - 3. Risk Factors Special Note Regarding Forward-looking Statements. This annual report contains forward-looking statements about our industry, our business, our plans and objectives, our financial condition and our results of operations that are based on our current expectations, assumptions, estimates and projections. These forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plan” or similar words. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of operations or of financial condition, or state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause our actual results to adversely differ, materially, from those contained in or suggested by any forward-looking statement. We cannot promise that our expectations, projections, anticipated estimates or other information expressed in or underlying these forward-looking statements will be realized. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important risk factors that could cause our actual results to be materially different from those described in the forward-looking statements are set forth in this Item 3. or elsewhere • in this annual report and include, without limitation: our ability to continue to win acceptance of our products, which are offered in highly competitive markets characterized by the continuous introduction of new products, rapid developments in technology and subjective and changing consumer preferences; changes in economic conditions affecting our operations or the way that individuals choose to spend their leisure time; our ability to successfully expand internationally with a focus on our Digital Entertainment segment and Gaming & Systems segment; our ability to successfully expand the scope of our business and broaden our customer base through our Sports segment; our ability to successfully generate cash flows on an individual club operation level sufficient to recover the carrying value of the related individual club operations; regulatory developments and changes, in particular in the gaming industry, and our ability to respond and adapt to those changes; the impact of natural disasters, such as earthquakes, on our facilities and personnel; our ability to successfully integrate current acquisitions and realize expected synergies and business benefits to recover the acquisition investment, including goodwill and separately identifiable intangible assets; and • • • • • • • • our expectations with regard to further acquisitions and the integration of any companies we may acquire. (1) Risks relating to timely introduction of new products and services. The timely releases of a new product and service highly depend on various factors, including production capacity and capability of adapting to new platforms and regulations. If we are unable to release our new products and services in a timely fashion in accordance with our plans, our business results could be negatively affected. - 68 - (2) Risks relating to competition. The markets for entertainment and sports-oriented products and services we involve are intensely competitive, and new products and services are regularly introduced. Also, new type of entertainment and leisure activities which may become our competitors continue to be introduced. This may cause new competitions, and our business results could be negatively impacted. (3) Risks relating to unfavorable economic conditions. Any significant downturn in economic conditions which results in a reduction in consumer spending could highly reduce demand for entertainment and sports-oriented products and services we involve and may harm our business results. (4) Risks relating to aging population and declining birth rate in Japan. If rapidly growing aging population and declining birth rate in Japan significantly were to change demand for entertainment and sports-oriented products and services we involve, our business results could be negatively affected. (5) Risks relating to changing consumer preferences. Many of our markets are characterized by rapidly changing trends and fads, and frequent innovations and improvements to products and services are necessary to maintain consumer interest. Our business results may be harmed if we are unable to successfully adapt and offer our products and services to changing consumer preferences. (6) Risks relating to governmental restrictions and legal systems. If governmental restrictions and legal systems in each country were to be changed significantly, we may have to change our products and services, marketing strategies and business models in order to observe new regulations. As a result, this could delay or suspend the delivery of our products and services in those relevant countries and may harm our business results. (7) Risks relating to intellectual property rights. Products and services, that we manufacture, develop, sell, distribute and provide, use and incorporate certain copyrights and other intellectual properties which are owned by outside. If these outside intellectual properties are unable to be licensed, our business results could be negatively affected as the relevant products and services are unable to be provided. In addition, though we are making efforts such as improvement of operation flows to prevent the possibility that our products and services violate the intellectual property rights of others, it is not zero that third parties still may claim infringement. In this event, the management may determine additional costly litigation to solve the dispute or to cease using the relevant intellectual property of others, and our business results could be negatively affected. - 69 - (8) Risks relating to our products containing defect. Although extensive tests are made to our products prior to release, errors may be found in products after shipment. If these errors were to result in a loss of market demand, our business results could be negatively impacted. (9) Risks relating to acquisition opportunities and investments. We are seeking opportunities in and outside Japan to make acquisitions and investments that will not only expand our current businesses but also be expected to grow new businesses in the medium- and long-term. In the event we make such acquisitions or investments, our business results could be negatively affected since we may face additional financial and • operational risks, including: • impairment losses could occur in future if the relevant acquisitions and investments are unable to be carried out at reasonable costs; and If acquired companies are unable to be successfully integrated as we intend, sufficient effects could not be obtained from the acquisitions and investments. (10) Risks relating to personnel resources. Our continued growth and success depend to a significant extent on the continued service of our senior management and other key employees and the hiring of new qualified employees. In particular, the software industry is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel. Retention of those human resources is extremely difficult. In addition, the hiring of international-skilled employees is urgently required in order to expand overseas operations further. If we are unable to attract and retain skilled personnel, our business results could be adversely affected. (11) Risks relating to overseas operations. Operations in foreign countries are required to address not only languages but also local issues, including each country-specific business practice and suspension of currency exchange and forfeiture of property through expropriation by governments. International trade is also exposed to fluctuating exchange rates. If we are unable to take appropriate actions to all of these and other factors that are specific to overseas, our business results could be negatively affected. (12) Risks relating to natural disasters, wars and other incidents. Incidents such as natural disasters, wars, terrorism and pandemic may adversely affect the world economy. If these incidents may cause further social and political uncertainty in each of the regions we conduct our operations, our business results may be adversely affected. (13) Risks relating to unexpected network interruptions or security breaches. Security breaches, including hacking and unauthorized access, that are affecting any of our systems may cause delays or other interruptions to our service and business activities. This may harm our business results. On the other hand, we endeavor to maintain robust security protections to prevent such security breaches. - 70 - (14) Risks relating to protection of personal information. If it may cause that leaks of personal information on account of inappropriate administration, security breaches, including hacking and unauthorized access, and others, our reputation and brands and business results may be negatively affected. On the other hand, we endeavor to maintain robust protections to prevent such leaks of personal information. (15) Risks relating to future lawsuits. If our business operations were to be charged by legal claims, lawsuits and other legal proceedings and these conclusions were to be adverse conditions to us, our business results may be negatively impacted. (16) Risks relating to dishonest actions. We are not only putting systems in place to prevent dishonest actions through illicit means and use on our products and services, but also prohibiting these acts in the Terms of Use and carrying out user awareness programs. In addition, we invoke serious penalties for violator of this policy, including suspensions of membership or compulsory termination of account. However, if by any chance the kind of dishonest actions should occur on a significant scale, our business results could be adversely affected as trust in Konami Group and its brand could be impaired. - 71 - Responsibility Statement July 10, 2019 The following responsibility statement is made solely to comply with the requirements of DTR 4.1.12 of the United Kingdom Financial Conduct Authority’s Disclosure Rules and Transparency Rules, in relation to KONAMI HOLDINGS CORPORATION as an issuer whose financial instruments are admitted to trading on the London Stock Exchange. Takuya Kozuki, Representative Director, President, confirms that: • • to the best of his knowledge, the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of KONAMI HOLDINGS CORPORATION and the undertakings included in the consolidation taken as a whole; and to the best of his knowledge, this annual financial information includes a fair review of the development and performance of the business and the position of KONAMI HOLDINGS CORPORATION and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. - 72 -