Sony 2015 Annual Report Download - page 21

unknown for substantial periods of time. For example, legal proceedings, including regulatory actions, may result
from antitrust scrutiny of market practices for anti-competitive conduct. A substantial legal liability or adverse
regulatory outcome and the substantial cost to defend the litigation or regulatory proceedings may have an
adverse effect on Sony’s reputation, operating results and financial condition.
Sony is subject to financial and reputational risks due to product quality and liability issues.
Sony’s products and services, such as consumer products, non-consumer products, parts and components,
semiconductors, software and network services are becoming increasingly sophisticated and complicated as rapid
advancements in technologies occur and as demand increases for mobile products and online services. Sony’s
efforts to adapt to rapid advancements in technologies and increased demand for mobile products and online
services, while also maintaining product quality, may not be successful and may increase exposure to product
liability. As a result, Sony may incur both reputational damage and expenses in connection with, for example,
product recalls and after-sales services. In addition, Sony may not be successful in introducing after-sales
upgrades, enhancements or new features to existing products and services, or in enabling existing products and
services to continue to conveniently and effectively integrate with other technologies and online services. As a
result, the quality of Sony’s existing products and services may not remain satisfactory to consumers and become
less marketable, less competitive or obsolete, and Sony’s reputation, operating results and financial condition
may be adversely affected. Moreover, allegations of health and safety issues related to Sony products, or lawsuits
related to product quality, health issues arising from products or product safety, regardless of merit, may
adversely impact Sony’s operating results and financial condition, either directly or as a result of the impact on
Sony’s brand image and reputation as a producer of high-quality products and services. These issues are relevant
to Sony products sold directly to customers, whether manufactured by Sony or a third party, and also to products
of other companies that are equipped with Sony’s components, such as semiconductors.
Sony’s operating results and financial condition may be adversely affected by its employee benefit obligations.
Sony recognizes an unfunded pension obligation for its defined benefit pension plans based on (i) the
Projected Benefit Obligation (“PBO”) under each pension plan less (ii) the fair value of the pension plan’s assets,
in accordance with the accounting guidance for defined benefit plans. Actuarial gains and losses are amortized
and included in pension expenses in a systematic manner over employees’ average remaining service periods.
Any decrease of the pension plan asset value due to low returns from investments or increases in the PBO due to
a lower discount rate, increases in rates of compensation and changes in certain other actuarial assumptions may
increase the unfunded pension obligations and may result in an increase in pension expenses recorded as cost of
sales or as a selling, general and administrative expense.
Sony’s operating results and financial condition may be adversely affected by the status of its Japanese and
foreign pension plans. Specifically, adverse equity market conditions and volatility in the credit markets may
have an unfavorable impact on the value of Sony’s pension plan assets and its future estimated pension liabilities,
the majority of which relate to the Japanese plans, which have approximately 30 percent of pension plan assets
invested in equity securities. As a result, Sony’s operating results or financial condition could be adversely
affected.
Further, Sony’s operating results and financial condition could be adversely affected by future pension
funding requirements pursuant to the Japanese Defined Benefit Corporate Pension Plan Act (“Act”). Under the
Act, Sony is required to meet certain financial criteria including periodic actuarial revaluation and the annual
settlement of gains or losses of the plans. In the event that the actuarial reserve required by law exceeds the fair
value of pension plan assets and that the fair value of pension assets may not be recovered within a certain
moratorium period permitted by laws and/or special legislative decree, Sony may be required to make an
additional contribution to the plan, which may reduce cash flows. Similarly, if Sony is required to make an
additional contribution to a foreign plan to meet any funding requirements in accordance with local laws and
regulations in each country, Sony’s cash flows might be adversely affected. If Sony is required to increase cash
contributions to its pension plans when actuarial assumptions, such as an expected long-term rate of return of the
pension plan assets, are updated for purposes of determining statutory contributions, it may have an adverse
impact on Sony’s cash flows.
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