Sony 2005 Annual Report Download - page 65

62 Sony Corporation
As of March 31, 2005, Sony had deferred tax assets on tax
loss carry forwards in relation to Japanese local income taxes
totaling 77.5 billion yen. However, there is a possibility that,
depending on future operating performance, Sony may establish
a valuation allowance against part or all of its deferred tax assets
that would be charged to income as an increase in tax expense.
However, the forecast above does not include this possibility.
The forecast for each business segment (excluding the
anticipated gain from the transfer of the substitutional portion of
Sony’s Employee Pension Fund) is as follows:
■ELECTRONICS
Sales are expected to increase primarily due to an increase in
the sales of products such as flat panel televisions and LCD rear
projection televisions. With regard to operating performance,
although an improvement is expected due to the increase in
sales and a reduction in fixed costs relating to restructuring
implemented during the previous fiscal year, a decline in unit
prices, appreciation of the yen against the U.S. dollar and euro
and increase in both depreciation and amortization and research
and development costs are also anticipated. An improvement in
operating performance is expected, reflecting the above-
mentioned factors, as well as an anticipated reduction in
restructuring charges.
■GAME
Sales are expected to increase due to the contribution from
both PSP hardware and software. Although PS2 and PSP are
expected to contribute to operating income, increased research
and development costs primarily for PS3 are expected to leave
operating income relatively unchanged.
■MUSIC
Due to the establishment of SONY BMG, sales are expected to
decrease. A small increase in operating income is anticipated.
■PICTURES
Although sales are expected to increase due to the impact of
SPE’s agreements with MGM, operating income is expected to
decrease compared to the fiscal year ended March 31, 2005, in
which Spider-Man 2 was a substantial contributor.
■FINANCIAL SERVICES
Although revenue is expected to continue to grow mainly due to
an increase in revenue from insurance premiums at Sony Life, a
small decrease is expected in operating income due to the
conservative estimation of insurance claim payments.
■CAPITAL EXPENDITURES
In the fiscal year ending March 31, 2006, capital expenditures
(additions to fixed assets) are expected to be 410 billion yen, an
increase of 15 percent compared with the fiscal year ended
March 31, 2005. Approximately 90 percent of the amount is
expected to be spent in the Electronics segment. Of this
amount, capital expenditures on semiconductors during the
fiscal year are expected to amount to 160 billion yen (actual
amount in the fiscal year ended March 31, 2005 was 150 billion
yen). For an explanation regarding fund procurement, refer to
“Liquidity and Capital Resources” above.
■DEPRECIATION AND AMORTIZATION
In the fiscal year ending March 31, 2006, expenses for deprecia-
tion and amortization, which includes the amortization of
intangible assets and the amortization of deferred insurance
acquisition costs, are expected to be 390 billion yen, an in-
crease of 5 percent compared with the fiscal year ended March
31, 2005. Both expenses for the amortization of deferred
insurance acquisition costs in the Financial Services segment
and expenses for depreciation and amortization in the
Electronics segment are expected to increase.
■RESEARCH AND DEVELOPMENT
Sony expects research and development costs (total of expenses
for the development of new product prototypes and expenses for
the development of mid- to long-term new technologies) for the
fiscal year ending March 31, 2006 to be 520 billion yen, a 4
percent increase compared with the fiscal year ended March 31,
2005. Research and development costs for both the Electronics
and Game segments are expected to increase.
CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
On an ongoing basis, Sony evaluates its estimates which are
based on historical experience and on various other assump-
tions that are believed to be reasonable under the circum-
stances. The results of these evaluations form the basis for
making judgments about the carrying values of assets and
liabilities and the reported amounts of expenses that are not
readily apparent from other sources. Actual results may differ
from these estimates under different assumptions. Sony
considers an accounting policy to be critical if it is important to
its financial condition and results, and requires significant
judgments and estimates on the part of management in its
application. Sony believes that the following represent the critical
accounting policies of the company.
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