Sony 2005 Annual Report Download - page 93

90 Sony Corporation
Selling, general and administrative expenses are expensed
as incurred.
■ Financial service expenses
Financial service expenses include a provision for policy reserves
and amortization of deferred insurance acquisition cost, and all
other operating costs such as personnel expenses, depreciation
of fixed assets, and office rental of subsidiaries in the Financial
Services segment.
■ Advertising costs
Advertising costs are expensed when the advertisement or
commercial appears in the selected media, except for advertising
costs for acquiring new insurance policies which are deferred and
amortized as part of insurance acquisition costs.
■ Shipping and handling costs
The majority of shipping and handling, warehousing and internal
transfer costs for finished goods are included in selling, general
and administrative expenses. An exception to this is in the
Pictures segment where such costs are charged to cost of sales
as they are integral part of producing and distributing the film
under SOP 00-2, “Accounting by Producers or Distributors of
Films”. All other costs related to Sony’s distribution network are
included in cost of sales, including inbound freight charges,
purchasing and receiving costs, inspection costs and warehous-
ing costs for raw materials and in-process inventory. In addition,
amounts paid by customers for shipping and handling costs are
included in net sales.
■ Income taxes
The provision for income taxes is computed based on the pretax
income included in the consolidated statements of income. The
asset and liability approach is used to recognize deferred tax
assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. Sony records a valuation
allowances to reduce deferred tax assets to the amount that
management believes is more likely than not to be realized.
In assessing the likelihood of realization, Sony considers all
currently available evidence for future years, both positive and
negative, supplemented by information of historical results for
each tax filling unit.
■ Net income per share
Sony calculates and presents per share data separately for
Sony’s common stock and for the subsidiary tracking stock,
based on FAS No. 128. The holders of the subsidiary tracking
stock have the right to participate in earnings, together with
common stockholders. Accordingly, Sony calculates per share
data by the “two-class” method based on FAS No. 128. Under
this method, basic net income per share (“EPS”) for each class
of stock is calculated based on the earnings allocated to each
class of stock for the applicable period, divided by the weighted-
average number of outstanding shares in each class during the
applicable period.
The earnings allocated to the subsidiary tracking stock are
determined based on the subsidiary tracking stock holders’
economic interest in the targeted subsidiary’s earnings available
for dividends. As defined by Sony Corporation’s articles of
incorporation, the amount distributable to the subsidiary tracking
stock holders is based on the declared dividends of the targeted
subsidiary, which may only be declared from the amounts
available for dividends of the targeted subsidiary. The targeted
subsidiary’s earnings available for dividends are, as stipulated by
the Japanese Commercial Code, not including those of the
targeted subsidiary’s subsidiaries. If the targeted subsidiary has
accumulated losses, a change in accumulated losses is also
allocated to the subsidiary tracking stock. The subsidiary track-
ing stock holders’ economic interest is calculated as the number
of the subsidiary tracking stock outstanding (3,072,000 shares
as of March 31, 2005) divided by the number of the targeted
subsidiary’s common stock outstanding (235,520 shares as of
March 31, 2005), subject to multiplying by the Standard Ratio
(tracking stock : subsidiary’s common stock=1 : 100, as defined
in the articles of incorporation). The earnings allocated to the
common stock are calculated by subtracting the earnings allo-
cated to the subsidiary tracking stock from Sony’s net income
for the period.
The computation of diluted net income per common stock
reflects the maximum possible dilution from conversion, exer-
cise, or contingent issuance of securities including the conver-
sion of Co-Cos regardless of whether the conditions to exercise
the conversion rights have been met.
There are no potentially dilutive securities for net income per
subsidiary tracking stock, as tracking stock shares outstanding
are increased upon potential subsidiary tracking stocks’ being
exercised, which results in a proportionate increase in earnings
allocated to the subsidiary tracking stock. However, they could
have a dilutive effect on net income per common stock, as
earnings allocated to the common stock would be decreased.
(3) Recent pronouncements:
■ Accounting for stock-based compensation
In December 2004, the FASB issued FAS No. 123 (revised
2004), “Share-Based Payment” (“FAS No. 123(R)”). This state-
ment requires the use of the fair value based method of account-
ing for employee stock-based compensation and eliminates the
alternative use of the intrinsic value method prescribed by APB
No. 25. With limited exceptions, FAS No. 123(R) requires that
the grant-date fair value of share-based payments to employees
be expensed over the period the service is received. Sony has
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