Sony 2006 Annual Report Download - page 75

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judgments and estimates on the part of management in its
application. Sony believes that the following represent the critical
accounting policies of the company.
■INVESTMENTS
Sony’s investments are comprised of debt and equity securities
accounted for under both the cost and equity method of
accounting. If it has been determined that an investment has
sustained an other-than-temporary decline in its value, the
investment is written down to its fair value by a charge to
earnings. Sony regularly evaluates its investment portfolio to
identify other-than-temporary impairments of individual securi-
ties. Factors that are considered by Sony in determining whether
an other-than-temporary decline in value has occurred include:
the length of time and extent to which the market value of the
security has been less than its original cost, the financial
condition, operating results, business plans and estimated future
cash flows of the issuer of the security, other specific factors
affecting the market value, deterioration of credit condition of the
issuers, sovereign risk, and ability to retain the investment for a
period of time sufficient to allow for the anticipated recovery in
market value.
In evaluating the factors for available-for-sale securities whose
fair values are readily determinable, management presumes a
decline in value to be other-than-temporary if the fair value of the
security is 20% or more below its original cost for an extended
period of time (generally a period of up to six to twelve months).
This criteria is employed as a threshold to identify securities
which may have a decline in value that is other-than-temporary.
The presumption of an other-than-temporary impairment in such
cases may be overcome if there is evidence to support that the
decline is temporary in nature due to the existence of other
factors which overcome the duration or magnitude of the
decline. On the other hand, there may be cases where impair-
ment losses are recognized when the decline in the fair value of
the security is not more than 20% or such decline has not
existed for an extended period of time, as a result of considering
specific factors which may indicate the decline in the fair value is
other-than-temporary.
The assessment of whether a decline in the value of an
investment is other-than-temporary often requires management
judgment based on evaluation of relevant factors. Those factors
include business plans and future cash flows of the issuer of the
security, the regulatory, economic or technological environment
of the investee, and the general market condition of either the
geographic area or the industry in which the investee operates.
Accordingly, it is possible that investments in Sony’s portfolio
that have had a decline in value that are currently believed to be
temporary may determine to be other-than-temporary in the
future based on Sony’s evaluation of additional information such
as continued poor operating results, future broad declines in
value of worldwide equity markets or circumstances in market
interest rate fluctuations. As a result, unrealized losses recorded
for investments may be recognized into income in future periods.
■IMPAIRMENT OF LONG-LIVED ASSETS
Sony reviews the carrying value of its long-lived assets held and
used and long-lived assets to be disposed of whenever events
or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. This review is performed
using estimates of future cash flows by product category (e.g.
CRT TV display) or entity (e.g. semiconductor manufacturing
division in the U.S.). If the carrying value of the asset is consid-
ered impaired, an impairment charge is recorded for the amount
by which the carrying value of the asset exceeds its fair value.
Fair value is determined using the present value of estimated net
cash flows or comparable market values.
Management believes that the estimates of future cash flows
and fair value are reasonable; however, changes in estimates
resulting in lower future cash flows and fair value due to unfore-
seen changes in business assumptions could negatively affect
the valuations of those long-lived assets.
In the fiscal year ended March 31, 2004, Sony recorded
impairment charges for long-lived assets totaling ¥16.1 billion. It
included ¥5.3 billion for the impairment of long-lived assets such
as semiconductor and CRT TV display manufacturing equipment
to be abandoned or sold in connection with certain restructuring
activities in the Electronics segment. It also included ¥3.0 billion
for the impairment of long-lived assets in the Music business
such as a certain CD manufacturing facility to be abandoned or
sold and a recording studio and equipment to be held and used
in Japan. Fair value of these assets was determined using
estimated future discounted cash flows which were based on
the best information available.
In the fiscal year ended March 31, 2005, Sony recorded
impairment charges for long-lived assets totaling ¥19.2 billion. It
included ¥7.5 billion for the impairment of long-lived assets of
CRT TV display manufacturing facilities to be held and used in
Europe in connection with certain restructuring activities in the
Electronics segment. Fair value of these assets was determined
using estimated future discounted cash flows which were based
on the best information available.
In the fiscal year ended March 31, 2006, Sony recorded
impairment charges for long-lived assets totaling ¥59.8 billion. It
included ¥25.5 billion for the impairment of long-lived assets of
CRT TV display manufacturing facilities to be held and used in
the U.S. in connection with certain restructuring activities in the
Electronics segment. Fair value of these assets was determined
using estimated future discounted cash flows which were based
on the best information available. The impairment charge also