Sony 2006 Annual Report Download - page 96

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Notes to Consolidated Financial Statements
Sony Corporation and Consolidated Subsidiaries
1. Nature of operations
Sony Corporation and its consolidated subsidiaries (hereinafter
collectively referred to as “Sony”) are engaged in the develop-
ment, design, manufacture, and sale of various kinds of elec-
tronic equipment, instruments, and devices for consumer and
industrial markets. Sony also develops, produces, manufac-
tures, and markets home-use game consoles and software.
Sony’s principal manufacturing facilities are located in Japan,
the United States of America, Europe, and Asia. Its electronic
products are marketed throughout the world and game prod-
ucts are marketed mainly in Japan, the United States of America
and Europe by sales subsidiaries and unaffiliated local distribu-
tors as well as direct sales via the Internet. Sony is engaged in
the development, production, manufacture, marketing, distribu-
tion and broadcasting of image-based software, including film,
video and television product. Sony is also engaged in various
financial service businesses including insurance operations
through a Japanese life insurance subsidiary and a non-life
insurance subsidiary, banking operations through a Japanese
internet-based banking subsidiary and leasing and credit
financing operations in Japan. In addition to the above, Sony
is engaged in the development, production, manufacture, and
distribution of recorded music, network service business includ-
ing Internet-related businesses, an animation production and
marketing business, an imported general merchandise retail
business and an advertising agency business in Japan.
2. Summary of significant accounting policies
Sony Corporation and its subsidiaries in Japan maintain their
records and prepare their financial statements in accordance
with accounting principles generally accepted in Japan while
its foreign subsidiaries maintain their records and prepare their
financial statements in conformity with accounting principles
generally accepted in the countries of their domiciles. Certain
adjustments and reclassifications have been incorporated in the
accompanying consolidated financial statements to conform
with accounting principles generally accepted in the United
States of America (“U.S. GAAP”). These adjustments were not
recorded in the statutory books of account.
(1) Newly adopted accounting pronouncements:
■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
guidance 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 ¥5,156 million for the fiscal year ended March 31, 2005.
Additionally, on April 1, 2004, Sony recorded a ¥4,713 million
charge (net of income taxes of ¥2,675 million) 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 contin-
gently 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 effec-
tive 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, “Consolidation
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