Sony 2006 Annual Report Download - page 78

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an immediate write off of unrecoverable film costs. Second, the
amount of film costs recognized as cost of sales for a given film
as it is exhibited in various markets throughout its life cycle is
based upon the proportion that current period actual revenues
bear to the estimated ultimate total revenues.
Management bases its estimates of ultimate revenue for each
film on several factors including the historical performance of
similar genre films, the star power of the lead actors and
actresses, the expected number of theaters at which the film will
be released, anticipated performance in the home entertainment,
television and other ancillary markets, and agreements for future
sales. Management updates such estimates based on the
actual results to date of each film. For example, a film that has
resulted in lower than expected theatrical revenues in its initial
weeks of release would generally have its theatrical, home enter-
tainment and television distribution ultimate revenues adjusted
downward; a failure to do so would result in the understatement
of amortized film costs for the period. Since the total film cost to
be amortized for a given film is fixed, the estimate of ultimate
revenues impacts only the timing of film cost amortization.
■FUTURE INSURANCE POLICY BENEFITS
Liabilities for future insurance policy benefits are established in
amounts adequate to meet the estimated future obligations of
policies in force. These liabilities are computed by the net level
premium method based upon estimates as to future investment
yield, mortality, morbidity, withdrawals and other factors. Future
policy benefits are computed using interest rates ranging from
approximately 0.90% to 5.10%. Mortality, morbidity and with-
drawal assumptions for all policies are based on either the life
insurance subsidiary’s own experience or various actuarial
tables. Generally these assumptions are “locked-in” upon the
issuance of new insurance. While management believes that the
assumptions used are appropriate, differences in actual experi-
ence or changes in assumptions may affect Sony’s future
insurance policy benefits.
RECENTLY ADOPTED ACCOUNTING
STANDARDS
■ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-
DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS
In July 2003, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued
Statement of Position (“SOP”) 03-1, “Accounting and Reporting
by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts.” SOP 03-1 requires
insurance enterprises to record additional reserves for long-
duration life insurance contracts with minimum guarantee or
annuity receivable options. Additionally, SOP 03-1 provides guid-
ance for the presentation of separate accounts. This statement is
effective for fiscal years beginning after December 15, 2003. Sony
adopted SOP 03-1 on April 1, 2004. As a result of the adoption of
SOP 03-1, Sony’s operating income decreased by ¥5.2 billion
for the fiscal year ended March 31, 2005. Additionally, on April 1,
2004, Sony recorded a ¥4.7 billion charge (net of income taxes of
¥2.7 billion) as a cumulative effect of an accounting change.
■THE EFFECT OF CONTINGENTLY CONVERTIBLE
INSTRUMENTS ON DILUTED EARNINGS PER SHARE
In July 2004, the Emerging Issues Task Force (“EITF”) issued
EITF Issue No. 04-8, “The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share.” In accordance with
Statement of Financial Accounting Standards (‘‘FAS’’) No.128,
‘‘Earnings per Share’’, Sony had not previously included in the
computation of diluted earnings per share (‘‘EPS’’) the number of
potential common stock issuable upon the conversion of
contingently convertible debt instruments (‘‘Co-Cos’’) that had
not met the conditions to exercise the stock acquisition rights.
EITF Issue No. 04-8 requires that the maximum number of
common stock that could be issued upon the conversion of
Co-Cos be included in diluted EPS computations from the date
of issuance regardless of whether the conditions to exercise the
stock acquisition rights have been met. EITF Issue No. 04-8 is
effective for reporting periods ending after December 15, 2004.
Sony adopted EITF Issue No. 04-8 during the quarter ended
December 31, 2004. As a result of the adoption of EITF Issue
No. 04-8, Sony’s diluted EPS of income before cumulative effect
of an accounting change and net income for the fiscal year
ended March 31, 2004 were restated. Sony’s diluted EPS of
income before cumulative effect of an accounting change and
net income for the fiscal year ended March 31, 2005 decreased
by ¥7.26 and ¥7.06, respectively, as a result of adopting EITF
Issue No. 04-8.
■CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolida-
tion of Variable Interest Entities—an Interpretation of Accounting
Research Bulletin (“ARB”) No. 51”. FIN No. 46 addresses
consolidation by a primary beneficiary of a variable interest entity
(“VIE”). Sony early adopted the provisions of FIN No. 46 on July 1,
2003. As a result of adopting the original FIN No. 46, Sony
recognized a one-time charge with no tax effect of ¥2.1 billion
as a cumulative effect of accounting change in the consolidated