Sony 2005 Annual Report Download - page 105

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102 Sony Corporation
interest rate future contracts as part of portfolio investments,
which are marked-to-market with changes in value recognized
in financial service revenue.
Embedded derivatives
Changes in the fair value of embedded derivatives that must be
separated from the host contracts and accounted for as deriva-
tive instruments under FAS No. 133 are recognized in income.
For example, the convertible rights included in convertible bonds
held by Sony’s life insurance subsidiary, which are classified as
available-for-sale debt securities, are considered embedded
derivatives and are marked-to-market with changes in value
recognized in financial service revenue.
(2) Fair value of financial instruments:
The estimated fair values of Sony’s financial instruments are
summarized as follows. The following summary excludes cash
and cash equivalents, time deposits, notes and accounts receiv-
able, trade, short-term borrowings, notes and accounts payable,
trade and deposits from customers in the banking business that
are carried at amounts which approximate fair value. The sum-
mary also excludes debt and equity securities which are disclosed
in Note 8.
Yen in millions
2004 2005
Notional Carrying Estimated Notional Carrying Estimated
March 31 amount amount fair value amount amount fair value
Long-term debt including the current portion . . . . . . . . . . . . . . . .
—¥(1,161,406) ¥(1,235,669) —¥(845,862) ¥(856,321)
Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . .
¥1,348,157 (994) (994) ¥1,545,814 (55) (55)
Currency option contracts purchased . . . . . . . . . . . . . . . . . . . . .
375,582 10,781 10,781 428,261 1,646 1,646
Currency option contracts written . . . . . . . . . . . . . . . . . . . . . . . .
124,925 (1,000) (1,000) 146,506 (3,390) (3,390)
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .
218,101 (4,229) (4,229) 171,133 (4,417) (4,417)
Interest rate and currency swap agreements . . . . . . . . . . . . . . . .
8,574 384 384 5,734 131 131
Interest rate future contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,007 (9) (9) 136,470 (92) (92)
Embedded derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
421,416 12,885 12,885 405,756 11,894 11,894
Dollars in millions
2005
Notional Carrying Estimated
March 31 amount amount fair value
Long-term debt including the current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—$(7,906) $(8,003)
Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,447 (1) (1)
Currency option contracts purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,002 15 15
Currency option contracts written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,369 (32) (32)
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,599 (41) (41)
Interest rate and currency swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54 1 1
Interest rate future contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,275 (1) (1)
Embedded derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,792 111 111
The following are explanatory notes regarding the estimation
method of fair values in the above table.
Long-term debt including the current portion
The fair values of long-term debt, including the current portion,
were estimated based on either the market value or the dis-
counted amounts of future cash flows using Sony’s current
incremental debt rates for similar liabilities.
Derivative financial instruments
The fair values of foreign exchange forward contracts and
foreign currency option contracts were estimated based on
market quotations. The fair values of interest rate and currency
swap agreements were estimated based on the discounted
amounts of future net cash flows. The fair values of convertible
rights, which were a majority of embedded derivatives, were
estimated based on the market price of stock which will be
acquired by the exercise of these rights.
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