Form 6-K
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 OF

THE SECURITIES EXCHANGE Act of 1934

For the month of February 2017.

Commission File Number: 001-14856

 

 

ORIX Corporation

(Translation of Registrant’s Name into English)

 

 

World Trade Center Bldg., 2-4-1 Hamamatsu-cho, Minato-ku,

Tokyo, JAPAN

(Address of Principal Executive Offices)

 

 

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

Form 20-F  ☒        Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

 

 

 


Table of Contents

Table of Document(s) Submitted

 

1.

  

This is an English translation of ORIX Corporation’s quarterly financial report (shihanki houkokusho) as filed with the Kanto Financial Bureau in Japan on February 13, 2017, which includes unaudited consolidated financial information prepared in accordance with generally accepted accounting principles in the United States as of March 31, 2016 and December 31, 2016 and for the three and nine months ended December 31, 2015 and 2016.


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ORIX Corporation

Date: February 13, 2017

 

By

 

/s/ Kazuo Kojima

   

Kazuo Kojima

   

Director

   

Deputy President and Chief Financial Officer

   

ORIX Corporation


Table of Contents

CONSOLIDATED FINANCIAL INFORMATION

Notes to Translation

 

1.

The following is an English translation of ORIX Corporation’s quarterly financial report (shihanki houkokusho) as filed with the Kanto Financial Bureau in Japan on February 13, 2017, which includes unaudited consolidated financial information prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) as of March 31, 2016 and December 31, 2016 and for the three and nine months ended December 31, 2015 and 2016.

 

2.

Significant differences between U.S. GAAP and generally accepted accounting principles in Japan (“Japanese GAAP”) are stated in Note 1 “Overview of Accounting Principles Utilized” of the notes to Consolidated Financial Statements.

In preparing its consolidated financial information, ORIX Corporation (the “Company”) and its subsidiaries have complied with U.S. GAAP.

This document may contain forward-looking statements about expected future events and financial results that involve risks and uncertainties. Such statements are based on the Company’s current expectations and are subject to uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause such a difference include, but are not limited to, those described under “Risk Factors” in the Company’s most recent annual report on Form 20-F filed with the U.S. Securities and Exchange Commission.

The Company believes that it may have been a “passive foreign investment company” for U.S. federal income tax purposes in the year to which these consolidated financial results relate by reason of the composition of its assets and the nature of its income. In addition, the Company may be a PFIC for the foreseeable future. Assuming that the Company is a PFIC, a U.S. holder of the shares or ADSs of the Company will be subject to special rules generally intended to eliminate any benefits from the deferral of U.S. federal income tax that a holder could derive from investing in a foreign corporation that does not distribute all of its earnings on a current basis. Investors should consult their tax advisors with respect to such rules, which are summarized in the Company’s annual report.

 

– 1 –


Table of Contents
1. Information on the Company and its Subsidiaries

(1) Consolidated Financial Highlights

 

     Millions of yen
(except for per share amounts and ratios)
 
     Nine months
ended
December 31,
2015
     Nine months
ended
December 31,
2016
     Fiscal year
ended
March 31,
2016
 

Total revenues

   ¥ 1,797,080       ¥ 1,925,769       ¥ 2,369,202  

Income before income taxes

     334,672         334,096         391,302  

Net income attributable to ORIX Corporation shareholders

     215,364         217,118         260,169  

Comprehensive Income attributable to ORIX Corporation shareholders

     194,568         185,536         223,574  

ORIX Corporation shareholders’ equity

     2,273,448         2,437,009         2,310,431  

Total assets

     11,060,760         11,142,540         10,992,918  

Earnings per share for net income attributable to ORIX Corporation shareholders

        

Basic (yen)

     164.52         165.89         198.73  

Diluted (yen)

     164.35         165.74         198.52  

ORIX Corporation shareholders’ equity ratio (%)

     20.5         21.9         21.0  

Cash flows from operating activities

     357,265         443,035         510,562  

Cash flows from investing activities

     (302,503)        (116,113)        (552,529

Cash flows from financing activities

     (70,272)        (113,913)        (48,001

Cash and cash equivalents at end of period

     809,600         941,326         730,420  
     Millions of yen
(except for per share amounts)
        
     Three months
ended
December 31,
2015
     Three months
ended
December 31,
2016
    

Total revenues

   ¥ 626,886      ¥ 704,644     

Net income attributable to ORIX Corporation shareholders

     54,066        74,968     

Earnings per share for net income attributable to ORIX Corporation shareholders

        

Basic (yen)

     41.30        57.32     

 

Notes:   1.   

Consumption tax is excluded from the stated amount of total revenues.

  2.   

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03 (“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

(2) Overview of Activities

During the nine months ended December 31, 2016, no significant changes were made in the Company and its subsidiaries’ operations. Additionally, there were no changes of principal subsidiaries and affiliates.

 

2.

Risk Factors

Investing in the Company’s securities involves risks. You should carefully consider the information described herein as well as the risks described under “Risk Factors” in our Form 20-F for the fiscal year ended March 31, 2016 and the other information in that annual report, including, but not limited to, the Company’s consolidated financial statements and related notes and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” The Company’s business activities, financial condition and results of operations and the trading prices of the Company’s securities could be adversely affected by any of those factors or other factors.

 

3.

Material Contracts

Not applicable.

 

– 2 –


Table of Contents
4.

Analysis of Financial Results and Condition

The following discussion provides management’s explanation of factors and events that have significantly affected the Company’s financial condition and results of operations. Also included is management’s assessment of factors and trends that could have a material effect on the Company’s financial condition and results of operations in the future. However, please be advised that financial conditions and results of operations in the future may also be affected by factors other than those discussed herein. These factors and trends regarding the future were assessed as of the issue date of this quarterly financial report (shihanki houkokusho).

 

(1)

Qualitative Information Regarding Consolidated Financial Results

Economic Environment

The economy of the United States has been expanding moderately and interest rates and stock prices increased after the presidential election last November based on expectations for economic policies under the new administration. While the economy of Europe remains mostly flat, the Chinese economy is still in a correction phase and the economies of emerging and resource-rich countries have bottomed out. Against the backdrop of monetary easing measures in several countries, interest rates remain low worldwide. In addition, political and geopolitical tensions in certain regions continue to require careful monitoring.

Despite weakness in part, the Japanese economy is showing signs of recovery overall.

Financial Highlights

Financial Results for the Nine Months Ended December 31, 2016

Total revenues

   ¥1,925,769 million (Up 7% year on year)

Total expenses

   ¥1,678,202 million (Up 9% year on year)

Income before income taxes

   ¥334,096 million (Down 0% year on year)

Net income attributable to ORIX Corporation Shareholders

   ¥217,118 million (Up 1% year on year)

Earnings per share for net income attributable to ORIX Corporation Shareholders

  

(Basic)

   ¥165.89 (Up 1% year on year)

(Diluted)

   ¥165.74 (Up 1% year on year)

ROE (Annualized) *1

   12.2% (13.0% during the same period in the previous fiscal year)

ROA (Annualized) *2

   2.62% (2.55% during the same period in the previous fiscal year)

 

Note:

  

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03
(“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

*1

ROE is the ratio of Net Income Attributable to ORIX Corporation Shareholders for the period to average ORIX Corporation Shareholders’ Equity.

*2

ROA is the ratio of Net Income Attributable to ORIX Corporation Shareholders for the period to average Total Assets.

Total revenues for the nine months ended December 31, 2016 increased 7% to ¥1,925,769 million compared to ¥1,797,080 million during the same period of the previous fiscal year. Operating leases revenues increased due to an increase in gains on sales of real estate under operating leases. Life insurance premiums and related investment income increased mainly due to increases in insurance premiums and investment income in ORIX Life Insurance Corporation (hereinafter, “ORIX Life Insurance”), and an improvement in investment income from assets under variable annuity and variable life insurance contracts originally held by Hartford Life Insurance K.K. (hereinafter, “HLIKK”) compared to the same period of the previous fiscal year during which the investment income decreased with deterioration of market environment. HLIKK was merged into ORIX Life Insurance on July 1, 2015. In addition, sales of goods and real estate increased due primarily to revenues generated by subsidiaries in the principal investment business. On the other hand, services income decreased due to the partial divestment of Houlihan Lokey Inc. (hereinafter, “Houlihan Lokey”) shares in connection with its initial public offering in the United States and its becoming an equity method affiliate during the three months ended September 30, 2015.

 

– 3 –


Table of Contents

Total expenses increased 9% to ¥1,678,202 million compared to ¥1,544,464 million during the same period of the previous fiscal year. Life insurance costs increased due to a provision of liability reserve in ORIX Life Insurance in line with the increase in new insurance contracts in addition to a provision of liability reserve in line with the aforementioned improvement in investment income from assets under variable annuity and variable life insurance contracts. Costs of goods and real estate sold increased in line with the aforementioned revenue increase. On the other hand, selling, general and administrative expenses decreased compared to the same period of the previous fiscal year in line with Houlihan Lokey becoming an equity method affiliate in the previous fiscal year as mentioned above.

Gains on sales of subsidiaries and affiliates and liquidation losses, net remained at flat level compared to the same period of the previous fiscal year due to a significant gain on sales of subsidiaries and affiliates recorded during the nine months ended December 31, 2016, while there was a gain from the aforementioned partial divestment of Houlihan Lokey in the previous fiscal year.

As a result of the foregoing, income before income taxes for the nine months ended December 31, 2016 remained flat at ¥334,096 million compared to the same period of the previous fiscal year, and net income attributable to ORIX Corporation shareholders increased 1% to ¥217,118 million compared to ¥215,364 million during the same period of the previous fiscal year.

 

– 4 –


Table of Contents

Segment Information

Total revenues and profits by segment for the nine months ended December 31, 2015 and 2016 are as follows:

 

     Millions of yen  
     Nine months  ended
December 31, 2015
     Nine months  ended
December 31, 2016
     Change
(revenues)
    Change
(profits)
 
     Segment
Revenues
    Segment
Profits
     Segment
Revenues
    Segment
Profits
     Amount     Percent
(%)
    Amount     Percent
(%)
 

Corporate Financial Services

   ¥ 81,475     ¥ 33,841      ¥ 75,546     ¥ 26,314      ¥ (5,929     (7   ¥ (7,527     (22

Maintenance Leasing

     204,743       33,691        202,657       28,642        (2,086     (1     (5,049     (15

Real Estate

     154,691       44,374        153,243       49,721        (1,448     (1     5,347       12  

Investment and Operation

     751,084       46,672        870,404       68,783        119,320       16            22,111       47  

Retail

     208,751       48,835        274,708       60,055        65,957       32       11,220       23  

Overseas Business

     399,856       116,001        351,733       95,600        (48,123     (12     (20,401     (18
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1,800,600       323,414        1,928,291       329,115        127,691       7       5,701       2  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Difference between Segment Total and Consolidated Amounts

     (3,520     11,258        (2,522     4,981        998       —         (6,277     (56
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Consolidated Amounts

   ¥ 1,797,080     ¥ 334,672      ¥   1,925,769     ¥   334,096      ¥         128,689                     7     ¥ (576     (0
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets by segment as of March 31, 2016 and December 31, 2016 are as follows:

 

     Millions of yen  
     March 31, 2016      December 31, 2016     Change  
     Segment
Assets
     Composition
ratio (%)
     Segment
Assets
    Composition
ratio (%)
    Amount     Percent
(%)
 

Corporate Financial Services

   ¥ 1,049,867        9.6      ¥ 1,038,857       9.3      ¥ (11,010     (1

Maintenance Leasing

     731,329        6.7        731,492        6.6       163       0  

Real Estate

     739,592        6.7        680,231       6.1       (59,361     (8

Investment and Operation

     704,156        6.4        697,591       6.3       (6,565     (1

Retail

     3,462,772        31.5        3,331,594       29.9       (131,178     (4

Overseas Business

     2,284,733        20.7        2,416,885       21.6       132,152       6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     8,972,449        81.6        8,896,650       79.8       (75,799     (1
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Difference between Segment Total and Consolidated Amounts

     2,020,469        18.4        2,245,890       20.2       225,421       11  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Consolidated Amounts

   ¥ 10,992,918        100.0      ¥ 11,142,540       100.0     ¥ 149,622       1  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:  

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03 (“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

Total segment profits for the nine months ended December 31, 2016 increased 2% to ¥329,115 million compared to ¥323,414 million during the same period of the previous fiscal year. While segment profits decreased in Corporate Financial Services, Maintenance Leasing and Overseas Business segments, segment profits increased significantly in the Investment and Operation segment and secondarily in the Real Estate and Retail segments.

Segment information for the nine months ended December 31, 2016 is as follows:

 

– 5 –


Table of Contents

Corporate Financial Services Segment: Lending, leasing and fee business

The Japanese economy on the whole is expected to recover despite some areas of weakness. While interest rates overall increased along with the United States economy, the balance of outstanding loans at financial institutions continues to increase and interest rates on loans remain at low levels.

Segment revenues decreased 7% to ¥75,546 million compared to ¥81,475 million during the same period of the previous fiscal year due to a decrease in gains on investment securities, and a decrease in finance revenues in line with the decreased average investment balance, despite an increase in services income resulting primarily from revenue generated by Yayoi Co., Ltd. and stable fee business to domestic small-and medium-sized enterprise customers.

Segment expenses increased due primarily to an increase in selling, general and administrative expenses compared to the same period of the previous fiscal year. As a result, segment profits decreased 22% to ¥26,314 million compared to ¥33,841 million during the same period of the previous fiscal year.

Segment assets decreased 1% to ¥1,038,857 million compared to the end of the previous fiscal year due primarily to a decrease in installment loans.

 

     Nine months
ended December 31,
2015
    Nine months
ended December 31,
2016
     Change  
          Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Segment Revenues:

         

Finance revenues

   ¥ 26,070     ¥ 22,872      ¥ (3,198     (12

Operating leases

     19,168       18,575        (593     (3

Services income

     25,832       28,776        2,944       11  

Sales of goods and real estate, and other

     10,405       5,323        (5,082     (49
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     81,475       75,546        (5,929     (7
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment Expenses:

         

Interest expense

     5,515       4,631        (884     (16

Provision for doubtful receivables and probable loan losses and write-downs of long-lived assets and securities

     (1,208     365        1,573       —    

Other than the above

     43,870       46,290        2,420       6  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     48,177       51,286        3,109       6  
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment Operating Income

     33,298       24,260        (9,038     (27
  

 

 

   

 

 

    

 

 

   

 

 

 

Equity in Net income of Affiliates, and others

     543       2,054        1,511       278  
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 33,841     ¥ 26,314      ¥ (7,527     (22
  

 

 

   

 

 

    

 

 

   

 

 

 
     As of
March 31,
2016
    As of
December 31,
2016
     Change  
          Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 431,603     ¥ 433,663      ¥ 2,060       0  

Installment loans

     411,824       399,289        (12,535     (3

Investment in operating leases

     28,695       29,877        1,182       4  

Investment in securities

     36,542       34,763        (1,779     (5

Property under facility operations

     11,294       12,035        741       7  

Inventories

     53       56        3       6  

Advances for investment in operating leases

     1,737       2,274        537       31  

Investment in affiliates

     22,755       22,940        185       1  

Advances for property under facility operations

     304       382        78       26  

Goodwill and other intangible assets acquired in business combinations

     105,060       103,578        (1,482     (1
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥ 1,049,867     ¥ 1,038,857      ¥ (11,010     (1
  

 

 

   

 

 

    

 

 

   

 

 

 

 

– 6 –


Table of Contents

Maintenance Leasing Segment: Automobile leasing and rentals, car sharing, and test and measurement instruments and IT-related equipment rentals and leasing

While demand in corporate capital investment is gradually increasing, concerns about uncertainty in the domestic and overseas economic outlook interfere with new investment. The volume of new auto leases in Japan increased slightly compared to the previous fiscal year.

Segment revenues decreased 1% to ¥202,657 million from ¥204,743 million during the same period of the previous fiscal year due to lower gains on sales in operating leases revenues.

Segment expenses increased due primarily to increases in costs of operating leases in line with increased average investment asset balance in the auto-business and selling, general and administrative expenses. Segment profits decreased 15% to ¥28,642 million compared to ¥33,691 million during the same period of the previous fiscal year.

Segment assets remained flat at ¥731,492 million compared to the end of the previous fiscal year due primarily to an increase in leasing assets as a result of new auto-leases in the auto-business offsetting a decrease in leasing assets in line with the securitization.

 

     Nine months
ended December 31,
2015
    Nine months
ended December 31,
2016
    Change  
         Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Segment Revenues:

        

Finance revenues

   ¥ 8,938     ¥ 9,723     ¥ 785       9  

Operating leases

     141,987       139,960       (2,027     (1

Services income

     50,768       50,059       (709     (1

Sales of goods and real estate, and other

     3,050       2,915       (135     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     204,743       202,657       (2,086     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Expenses:

        

Interest expense

     2,646       2,556       (90     (3

Provision for doubtful receivables and probable loan losses and write-downs of long-lived assets and securities

     (9     260       269       —    

Other than the above

     168,446       171,180       2,734       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     171,083       173,996       2,913       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Income

     33,660       28,661       (4,999     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Net income of Affiliates, and others

     31       (19     (50     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 33,691     ¥ 28,642       ¥(5,049     (15
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of
March 31,
2016
    As of
December 31,
2016
    Change  
         Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 245,257     ¥ 264,984     ¥ 19,727       8  

Investment in operating leases

     481,031       461,250       (19,781     (4

Investment in securities

     1,214       1,299       85       7  

Property under facility operations

     718       730       12       2  

Inventories

     374       353       (21     (6

Advances for investment in operating leases

     314       510       196       62  

Investment in affiliates

     1,996       1,942       (54     (3

Goodwill and other intangible assets acquired in business combinations

     425       424       (1     (0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥ 731,329     ¥ 731,492     ¥ 163       0  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

– 7 –


Table of Contents

Real Estate Segment: Real estate development and rental, facility operation, REIT asset management, and real estate investment advisory services

The real estate market has remained active due primarily to the quantitative easing policies implemented by the Bank of Japan, including the introduction of low interest rates. Land prices remain high and vacancy rates in the Japanese office building market continue to show improvements especially in the Greater Tokyo Area. Furthermore, we are seeing increases in the occupancy rates and average daily rates of hotels and Japanese inns. Meanwhile, we are also seeing a trend where by sales prices of condominiums are no longer raising.

Segment revenues decreased 1% to ¥153,243 million compared to ¥154,691 million during the same period of the previous fiscal year due primarily to a decrease in financial revenues compared to the same period of the previous fiscal year during which the sale of large scale rental properties was recognized in finance revenues and also due to a decrease in sales of real estate, despite an increase in gains on sales of rental properties, which are included in operating leases revenues.

Segment expenses decreased compared to the same period of the previous fiscal year due primarily to decreases in costs of operating leases in line with a decrease in assets and the costs of sales of real estate as well as recognition of write-downs of long-lived assets of large scale rental properties during the same period of the previous fiscal year.

As a result of the foregoing, segment profits increased 12% to ¥49,721 million compared to ¥44,374 million during the same period of the previous fiscal year.

Segment assets decreased 8% to ¥680,231 million compared to the end of the previous fiscal year due primarily to a decrease in investment in operating leases, which resulted from sales of rental properties.

 

     Nine months
ended December 31,
2015
     Nine months
ended December 31,
2016
     Change  
           Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Segment Revenues:

          

Finance revenues

   ¥ 6,113      ¥ 1,786      ¥ (4,327     (71

Operating leases

     50,124        59,636        9,512       19  

Services income

     86,733        86,004        (729     (1

Sales of goods and real estate, and other

     11,721        5,817        (5,904     (50
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     154,691        153,243        (1,448     (1
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Expenses:

          

Interest expense

     3,674        2,404        (1,270     (35

Provision for doubtful receivables and probable loan losses and write-downs of long-lived assets and securities

     4,298        630        (3,668     (85

Other than the above

     107,463        102,467        (4,996     (5
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     115,435        105,501        (9,934     (9
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Operating Income

     39,256        47,742        8,486       22  
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity in Net income of Affiliates, and others

     5,118        1,979        (3,139     (61
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 44,374      ¥ 49,721      ¥ 5,347       12  
  

 

 

    

 

 

    

 

 

   

 

 

 
     As of
March 31,
2016
     As of
December 31,
2016
     Change  
           Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 21,541      ¥ 27,379      ¥ 5,838       27  

Installment loans

     5,821        985        (4,836     (83

Investment in operating leases

     375,050        320,867        (54,183     (14

Investment in securities

     5,861        4,456        (1,405     (24

Property under facility operations

     177,510        181,699        4,189       2  

Inventories

     3,597        3,559        (38     (1

Advances for investment in operating leases

     38,486        21,280        (17,206     (45

Investment in affiliates

     91,010        94,087        3,077       3  

Advances for property under facility operations

     8,829        14,197        5,368       61  

Goodwill and other intangible assets acquired in business combinations

     11,887        11,722        (165     (1
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥ 739,592      ¥ 680,231      ¥ (59,361     (8
  

 

 

    

 

 

    

 

 

   

 

 

 

 

– 8 –


Table of Contents

Investment and Operation Segment: Environment and energy business, principal investment, loan servicing (asset recovery), and concession business

While the Japanese government has been reassessing its renewable energy purchase program, the significance of renewable energy in the mid- to long- term is on the rise with investment targets expanding beyond solar power generation projects to include wind and geothermal power generation projects. In the capital markets, the number of mergers and acquisitions by Japanese companies has remained high.

Segment revenues increased 16% to ¥870,404 million compared to ¥751,084 million during the same period of the previous fiscal year due to increases in sales of goods and services income from the environment and energy business and subsidiaries in the principal investment business.

Segment expenses increased compared to the same period of the previous fiscal year due to an increase in expenses in line with the aforementioned revenues expansion and recognition of write-downs of securities.

As a result of the foregoing and the recognition of gains on sales of shares of subsidiaries and affiliates and the recognition of a bargain purchase gain from the acquisition of a subsidiary, segment profits increased 47% to ¥68,783 million compared to ¥46,672 million during the same period of the previous fiscal year.

Segment assets decreased 1% to ¥697,591 million compared to the end of the previous fiscal year due primarily to a decrease in line with the sale of investment in securities and affiliates despite an increase in property under facility operations in the environment and energy business and inventories in DAIKYO INCORPORATED.

 

     Nine months
ended December 31,

2015
    Nine months
ended December 31,

2016
     Change  
          Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Segment Revenues:

         

Finance revenues

   ¥ 10,396     ¥ 7,907      ¥ (2,489     (24

Gains on investment securities and dividends

     10,115       11,517        1,402       14  

Sales of goods and real estate

     527,625       626,964        99,339       19  

Services income

     195,800       217,093        21,293       11  

Operating leases, and other

     7,148       6,923        (225     (3
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     751,084       870,404        119,320       16  
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment Expenses:

         

Interest expense

     2,598       3,643        1,045       40  

Provision for doubtful receivables and probable loan losses and write-downs of long-lived assets and securities

     (346     5,183        5,529       —    

Other than the above

     714,048       828,571        114,523       16  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     716,300       837,397        121,097       17  
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment Operating Income

     34,784       33,007        (1,777     (5
  

 

 

   

 

 

    

 

 

   

 

 

 

Equity in Net income of Affiliates, and others

     11,888       35,776        23,888       201  
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 46,672     ¥ 68,783      ¥ 22,111       47  
  

 

 

   

 

 

    

 

 

   

 

 

 
     As of
March 31,
2016
    As of
December 31,
2016
     Change  
          Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 21,133     ¥ 24,024      ¥ 2,891       14  

Installment loans

     75,996       60,177        (15,819     (21

Investment in operating leases

     24,378       25,435        1,057       4  

Investment in securities

     71,705       49,866        (21,839     (30

Property under facility operations

     130,568       162,264        31,696       24  

Inventories

     98,016       114,308        16,292       17  

Advances for investment in operating leases

     404       1,216        812       201  

Investment in affiliates

     108,237       69,539        (38,698     (36

Advances for property under facility operations

     38,628       48,580        9,952       26  

Goodwill and other intangible assets acquired in business combinations

     135,091       142,182        7,091       5  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥ 704,156     ¥ 697,591      ¥ (6,565     (1
  

 

 

   

 

 

    

 

 

   

 

 

 

 

– 9 –


Table of Contents

Retail Segment: Life insurance, banking and card loan business

The life insurance business in Japan is currently affected by macroeconomic factors such as domestic population decline. However, we are seeing an increasing number of companies develop new products in response to the rising demand for medical insurance. On the other hand, we are seeing suspensions of the sales of certain products and an increase in insurance premiums on new contracts due primarily to the Bank of Japan’s adoption of negative interest rate policy. In the card loan business for individuals, banks and other lenders are expanding their assets and competition in the lending business continues to intensify in the current low interest rate environment.

Segment revenues increased 32% to ¥274,708 million compared to ¥208,751 million during the same period of the previous fiscal year due to increases in insurance premiums and investment income in line with an increase in new insurance contracts in ORIX Life Insurance, and an improvement in investment income from assets under variable annuity and variable life insurance contracts originally held by HLIKK compared to the same period of the previous fiscal year during which the investment income decreased with deterioration of market environment.

Segment expenses increased compared to the same period of the previous fiscal year due to a provision of liability reserve in ORIX Life Insurance in line with the aforementioned increase in new insurance contracts in addition to a provision of liability reserve in line with the improvement in investment income from assets under variable annuity and variable life insurance contracts in HLIKK.

As a result of the foregoing, segment profits increased 23% to ¥60,055 million compared to ¥48,835 million during the same period of the previous fiscal year.

Segment assets decreased 4% to ¥3,331,594 million compared to the end of the previous fiscal year due primarily to sales of investment in securities in ORIX Life Insurance as well as surrender of variable annuity and variable life insurance contracts originally held by HLIKK, offsetting an increase in installment loans in the banking business.

 

     Nine months
ended December 31,
2015
     Nine months
ended December 31,
2016
     Change  
           Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Segment Revenues:

          

Finance revenues

   ¥ 41,184      ¥ 43,680      ¥ 2,496       6  

Life insurance premiums and related investment income

     161,565        222,456        60,891       38  

Services income, and other

     6,002        8,572        2,570       43  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     208,751        274,708        65,957       32  
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Expenses:

          

Interest expense

     3,526        3,082        (444     (13

Provision for doubtful receivables and probable loan losses and write-downs of long-lived assets and securities

     5,714        7,459        1,745       31  

Other than the above

     151,473        204,115        52,642       35  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     160,713        214,656        53,943       34  
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Operating Income

     48,038        60,052        12,014       25  
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity in Net income of Affiliates, and others

     797        3        (794     (100
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 48,835      ¥ 60,055      ¥ 11,220       23  
  

 

 

    

 

 

    

 

 

   

 

 

 
     As of
March 31,
2016
     As of
December 31,
2016
     Change  
           Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 1,198      ¥ 640      ¥ (558     (47

Installment loans

     1,496,407        1,665,529        169,122       11  

Investment in operating leases

     52,359        51,664        (695     (1

Investment in securities

     1,893,631        1,596,028        (297,603     (16

Investment in affiliates

     911        693        (218     (24

Goodwill and other intangible assets acquired in business combinations

     18,266        17,040        (1,226     (7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥ 3,462,772      ¥ 3,331,594      ¥ (131,178     (4
  

 

 

    

 

 

    

 

 

   

 

 

 

 

– 10 –


Table of Contents

Overseas Business Segment: Leasing, lending, investment in bonds, asset management and ship- and aircraft-related operations

The economy of the United States has been expanding moderately and interest rates and stock prices increased after the presidential election last November based on expectations for economic policies under the new administration. While the economy of Europe remains mostly flat, the Chinese economy is still in a correction phase and the economies of other emerging and resource-rich countries have bottomed out. Against the backdrop of monetary easing measures in several countries, interest rates remain low worldwide. In addition, political and geopolitical tensions in certain regions continue to require careful monitoring.

Segment revenues decreased 12% to ¥351,733 million compared to ¥399,856 million during the same period of the previous fiscal year due to decreases in services income resulting primarily from the deconsolidation of Houlihan Lokey during the three months ended September 30, 2015, as well as the appreciation of the yen, despite an increase in finance revenues from the Americas and consolidated subsidiaries in Asia.

Segment expenses decreased compared to the same period of the previous fiscal year due primarily to the deconsolidation of Houlihan Lokey and the appreciation of the yen.

As a result of the foregoing and due to the recognition of a gain on the partial divestment of Houlihan Lokey shares during the same period of the previous fiscal year, despite a significant gain on sale of subsidiary in the Americas, segment profits decreased 18% to ¥95,600 million compared to ¥116,001 million during the same period of the previous fiscal year.

Segment assets increased 6% to ¥2,416,885 million compared to the end of the previous fiscal year due to increases in investment in securities and installment loans in the Americas as well as an increase in investment in operating leases of aircraft-related operations, despite a decrease in inventories due to a sale of a subsidiary.

 

     Nine months
ended December 31,
2015
     Nine months
ended December 31,
2016
     Change  
           Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Segment Revenues:

 

Finance revenues

   ¥ 55,885      ¥ 59,165      ¥ 3,280       6  

Gains on investment securities and dividends

     13,805        9,089        (4,716     (34

Operating leases

     67,321        65,868        (1,453     (2

Services income

     198,603        161,111        (37,492     (19

Sales of goods and real estate, and other

     64,242        56,500        (7,742     (12
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     399,856        351,733        (48,123     (12
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Expenses:

          

Interest expense

     24,186        26,779        2,593       11  

Provision for doubtful receivables and probable loan losses and write-downs of long-lived assets and securities

     6,679        9,835        3,156       47  

Other than the above

     305,354        256,766        (48,588     (16
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     336,219        293,380        (42,839     (13
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Operating Income

     63,637        58,353        (5,284     (8
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity in Net income of Affiliates, and others

     52,364        37,247        (15,117     (29
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 116,001      ¥ 95,600      ¥ (20,401     (18
  

 

 

    

 

 

    

 

 

   

 

 

 
     As of
March 31,
2016
     As of
December 31,
2016
     Change  
           Amount     Percent
(%)
 
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 351,010      ¥ 343,805      ¥ (7,205     (2

Installment loans

     407,870        462,668        54,798       13  

Investment in operating leases

     375,401        399,345        23,944       6  

Investment in securities

     383,227        462,765        79,538       21  

Property under facility operations

     23,762        29,374        5,612       24  

Inventories

     37,782        24,258        (13,524     (36

Advances for investment in operating leases

     5,302        9,409        4,107       77  

Investment in affiliates

     305,674        299,729        (5,945     (2

Advances for property under facility operations

     39        43        4       10  

Goodwill and other intangible assets acquired in business combinations

     394,666        385,489        (9,177     (2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥ 2,284,733      ¥ 2,416,885      ¥ 132,152       6  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

– 11 –


Table of Contents

(2) Financial Condition

 

     As of
March 31,
2016
    As of
December 31,
2016
    Change  
       Amount     Percent
(%)
 
     (Millions of yen except per share, ratios and percentages)  

Total assets

   ¥ 10,992,918     ¥ 11,142,540     ¥ 149,622       1  

(Segment assets)

     8,972,449       8,896,650       (75,799     (1

Total liabilities

     8,512,632       8,557,266       44,634       1  

(Short- and long-term debt)

     4,286,542       4,172,832       (113,710     (3

(Deposits)

     1,398,472       1,526,300       127,828       9  

ORIX Corporation shareholders’ equity

     2,310,431       2,437,009       126,578       5  

ORIX Corporation shareholders’ equity per share (yen)*1

     1,764.34       1,864.50       100.16       6  

ORIX Corporation shareholders’ equity ratio*2

     21.0     21.9     —         —    

D/E ratio (Debt-to-equity ratio) (Short-and long-term debt (excluding deposits) / ORIX Corporation shareholders’ equity)

     1.9     1.7     —         —    

 

Note:

  

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03
(“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

*1

ORIX Corporation shareholders’ equity per share is calculated using total ORIX Corporation shareholders’ equity.

*2

ORIX Corporation shareholders’ equity ratio is the ratio as of the period end of ORIX Corporation shareholders’ equity to total assets.

Total assets increased 1% to ¥11,142,540 million compared to ¥10,992,918 million as of March 31, 2016. Installment loans increased due primarily to an increase of assets in the banking business. On the other hand, investment in securities decreased due primarily to sales of investment in securities in ORIX Life Insurance as well as surrender of variable annuity and variable life insurance contracts originally held by HLIKK. In addition, investment in affiliates decreased due primarily to sales of shares of affiliates in the Investment and Operation segment. Segment assets decreased 1% to ¥8,896,650 million compared to March 31, 2016.

We manage the balance of interest-bearing liabilities at an appropriate level taking into account the condition of assets and liquidity on-hand as well as the domestic and overseas financial environment. As a result, long- and short-term debt decreased and deposits increased compared to March 31, 2016. In addition, policy liabilities and policy account balances decreased due primarily to the surrender of variable annuity and variable life insurance contracts originally held by HLIKK.

Shareholders’ equity increased 5% to ¥2,437,009 million compared to March 31, 2016 due primarily to an increase in retained earnings.

 

– 12 –


Table of Contents

(3) Liquidity and Capital Resources

We require capital resources for working capital, investment and lending in our businesses. We accordingly prioritize funding stability, maintaining adequate liquidity, and reducing capital costs. We formulate and execute on funding policies that are resistant to sudden negative events in financial markets, and then conduct funding activities in accordance with actual transitions in our assets and changes in financial markets. In preparing our management plan, we project funding activities to maintain a balanced capital structure in light of projected cash flows, asset liquidity and our own liquidity situation. When implementing our management plan, we adjust our funding based on changes in the external environment and our needs in light of our business activities, and endeavor to maintain flexibility in our funding activities. We endeavor to diversify our funding sources, promote longer liability maturities, disperse interest and principal repayment dates, maintain sufficient liquidity, optimize the balance of liabilities and equity and reinforce our funding stability.

Our funding is comprised of borrowings from financial institutions, direct fund procurement from capital markets and deposits. ORIX Group’s total funding including that from short- and long-term debt and deposits on a consolidated basis was ¥5,699,132 million as of December 31, 2016. Borrowings are procured from a diverse range of financial institutions including major banks, regional banks, foreign banks and life and casualty insurance companies. The number of financial institutions from which we procured borrowings exceeded 200 as of December 31, 2016. Procurement from the capital markets is composed of bonds, medium-term notes, commercial paper, payables under securitized leases, loan receivables and other assets (including asset backed securities). ORIX Group accepts deposits for funding purposes, with the majority of deposits attributable to ORIX Bank Corporation.

In an effort to promote longer liability maturities and diversify our funding sources, during the nine months ended December 31, 2016, we issued US dollars, Korean won, Indian rupee, Thai baht, and Malaysian ringgit denominated straight bonds and medium-term notes outside Japan. We procured financing through a subordinated syndicated loan (hybrid loan) which has similar characteristics to capital. We intend to continue to strengthen our financial condition, while maintaining appropriately diverse funding.

Short-term and long-term debt and deposits

(a) Short-term debt

 

     Millions of yen  
     March 31, 2016      December 31, 2016  

Borrowings from financial institutions

   ¥   247,263      ¥   254,272  

Commercial paper

     102,361        42,017  
  

 

 

    

 

 

 

Total short-term debt

   ¥ 349,624      ¥ 296,289  
  

 

 

    

 

 

 

Short-term debt as of December 31, 2016 was ¥296,289 million, which accounted for 7% of the total amount of short and long-term debt (excluding deposits) as compared to 8% as of March 31, 2016.

While the amount of short-term debt as of December 31, 2016 was ¥296,289 million, the sum of cash and cash equivalents and the unused amount of committed credit facilities as of December 31, 2016 was ¥1,282,760 million.

(b) Long-term debt

 

     Millions of yen  
     March 31, 2016      December 31, 2016  

Borrowings from financial institutions

   ¥ 2,723,320      ¥ 2,684,468  

Bonds

     875,575        787,723  

Medium-term notes

     62,491        118,410  

Payables under securitized lease, loan receivables and other assets

     275,532        285,942  
  

 

 

    

 

 

 

Total long-term debt

   ¥ 3,936,918      ¥ 3,876,543  
  

 

 

    

 

 

 

 

Note:

 

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03
(“Simplifying the Presentation of Debt Issuance Costs”—ASC835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

 

 

– 13 –


Table of Contents

The balance of long-term debt as of December 31, 2016 was ¥3,876,543 million, which accounted for 93% of the total amount of short and long-term debt (excluding deposits) as compared to 92% as of March 31, 2016.

(c) Deposits

 

     Millions of yen  
     March 31, 2016      December 31, 2016  

Deposits

   ¥ 1,398,472      ¥ 1,526,300  

Apart from the short-term and long-term debt noted above, ORIX Bank Corporation and ORIX Asia Limited accept deposits. These deposit-taking subsidiaries are regulated institutions, and loans from these subsidiaries to ORIX Group entities are subject to maximum regulatory limits.

(4) Summary of Cash Flows

Cash and cash equivalents as of December 31, 2016 increased by ¥210,906 million to ¥941,326 million compared to March 31, 2016.

Cash flows provided by operating activities were ¥443,035 million in the nine months ended December 31, 2016, up from ¥357,265 million during the same period of the previous fiscal year, primarily resulting from a decrease in a previous decrease in policy liabilities and policy account balances, partially offset by a decrease in a previous decrease in trading securities as compared to the same period of the previous fiscal year.

Cash flows used in investing activities were ¥116,113 million in the nine months ended December 31, 2016, down from ¥302,503 million during the same period of the previous fiscal year, primarily resulting from a decrease in purchases of available-for-sale securities, partially offset by a decrease in proceeds from redemption of available-for-sale securities as compared to the same period of the previous fiscal year.

Cash flows used in financing activities were ¥113,913 million in the nine months ended December 31, 2016, up from ¥70,272 million during the same period of the previous fiscal year, primarily resulting from an increase in repayment of debt with maturities longer than three months as compared to the same period of the previous fiscal year.

(5) Challenges to be addressed

There were no significant changes for the nine months ended December 31, 2016.

(6) Research and Development Activity

There were no significant changes in research and development activities for the nine months ended December 31, 2016.

(7) Major facilities

We have finished the construction of a solar power station in Tsu-city, Mie prefecture, Japan. The aggregate book value of the solar power station was ¥17 billion as of December 31, 2016. In addition, we have finished the construction of a building in Taito-ku, Tokyo, Japan. The aggregate book value of the building was ¥13 billion as of December 31, 2016.

Except for this, there were no significant changes in major facilities for the nine months ended December 31, 2016.

 

– 14 –


Table of Contents
5.

Company Stock Information

(The following disclosure is provided for ORIX Corporation on a stand-alone basis and has been prepared based on Japanese GAAP.)

(1) Issued Shares, Common Stock and Capital Reserve

The number of issued shares, the amount of common stock and capital reserve for the three months ended December 31, 2016 is as follows:

 

In thousands   Millions of yen
Number of issued shares   Common stock   Capital reserve

Increase, net

 

December 31, 2016

 

Increase, net

 

December 31, 2016

 

Increase, net

 

December 31, 2016

31   1,324,089   ¥34   ¥220,504   ¥34   ¥247,683

(2) List of Major Shareholders

Not applicable (this item is not subject to disclosure in quarterly reports for the three-month periods ended June 30 or December 31).

 

6.

Directors and Executive Officers

Between the filing date of Form 20-F for the fiscal year ended March 31, 2016 and December 31, 2016, the personnel changes of the directors and the executive officers are as follows:

(1) Departures

 

Name

  

Title

  

Areas of duties

  

The day of retirement

Hiroaki Nishina*1

   Vice chairman   

Group Kansai Representative

Responsible for Real Estate Segment

Chairman, ORIX Real Estate Corporation

President, ORIX Baseball Club Co., Ltd.

   December 31, 2016

Tetsuo Matsumoto

   Corporate Senior Vice President   

Head of Real Estate Headquarters

Responsible for Finance and Investment Department

President, ORIX Real Estate Corporation

   December 31, 2016

Tetsuro Masuko

   Executive Officer    Head of District Sales Headquarters    December 31, 2016

Yasuyuki Ijiri

   Group Executive    Deputy President, ORIX Auto Corporation    December 31, 2016

 

*1

Mr. Nishina will continue his role as a President of ORIX Baseball Club Co., Ltd.

 

– 15 –


Table of Contents
7.

Financial Information

(1) Condensed Consolidated Balance Sheets (Unaudited)

 

                                                                     
     Millions of yen  

Assets

   March 31, 2016     December 31, 2016  

Cash and Cash Equivalents

   ¥ 730,420     ¥ 941,326  

Restricted Cash

     80,979       105,399  

Investment in Direct Financing Leases

     1,190,136       1,199,487  

Installment Loans

     2,592,233       2,808,316  

The amounts which are measured at fair value by electing the fair value option are as follows:

    

March 31, 2016                                       ¥20,673  million

    

December 31, 2016                                  ¥14,735 million

    

Allowance for Doubtful Receivables on Direct Financing Leases and Probable Loan Losses

     (60,071     (59,880

Investment in Operating Leases

     1,349,199       1,318,779  

Investment in Securities

     2,344,792       2,107,846  

The amounts which are measured at fair value by electing the fair value option are as follows:

    

March 31, 2016                                       ¥27,367  million

    

December 31, 2016                                  ¥25,919 million

    

Property under Facility Operations

     327,016       368,075  

Investment in Affiliates

     530,667       489,111  

Trade Notes, Accounts and Other Receivable

     294,638       270,520  

Inventories

     139,950       142,656  

Office Facilities

     120,173       118,043  

Other Assets

     1,352,786       1,332,862  

The amounts which are measured at fair value by electing the fair value option are as follows:

    

March 31, 2016                                       ¥37,855  million

    

December 31, 2016                                  ¥26,156 million

    
  

 

 

   

 

 

 

Total Assets

   ¥ 10,992,918     ¥ 11,142,540  
  

 

 

   

 

 

 

 

Notes:

 

1.

 

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03 (“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

 

2.

 

The assets of consolidated variable interest entities (VIEs) that can be used only to settle obligations of those VIEs are below:

 

                                                                     
     Millions of yen  
     March 31, 2016     December 31, 2016  

Cash and Cash Equivalents

   ¥          4,697      ¥ 4,457   

Investment in Direct Financing Leases (Net of Allowance for Doubtful Receivables on Direct Financing Leases and Probable Loan Losses)

     134,604       105,416  

Installment Loans (Net of Allowance for Doubtful Receivables on Direct Financing Leases and Probable Loan Losses)

     195,702       212,536  

Investment in Operating Leases

     227,340       190,931  

Property under Facility Operations

     79,697       104,785  

Investment in Affiliates

     65,059       53,201  

Other

     93,410       119,733  
  

 

 

   

 

 

 
   ¥      800,509     ¥      791,059  
  

 

 

   

 

 

 

 

– 16 –


Table of Contents
                                                                     
     Millions of yen  

Liabilities and Equity

   March 31, 2016     December 31, 2016  

Liabilities:

    

Short-Term Debt

   ¥ 349,624     ¥ 296,289  

Deposits

     1,398,472       1,526,300  

Trade Notes, Accounts and Other Payable

     266,216       208,210  

Policy Liabilities and Policy Account Balances

     1,668,636       1,591,771  

The amounts which are measured at fair value by electing the fair value option are as follows:

    

March 31, 2016                                        ¥795,001 million

    

December 31, 2016                                  ¥675,938 million

    

Current and Deferred Income Taxes

     358,758       417,836  

Long-Term Debt

     3,936,918       3,876,543  

Other Liabilities

     534,008       640,317  
  

 

 

   

 

 

 

Total Liabilities

     8,512,632       8,557,266  
  

 

 

   

 

 

 

Redeemable Noncontrolling Interests

     7,467       7,966  
  

 

 

   

 

 

 

Commitments and Contingent Liabilities

    

Equity:

    

Common Stock

     220,469       220,504  

Additional Paid-in Capital

     257,629       268,881  

Retained Earnings

     1,864,241       2,020,060  

Accumulated Other Comprehensive Income (Loss)

     (6,222     (42,990

Treasury Stock, at Cost

     (25,686     (29,446
  

 

 

   

 

 

 

ORIX Corporation Shareholders’ Equity

     2,310,431       2,437,009  

Noncontrolling Interests

     162,388       140,299  
  

 

 

   

 

 

 

Total Equity

     2,472,819       2,577,308  
  

 

 

   

 

 

 

Total Liabilities and Equity

   ¥ 10,992,918     ¥ 11,142,540  
  

 

 

   

 

 

 

 

Notes:   1.   

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03 (“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

  2.   

The liabilities of consolidated VIEs for which creditors (or beneficial interest holders) do not have recourse to the general credit of the Company and its subsidiaries are below:

 

                                                                     
     Millions of yen  
     March 31, 2016     December 31, 2016  

Trade Notes, Accounts and Other Payable

   ¥          1,576      ¥ 2,717   

Long-Term Debt

     479,152       492,124  

Other

     11,778       13,079  
  

 

 

   

 

 

 
   ¥      492,506     ¥      507,920  
  

 

 

   

 

 

 

 

– 17 –


Table of Contents

(2) Condensed Consolidated Statements of Income (Unaudited)

 

                                                                     
     Millions of yen  
     Nine months ended
December 31, 2015
    Nine months ended
December 31, 2016
 

Revenues:

    

Finance revenues

   ¥ 152,614     ¥ 147,894  

Gains on investment securities and dividends

     33,017       24,354  

Operating leases

     284,396       289,769  

Life insurance premiums and related investment income

     160,735       221,398  

Sales of goods and real estate

     609,783       695,616  

Services income

     556,535       546,738  
  

 

 

   

 

 

 

Total revenues

     1,797,080       1,925,769  
  

 

 

   

 

 

 

Expenses:

    

Interest expense

     54,025       53,955  

Costs of operating leases

     183,695       181,417   

Life insurance costs

     101,206       147,467  

Costs of goods and real estate sold

     546,915       631,538  

Services expense

     328,264       332,299  

Other (income) and expense, net

     (1,033     710  

Selling, general and administrative expenses

     316,953       307,280  

Provision for doubtful receivables and probable loan losses

     5,940       12,371  

Write-downs of long-lived assets

     4,547       4,802  

Write-downs of securities

     3,952       6,363  
  

 

 

   

 

 

 

Total expenses

     1,544,464       1,678,202  
  

 

 

   

 

 

 

Operating Income

     252,616       247,567  

Equity in Net Income of Affiliates

     25,044       25,811  

Gains on Sales of Subsidiaries and Affiliates and Liquidation Losses, net

     57,012       56,431  

Bargain Purchase Gain

     0       4,287  
  

 

 

   

 

 

 

Income before Income Taxes

     334,672       334,096  

Provision for Income Taxes

     111,489       110,212  
  

 

 

   

 

 

 

Net Income

     223,183       223,884  
  

 

 

   

 

 

 

Net Income Attributable to the Noncontrolling Interests

     7,009       6,542  
  

 

 

   

 

 

 

Net Income Attributable to the Redeemable Noncontrolling Interests

     810       224  
  

 

 

   

 

 

 

Net Income Attributable to ORIX Corporation Shareholders

   ¥      215,364     ¥      217,118  
  

 

 

   

 

 

 
     Yen  
     Nine months ended
December 31, 2015
    Nine months ended
December 31, 2016
 

Amounts per Share of Common Stock for Net Income attributable to ORIX Corporation shareholders:

    

Basic:

   ¥ 164.52     ¥ 165.89  

Diluted:

   ¥ 164.35     ¥ 165.74  

 

– 18 –


Table of Contents
                                                                     
     Millions of yen  
     Three months ended
December 31, 2015
    Three months ended
December 31, 2016
 

Revenues:

    

Finance revenues

   ¥ 51,370     ¥ 51,312  

Gains on investment securities and dividends

     1,700       9,147  

Operating leases

     93,066       93,697  

Life insurance premiums and related investment income

     90,243       105,662  

Sales of goods and real estate

     214,357       262,090  

Services income

     176,150       182,736  
  

 

 

   

 

 

 

Total revenues

     626,886       704,644  
  

 

 

   

 

 

 

Expenses:

    

Interest expense

     18,167       18,607  

Costs of operating leases

     61,255       60,151  

Life insurance costs

     69,406       76,044  

Costs of goods and real estate sold

     195,454       241,174   

Services expense

     110,384       113,306  

Other (income) and expense, net

     (5,588     1,391  

Selling, general and administrative expenses

     100,609       103,581  

Provision for doubtful receivables and probable loan losses

     2,992       5,628  

Write-downs of long-lived assets

     3,601       3,393  

Write-downs of securities

     470       151  
  

 

 

   

 

 

 

Total expenses

     556,750       623,426  
  

 

 

   

 

 

 

Operating Income

     70,136       81,218  

Equity in Net Income of Affiliates

     13,188       10,046  

Gains on Sales of Subsidiaries and Affiliates and Liquidation Losses, net

     603       23,597  
  

 

 

   

 

 

 

Income before Income Taxes

     83,927       114,861  

Provision for Income Taxes

     28,853       37,916  
  

 

 

   

 

 

 

Net Income

     55,074       76,945  
  

 

 

   

 

 

 

Net Income Attributable to the Noncontrolling Interests

     1,463       1,901  
  

 

 

   

 

 

 

Net Income (Loss) Attributable to the Redeemable Noncontrolling Interests

     (455     76  
  

 

 

   

 

 

 

Net Income Attributable to ORIX Corporation Shareholders

   ¥        54,066     ¥        74,968  
  

 

 

   

 

 

 
     Yen  
     Three months  ended
December 31, 2015
    Three months  ended
December 31, 2016
 

Amounts per Share of Common Stock for Net Income attributable to ORIX Corporation shareholders:

    

Basic:

   ¥ 41.30     ¥ 57.32  

Diluted:

   ¥ 41.25     ¥ 57.26  

 

– 19 –


Table of Contents

(3) Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

                                                                     
     Millions of yen  
     Nine months ended
December 31, 2015
    Nine months ended
December 31, 2016
 

Net Income

   ¥ 223,183     ¥ 223,884  
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

    

Net change of unrealized gains (losses) on investment in securities

     (14,215     (16,872

Net change of defined benefit pension plans

     (113     677  

Net change of foreign currency translation adjustments

     (4,708     (18,528

Net change of unrealized gains (losses) on derivative instruments

     (623     353  
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     (19,659     (34,370
  

 

 

   

 

 

 

Comprehensive Income

     203,524       189,514  
  

 

 

   

 

 

 

Comprehensive Income Attributable to the Noncontrolling Interests

     6,882       3,479  
  

 

 

   

 

 

 

Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     2,074       499  
  

 

 

   

 

 

 

Comprehensive Income Attributable to ORIX Corporation Shareholders

   ¥      194,568     ¥      185,536  
  

 

 

   

 

 

 
     Millions of yen  
     Three months ended
December 31, 2015
    Three months ended
December 31, 2016
 

Net Income

   ¥ 55,074     ¥ 76,945  
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

    

Net change of unrealized gains (losses) on investment in securities

     (401     (14,019

Net change of defined benefit pension plans

     348       (822

Net change of foreign currency translation adjustments

     (1,568     40,984  

Net change of unrealized gains (losses) on derivative instruments

     (635     2,153  
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     (2,256     28,296  
  

 

 

   

 

 

 

Comprehensive Income

     52,818       105,241  
  

 

 

   

 

 

 

Comprehensive Income Attributable to the Noncontrolling Interests

     296       5,268  
  

 

 

   

 

 

 

Comprehensive Income (Loss) Attributable to the Redeemable Noncontrolling Interests

     (349     1,123  
  

 

 

   

 

 

 

Comprehensive Income Attributable to ORIX Corporation Shareholders

   ¥      52,871     ¥      98,850  
  

 

 

   

 

 

 

 

– 20 –


Table of Contents

(4) Condensed Consolidated Statements of Changes in Equity (Unaudited)

Nine months ended December 31, 2015

 

     Millions of yen  
     ORIX Corporation Shareholders’ Equity              
     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total ORIX
Corporation
Shareholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

Beginning Balance

   ¥ 220,056      ¥ 255,595     ¥ 1,672,585     ¥ 30,373     ¥ (26,411   ¥ 2,152,198     ¥ 165,873     ¥ 2,318,071  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution to subsidiaries

                0       6,719       6,719  

Transaction with noncontrolling interests

        (193           (193     (6,902     (7,095

Comprehensive income, net of tax:

                 

Net income

          215,364           215,364       7,009       222,373  

Other comprehensive income (loss)

                 

Net change of unrealized losses on investment in securities

            (14,243       (14,243     28       (14,215

Net change of defined benefit pension plans

            (158       (158     45       (113

Net change of foreign currency translation adjustments

            (5,804       (5,804     (168     (5,972

Net change of unrealized gains on derivative instruments

            (591       (591     (32     (623
             

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

                (20,796     (127     (20,923
             

 

 

   

 

 

   

 

 

 

Total comprehensive income

                194,568       6,882       201,450  
             

 

 

   

 

 

   

 

 

 

Cash dividends

          (76,034         (76,034     (4,262     (80,296

Exercise of stock options

     413        409             822       0       822  

Acquisition of treasury stock

              (2     (2     0       (2

Disposal of treasury stock

        (185     (31       329       113       0       113  

Other, net

        156       1,820           1,976       0       1,976  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   ¥ 220,469      ¥ 255,782     ¥ 1,813,704     ¥ 9,577     ¥ (26,084   ¥ 2,273,448     ¥ 168,310     ¥ 2,441,758  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months ended December 31, 2016

 

 

     Millions of yen  
     ORIX Corporation Shareholders’ Equity              
     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total ORIX
Corporation
Shareholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

Beginning Balance

   ¥ 220,469      ¥ 257,629     ¥ 1,864,241     ¥ (6,222   ¥ (25,686   ¥ 2,310,431     ¥ 162,388     ¥ 2,472,819  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution to subsidiaries

                0       17,318       17,318  

Transaction with noncontrolling interests

        10,996         (5,186       5,810       (39,972     (34,162

Comprehensive income, net of tax:

                 

Net income

          217,118           217,118       6,542       223,660  

Other comprehensive income (loss)

                 

Net change of unrealized losses on investment in securities

            (16,853       (16,853     (19     (16,872

Net change of defined benefit pension plans

            550         550       127       677  

Net change of foreign currency translation adjustments

            (15,579       (15,579     (3,224     (18,803

Net change of unrealized gains on derivative instruments

            300         300       53       353  
             

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

                (31,582     (3,063     (34,645
             

 

 

   

 

 

   

 

 

 

Total comprehensive income

                185,536       3,479       189,015  
             

 

 

   

 

 

   

 

 

 

Cash dividends

          (61,299         (61,299     (2,914     (64,213

Exercise of stock options

     35        17             52       0       52  

Acquisition of treasury stock

              (3,844     (3,844     0       (3,844

Disposal of treasury stock

        (56         84       28       0       28  

Other, net

        295             295       0       295  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   ¥ 220,504      ¥ 268,881     ¥ 2,020,060     ¥ (42,990   ¥ (29,446   ¥ 2,437,009     ¥ 140,299     ¥ 2,577,308  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:   Changes in the redeemable noncontrolling interests are not included in this table. For further information, see Note 10 “Redeemable Noncontrolling Interests.”

 

– 21 –


Table of Contents

(5) Condensed Consolidated Statements of Cash Flows (Unaudited)

 

                                                                     
     Millions of yen  
     Nine months  ended
December 31, 2015
    Nine months  ended
December 31, 2016
 

Cash Flows from Operating Activities:

    

Net income

   ¥       223,183     ¥       223,884  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     181,206       187,904  

Provision for doubtful receivables and probable loan losses

     5,940       12,371  

Equity in net income of affiliates (excluding interest on loans)

     (24,024     (24,326

Gains on sales of subsidiaries and affiliates and liquidation losses, net

     (57,012     (56,431

Bargain purchase gain

     0       (4,287

Gains on sales of available-for-sale securities

     (31,524     (31,043

Gains on sales of operating lease assets

     (32,717     (44,435

Write-downs of long-lived assets

     4,547       4,802  

Write-downs of securities

     3,952       6,363  

Decrease in restricted cash

     8,800       703  

Decrease in trading securities

     387,164       85,264  

Decrease (Increase) in inventories

     15,524       (12,985

Decrease (Increase) in trade notes, accounts and other receivable

     (6,510     7,820  

Decrease in trade notes, accounts and other payable

     (59,336     (21,523

Decrease in policy liabilities and policy account balances

     (350,041     (76,865

Other, net

     88,113       185,819  
  

 

 

   

 

 

 

Net cash provided by operating activities

     357,265       443,035  
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Purchases of lease equipment

     (696,943     (624,957

Principal payments received under direct financing leases

     372,679       339,905  

Installment loans made to customers

     (808,708     (958,188

Principal collected on installment loans

     710,848       745,385  

Proceeds from sales of operating lease assets

     181,309       226,852  

Investment in affiliates, net

     (19,502     (8,907

Proceeds from sales of investment in affiliates

     15,773       75,296  

Purchases of available-for-sale securities

     (745,150     (357,065

Proceeds from sales of available-for-sale securities

     415,389       461,836  

Proceeds from redemption of available-for-sale securities

     313,052       93,521  

Purchases of held-to-maturity securities

     (395     (306

Purchases of other securities

     (14,799     (8,311

Proceeds from sales of other securities

     34,460       21,630  

Purchases of property under facility operations

     (65,468     (66,980

Acquisitions of subsidiaries, net of cash acquired

     (22,096     (45,980

Sales of subsidiaries, net of cash disposed

     37,576       38,707  

Other, net

     (10,528     (48,551
  

 

 

   

 

 

 

Net cash used in investing activities

     (302,503     (116,113
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Net decrease in debt with maturities of three months or less

     (60,045     (24,429

Proceeds from debt with maturities longer than three months

     910,123       896,938  

Repayment of debt with maturities longer than three months

     (944,805     (1,032,037

Net increase in deposits due to customers

     98,285       127,706  

Cash dividends paid to ORIX Corporation shareholders

     (76,034     (61,299

Contribution from noncontrolling interests

     4,672       2,844  

Purchases of shares of subsidiaries from noncontrolling interests

     0       (24,929

Cash dividends paid to redeemable noncontrolling interests

     (11,272     0  

Net increase in call money

     17,000       10,500  

Other, net

     (8,196     (9,207
  

 

 

   

 

 

 

Net cash used in financing activities

     (70,272     (113,913
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (2,408     (2,103
  

 

 

   

 

 

 

Net increase (decrease) in Cash and Cash Equivalents

     (17,918     210,906  
  

 

 

   

 

 

 

Cash and Cash Equivalents at Beginning of Period

     827,518       730,420  
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   ¥ 809,600     ¥ 941,326  
  

 

 

   

 

 

 

 

– 22 –


Table of Contents

Notes to Consolidated Financial Statements

 

1. Overview of Accounting Principles Utilized

In preparing the accompanying consolidated financial statements, ORIX Corporation (the “Company”) and its subsidiaries have complied with accounting principles generally accepted in the United States of America (“U.S. GAAP”), except for the accounting for stock splits (see Note 2 (n)).

These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our March 31, 2016 consolidated financial statements on Form 20-F.

Since the Company listed on the New York Stock Exchange in September 1998, the Company has filed the annual report (Form 20-F) including the consolidated financial statements with the Securities and Exchange Commission.

Significant differences between U.S. GAAP and generally accepted accounting principles in Japan (“Japanese GAAP”) are as follows:

(a) Initial direct costs

Under U.S. GAAP, certain initial direct costs to originate leases or loans are being deferred and amortized as yield adjustments over the life of related direct financing leases or loans by using interest method.

Under Japanese GAAP, those initial direct costs are recognized as expenses when they are incurred.

(b) Operating leases

Under U.S. GAAP, revenues from operating leases are recognized on a straight-line basis over the contract terms. Also operating lease assets are depreciated over their estimated useful lives mainly on a straight-line basis.

Japanese GAAP allows for operating lease assets to be depreciated using mainly either a declining-balance basis or a straight-line basis.

(c) Accounting for life insurance operations

Under U.S. GAAP, certain costs related directly to the successful acquisition of new (or renewal of) insurance contracts, or deferred policy acquisition costs, are being deferred and amortized over the respective policy periods in proportion to anticipated premium revenue.

Under Japanese GAAP, such costs are recorded as expenses currently in earnings in each accounting period.

In addition, under U.S. GAAP, although policy liabilities for future policy benefits are established using the net level premium method, based on actuarial estimates of the amount of future policyholder benefits, under Japanese GAAP, these are calculated by the methodology which relevant authorities accept.

(d) Accounting for goodwill and other intangible assets in business combination

Under U.S. GAAP, goodwill and intangible assets that have indefinite useful lives are not amortized, but assessed for impairment at least annually. Additionally, if events or changes in circumstances indicate that the asset might be impaired, the Company and its subsidiaries test for impairment when such events or changes occur.

Under Japanese GAAP, goodwill is amortized over an appropriate period up to 20 years.

(e) Accounting for contingent consideration in business combination

Under U.S. GAAP, contingent consideration issued in a business combination that is classified as a liability is recognized at fair value at the acquisition date and subsequently remeasured to fair value, with changes in fair value recognized in earnings until the contingency is resolved.

 

– 23 –


Table of Contents

Under Japanese GAAP, contingent consideration is recognized as additional acquisition cost and goodwill is additionally recognized when it becomes most probable to deliver and its fair value becomes reasonably determinable.

(f) Accounting for pension plans

Under U.S. GAAP, the net actuarial gain (loss) is amortized using a corridor test.

Under Japanese GAAP, the net actuarial gain (loss) is fully amortized over a certain term within the average remaining service period of employees.

(g) Sale of the parent’s ownership interest in subsidiaries

Under U.S. GAAP, in a transaction that results in the loss of control, the gain or loss recognized in income includes the realized gain or loss related to the portion of ownership interest sold and the gain or loss on the remeasurement to fair value of the interest retained.

Under Japanese GAAP, in a transaction that results in the loss of control, only the realized gain or loss related to the portion of ownership interest sold is recognized in income and the gain or loss on the remeasurement to fair value of the interest retained is not recognized.

(h) Classification in consolidated statements of cash flows

Classification in the statements of cash flows under U.S. GAAP differs from Japanese GAAP. As significant differences, purchase of lease equipment and principal payments received under direct financing leases, proceeds from sales of operating lease assets, installment loans made to customers and principal collected on installment loans (excluding issues and collections of loans held for sale) are included in “Cash Flows from Investing Activities” under U.S. GAAP while they are classified as “Cash Flows from Operating Activities” under Japanese GAAP.

(i) Securitization of financial assets

Under U.S. GAAP, an enterprise is required to perform analysis to determine whether or not to consolidate special-purpose entities (“SPEs”) for securitization under the VIE’s consolidation rules. As a result of the analysis, if it is determined that the enterprise transferred financial assets in a securitization transaction to an SPE that needs to be consolidated, the transaction is not accounted for as a sale but accounted for as a secured borrowing.

Under Japanese GAAP, an SPE that meets certain conditions may be considered not to be a subsidiary of the transferor. Therefore, if an enterprise transfers financial assets to this type of SPE in a securitization transaction, the transferee SPE is not required to be consolidated, and the enterprise accounts for the transaction as a sale and recognizes a gain or loss on the sale into earnings when control over the transferred assets is surrendered.

(j) Fair value option

Under U.S. GAAP, an entity is permitted to carry certain eligible financial assets and liabilities at fair value and to recognize changes in that item’s fair value in earnings through the election of the fair value option.

Under Japanese GAAP, there is no accounting standard for fair value option.

 

– 24 –


Table of Contents
2.

Significant Accounting and Reporting Policies

(a) Principles of consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Investments in affiliates, where the Company has the ability to exercise significant influence by way of 20% – 50% ownership or other means, are accounted for by using the equity method. Where the Company holds majority voting interests but noncontrolling shareholders have substantive participating rights to decisions that occur as part of the ordinary course of their business, the equity method is applied. In addition, the consolidated financial statements also include variable interest entities to which the Company and its subsidiaries are primary beneficiaries.

A lag period of up to three months is used on a consistent basis for recognizing the results of certain subsidiaries and affiliates.

All significant intercompany accounts and transactions have been eliminated in consolidation.

(b) Use of estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company has identified ten areas where it believes assumptions and estimates are particularly critical to the financial statements. The Company makes estimates and assumptions to the selection of valuation techniques and determination of assumptions used in fair value measurements (see Note 3), the determination and periodic reassessment of the unguaranteed residual value for direct financing leases and operating leases (see (d)), the determination and reassessment of insurance policy liabilities and deferred policy acquisition costs (see (e)), the determination of the allowance for doubtful receivables on direct financing leases and probable loan losses (see (f)), the recognition and measurement of impairment of long-lived assets (see (g)), the recognition and measurement of impairment of investment in securities (see (h)), the determination of the valuation allowance for deferred tax assets and the evaluation of tax positions (see (i)), the assessment and measurement of effectiveness in hedging relationship using derivative financial instruments (see (k)), the determination of benefit obligation and net periodic pension cost (see (l)) and the recognition and measurement of impairment of goodwill and intangible assets that have indefinite useful lives (see (w)).

(c) Foreign currencies translation

The Company and its subsidiaries maintain their accounting records in their functional currency. Transactions in foreign currencies are recorded in the entity’s functional currency based on the prevailing exchange rates on the transaction date.

The financial statements of overseas subsidiaries and affiliates are translated into Japanese yen by applying the exchange rates in effect at the end of each fiscal period to all assets and liabilities. Income and expenses are translated at the average rates of exchange prevailing during the fiscal period. The currencies in which the operations of the overseas subsidiaries and affiliates are conducted are regarded as the functional currencies of these companies. Foreign currency translation adjustments reflected in accumulated other comprehensive income (loss) arise from the translation of foreign currency financial statements into Japanese yen.

(d) Recognition of revenues

Revenues are recognized when persuasive evidence of an arrangement exists, the service has been rendered or the goods have been delivered to the customer, the transaction price is fixed or determinable and collectability is reasonably assured.

In addition to the aforementioned general policy, the policies as specifically described hereinafter are applied for each of the major revenue items.

 

– 25 –


Table of Contents

Finance Revenues—Finance revenues mainly include revenues for direct financing leases and installment loans. The policies applied to direct financing leases and installment loans are described hereinafter.

(1) Revenues from direct financing leases

Direct financing leases consist of full-payout leases for various equipment types, including office equipment, industrial machinery and transportation equipment. In providing leasing services, the Company and its subsidiaries execute supplemental services, such as paying insurance and handling taxes on leased assets on behalf of lessees. The excess of aggregate lease rentals plus the estimated unguaranteed residual value over the cost of the leased equipment constitutes the unearned lease income to be taken into income over the lease term by using the interest method. The estimated residual values represent estimated proceeds from the disposition of equipment at the time the lease is terminated. Estimates of unguaranteed residual values are based on market values of used equipment, estimates of when and how much equipment will become obsolete, and actual recovery being experienced for similar used equipment. Initial direct costs are being deferred and amortized as a yield adjustment over the life of the related lease by using interest method. The unamortized balance of initial direct costs is reflected as a component of investment in direct financing leases.

(2) Revenues from installment loans

Interest income on installment loans is recognized on an accrual basis. Certain direct loan origination costs, net of origination fees, are being deferred and amortized over the contractual term of the loan as an adjustment of the related loan’s yield using the interest method.

Interest payments received on impaired loans other than purchased loans are recorded as interest income unless the collection of the remaining investment is doubtful at which time payments received are recorded as reductions of principal. For purchased loans, although the acquired assets may remain loans in legal form, collections on these loans often do not reflect the normal historical experience of collecting delinquent accounts, and the need to tailor individual collateral-realization strategies often makes it difficult to reliably estimate the amount, timing, or nature of collections. Accordingly, the Company and its subsidiaries use the cost recovery method of income recognition for such purchased loans regardless of whether impairment is recognized or not.

(3) Non-accrual policy

In common with all classes, past-due financing receivables are receivables for which principal or interest is past-due 30 days or more. Loans whose terms have been modified are not classified as past-due financing receivables if the principals and interests are not past-due 30 days or more in accordance with the modified terms. The Company and its subsidiaries suspend accruing revenues on past-due installment loans and direct financing leases when principal or interest is past-due 90 days or more, or earlier, if management determines that their collections are doubtful based on factors such as individual debtors’ creditworthiness, historical loss experience, current delinquencies and delinquency trends. Accrued but uncollected interest is reclassified to investment in direct financing leases or installment loans in the accompanying consolidated balance sheets and becomes subject to the allowance for doubtful receivables and probable loan loss process. Cash repayments received on non-accrual loans are applied first against past due interest and then any surpluses are applied to principal in view of the conditions of the contract and obligors. The Company and its subsidiaries return non-accrual loans and lease receivables to accrual status when it becomes probable that the Company and its subsidiaries will be able to collect all amounts due according to the contractual terms of these loans and receivables, as evidenced by continual payments from the debtors. The period of such continual payments before returning to accrual status varies depending on factors that we consider are relevant in assessing the debtor’s creditworthiness, such as the debtor’s business characteristics and financial conditions as well as relevant economic conditions and trends.

Gains on investment securities and dividendsGains on investment securities are recorded on a trade date basis. Dividends are recorded when right to receive dividends is established.

 

– 26 –


Table of Contents

Operating leasesRevenues from operating leases are recognized on a straight-line basis over the contract terms. Investment in operating leases is recorded at cost less accumulated depreciation, which was ¥542,868 million and ¥565,335 million as of March 31, 2016 and December 31, 2016, respectively. Operating lease assets are depreciated over their estimated useful lives mainly on a straight-line basis. Depreciation expenses are included in costs of operating leases. Gains or losses arising from dispositions of operating lease assets are included in operating lease revenues.

Estimates of residual values are based on market values of used equipment, estimates of when and the extent to which equipment will become obsolete and actual recovery being experienced for similar used equipment.

Sales of goods and real estate—

(1) Sales of goods

The Company and its subsidiaries sell to their customers various types of goods, including precious metals and jewels, and aftermarket parts and accessories for vehicles. Revenues from such sales of goods are recognized when persuasive evidence of an arrangement exists, delivery has occurred, and collectability is reasonably assured. Delivery is considered to have occurred when the customer has taken title to the goods and assumed the risks and rewards of ownership. Revenues are recognized net of estimated sales returns and incentives.

(2) Real estate sales

Revenues from the sales of real estate are recognized when a contract is in place, a closing has taken place, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property and the Company and its subsidiaries do not have a substantial continuing involvement in the property.

Services incomeRevenues are recognized when persuasive evidence of an arrangement exists, the service has been rendered to the customer, the transaction price is fixed or determinable and collectability is reasonably assured. The policies applied to asset management, servicing and automobile maintenance services are described hereinafter.

(1) Revenues from asset management and servicing

The Company and its subsidiaries provide to our customers investment management services for investments in financial assets, and asset management as well as maintenance and administrative services for investments in real estate properties. The Company and its subsidiaries also perform servicing on behalf of our customers. The Company and its subsidiaries receive fees for those services from our customers.

Revenues from asset management and servicing primarily include management fees, servicing fees, and performance fees. Management and servicing fees are recognized when transactions occur or services are rendered and the amounts are fixed or determinable and collectability of which is reasonably assured. Management fees are calculated based on the predetermined percentages of the market value of the assets under management or net assets of the investment funds in accordance with contracts. Certain subsidiaries recognize revenues from performance fees when earned based on the performance of the asset under management while other subsidiaries recognize revenues from performance fees on an accrual basis over the period in which services are performed. Performance fees are calculated based on the predetermined percentages on the performance of the assets under management in accordance with the contracts.

(2) Revenues from automobile maintenance services

The Company and its subsidiaries provide automobile maintenance services to lessees. Where under terms of the lease or related maintenance agreements the Company and its subsidiaries bear the favorable or unfavorable variability of cost, revenues and expenses are recorded on a gross basis. For those arrangements in which the Company and its subsidiaries do not have substantial risks and rewards of ownership, but instead serve as an agent in collecting from lessees and remitting payments to third parties, the Company and its subsidiaries record revenues net of third-party services costs. Revenues from automobile maintenance services are recognized over the contract period in proportion to the estimated service costs to be incurred.

 

– 27 –


Table of Contents

(e) Insurance and reinsurance transactions

Premium income from life insurance policies, net of premiums on reinsurance ceded, is recognized as earned premiums when due.

Life insurance benefits are recorded as expenses when they are incurred. Policy liabilities and policy account balances for future policy benefits are measured using the net level premium method, based on actuarial estimates of the amount of future policyholder benefits. The policies are characterized as long-duration policies and mainly consist of whole life, term life, endowments, medical insurance and individual annuity insurance contracts. For policies other than individual annuity insurance contracts, computation of policy liabilities necessarily includes assumptions about mortality, morbidity, lapse rates, future yields on related investments and other factors applicable at the time the policies are written. A certain subsidiary continually evaluates the potential for changes in the estimates and assumptions applied in determining policy liabilities, both positive and negative and uses the results of these evaluations both to adjust recorded liabilities and to adjust underwriting criteria and product offerings.

The insurance contracts sold by the subsidiary consist of variable annuity, variable life and fixed annuity insurance contracts. The subsidiary manages investment assets on behalf of variable annuity and variable life policyholders, which consist of equity securities and are included in investments in securities in the consolidated balance sheets. These investment assets are measured at fair value with realized and unrealized gains or losses recognized in life insurance premiums and related investment income in the consolidated statements of income. The subsidiary elected the fair value option for the entire variable annuity and variable life insurance contracts with changes in the fair value recognized in life insurance costs.

The subsidiary provides minimum guarantees to variable annuity and variable life policyholders under which it is exposed to the risk of compensating losses incurred by the policyholders to the extent contractually required. To mitigate the risk, a portion of the minimum guarantee risk related to variable annuity and variable life insurance contracts is ceded to reinsurance companies and the remaining risk is economically hedged by entering into derivative contracts (See Note 18 “Derivative financial instruments and hedging”). The reinsurance contracts do not relieve the subsidiary from the obligation as the primary obligor to compensate certain losses incurred by the policyholders, and the default of the reinsurance companies may impose additional losses on the subsidiary. Certain subsidiaries have elected the fair value option for certain reinsurance contracts relating to variable annuity and variable life insurance contracts, which is included in other assets in the consolidated balance sheets.

Policy liabilities and policy account balances for fixed annuity insurance contracts are measured based on the single-premiums plus interest based on expected rate and fair value adjustments relating to the acquisition of a subsidiary, less withdrawals, expenses and other charges. The credited interest is recorded in life insurance costs in the consolidated statements of income.

Certain costs related directly to the successful acquisition of new or renewal insurance contracts, or deferred policy acquisition costs, are deferred and amortized over the respective policy periods in proportion to anticipated premium revenue. These deferred policy acquisition costs consist primarily of first-year commissions, except for recurring policy maintenance costs and certain variable costs and expenses for underwriting policies.

(f) Allowance for doubtful receivables on direct financing leases and probable loan losses

The allowance for doubtful receivables on direct financing leases and probable loan losses is maintained at a level which, in the judgment of management, is appropriate to provide for probable losses inherent in lease and loan portfolios. The allowance is increased by provision charged to income and is decreased by charge-offs, net of recoveries.

 

– 28 –


Table of Contents

Developing the allowance for doubtful receivables on direct financing leases and probable loan losses is subject to numerous estimates and judgments. In evaluating the appropriateness of the allowance, management considers various factors, including the business characteristics and financial conditions of the obligors, current economic conditions and trends, prior charge-off experience, current delinquencies and delinquency trends, future cash flows expected to be received from the direct financing leases and loans and value of underlying collateral and guarantees. Impaired loans are individually evaluated for a valuation allowance based on the present value of expected future cash flows, the loan’s observable market price or the fair value of the collateral securing the loans if the loans are collateral-dependent. For non-impaired loans, including loans that are not individually evaluated for impairment, and direct financing leases, the Company and its subsidiaries evaluate prior charge-off experience segmented by the debtors’ industries and the purpose of the loans, and then develop the allowance for doubtful receivables on direct financing leases and probable loan losses considering the prior charge-off experience and current economic conditions.

The Company and its subsidiaries charge off doubtful receivables when the likelihood of any future collection is believed to be minimal considering debtors’ creditworthiness and the liquidation status of collateral.

(g) Impairment of long-lived assets

The Company and its subsidiaries perform a recoverability test for long-lived assets to be held and used in operations, including tangible assets and intangible assets being amortized, consisting primarily of office buildings, condominiums, golf courses and other properties under facility operations, whenever events or changes in circumstances indicated that the assets might be impaired. The assets are considered not recoverable when the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The carrying amount of assets not recoverable is reduced to fair value if lower than the carrying amount. The Company and its subsidiaries determine the fair value using appraisals prepared by independent third party appraisers or our own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flows methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate.

(h) Investment in securities

Trading securities are reported at fair value with unrealized gains and losses included in income.

Available-for-sale securities are reported at fair value, and unrealized gains or losses are recorded in accumulated other comprehensive income (loss), net of applicable income taxes, except investments which are recorded at fair value with unrealized gains and losses included in income by electing the fair value option.

Held-to-maturity securities are recorded at amortized cost.

Other securities are recorded at cost or carrying value that reflects equity income and loss based on the Company’s share, except investments which are recorded at fair value with unrealized gains and losses included in income by electing the fair value option.

For available-for-sale securities, the Company and its subsidiaries generally recognize losses related to equity securities for which the fair value has been significantly below the acquisition cost (or current carrying value if an adjustment has been made in the past) for more than six months. Also, the Company and its subsidiaries charge against income losses related to equity securities in situations where, even though the fair value has not remained significantly below the carrying value for six months, the decline in the fair value of an equity security is based on the issuer’s specific economic conditions and not just general declines in the related market and where it is considered unlikely that the fair value of the equity security will recover within six months.

 

– 29 –


Table of Contents

For debt securities, where the fair value is less than the amortized cost, the Company and its subsidiaries consider whether those securities are other-than-temporarily impaired using all available information about their collectability. The Company and its subsidiaries do not consider a debt security to be other-than-temporarily impaired if (1) the Company and its subsidiaries do not intend to sell the debt security, (2) it is not more likely than not that the Company and its subsidiaries will be required to sell the debt security before recovery of its amortized cost basis and (3) the present value of estimated cash flows will fully cover the amortized cost of the security. On the other hand, the Company and its subsidiaries consider a debt security to be other-than-temporarily impaired if any of the above mentioned three conditions are not met. When the Company and its subsidiaries deem a debt security to be other-than-temporarily impaired, the Company and its subsidiaries recognize the entire difference between the amortized cost and the fair value of the debt securities in earnings if the Company and its subsidiaries intend to sell the debt security or it is more likely than not that the Company and its subsidiaries will be required to sell the debt security before recovery of its amortized cost basis less any current-period credit loss. However, if the Company and its subsidiaries do not intend to sell the debt security and it is not more likely than not that the Company and its subsidiaries will be required to sell the debt security before recovery of its amortized cost basis less any current-period credit loss, the Company and its subsidiaries separate the difference between the amortized cost and the fair value of the debt securities into the credit loss component and the non-credit loss component. The credit loss component is recognized in earnings, and the non-credit loss component is recognized in other comprehensive income (loss), net of applicable income taxes.

For other securities, when the Company and its subsidiaries determine the decline in value is other than temporary, the Company and its subsidiaries reduce the carrying value of the security to the fair value and charge against income losses related to these other securities.

(i) Income taxes

The Company, in general, determines its provision for income taxes for quarterly periods by applying the current estimate of the effective tax rate for the full fiscal year to the actual year-to-date income before income taxes. The estimated effective tax rate is determined by dividing the estimated provision for income taxes for the full fiscal year by the estimated income before income taxes for the full fiscal year.

At the fiscal year end, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if, based on the weight of available evidence, it is “more likely than not” that some portion or all of the deferred tax asset will not be realized.

The effective income tax rates for the nine months ended December 31, 2015 and 2016 were 33.3% and 33.0%, respectively. These rates are 34.4% and 33.0% for the three months ended December 31, 2015 and 2016 respectively. For the nine months ended December 31, 2015, the Company and its subsidiaries in Japan were subject to a National Corporate tax of approximately 25%, an Inhabitant tax of approximately 4% and a deductible Enterprise tax of approximately 6%, which in the aggregate result in a statutory income tax rate of approximately 33.5%. For the nine months ended December 31, 2016, as a result of the tax reforms as discussed in the following paragraph, the Company and its subsidiaries in Japan were subject to a National Corporate tax of approximately 24%, an Inhabitant tax of approximately 4% and a deductible Enterprise tax of approximately 4%, which in the aggregate result in a statutory income tax rate of approximately 31.7%. The effective income tax rate is different from the statutory tax rate primarily because of certain nondeductible expenses for tax purposes, non-taxable income for tax purposes, changes in valuation allowance, the effect of lower income tax rates on foreign subsidiaries and a domestic life insurance subsidiary.

 

– 30 –


Table of Contents

On March 29, 2016, the 2016 tax reform bill was passed by the National Diet of Japan. From fiscal years beginning on April 1, 2016, the national corporate tax rate and local business tax rate were reduced and the local corporate tax rate was increased. The net effect of those changes was a reduction in the combined statutory income tax rate for the fiscal year beginning on April 1, 2016 from approximately 32.9% to approximately 31.7%, and a further reduction in the combined statutory income tax rate for fiscal year beginning on April 1, 2017 to approximately 31.5%. For the fiscal years beginning on or after April 1, 2018, the combined statutory income tax rate was further reduced to approximately 31.3%. In addition, tax loss carryforward rules were amended, and the deductible amount of tax losses carried forward for the fiscal year beginning on April 1, 2016 is reduced to 60% of taxable income for the year, compared to 65% pursuant to the 2015 tax reform. From the fiscal year beginning on April 1, 2017, the deductible limit of tax losses carried forward will be increased to 55% of taxable income for the year, while the tax loss carryforward period will be reduced from ten years to nine years. From the fiscal years beginning on or after April 1, 2018, the deductible limit of tax losses carried forward will remain at 50% of taxable income for the year and the tax loss carryforward period will remain at 10 years, consistent with the 2015 tax reform.

The Company and its subsidiaries file tax returns in Japan and certain foreign tax jurisdictions and recognize the financial statement effects of a tax position taken or expected to be taken in a tax return when it is more likely than not, based on the technical merits, that the position will be sustained upon tax examination, including resolution of any related appeals or litigation processes, and measure tax positions that meet the recognition threshold at the largest amount of tax benefit that is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company and its subsidiaries present an unrecognized tax benefit as either a reduction of a deferred tax asset, a reduction of an amount refundable or a liability, based on the intended method of settlement. The Company and its subsidiaries classify penalties and interest expense related to income taxes as part of provision for income taxes in the condensed consolidated statements of income.

The Company and certain subsidiaries have elected to file a consolidated tax return for National Corporation tax purposes.

(j) Securitized assets

The Company and its subsidiaries have securitized and sold to investors various financial assets such as lease receivables and loan receivables. In the securitization process, the assets to be securitized are sold to trusts or SPEs that issue asset-backed beneficial interests and securities to the investors.

Trusts or SPEs used in securitization transactions are consolidated if the Company and its subsidiaries are the primary beneficiary of the trusts or SPEs, and the transfers of the financial assets to those consolidated trusts and SPEs are not accounted for as sales. Assets held by consolidated trusts or consolidated SPEs continue to be accounted for as lease receivables or loan receivables, as they were before the transfer, and asset-backed beneficial interests and securities issued to the investors are accounted for as debt. When the Company and its subsidiaries have transferred financial assets to a transferee that is not subject to consolidation, the Company and its subsidiaries account for the transfer as a sale if control over the transferred assets is surrendered.

A certain subsidiary originates and sells loans into the secondary market, while retaining the obligation to service those loans. In addition, it undertakes obligations to service loans originated by others. The subsidiary recognizes servicing assets if it expects the benefit of servicing to more than adequately compensate it for performing the servicing or recognizes servicing liabilities if it expects the benefit of servicing to less than adequately compensate it. These servicing assets and liabilities are initially recognized at fair value and subsequently accounted for using the amortization method whereby the assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss. On a quarterly basis, servicing assets and liabilities are evaluated for impairment or increased obligations. The fair value of servicing assets and liabilities is estimated using an internal valuation model, or by obtaining an opinion of value from an independent third-party vendor. Both methods are based on calculating the present value of estimated future net servicing cash flows, taking into consideration discount rates, prepayments and servicing costs. The internal valuation model is validated at least semiannually through third-party valuations.

(k) Derivative financial instruments

The Company and its subsidiaries recognize all derivatives on the consolidated balance sheets at fair value. The accounting treatment of subsequent changes in the fair value depends on their use, and whether they qualify as effective “hedges” for accounting purposes. Derivatives for the purpose of economic hedge that are not qualified for hedge accounting are adjusted to fair value through the consolidated statements of income. If a derivative is a hedge, then depending on its nature, changes in its fair value will be either offset against change in the fair value of hedged assets or liabilities through the consolidated statements of income, or recorded in other comprehensive income (loss).

 

– 31 –


Table of Contents

If a derivative is held as a hedge of the variability of fair value related to a recognized asset or liability or an unrecognized firm commitment (“fair value” hedge), changes in the fair value of the derivative are recorded in earnings along with the changes in the fair value of the hedged item.

If a derivative is held as a hedge of the variability of cash flows related to a forecasted transaction or a recognized asset or liability (“cash flow” hedge), changes in the fair value of the derivative are recorded in other comprehensive income (loss) to the extent that the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designated hedged item.

If a derivative is held as a hedge of a foreign-currency fair-value or cash-flow hedge (“foreign currency” hedge), changes in the fair value of the derivative are recorded in either earnings or other comprehensive income (loss), depending on whether the hedged transaction is a fair-value hedge or a cash-flow hedge. However, if a derivative is used as a hedge of a net investment in a foreign operation, changes in its fair value, to the extent effective as a hedge, are recorded in the foreign currency translation adjustments account within other comprehensive income (loss).

The ineffective portion of changes in fair value of derivatives that qualify as a hedge are recorded in earnings.

For all hedging relationships that are designated and qualify as hedging, at inception the Company and its subsidiaries formally document the details of the hedging relationship and the hedged activity. The Company and its subsidiaries also formally assess, both at the hedge’s inception and on an ongoing basis, the effectiveness of the hedge relationship. The Company and its subsidiaries cease hedge accounting prospectively when the derivative no longer qualifies for hedge accounting.

(l) Pension plans

The Company and certain subsidiaries have contributory and non-contributory pension plans covering substantially all of their employees. The costs of pension plans are accrued based on amounts determined using actuarial methods, with assumptions of discount rate, rate of increase in compensation level, expected long-term rate of return on plan assets and others.

The Company and its subsidiaries also recognize the funded status of pension plans, measured as the difference between the fair value of plan assets and the benefit obligation, on the consolidated balance sheets. Changes in that funded status are recognized in the year in which the changes occur through other comprehensive income (loss), net of applicable income taxes.

(m) Stock-based compensation

The Company and its subsidiaries measure, with limited exception, the cost of employee services received in exchange for an award of equity instruments at the grant-date fair value. The costs are recognized over the requisite employee service period.

(n) Stock splits

Stock splits implemented prior to October 1, 2001 had been accounted for by transferring an amount equivalent to the par value of the shares from additional paid-in capital to common stock as required by the Japanese Commercial Code (the “Code”) before amendment. However, no such reclassification was made for stock splits when common stock already included a portion of the proceeds from shares issued at a price in excess of par value. This method of accounting was in conformity with accounting principles generally accepted in Japan.

As a result of a revision to the Code before amendment effective on October 1, 2001 and the Companies Act implemented on May 1, 2006, the above-mentioned method of accounting required by the Code became unnecessary.

In the United States, stock splits in comparable circumstances are considered to be stock dividends and are accounted for by transferring from retained earnings to common stock and additional paid-in capital amounts equal to the fair market value of the shares issued. Common stock is increased by the par value of the shares and additional paid-in capital is increased by the excess of the market value over par value of the shares issued. Had such stock splits made prior to October 1, 2001 been accounted for in this manner, additional paid-in capital as of December 31, 2016 would have increased by approximately ¥24,674 million, with a corresponding decrease in retained earnings. Total ORIX Corporation shareholders’ equity would remain unchanged. Stock splits on May 19, 2000 were excluded from the above amounts because the stock splits were not considered to be stock dividends under U.S. GAAP.

 

– 32 –


Table of Contents

(o) Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits placed with banks and short-term highly liquid investments with original maturities of three months or less.

(p) Restricted cash

Restricted cash consists of trust accounts under securitization programs and real estate, deposits related to servicing agreements, deposits collected on the underlying assets and applied to non-recourse loans and others.

(q) Installment loans

Certain loans, for which the Company and its subsidiaries have the intent and ability to sell to outside parties in the foreseeable future, are considered held for sale and are carried at the lower of cost or fair value determined on an individual basis, except loans held for sale for which the fair value option under ASC 825 (“Financial Instruments”) was elected. A subsidiary elected the fair value option under ASC 825 on its loans held for sale originated on or after October 1, 2011. The subsidiary enters into forward sale agreements to offset the change in the fair value of loans held for sale, and the election of the fair value option allows the subsidiary to recognize both the change in the fair value of the loans and the change in the fair value of the forward sale agreements due to changes in interest rates in the same accounting period.

Loans held for sale are included in installment loans, and the outstanding balances of these loans as of March 31, 2016 and December 31, 2016 were ¥21,867 million and ¥15,476 million, respectively. There were ¥20,673 million and ¥14,735 million of loans held for sale as of March 31, 2016 and December 31, 2016, respectively, measured at fair value by electing the fair value option.

(r) Property under facility operations

Property under facility operations consist primarily of operating facilities (including golf courses, hotels and training facilities and senior housings) and environmental assets (including mega solar), which are stated at cost less accumulated depreciation, and depreciation is calculated mainly on a straight-line basis over the estimated useful lives of the assets. Accumulated depreciation was ¥67,055 million and ¥79,341 million as of March 31, 2016 and December 31, 2016, respectively.

(s) Trade notes, accounts and other receivable

Trade notes, accounts and other receivable primarily include accounts receivables in relation to sales of assets to be leased, inventories and other assets and payment made on behalf of lessees for property tax, maintenance fees and insurance premiums in relation to direct financing lease contracts.

(t) Inventories

Inventories consist primarily of residential condominiums under development, completed residential condominiums (including those waiting to be delivered to buyers under the contract for sale), and merchandise for sale. Residential condominiums under development are carried at cost less any impairment losses, and completed residential condominiums and merchandises for sale are stated at the lower of cost or fair value less cost to sell. The cost of inventories that are unique and not interchangeable is determined on the specific identification method and the cost of other inventories is principally determined on the first-in first-out (FIFO) method. As of March 31, 2016 and December 31, 2016, residential condominiums under development were ¥81,859 million and ¥93,535 million, respectively, and completed residential condominiums and merchandises for sale were ¥58,091 million and ¥49,121 million, respectively.

The Company and its subsidiaries recorded ¥34 million and ¥654 million of write-downs principally on residential condominiums and merchandise for sale for the nine months ended December 31, 2015 and 2016, respectively, primarily resulting from a decrease in expected sales price. The amounts of such write-downs for the three months ended December 31, 2015 and 2016 were ¥5 million and ¥18 million respectively. These write-downs were principally recorded in costs of goods and real estate sold and included in the Corporate Financial Services segment and the Investment and Operation segment.

(u) Office facilities

Office facilities are stated at cost less accumulated depreciation. Depreciation is calculated on a declining-balance basis or straight-line basis over the estimated useful lives of the assets. Accumulated depreciation was ¥45,310 million and ¥47,549 million as of March 31, 2016 and December 31, 2016, respectively.

 

– 33 –


Table of Contents

(v) Other assets

Other assets consist primarily of the excess of purchase prices over the net assets acquired in acquisitions (goodwill) and other intangible assets (see (w)), reinsurance recoverables in relation to reinsurance contracts (see (e)), deferred insurance policy acquisition costs which are amortized over the contract periods (see (e)), leasehold deposits, advance payments made in relation to purchases of assets to be leased and construction of real estate for operating lease, prepaid benefit cost, derivative assets and deferred tax assets.

(w) Goodwill and other intangible assets

The Company and its subsidiaries account for all business combinations using the acquisition method. The Company and its subsidiaries recognize intangible assets acquired in a business combination apart from goodwill if the intangible assets meet one of two criteria—either the contractual-legal criterion or the separability criterion. Goodwill is measured as an excess of the aggregate of consideration transferred and the fair value of noncontrolling interests over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed in the business combination measured at fair value. The Company and its subsidiaries would recognize a bargain purchase gain when the amount of recognized net assets exceeds the sum of consideration transferred and the fair value of noncontrolling interests. In a business combination achieved in stages, the Company and its subsidiaries remeasure their previously held equity interest at their acquisition-date fair value and recognize the resulting gain or loss, if any, in earnings.

The Company and its subsidiaries perform an impairment test for goodwill and any intangible assets that have indefinite useful lives at least annually. Additionally, if events or changes in circumstances indicate that the asset might be impaired, the Company and its subsidiaries test for impairment when such events or changes occur.

The Company and its subsidiaries have the option to perform a qualitative assessment to determine whether to calculate the fair value of a reporting unit under the first step of the two-step goodwill impairment test. The Company and its subsidiaries perform the qualitative assessment for some goodwill but bypass the qualitative assessment and proceed directly to the first step of the two-step impairment test for other goodwill. For the goodwill for which the qualitative assessment is performed, if, after assessing the totality of events or circumstances, the Company and/or subsidiaries determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company and/or subsidiaries do not perform the two-step impairment test. However, if the Company and/or subsidiaries conclude otherwise or determine to bypass the qualitative assessment, the Company and/or subsidiaries proceed to perform the first step of the two-step impairment test. The first step of goodwill impairment test, used to identify potential impairment, calculates the fair value of the reporting unit and compares the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit falls below its carrying amount, the second step of the goodwill impairment test is performed to measure the amount of impairment loss. The second step of the goodwill impairment test compares implied fair value of goodwill with its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess. The Company and its subsidiaries test the goodwill either at the operating segment level or one level below the operating segments.

The Company and its subsidiaries have the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The Company and its subsidiaries perform the qualitative assessment for some indefinite-lived intangible assets but bypass the qualitative assessment and perform the quantitative assessment for other indefinite-lived intangible assets. For those indefinite-lived assets for which the qualitative assessment is performed, if, after assessing the totality of events and circumstances, the Company and/or subsidiaries conclude that it is not more likely than not that the indefinite-lived asset is impaired, then the Company and/or subsidiaries do not perform the quantitative impairment test. However, if the Company and/or subsidiaries conclude otherwise or determine to bypass the qualitative assessment, the Company and/or subsidiaries calculate the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Intangible assets with finite lives are amortized over their useful lives and tested for impairment. The Company and its subsidiaries perform a recoverability test for the intangible assets whenever events or changes in circumstances indicate that the assets might be impaired. The intangible assets are considered not recoverable when the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those assets, and the net carrying amount of assets not recoverable is reduced to fair value if lower than the carrying amount.

 

– 34 –


Table of Contents

The amount of goodwill was ¥332,153 million and ¥334,922 million as of March 31, 2016 and December 31, 2016, respectively.

The amount of other intangible assets was ¥386,334 million and ¥369,665 million as of March 31, 2016 and December 31, 2016, respectively.

(x) Trade notes, accounts and other payable

Trade notes, accounts and other payable include primarily accounts payable in relation to purchase of assets to be leased, merchandise for sale and other assets, accounts payable in relation to construction work of residential condominiums and deposits received mainly for withholding income tax.

(y) Other Liabilities

Other liabilities include primarily interest, bonus accrued expense and accrued benefit liability, advances received from lessees in relation to lease contracts, deposit received from real estate transaction and derivative liabilities.

(z) Capitalization of interest costs

The Company and its subsidiaries capitalized interest costs related to specific long-term development projects.

(aa) Advertising

The costs of advertising are expensed as incurred.

(ab) Earnings per share

Basic earnings per share is computed by dividing net income attributable to ORIX Corporation shareholders by the weighted average number of shares of outstanding common stock in each period and diluted earnings per share, which reflects the potential dilution that could occur if securities or other contracts issuing common stock were exercised or converted into common stock.

(ac) Additional acquisition and partial sale of the parent’s ownership interest in subsidiaries

Additional acquisition of the parent’s ownership interest in subsidiaries and partial sale of such interest where the parent continues to retain control of that subsidiary are accounted for as equity transactions. On the other hand, in a transaction that results in the loss of control, the gain or loss recognized in income includes the realized gain or loss related to the portion of ownership interest sold and the gain or loss on the remeasurement to fair value of the interest retained.

(ad) Redeemable noncontrolling interests

Noncontrolling interests in a certain subsidiary are redeemable preferred shares which are subject to call and put rights upon certain shareholder events. As redemption of the noncontrolling interest is not solely in the control of the subsidiary, it is recorded between liabilities and equity on the consolidated balance sheets at its estimated redemption value.

(ae) Issuance of stock by an affiliate

When an affiliate issues stocks to unrelated third parties, the Company and its subsidiaries’ ownership interest in the affiliate decreases. In the event that the price per share is more or less than the Company and its subsidiaries’ average carrying amount per share, the Company and its subsidiaries adjust the carrying amount of its investment in the affiliate and recognize gain or loss in the consolidated statements of income in the year in which the change in ownership interest occurs.

(af) New accounting pronouncements

In May 2014, Accounting Standards Update 2014-09 (“Revenue from Contracts with Customers”—ASC 606 (“Revenue from Contracts with Customers”)) was issued. The core principle of this Update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply a five-step model to determine when to recognize revenue, and in what amount. The five steps to apply the model are:

 

   

Identify the contract(s) with a customer

 

   

Identify the performance obligations in the contract

 

   

Determine the transaction price

 

   

Allocate the transaction price to the performance obligations in the contract

 

   

Recognize revenue when (or as) the entity satisfies a performance obligation

 

– 35 –


Table of Contents

This Update requires an entity to disclose more information about contracts with customers than under the current disclosure requirements.

In April 2016, Accounting Standards Update 2016-10 (“Identifying Performance Obligations and Licensing”—ASC 606 (“Revenue from Contracts with Customers”)) was issued as an amendment of the new revenue standard. This Update adds further guidance on identifying performance obligations and also improves the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in ASC 606.

In May 2016, Accounting Standards Update 2016-12 (“Narrow-Scope Improvements and Practical Expedients”—ASC 606 (“Revenue from Contracts with Customers”)) was issued as an amendment of the new revenue standard. This Update (1) clarifies the objective of the collectibility criterion for applying paragraph 606-10-25-7; (2) permits an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specifies that the measurement date for non-cash consideration is contract inception; (4) provides a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarifies that an entity that retrospectively applies ASC 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption.

These Updates are effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted only for the fiscal year beginning after December 15, 2016, and interim periods within the fiscal year. An entity should apply the amendments in these Updates using either a retrospective method or a cumulative-effect method. The entity may elect some optional practical expedients when applying these Updates. The entity using the cumulative-effect method would recognize the cumulative effect of initially applying these Updates as an adjustment to the opening balance of retained earnings or net assets at the date of initial application. The Company and its subsidiaries are currently evaluating the effect that the adoption of these Updates will have on the Company and its subsidiaries’ results of operations or financial position.

In June 2014, Accounting Standards Update 2014-12 (“Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”—ASC 718 (“Compensation—Stock Compensation”)) was issued. This Update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The Company and its subsidiaries adopted this Update on April 1, 2016. The adoption had no effect on the Company and its subsidiaries’ results of operations or financial position.

In August 2014, Accounting Standards Update 2014-13 (“Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity”—ASC 810 (“Consolidation”)) was issued. This Update permits the parent of the consolidated collateralized financing entity (“CFE”) within the scope of this Update to measure the CFE’s financial assets and liabilities based on either the fair value of the financial assets or financial liabilities, whichever has the more observable inputs. The Company and its subsidiaries adopted this Update on April 1, 2016. The adoption had no effect on the Company and its subsidiaries’ results of operations or financial position.

 

– 36 –


Table of Contents

In August 2014, Accounting Standards Update 2014-15 (“Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”—ASC 205-40 (“Presentation of Financial Statements—Going Concern”)) was issued. This Update requires an entity to perform a going concern assessment by evaluating their ability to meet obligations for a look-forward period of one year from the financial statement issuance date (or date the financial statements are available to be issued). Disclosures are required if it is probable an entity will be unable to meet its obligations within the look-forward period. Incremental substantial doubt disclosure is required if the probability is not mitigated by management’s plans. This Update is effective for the first fiscal year ending after December 15, 2016 and fiscal years and interim periods thereafter. Early adoption is permitted. The Update only relates to certain disclosure requirements and the adoption will have no effect on the Company and its subsidiaries’ results of operations or financial position.

In November 2014, Accounting Standards Update 2014-16 (“Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity”—ASC 815 (“Derivatives and Hedging”)) was issued. This Update requires an issuer or an investor of hybrid financial instruments issued in the form of a share to determine whether the nature of the host contract is more akin to debt or to equity by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The Company and its subsidiaries adopted this Update on April 1, 2016. The adoption had no effect on the Company and its subsidiaries’ results of operations or financial position.

In January 2015, Accounting Standards Update 2015-01 (“Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”—ASC 225-20 (“Income Statement—Extraordinary and Unusual Items”)) was issued. This Update eliminates the concept of extraordinary items from U.S. GAAP, but does not change the current presentation and disclosure requirements for material events or transactions that are unusual in nature or infrequent in occurrence. The Company and its subsidiaries adopted this Update on April 1, 2016. The adoption had no effect on the Company and its subsidiaries’ results of operations or financial position.

In February 2015, Accounting Standards Update 2015-02 (“Amendments to the Consolidation Analysis”—ASC 810 (“Consolidation”)) was issued. This Update requires an entity to change the way to evaluate whether reporting entities should consolidate limited partnerships and similar legal entities, fees paid to a decision maker or service provider are variable interest in a VIE, and variable interests in a VIE held by related parties of the reporting entity require the reporting entity to consolidate the VIE. Additionally, the amendments in this Update rescind the indefinite deferral of FASB Statement No.167 (“Amendments to FASB Interpretation No.46(R)”), included in Accounting Standards Update 2010-10 (ASC 810 (“Consolidation”)) for certain investment companies and similar entities. The Company and its subsidiaries adopted this Update on April 1, 2016. The adoption had no effect on the Company and its subsidiaries’ results of operations or financial position. See Note 8 “Variable Interest Entities” where the required disclosure has been provided.

In April 2015, Accounting Standards Update 2015-03 (“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) was issued. This Update requires that debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, similar to the presentation of debt discounts or premiums. The Company and its subsidiaries adopted this Update retrospectively to prior period financial statements on April 1, 2016. The effect of the retrospective adoption on the financial position as of March 31, 2016 was a decrease of approximately ¥3,988 million in other assets and a decrease of approximately ¥3,988 million in long-term debt in the condensed consolidated balance sheets.

In July 2015, Accounting Standards Update 2015-11 (“Simplifying the Measurement of Inventory”—ASC 330 (“Inventory”)) was issued. This Update applies to all inventory except for which is measured using last-in, first-out (LIFO) or the retail inventory method, and requires an entity to measure inventory at the lower of cost and net realizable value. Additionally, this Update defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2016. The amendments in this Update should be applied on a prospective basis. Early adoption is permitted. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

 

– 37 –


Table of Contents

In September 2015, Accounting Standards Update 2015-16 (“Simplifying the Accounting for Measurement-Period Adjustments”—ASC 805 (“Business Combinations”)) was issued. This Update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The Company and its subsidiaries adopted this Update on April 1, 2016. The adoption had no effect on the Company and its subsidiaries’ results of operations or financial position.

In January 2016, Accounting Standards Update 2016-01 (“Recognition and Measurement of Financial Assets and Financial Liabilities”—ASC 825-10 (“Financial Instruments—Overall”)) was issued. This Update revises accounting related to the classification and measurement of equity investments. This Update also revises the presentation of certain fair value changes for financial liabilities measured at fair value. Additionally, this Update amends certain disclosure requirements associated with the fair value of financial instruments. This Update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early application to financial statements of fiscal years or interim periods that have not yet been issued is permitted as of the beginning of the fiscal year of adoption. The amendments in this Update should be applied by means of cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company and its subsidiaries are currently evaluating the effect that adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

In February 2016, Accounting Standards Update 2016-02 (ASC 842 (“Leases”)) was issued. This Update requires a lessee to recognize most leases on-balance sheet. Lessor accounting remains substantially similar to current U.S. GAAP but with some important changes. This Update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted. The amendments in this Update should be applied at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. The Company and its subsidiaries are currently evaluating the effect that adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

In March 2016, Accounting Standards Update 2016-07 (“Simplifying the Transition to the Equity Method Accounting”—ASC 323 (“Investments—Equity Method and Joint Ventures”)) was issued. This Update eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. This Update also requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and requires that an entity that has an available-for sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. This Update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments in this Update should be applied prospectively. Early application is permitted. Generally, the effect of adopting this Update on the Company and its subsidiaries’ results of operations or financial position will depend on future transactions.

In June 2016, Accounting Standards Update 2016-13 (“Measurement of Credit Losses on Financial Instruments”—ASC 326 (“Financial Instruments—Credit Losses”)) was issued. This Update significantly changes how companies measure and recognize credit impairment for many financial assets. The new current expected credit loss model requires companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are within the scope of this Update. This Update also makes targeted amendments to the current impairment model for available-for-sale debt securities. This Update is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this Update should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Early application is permitted for fiscal year beginning after December 15, 2018, including interim periods within the fiscal year. The Company and its subsidiaries are currently evaluating the effect that adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

 

– 38 –


Table of Contents

In August 2016, Accounting Standards Update 2016-15 (“Classification of Certain Cash Receipts and Cash Payments”—ASC 230 (“Statement of Cash Flows”) was issued. This Update amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. This Update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. This Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ Statement of Cash Flows.

In October 2016, Accounting Standards Update 2016-16 (“Intra-Entity Transfers of Assets Other Than Inventory”—ASC 740 (“Income Taxes”) was issued. This Update eliminates the exception to defer the income tax consequences of intra-entity transfers of assets other than inventory until the assets are ultimately sold to an outside party and requires the recognition of the current and deferred tax consequences when those transfers occur. This Update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. This Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

In October 2016, Accounting Standards Update 2016-17 (“Interests Held through Related Parties That Are under Common Control”—ASC 810 (“Consolidation”) was issued. This Update amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. This Update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company and its subsidiaries have already adopted the amendments in Accounting Standards Update 2015-02 and accordingly would be required to apply the amendments in this Update retrospectively to all relevant prior periods beginning with the fiscal year in which the amendments in that Update 2015-02 initially were applied. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

In November 2016, Accounting Standards Update 2016-18 (“Restricted Cash”—ASC230 (“Statement of Cash Flows”)) was issued. This Update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This Update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ Statement of Cash Flows.

In January 2017, Accounting Standards Update 2017-04 (“Simplifying the Test for Goodwill Impairment”—ASC350 (“Intangible—Goodwill and Other”)) was issued. This Update eliminated Step 2 from the current goodwill impairment test. Instead, goodwill impairments would be measured by the amount by which the carrying amount exceeds the reporting unit’s fair value. This Update also eliminated the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it is more likely than not that the goodwill is impaired, to perform Step 2 of the goodwill impairment test. This Update is effective for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Generally, the effect of adopting this update on the Company and its subsidiaries’ results of operation or financial position will depend on future conditions.

 

– 39 –


Table of Contents
3.

Fair Value Measurements

ASC 820 (“Fair Value Measurement”) defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

This Codification Section classifies and prioritizes inputs used in valuation techniques to measure fair value into the following three levels:

 

Level 1:

  Inputs of quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2:

  Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.

Level 3:

  Unobservable inputs for the assets or liabilities.

This Codification Section differentiates between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). The Company and its subsidiaries mainly measure certain loans held for sale, trading securities, available-for-sale securities, certain investment funds, derivatives, certain reinsurance recoverables, certain contingent consideration, and variable annuity and variable life insurance contracts at fair value on a recurring basis.

 

– 40 –


Table of Contents

The following table presents recorded amounts of major financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2016:

March 31, 2016

 

     Millions of yen  
     Total
Carrying
Value in
Consolidated
Balance Sheets
    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

          

Loans held for sale*1

   ¥ 20,673     ¥ 0      ¥ 20,673      ¥ 0  

Trading securities

     725,821       37,592        688,229        0  

Available-for-sale securities

     1,347,890       99,347        1,149,021        99,522  

Japanese and foreign government bond securities

     497,355       988        496,367        0  

Japanese prefectural and foreign municipal bond securities*2

     169,534       0        169,534        0  

Corporate debt securities

     410,779       0        410,774        5  

Specified bonds issued by SPEs in Japan

     3,461       0        0        3,461  

CMBS and RMBS in the Americas

     97,186       0        58,693        38,493  

Other asset- backed securities and debt securities

     58,230       0        667        57,563  

Equity securities*4

     111,345       98,359        12,986        0  

Other securities

     17,751       0        0        17,751  

Investment funds*5

     17,751       0        0        17,751  

Derivative assets

     33,747       48        25,491        8,208  

Interest rate swap agreements

     93       0        93        0  

Options held/written and other

     8,789       0        581        8,208  

Futures, foreign exchange contracts

     18,294       48        18,246        0  

Foreign currency swap agreements

     6,571       0        6,571        0  

Netting*6

     (5,757     0        0        0  

Net derivative assets

     27,990       0        0        0  

Other assets

     37,855       0        0        37,855  

Reinsurance recoverables*7

     37,855       0        0        37,855  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 2,183,737     ¥ 136,987      ¥ 1,883,414      ¥ 163,336  
  

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities:

          

Derivative liabilities

   ¥ 19,870     ¥ 533      ¥ 19,337      ¥ 0  

Interest rate swap agreements

     5,921       0        5,921        0  

Options held/written and other

     3,637       0        3,637        0  

Futures, foreign exchange contracts

     6,655       533        6,122        0  

Foreign currency swap agreements

     3,601       0        3,601        0  

Credit derivatives held

     56       0        56        0  

Netting*6

     (5,757     0        0        0  

Net derivative Liabilities

     14,113       0        0        0  

Policy Liabilities and Policy Account Balances

     795,001       0        0        795,001  

Variable annuity and variable life insurance contracts*8

     795,001       0        0        795,001  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 814,871     ¥ 533      ¥ 19,337      ¥ 795,001  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

– 41 –


Table of Contents

December 31, 2016

 

     Millions of yen  
     Total
Carrying
Value in
Consolidated
Balance Sheets
    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

          

Loans held for sale*1

   ¥ 14,735     ¥ 0      ¥ 14,735      ¥ 0  

Trading securities

     648,322       39,030        606,134        3,158  

Available-for-sale securities

     1,172,098       78,172        964,582        129,344  

Japanese and foreign government bond securities

     335,767       2,788        332,979        0  

Japanese prefectural and foreign municipal bond securities*2

     175,618       0        175,618        0  

Corporate debt securities*3

     409,659       838        407,368        1,453  

Specified bonds issued by SPEs in Japan

     1,162       0        0        1,162  

CMBS and RMBS in the Americas

     97,453       0        34,712        62,741  

Other asset- backed securities and debt securities

     76,639       0        12,651        63,988  

Equity securities*4

     75,800       74,546        1,254        0  

Other securities

     19,520       0        0        19,520  

Investment funds*5

     19,520       0        0        19,520  

Derivative assets

     16,705       176        11,901        4,628  

Interest rate swap agreements

     287       0        287        0  

Options held/written and other

     7,094       0        2,466        4,628  

Futures, foreign exchange contracts

     1,994       176        1,818        0  

Foreign currency swap agreements

     7,330       0        7,330        0  

Netting*6

     (1,306     0        0        0  

Net derivative assets

     15,399       0        0        0  

Other assets

     26,156       0        0        26,156  

Reinsurance recoverables*7

     26,156       0        0        26,156  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,897,536     ¥ 117,378      ¥ 1,597,352      ¥ 182,806  
  

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities:

          

Derivative liabilities

   ¥ 80,306     ¥ 1,303      ¥ 79,003      ¥ 0  

Interest rate swap agreements

     4,999       0        4,999        0  

Options held/written and other

     2,332       0        2,332        0  

Futures, foreign exchange contracts

     72,466       1,303        71,163        0  

Foreign currency swap agreements

     393       0        393        0  

Credit derivatives held

     116       0        116        0  

Netting*6

     (1,306     0        0        0  

Net derivative Liabilities

     79,000       0        0        0  

Policy Liabilities and Policy Account Balances

     675,938       0        0        675,938  

Variable annuity and variable life insurance contracts*8

     675,938       0        0        675,938  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 756,244     ¥ 1,303      ¥ 79,003      ¥ 675,938  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

*1

A certain subsidiary elected the fair value option on the loans held for sale originated on or after October 1, 2011. These loans are multi-family and seniors housing loans and are sold to Federal National Mortgage Association (“Fannie Mae”) or institutional investors. Included in “Other (income) and expense, net” in the consolidated statements of income were losses of ¥667 million and ¥633 million from the change in the fair value of the loans for the nine months ended December 31, 2015 and 2016, respectively. Included in “Other (income) and expense, net” in the consolidated statements of income were losses of ¥691 million and ¥1,314 million from the change in the fair value of the loans for the three months ended December 31, 2015 and 2016, respectively. No gains or losses were recognized in earnings during the nine months ended December 31, 2015 and 2016 attributable to changes in instrument-specific credit risk. The amounts of aggregate unpaid principal balance and aggregate fair value of the loans held for sale as of March 31, 2016, were ¥19,848 million and ¥20,673 million, respectively, and the amount of aggregate fair value exceeded the amount of aggregate unpaid principal balance by ¥825 million. The amounts of aggregate unpaid principal balance and aggregate fair value of the loans held for sale as of December 31, 2016, were ¥14,512 million and ¥14,735 million, respectively, and the amount of aggregate fair value exceeds the amount of aggregate unpaid principal balance by ¥223 million. As of March 31, 2016 and December 31, 2016, there were no loans that are 90 days or more past due, in non-accrual status, or both.

 

– 42 –


Table of Contents
*2

A certain subsidiary elected the fair value option for investments in foreign government bond securities included in available-for-sale securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were losses of ¥6 million and ¥21 million from the change in the fair value of those investments for the nine months ended December 31, 2015 and 2016, respectively. Included in “Gains on investment securities and dividends” in the consolidated statements of income was a loss of ¥8 million from the change in the fair value of those investments for the three months ended December 31, 2016. The amounts of aggregate fair value elected the fair value option were ¥988 million and ¥990 million as of March 31, 2016 and December 31, 2016.

*3

A certain subsidiary elected the fair value option for investments in foreign corporate debt securities included in available-for-sale securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income was a loss of ¥6 million from the change in the fair value of those investments for the nine and three months ended December 31, 2016. The amounts of aggregate fair value elected the fair value option was ¥838 million as of December 31, 2016.

*4

A certain subsidiary elected the fair value option for investments in equity securities included in available-for-sale securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a loss of ¥161 million and a gain of ¥352 million from the change in the fair value of those investments for the nine months ended December 31, 2015 and 2016, respectively. Included in “Gains on investment securities and dividends” in the consolidated statements of income were gains of ¥155 million and ¥7 million from the change in the fair value of those investments for the three months ended December 31, 2015 and 2016, respectively. The amounts of aggregate fair value elected the fair value option were ¥16,227 million and ¥16,215 million as of March 31, 2016 and December 31, 2016, respectively.

*5

Certain subsidiaries elected the fair value option for investments in some funds. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a loss of ¥90 million and a gain of ¥951 million from the change in the fair value of those investments for the nine months ended December 31, 2015 and 2016, respectively. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a loss of ¥74 million and a gain of ¥336 million from the change in the fair value of those investments for the three months ended December 31, 2015 and 2016, respectively. The amounts of aggregate fair value were ¥10,152 million and ¥7,876 million as of March 31, 2016 and December 31, 2016, respectively.

*6

It represents the amount offset under counterparty netting of derivative assets and liabilities.

*7

Certain subsidiaries elected the fair value option for certain reinsurance contracts held. The fair value of the reinsurance contracts elected for the fair value option in other assets were ¥37,855 million and ¥26,156 million as of March 31, 2016 and December 31, 2016, respectively. For the effect of changes in the fair value of those reinsurance recoverables on earnings during the nine and three months ended December 31, 2015 and 2016, see Note 15 “Life Insurance Operations.”

*8

A certain subsidiary elected the fair value option for the entire variable annuity and variable life insurance contracts held in order to match the earnings recognized for the changes in fair value of policy liabilities and policy account balances with earnings recognized for gains or losses from the investment assets managed on behalf of variable annuity and variable life policyholders, derivative contracts and the changes in fair value of reinsurance contracts. The fair value of the variable annuity and variable life insurance contracts elected for the fair value option in policy liabilities and policy account balances were ¥795,001 million and ¥675,938 million as of March 31, 2016 and December 31, 2016, respectively. For the effect of changes in the fair value of the variable annuity and variable life insurance contracts on earnings during the nine and three months ended December 31, 2015 and 2016, see Note 15 “Life Insurance Operations.”

 

– 43 –


Table of Contents

Changes in economic conditions or valuation methodologies may require the transfer of assets and liabilities from one fair value level to another. In such instances, the Company and its subsidiaries recognize the transfer at the beginning of the quarter during which the transfers occur. The Company and its subsidiaries evaluate the significance of transfers between levels based upon size of the transfer relative to total assets, total liabilities or total earnings. For the nine months ended December 31, 2015 and 2016, there were no transfers between Level 1 and Level 2.

The following table presents the reconciliation for financial assets and liabilities (net) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended December 31, 2015 and 2016:

Nine months ended December 31, 2015

 

    Millions of yen  
  Balance at
April  1,
2015
    Gains or  losses
(realized/unrealized)
    Purchases *3     Sales     Settlements *4     Transfers
in  and/
or out of
Level  3
(net) *5
    Balance  at
December 31,
2015
    Change  in
unrealized
gains or  losses
included in
earnings  for
assets and
liabilities
still held at

December 31,
2015 *1
 
    Included in
earnings  *1
    Included in
other
comprehensive
income *2
    Total              

Available-for-sale securities

  ¥      97,051     ¥         816     ¥   (3,679   ¥   (2,863   ¥      38,690     ¥ (12,655   ¥   (14,352   ¥     (869   ¥    105,002     ¥        (779

Corporate debt securities

    0       1       0       1       5       (1     0       0       5       0  

Specified bonds issued by SPEs in Japan

    7,280       4       14       18       0       0       (1,457     0       5,841       4  

CMBS and RMBS in the Americas

    22,658       435       (581     (146     19,856       (2,401     (3,224     0       36,743       (776

Other asset- backed securities and debt securities

    66,252       376       (3,120     (2,744     18,829       (10,253     (9,671     0       62,413       (7

Equity securities

    861       0       8       8       0       0       0       (869     0       0  

Other securities

    8,723       (430     36       (394     2,257       (742     0       0       9,844       (373

Investment funds

    8,723       (430     36       (394     2,257       (742     0       0       9,844       (373

Derivative assets and liabilities (net)

    11,870       (6,492     0       (6,492     3,711       0       (4,487     0       4,602       (6,492

Options held/written and other

    11,870       (6,492     0       (6,492     3,711       0       (4,487     0       4,602       (6,492

Other asset

    36,038       (11,795     0       (11,795     8,351       0       (260     0       32,334       (11,795

Reinsurance recoverables *6

    36,038       (11,795     0       (11,795     8,351       0       (260     0       32,334       (11,795

Accounts payable

    5,533       3,059       0       3,059       0       0       (2,474     0       0       0  

Contingent consideration

    5,533       3,059       0       3,059       0       0       (2,474     0       0       0  

Policy Liabilities and Policy Account Balances

    1,254,483       20,653       0       20,653       0       0       (366,198     0       867,632       20,653  

Variable annuity and variable life insurance contracts *7

    1,254,483       20,653       0       20,653       0       0       (366,198     0       867,632       20,653  

 

– 44 –


Table of Contents

Nine months ended December 31, 2016

 

    Millions of yen  
  Balance at
April  1,

2016
    Gains or  losses
(realized/unrealized)
    Purchases *3     Sales     Settlements *4     Transfers
in  and/
or out of
Level  3
(net) *5
    Balance at
December 31,
2016
    Change  in
unrealized
gains or  losses
included in
earnings  for
assets and
liabilities
still  held at
December 31,
2016 *1
 
    Included in
earnings  *1
    Included in
other
comprehensive
income *2
    Total              

Trading securities

  ¥               0     ¥             0      ¥       228     ¥       228     ¥        2,930     ¥           0     ¥              0     ¥          0      ¥        3,158     ¥            0   

Available-for-sale securities

    99,522       247       11,382       11,629       33,131       (1,666     (13,272     0       129,344       74  

Corporate debt securities

    5       0       (2     (2     1,500       0       (50     0       1,453       0  

Specified bonds issued by SPEs in Japan

    3,461       1       (27     (26     0       (1,200     (1,073     0       1,162       0  

CMBS and RMBS in the Americas

    38,493       182       4,513       4,695       24,061       (466     (4,042     0       62,741       18  

Other asset- backed securities and debt securities

    57,563       64       6,898       6,962       7,570       0       (8,107     0       63,988       56  

Other securities

    17,751       1,394       413       1,807       3,334       (3,372     0       0       19,520       1,394  

Investment funds

    17,751       1,394       413       1,807       3,334       (3,372     0       0       19,520       1,394  

Derivative assets and liabilities (net)

    8,208       (3,689     0       (3,689     1,312       0       (1,203     0       4,628       (3,689

Options held/written and other

    8,208       (3,689     0       (3,689     1,312       0       (1,203     0       4,628       (3,689

Other asset

    37,855       (17,079     0       (17,079     6,493       0       (1,113     0       26,156       (17,079

Reinsurance recoverables *6

    37,855       (17,079     0       (17,079     6,493       0       (1,113     0       26,156       (17,079

Policy Liabilities and Policy Account Balances

    795,001       (1,679     0       (1,679     0       0       (120,742     0       675,938       (1,679

Variable annuity and variable life insurance contracts *7

    795,001       (1,679     0       (1,679     0       0       (120,742     0       675,938       (1,679

 

*1

Principally, gains and losses from available-for-sale securities are included in “Gains on investment securities and dividends”, “Write-downs of securities” or “Life insurance premiums and related investment income”; other securities are included in “Gains on investment securities and dividends” and derivative assets and liabilities (net) are included in “Other (income) and expense, net” and gains and losses from accounts payable are included in “Other (income) and expense, net” respectively. Also, for available-for-sale securities, amortization of interest recognized in finance revenues is included in these columns.

*2

Unrealized gains and losses from trading securities are included in “Net change of foreign currency translation adjustments” and unrealized gains and losses from available-for-sale securities are included in “Net change of unrealized gains (losses) on investment in securities” and “Net change of foreign currency translation adjustments.”

*3

Increases resulting from insurance contracts ceded to reinsurance companies are included.

*4

Decreases resulting from the receipts of reimbursements for benefits, and decreases resulting from insurance payouts to variable annuity and variable life policyholders due to death, surrender and maturity of the investment period are included.

*5

The amount reported in “Transfers in and/or out of Level 3 (net)” is the fair value at the beginning of quarter during which the transfers occur.

*6

“Included in earnings” in the above table includes changes in the fair value of reinsurance contracts recorded in “Life insurance costs” and reinsurance premiums, net of reinsurance benefits received, recorded in “Life insurance premiums and related investment income.”

*7

“Included in earnings” in the above table is recorded in “Life insurance costs” and includes changes in the fair value of policy liabilities and policy account balances resulting from gains or losses on the underlying investment assets managed on behalf of variable annuity and variable life policyholders, and the changes in the minimum guarantee risks relating to variable annuity and variable life insurance contracts as well as insurance costs recognized for insurance and annuity payouts as a result of insured events.

In the nine months ended December 31, 2015, equity securities totaling ¥869 million were transferred from Level 3 to Level 2, since the inputs became observable. There were no transfers in or out of Level 3 in the nine months ended December 31, 2016.

 

– 45 –


Table of Contents

Changes in economic conditions or valuation methodologies may require the transfer of assets and liabilities from one fair value level to another. In such instances, the Company and its subsidiaries recognize the transfer at the beginning of the quarter during which the transfers occur. The Company and its subsidiaries evaluate the significance of transfers between levels based upon size of the transfer relative to total assets, total liabilities or total earnings. For the three months ended December 31, 2015 and 2016, there were no transfers between Level 1 and Level 2.

The following table presents the reconciliation for financial assets and liabilities (net) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 31, 2015 and 2016:

Three months ended December 31, 2015

 

    Millions of yen  
        Gains or losses
(realized/unrealized)
    Purchases *3     Sales     Settlements *4     Transfers
in and/ or
out of
Level 3
(net) *5
    Balance at
December 31,
2015
    Change in
unrealized
gains or losses
included in
earnings for
assets and
liabilities
still held at
December 31,
2015 *1
 
  Balance at
September 30,
2015
    Included in
earnings *1
    Included in
other
comprehensive
income *2
    Total              

Available-for-sale securities

  ¥    93,133     ¥         405      ¥    (2,043   ¥      (1,638   ¥    16,503     ¥      (694   ¥       (2,302   ¥           0     ¥    105,002     ¥        (31

Corporate debt securities

    5       0       0       0       0       0       0       0       5       0  

Specified bonds issued by SPEs in Japan

    5,893       2       (7     (5     0       0       (47     0       5,841       (38

CMBS and RMBS in the Americas

    28,533       374       (304     70       9,046          (500     (406     0       36,743       2  

Other asset- backed securities and debt securities

    58,702       29       (1,732     (1,703     7,457       (194     (1,849     0       62,413       5  

Other securities

    10,017       (205     67       (138     247       (282     0       0       9,844       (165

Investment funds

    10,017       (205     67       (138     247       (282     0       0       9,844       (165

Derivative assets and liabilities (net)

    7,400       (2,531     0       (2,531     656       0       (923     0       4,602       (2,531

Options held/written and other

    7,400       (2,531     0       (2,531     656       0       (923     0       4,602       (2,531

Other asset

    42,825       (12,922     0       (12,922     2,517       0       (86     0       32,334       (12,922

Reinsurance recoverables *6

    42,825       (12,922     0       (12,922     2,517       0       (86     0       32,334       (12,922

Accounts payable

    3,739       1,265       0       1,265       0       0       (2,474     0       0       0  

Contingent consideration

    3,739       1,265       0       1,265       0       0       (2,474     0       0       0  

Policy Liabilities and Policy Account Balances

    934,909       (18,929     0       (18,929     0       0       (86,206     0       867,632       (18,929

Variable annuity and variable life insurance contracts *7

    934,909       (18,929     0       (18,929     0       0       (86,206     0       867,632       (18,929

 

– 46 –


Table of Contents

Three months ended December 31, 2016

 

    Millions of yen  
  Balance at
September 30,
2016
    Gains or losses
(realized/unrealized)
    Purchases *3     Sales     Settlements *4     Transfers
in and/ or
out of
Level 3
(net) *5
    Balance at
December 31,
2016
    Change in
unrealized
gains or losses
included in
earnings for
assets and
liabilities
still held at
December 31,
2016 *1
 
    Included in
earnings *1
    Included in
other
comprehensive
income *2
    Total              

Trading securities

  ¥               0     ¥             0      ¥        228      ¥          228      ¥      2,930     ¥           0      ¥              0      ¥           0     ¥        3,158     ¥           0   

Available-for-sale securities

    105,687       24       14,702       14,726       12,049       0       (3,118     0       129,344       15  

Corporate debt securities

    1,507       0       (4     (4     0       0       (50     0       1,453       0  

Specified bonds issued by SPEs in Japan

    1,261       0       (9     (9     0       0       (90     0       1,162       (1

CMBS and RMBS in the Americas

    48,788       4       8,503       8,507       7,148       0       (1,702     0       62,741       4  

Other asset- backed securities and debt securities

    54,131       20       6,212       6,232       4,901       0       (1,276     0       63,988       12  

Other securities

    15,321       543       2,289       2,832       3,046       (1,679     0       0       19,520       555  

Investment funds

    15,321       543       2,289       2,832       3,046       (1,679     0       0       19,520       555  

Derivative assets and liabilities (net)

    9,873       (3,822     0       (3,822     (1,181     0       (242     0       4,628       (3,822

Options held/written and other

    9,873       (3,822     0       (3,822     (1,181     0       (242     0       4,628       (3,822

Other asset

    37,554       (12,809     0       (12,809     2,040       0       (629     0       26,156       (12,808

Reinsurance recoverables *6

    37,554       (12,809     0       (12,809     2,040       0       (629     0       26,156       (12,808

Policy Liabilities and Policy Account Balances

    715,434       (18,224     0       (18,224     0       0       (57,720     0       675,938       (18,224

Variable annuity and variable life insurance contracts *7

    715,434       (18,224     0       (18,224     0       0       (57,720     0       675,938       (18,224

 

*1

Principally, gains and losses from available-for-sale securities are included in “Gains on investment securities and dividends”, “Write-downs of securities” or “Life insurance premiums and related investment income”; other securities are included in “Gains on investment securities and dividends” and derivative assets and liabilities (net) are included in “Other (income) and expense, net” and gains and losses from accounts payable are included in “Other (income) and expense, net” respectively. Also, for available-for-sale securities, amortization of interest recognized in finance revenues is included in these columns.

*2

Unrealized gains and losses from trading securities are included in “Net change of foreign currency translation adjustments” and unrealized gains and losses from available-for-sale securities are included in “Net change of unrealized gains (losses) on investment in securities” and “Net change of foreign currency translation adjustments.”

*3

Increases resulting from insurance contracts ceded to reinsurance companies are included.

*4

Decreases resulting from the receipts of reimbursements for benefits, and decreases resulting from insurance payouts to variable annuity and variable life policyholders due to death, surrender and maturity of the investment period are included.

*5

The amount reported in “Transfers in and/or out of Level 3 (net)” is the fair value at the beginning of quarter during which the transfers occur.

*6

“Included in earnings” in the above table includes changes in the fair value of reinsurance contracts recorded in “Life insurance costs” and reinsurance premiums, net of reinsurance benefits received, recorded in “Life insurance premiums and related investment income.”

*7

“Included in earnings” in the above table is recorded in “Life insurance costs” and includes changes in the fair value of policy liabilities and policy account balances resulting from gains or losses on the underlying investment assets managed on behalf of variable annuity and variable life policyholders, and the changes in the minimum guarantee risks relating to variable annuity and variable life insurance contracts as well as insurance costs recognized for insurance and annuity payouts as a result of insured events.

There were no transfers in or out of Level 3 in the three months ended December 31, 2015 and 2016.

 

– 47 –


Table of Contents

The following table presents recorded amounts of assets measured at fair value on a nonrecurring basis as of March 31, 2016 and December 31, 2016. These assets are measured at fair value on a nonrecurring basis mainly to recognize impairment:

March 31, 2016

 

     Millions of yen  
     Total
Carrying
Value in
Consolidated
Balance Sheets
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Real estate collateral-dependent loans (net of allowance for probable loan losses)

   ¥ 17,511      ¥         0      ¥         0      ¥ 17,511  

Investment in operating leases and property under facility operations

     25,681        0        0        25,681  
  

 

 

    

 

 

    

 

 

    

 

 

 
   ¥ 43,192      ¥ 0      ¥ 0      ¥ 43,192  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2016

 

           
     Millions of yen  
     Total
Carrying
Value in
Consolidated
Balance Sheets
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Real estate collateral-dependent loans (net of allowance for probable loan losses)

   ¥ 14,642      ¥         0      ¥         0      ¥ 14,642  

Investment in operating leases and property under facility operations

     14,291        0        0        14,291  
  

 

 

    

 

 

    

 

 

    

 

 

 
   ¥ 28,933      ¥ 0      ¥ 0      ¥ 28,933  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

– 48 –


Table of Contents

The following is a description of the valuation process and the main valuation methodologies used for assets and liabilities measured at fair value.

Valuation process

The Company and its subsidiaries determine fair value of Level 3 assets and liabilities by using valuation techniques, such as internally developed models, or using third-party pricing information. Internally developed models include the discounted cash flow methodologies and direct capitalization methodologies. To measure the fair value of the assets and liabilities, the Company and its subsidiaries select the valuation technique which best reflects the nature, characteristics and risks of each asset and liability. The appropriateness of valuation methods and unobservable inputs is verified when measuring fair values of the assets and liabilities by using internally developed models. The Company and its subsidiaries also use third-party pricing information to measure the fair value of certain assets and liabilities. In that case, the Company and its subsidiaries verify the appropriateness of the prices by monitoring available information about the assets and liabilities, such as current conditions of the assets or liabilities, as well as surrounding market information. When these prices are determined to be able to reflect the nature, characteristics and risks of assets and liabilities reasonably, the Company and its subsidiaries use these prices as fair value of the assets and liabilities.

Loans held for sale

Certain loans, which the Company and its subsidiaries have the intent and ability to sell to outside parties in the foreseeable future, are considered held-for-sale. The loans held for sale in the Americas are classified as Level 2, because the Company and its subsidiaries measure their fair value based on a market approach using inputs other than quoted prices that are observable for the assets such as treasury rate, swap rate and market spread.

Real estate collateral-dependent loans

The valuation allowance for large balance non-homogeneous loans is individually evaluated based on the present value of expected future cash flows, the loan’s observable market price or the fair value of the collateral securing the loans if the loans are collateral-dependent. According to ASC 820 (“Fair Value Measurement”), measurement for impaired loans determined using a present value technique is not considered a fair value measurement. However, measurement for impaired loans determined using the loan’s observable market price or the fair value of the collateral securing the collateral-dependent loans are fair value measurements and are subject to the disclosure requirements for nonrecurring fair value measurements.

The Company and its subsidiaries determine the fair value of the real estate collateral of real estate collateral-dependent loans using appraisals prepared by independent third party appraisers or our own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flows methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate. The Company and its subsidiaries generally obtain a new appraisal once a fiscal year. In addition, the Company and its subsidiaries periodically monitor circumstances of the real estate collateral and then obtain a new appraisal in situations involving a significant change in economic and/or physical conditions, which may materially affect the fair value of the collateral. Real estate collateral-dependent loans whose fair values are estimated using appraisals of the underlying collateral based on these valuation techniques are classified as Level 3 because such appraisals involve unobservable inputs. These unobservable inputs contain discount rates and cap rates as well as future cash flows estimated to be generated from real estate collateral. An increase (decrease) in the discount rate or cap rate and a decrease (increase) in the estimated future cash flows would result in a decrease (increase) in the fair value of real estate collateral-dependent loans.

Investment in operating leases and property under facility operations and land and buildings undeveloped or under construction

Investment in operating leases measured at fair value is mostly real estate. The Company and its subsidiaries determine the fair value of investment in operating leases and property under facility operations and land and buildings undeveloped or under construction using appraisals prepared by independent third party appraisers or the Company’s own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flow methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate. The Company and its subsidiaries classified the assets as Level 3 because such appraisals involve unobservable inputs. These unobservable inputs contain discount rates as well as future cash flows estimated to be generated from the assets or projects. An increase (decrease) in the discount rate and a decrease (increase) in the estimated future cash flows would result in a decrease (increase) in the fair value of investment in operating leases and property under facility operations and land and buildings undeveloped or under construction.

 

– 49 –


Table of Contents

Trading securities, Available-for-sale securities and Investment in affiliates

If active market prices are available, fair value measurement is based on quoted active market prices and, accordingly, these securities are classified as Level 1. If active market prices are not available, fair value measurement is based on observable inputs other than quoted prices included within Level 1, such as prices for similar assets and accordingly these securities are classified as Level 2. If market prices are not available and there are no observable inputs, then fair value is estimated by using valuation models including discounted cash flow methodologies and broker quotes. Such securities are classified as Level 3, as the valuation models and broker quotes are based on inputs that are unobservable in the market. If fair value is based on broker quotes, the Company and its subsidiaries check the validity of received prices based on comparison to prices of other similar assets and market data such as relevant bench mark indices.

The Company and its subsidiaries classified CMBS and RMBS in the Americas and other asset-backed securities as Level 2 if the inputs such as trading price and/or bid price are observable. The Company and its subsidiaries classified CMBS and RMBS in the Americas and other asset-backed securities as Level 3 if the company and subsidiaries evaluate the fair value based on the unobservable inputs. In determining whether the inputs are observable or unobservable, the Company and its subsidiaries evaluate various factors such as the lack of recent transactions, price quotations that are not based on current information or vary substantially over time or among market makers, a significant increase in implied risk premium, a wide bid-ask spread, significant decline in new issuances, little or no public information (e.g. a principal-to-principal market) and other factors. With respect to certain CMBS and RMBS in the Americas and other asset-backed securities, the Company and its subsidiaries judged that there has been increased overall trading activity, and the Company and its subsidiaries classified these securities as Level 2 for those securities that were measured at fair value based on the observable inputs such as trading price and/or bit price. But for those securities that lacked observable trades because they are older vintage or below investment grade securities, the Company and its subsidiaries limit the reliance on independent pricing service vendors and brokers. As a result, the Company and its subsidiaries established internally developed pricing models using valuation techniques such as discounted cash flow model using Level 3 inputs in order to estimate fair value of these securities and classified them as Level 3. Under the models, the Company and its subsidiaries use anticipated cash flows of the security discounted at a risk-adjusted discount rate that incorporates our estimate of credit risk and liquidity risk that a market participant would consider. The cash flows are estimated based on a number of assumptions such as default rate and prepayment speed, as well as seniority of the security. An increase (decrease) in the discount rate or default rate would result in a decrease (increase) in the fair value of CMBS and RMBS in the Americas and other asset-backed securities.

The Company and its subsidiaries classified the specified bonds as Level 3 because the Company and its subsidiaries measure their fair value using unobservable inputs. Since the specified bonds are not traded in an open market, no relevant observable market data is available. Accordingly the Company and its subsidiaries use the discounted cash flow methodologies that incorporates significant unobservable inputs to measure their fair value. When evaluating the specified bonds issued by SPEs in Japan, the Company and its subsidiaries estimate the fair value by discounting future cash flows using a discount rate based on market interest rates and a risk premium. The future cash flows for the specified bonds issued by the SPEs in Japan are estimated based on contractual principal and interest repayment schedules on each of the specified bonds issued by the SPEs in Japan. Since the discount rate is not observable for the specified bonds, the Company and its subsidiaries use an internally developed model to estimate a risk premium considering the value of the real estate collateral (which also involves unobservable inputs in many cases when using valuation techniques such as discounted cash flow methodologies) and the seniority of the bonds. Under the model, the Company and its subsidiaries consider the loan-to-value ratio and other relevant available information to reflect both the credit risk and the liquidity risk in our own estimate of the risk premium. Generally, the higher the loan-to-value ratio, the larger the risk premium the Company and its subsidiaries estimate under the model. The fair value of the specified bonds issued by SPEs in Japan rises when the fair value of the collateral real estate rises and the discount rate declines. The fair value of the specified bonds issued by SPEs in Japan declines when the fair value of the collateral real estate declines and the discount rate rises.

Investment funds

Certain subsidiaries elected the fair value option for investments in some funds. These investment funds for which the fair value option is elected are classified as Level 3, because the subsidiaries measure their fair value using discounting to net asset value based on inputs that are unobservable in the market. A certain subsidiary measures its investment held by the investment company which is owned by the subsidiary at fair value.

 

– 50 –


Table of Contents

Derivatives

For exchange-traded derivatives, fair value is based on quoted market prices, and accordingly, classified as Level 1. For nonexchange traded derivatives, fair value is based on commonly used models and discounted cash flow methodologies. If the inputs used for these measurements including yield curves and volatilities, are observable, the Company and its subsidiaries classify it as Level 2. If the inputs are not observable, the Company and its subsidiaries classify it as Level 3. These unobservable inputs contain discount rates. An increase (decrease) in the discount rate would result in a decrease (increase) in the fair value of derivatives.

Reinsurance recoverables

Certain subsidiaries of the Company have elected the fair value option for certain reinsurance contracts related to variable annuity and variable life insurance contracts to partially offset the changes in fair value recognized in earnings of the policy liabilities and policy account balances attributable to the changes in the minimum guarantee risks of the variable annuity and variable life insurance contracts. These reinsurance contracts for which the fair value option is elected are classified as Level 3 because the subsidiaries measure their fair value using discounted cash flow methodologies based on inputs that are unobservable in the market.

Contingent consideration

The Company will be required to pay certain contingent consideration described in Note 4 “Acquisitions and divestitures” depending on the future performance of a certain asset management business of the acquired subsidiary, and the Company recognizes a liability for the contingent consideration at its estimated fair value. The fair value of the contingent consideration is classified as Level 3 because the Company measures its fair value using a Monte Carlo model based on inputs that are unobservable in the market.

Variable annuity and variable life insurance contracts

A certain subsidiary has elected the fair value option for the entire variable annuity and variable life insurance contracts held in order to match earnings recognized for changes in fair value of policy liabilities and policy account balances with the earnings recognized for gains or losses from the investment assets managed on behalf of variable annuity and variable life policyholders, derivative contracts and changes in fair value of reinsurance contracts. The changes in fair value of the variable annuity and variable life insurance contracts are linked to the fair value of the investment in securities managed on behalf of variable annuity and variable life policyholders. These securities consist mainly of equity securities traded in the market and are categorized as trading securities. In addition, variable annuity and variable life insurance contracts are exposed to the minimum guarantee risk, and the subsidiary adjusts the fair value of the underlying investments by incorporating changes in fair value of the minimum guarantee risk in the evaluation of the fair value of the entire variable annuity and variable life insurance contracts. The variable annuity and variable life insurance contracts for which the fair value option is elected are classified as Level 3 because the subsidiary measures the fair value using discounted cash flow methodologies based on inputs that are unobservable in the market.

 

– 51 –


Table of Contents

Information about Level 3 Fair Value Measurements

The following tables provide information about the valuation techniques and significant unobservable inputs used in the valuation of Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2016.

 

     March 31, 2016
     Millions of yen                 
     Fair value     

        Valuation technique(s)        

  

  Significant unobservable inputs  

  

Range

(Weighted average)

Assets:

           

Available-for-sale securities

           

Corporate debt securities

   ¥ 5      Appraisals/Broker quotes    —      —  

Specified bonds issued by SPEs in Japan

     806      Discounted cash flows    Discount rate    0.9%
(0.9%)
     2,655      Appraisals/Broker quotes    —      —  

CMBS and RMBS in the Americas

     38,493      Discounted cash flows    Discount rate    6.4% – 32.4%
            (18.5%)
         Probability of default    0.0% – 34.0%
            (8.2%)

Other asset-backed securities and debt securities

     7,432      Discounted cash flows    Discount rate    1.0% – 32.4%
            (12.7%)
         Probability of default    0.7% – 1.1%
            (0.9%)
     50,131      Appraisals/Broker quotes    —      —  

Other securities

           

Investment funds

     10,152      Internal cash flows    Discount rate    10.0% – 40.0%
           

(13.6%)

     7,599      Appraisals/Broker quotes    —      —  

Derivative assets

           

Options held/written and other

     4,876      Discounted cash flows    Discount rate    10.0% – 15.0%
           

(11.7%)

     3,332      Appraisals/Broker quotes    —      —  

Other assets

           

Reinsurance recoverables

     37,855      Discounted cash flows    Discount rate    (0.2)% – 0.5%
           

(0.1%)

         Mortality rate    0.0% – 100.0%
           

(0.9%)

         Lapse rate    1.5% – 54.0%
           

(15%)

        

Annuitization rate

(guaranteed minimum annuity benefit)

  

0.0% – 100.0%

(99.4%)

  

 

 

          

Total

   ¥      163,336           
  

 

 

          

Liabilities:

           

Policy liabilities and Policy Account Balances

           

Valuable annuity and variable life insurance contracts

   ¥ 795,001      Discounted cash flows    Discount rate    (0.2)% – 0.5%
           

(0.1%)

         Mortality rate    0.0% – 100.0%
           

(1.0%)

         Lapse rate    1.5% – 54.0%
           

(14.5%)

         Annuitization rate
(guaranteed minimum annuity benefit)
   0.0% – 100.0%
(85.2%)
  

 

 

          

Total

   ¥      795,001           
  

 

 

          

 

– 52 –


Table of Contents
     December 31, 2016
     Millions of yen                 
     Fair value     

        Valuation technique(s)        

  

  Significant unobservable inputs  

  

Range

(Weighted average)

Assets:

           

Trading securities

   ¥          3,158       Discounted cash flows    Discount rate   

5.4% – 10.0%

(8.6%)

Available-for-sale securities

           

Corporate debt securities

     1,448       Discounted cash flows    Discount rate    0.7% – 1.6%
            (1.2%)
     5       Appraisals/Broker quotes    —      —  

Specified bonds issued by SPEs in Japan

     1,162       Appraisals/Broker quotes    —      —  

CMBS and RMBS in the Americas

     57,658       Discounted cash flows    Discount rate    6.4% – 32.4%
            (18.0%)
         Probability of default    0.0% – 37.3%
            (4.7%)
     5,083       Appraisals/Broker quotes    —      —  

Other asset-backed securities and debt securities

     12,382       Discounted cash flows    Discount rate    1.0% – 51.2%
            (10.0%)
         Probability of default    0.6% – 11.0%
            (0.8%)
     51,606       Appraisals/Broker quotes    —      —  

Other securities

           

Investment funds

     7,876       Internal cash flows    Discount rate    0.0% – 40.0%
            (9.8%)
     11,644       Appraisals/Broker quotes    —      —  

Derivative assets

           

Options held/written and other

     2,348       Discounted cash flows    Discount rate    10.0% – 15.0%
            (11.4%)
     2,280       Appraisals/Broker quotes    —      —  

Other assets

           

Reinsurance recoverables

     26,156       Discounted cash flows    Discount rate    (0.2)% – 0.6%
            (0.1%)
         Mortality rate    0.0% – 100.0%
            (1.0%)
         Lapse rate    1.5% – 54.0%
            (14.0%)
        

Annuitization rate

(guaranteed minimum annuity benefit)

  

0.0% – 100.0%

            (99.3%)
  

 

 

          

Total

   ¥      182,806            
  

 

 

          

Liabilities:

           

Policy liabilities and Policy Account Balances

           

Valuable annuity and variable life insurance contracts

   ¥ 675,938       Discounted cash flows    Discount rate    (0.2)% – 0.6%
            (0.1%)
         Mortality rate    0.0% – 100.0%
            (1.0%)
         Lapse rate    1.5% – 54.0%
            (14.0%)
        

Annuitization rate

(guaranteed minimum annuity benefit)

   0.0% – 100.0%
            (83.6%)
  

 

 

          

Total

   ¥      675,938            
  

 

 

          

 

– 53 –


Table of Contents

The following tables provide information about the valuation techniques and significant unobservable inputs used in the valuation of Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2016 and December 31, 2016.

 

     March 31, 2016
     Millions of yen                 
     Fair value     

        Valuation technique(s)        

  

  Significant unobservable inputs  

  

Range

(Weighted average)

Assets:

           

Real estate collateral-dependent loans (net of allowance for probable loan losses)

   ¥        17,511      Discounted cash flows    Discount rate    5.3% – 10.9%
            (9.3%)
      Direct capitalization    Capitalization rate    5.9% – 17.0%
            (9.9%)

Investment in operating leases and property under facility operations

     5,679      Discounted cash flows    Discount rate    5.3% – 10.0%
            (5.5%)
     20,002      Appraisals    —      —  
  

 

 

          
   ¥    43,192           
  

 

 

          
     December 31, 2016
     Millions of yen                 
     Fair value     

Valuation technique(s)

  

  Significant unobservable inputs  

  

Range
(Weighted average)

Assets:

           

Real estate collateral-dependent loans (net of allowance for probable loan losses)

   ¥ 14,642      Discounted cash flows    Discount rate    7.9% – 10.9%
            (9.8%)
      Direct capitalization    Capitalization rate    8.4% – 11.3%
            (10.4%)

Investment in operating leases and property under facility operations

     203      Direct capitalization    Capitalization rate    8.5% – 10.0%
            (8.7%)
     14,088      Appraisals    —      —  
  

 

 

          
   ¥ 28,933           
  

 

 

          

The Company and its subsidiaries generally use discounted cash flow methodologies or similar internally developed models to determine the fair value of Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, changes in these unobservable inputs may have a significant impact on the fair value.

Certain of these unobservable inputs will have a directionally consistent impact on the fair value of the asset or liability for a given change in that input. Alternatively, the fair value of the asset or liability may move in an opposite direction for a given change in another input. Where multiple inputs are used within the valuation technique of an asset or liability, a change in one input in a certain direction may be offset by an opposite change in another input having a potentially muted impact to the overall fair value of that particular asset or liability. Additionally, a change in one unobservable input may result in a change to another unobservable input (that is, changes in certain inputs are interrelated to one another), which may counteract or magnify the fair value impact.

For more analysis of the sensitivity of each input, see the description of the valuation process and the main valuation methodologies used for assets and liabilities measured at fair value.

 

– 54 –


Table of Contents
4.

Acquisitions and divestitures

(1) Robeco Groep N.V. acquisition

On July 1, 2013, the Company acquired approximately 90.01% of the total voting equity interests of Robeco Groep N.V. (Head office: Rotterdam, the Netherlands, hereinafter, “Robeco”) from Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Head office: Utrecht, the Netherlands). As a result, Robeco has become a consolidated subsidiary of the Company. Furthermore, the Company acquired additional voting equity interests of Robeco during the three months ended December 31, 2016. Therefore, Robeco has become the Company’s wholly owned subsidiary. Robeco, a mid-size global asset manager, offers a mix of investment solutions in a broad range of strategies to institutional and private investors worldwide.

In accordance with the share purchase agreement, the Company agreed to pay contingent consideration depending on the future performance of a certain section of asset management business for each of Robeco’s fiscal years until the fiscal year ending in December 2015. The estimated fair value of such contingent consideration was ¥5,176 million, which is included in the total consideration transferred. During the three months ended September 30, 2016, the Company settled ¥2,398 million which had been included in trade notes, accounts and other payable in the Company’s consolidated balance sheets as of March 31, 2016.

(2) Other acquisitions

There were no material acquisitions during the nine months ended December 31, 2015 and 2016. The Company recognized a bargain purchase gain of ¥4,287 million associated with one of its acquisitions for the three months ended June 30, 2016. The bargain purchase gain could possibly be adjusted because the purchase price allocation has not been completed yet.

(3) Divestitures

Gains on sales of subsidiaries and affiliates and liquidation losses, net for the nine months ended December 31, 2015 and 2016 amounted to ¥57,012 million and ¥56,431 million, respectively. Gains on sales of subsidiaries and affiliates and liquidation losses, net for the nine months ended December 31, 2015 mainly consisted of ¥47,095 million in the Overseas Business segment and ¥9,189 million in the Investment and Operating segment. Gains on sales of subsidiaries and affiliates and liquidation losses, net for the nine months ended December 31, 2016 mainly consisted of ¥28,904 million in the Investment and Operating segment, ¥25,963 million in the Overseas Business segment and ¥1,301 million in the Corporate Financial Services Segment.

Gains on sales of subsidiaries and affiliates and liquidation losses, net for the three months ended December 31, 2015 and 2016 amounted to ¥603 million and ¥23,597 million, respectively. Gains on sales of subsidiaries and affiliates and liquidation losses, net for the three months ended December 31, 2016 mainly consisted of ¥23,611 million in the Overseas Business segment, and included gains on the sales of the automotive supply wholesale business unit of ORIX USA Corporation (hereinafter, “OUC”) a consolidated subsidiary of the Company.

During the three months ended September 30, 2015, OUC, a wholly owned subsidiary of the Company, sold 14.7% of its shares of Class A common stock of Houlihan Lokey, Inc. (hereinafter, “Houlihan Lokey”), a subsidiary of OUC, through the initial public offering (hereinafter, “IPO”), concurrently allotting its shares to Houlihan Lokey’s management and other employees. OUC retains a 33.0% interest in Houlihan Lokey’s Class B common stock and thus Houlihan Lokey became an equity method investee during the three months ended September 30, 2015. The partial sale of the ownership interest resulted in a gain of ¥10,498 million, and the remeasurement of the retained interest to its fair value due to a loss of control resulted in a gain of ¥29,087 million, both of which were included in earnings as gains on sales of subsidiaries and affiliates and liquidation losses, net during the three months ended September 30, 2015. The fair value of the retained interest was remeasured based on the sale price in the IPO.

 

5.

Credit Quality of Financing Receivables and the Allowance for Credit Losses

The Company and its subsidiaries apply ASC 310 (“Receivables”), which requires an entity to provide the following information disaggregated by portfolio segment and class of financing receivable.

Allowance for credit losses—by portfolio segment

Credit quality of financing receivables—by class

 

   

Impaired loans

 

   

Credit quality indicators

 

   

Non-accrual and past-due financing receivables

Information about troubled debt restructurings—by class

 

– 55 –


Table of Contents

A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. The Company and its subsidiaries classify our portfolio segments by instruments of loans and direct financing leases. Classes of financing receivables are determined based on the initial measurement attribute, risk characteristics of the financing receivables and the method for monitoring and assessing obligors’ credit risk, and are defined as the level of detail necessary for a financial statement user to understand the risks inherent in the financing receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment, and the Company and its subsidiaries disaggregate our portfolio segments into classes by regions, instruments or industries of our debtors.

 

– 56 –


Table of Contents

The following table provides information about the allowance for credit losses as of March 31, 2016, for the nine and three months ended December 31, 2015 and 2016:

 

     Nine months ended December 31, 2015  
     Millions of yen  
     Loans     Direct
financing
leases
    Total  
     Consumer     Corporate     Purchased
loans  *1
     
       Non-recourse
loans
    Other        

Allowance for Credit Losses :

            

Beginning Balance

   ¥ 12,585     ¥ 8,148     ¥ 25,672     ¥ 10,717     ¥ 15,204     ¥ 72,326  

Provision (Reversal)

     5,417       (587     910       (997     1,197       5,940  

Charge-offs

     (4,918     (512     (4,368     (1,190     (2,290     (13,278

Recoveries

     308       0       372       196       13       889  

Other *2

     178       (5,232     (77     (117     (457     (5,705
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   ¥ 13,570     ¥ 1,817     ¥ 22,509     ¥ 8,609     ¥ 13,667     ¥ 60,172  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     2,745       1,412       11,378       6,255       0       21,790  

Not Individually evaluated for impairment

     10,825       405       11,131       2,354       13,667       38,382  

Financing receivables :

            

Ending Balance

   ¥ 1,441,913     ¥ 83,383     ¥ 999,890     ¥ 29,845     ¥ 1,207,133     ¥ 3,762,164  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     14,693       11,355       32,498       11,872       0       70,418  

Not Individually evaluated for impairment

     1,427,220       72,028       967,392       17,973       1,207,133       3,691,746  
     Three months ended December 31, 2015  
     Millions of yen  
     Loans     Direct
financing
leases
    Total  
     Consumer     Corporate     Purchased
loans  *1
     
       Non-recourse
loans
    Other        

Allowance for Credit Losses :

            

Beginning Balance

   ¥ 13,009     ¥ 7,652     ¥ 22,977     ¥ 9,429     ¥ 13,743     ¥ 66,810  

Provision (Reversal)

     2,137       (343     1,020       (211     389       2,992  

Charge-offs

     (1,137     (265     (1,628     (570     (495     (4,095

Recoveries

     (550     0       97       (47     0       (500

Other *2

     111       (5,227     43       8       30       (5,035
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   ¥ 13,570     ¥ 1,817     ¥ 22,509     ¥ 8,609     ¥ 13,667     ¥ 60,172  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     March 31, 2016  
     Millions of yen  
     Loans     Direct
financing
leases
    Total  
     Consumer     Corporate     Purchased
loans  *1
     
       Non-recourse
loans
    Other        

Allowance for Credit Losses :

            

Ending Balance

   ¥ 13,267     ¥ 1,800     ¥ 23,391     ¥ 8,233     ¥ 13,380     ¥ 60,071  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     2,770       1,323       12,552       5,888       0       22,533  

Not Individually evaluated for impairment

     10,497       477       10,839       2,345       13,380       37,538  

Financing receivables :

            

Ending Balance

   ¥ 1,461,982     ¥ 81,211     ¥ 996,649     ¥ 30,524     ¥ 1,190,136     ¥ 3,760,502  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     14,101       11,057       37,422       11,013       0       73,593  

Not individually evaluated for impairment

     1,447,881       70,154       959,227       19,511       1,190,136       3,686,909  

 

– 57 –


Table of Contents
     Nine months ended December 31, 2016  
     Millions of yen  
     Loans     Direct
financing
leases
    Total  
     Consumer     Corporate     Purchased
loans  *1
     
       Non-recourse
loans
    Other        

Allowance for Credit Losses :

            

Beginning Balance

   ¥ 13,267     ¥ 1,800     ¥ 23,391     ¥ 8,233     ¥ 13,380     ¥ 60,071  

Provision (Reversal)

     7,731       1,064       3,538       (975     1,013       12,371  

Charge-offs

     (4,802     (2     (3,892     (785     (3,085     (12,566

Recoveries

     441       0       192       235       11       879  

Other *2

     584       129       (1,465     1       (124     (875
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   ¥ 17,221     ¥ 2,991     ¥ 21,764     ¥ 6,709     ¥ 11,195     ¥ 59,880  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     2,980       2,207       11,088       4,780       0       21,055  

Not individually evaluated for impairment

     14,241       784       10,676       1,929       11,195       38,825  

Financing Receivables :

            

Ending Balance

   ¥ 1,588,413     ¥ 89,235     ¥ 1,090,366     ¥ 24,826     ¥ 1,199,487     ¥ 3,992,327  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     15,565       6,214       30,917       8,414       0       61,110  

Not individually evaluated for impairment

     1,572,848       83,021       1,059,449       16,412       1,199,487       3,931,217  
     Three months ended December 31, 2016  
     Millions of yen  
     Loans     Direct
financing
leases
    Total  
     Consumer     Corporate     Purchased
loans  *1
     
       Non-recourse
loans
    Other        

Allowance for Credit Losses :

            

Beginning Balance

   ¥ 15,719     ¥ 1,878     ¥ 19,330     ¥ 7,110     ¥ 11,751     ¥ 55,788  

Provision (Reversal)

     2,456       803       2,352       (236     253       5,628  

Charge-offs

     (1,476     0       (1,202     (275     (1,287     (4,240

Recoveries

     203       0       47       15       0       265  

Other *2

     319       310       1,237       95       478       2,439  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   ¥ 17,221     ¥ 2,991     ¥ 21,764     ¥ 6,709     ¥ 11,195     ¥ 59,880  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

 

Loans held for sale are not included in the table above.

*1

Purchased loans represent loans with evidence of deterioration of credit quality since origination and for which it is probable at acquisition that collection of all contractually required payments from the debtors is unlikely.

*2

Other mainly includes foreign currency translation adjustments and decrease in allowance related to deconsolidated subsidiaries.

 

– 58 –


Table of Contents

In developing the allowance for credit losses, the Company and its subsidiaries consider, among other things, the following factors:

 

   

business characteristics and financial conditions of obligors;

 

   

current economic conditions and trends;

 

   

prior charge-off experience;

 

   

current delinquencies and delinquency trends; and

 

   

value of underlying collateral and guarantees.

The Company and its subsidiaries individually develop the allowance for credit losses for impaired loans. For non-impaired loans, including loans that are not individually evaluated for impairment, and direct financing leases, the Company and its subsidiaries evaluate prior charge-off experience as segmented by debtor’s industry and the purpose of the loans and develop the allowance for credit losses based on such prior charge-off experience as well as current economic conditions.

In common with all portfolio segments, a deterioration of debtors’ condition may increase the risk of delay in payments of principal and interest. For loans to consumer borrowers, the amount of the allowance for credit losses is changed by the variation of individual debtors’ creditworthiness and value of underlying collateral and guarantees, and the prior charge-off experience. For loans to corporate other borrowers and direct financing leases, the amount of the allowance for credit losses is changed by current economic conditions and trends, the value of underlying collateral and guarantees, and the prior charge-off experience in addition to the debtors’ creditworthiness.

The decline of the value of underlying collateral and guarantees may increase the risk of inability to collect from the loans and direct financing leases. Particularly for non-recourse loans for which cash flow from real estate is the source of repayment, their collection depends on the real estate collateral value, which may decline as a result of decrease in liquidity of the real estate market, rise in vacancy rate of rental properties, fall in rents and other factors. These risks may change the amount of the allowance for credit losses. For purchased loans, their collection may decrease due to a decline in the real estate collateral value and debtors’ creditworthiness. Thus, these risks may change the amount of the allowance for credit losses.

In common with all portfolio segments, the Company and its subsidiaries charge off doubtful receivables when the likelihood of any future collection is believed to be minimal, mainly based upon an evaluation of the relevant debtors’ creditworthiness and the liquidation status of collateral.

 

– 59 –


Table of Contents

The following table provides information about the impaired loans as of March 31, 2016 and December 31, 2016:

 

    

March 31, 2016

 
          Millions of yen  

Portfolio segment

  

Class

   Loans
Individually
Evaluated for
Impairment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded *1 :

      ¥ 14,601      ¥ 14,498      ¥ 0  

Consumer borrowers

        931        852        0  
  

Housing loans

     931        852        0  
  

Card loans

     0        0        0  
  

Other

     0        0        0  

Corporate borrowers

        13,670        13,646        0  

Non-recourse loans

   Japan      4,776        4,776        0  
  

The Americas

     0        0        0  

Other

   Real estate companies      0        0        0  
  

Entertainment companies

     211        211        0  
  

Other

     8,683        8,659        0  

Purchased loans

        0        0        0  

With an allowance recorded *2 :

        58,992        57,758        22,533  

Consumer borrowers

        13,170        12,628        2,770  
  

Housing loans

     3,580        3,058        1,401  
  

Card loans

     4,123        4,113        590  
  

Other

     5,467        5,457        779  

Corporate borrowers

        34,809        34,117        13,875  

Non-recourse loans

   Japan      292        292        72  
  

The Americas

     5,989        5,988        1,251  

Other

   Real estate companies      8,612        8,480        2,140  
  

Entertainment companies

     2,218        2,209        840  
  

Other

     17,698        17,148        9,572  

Purchased loans

        11,013        11,013        5,888  
     

 

 

    

 

 

    

 

 

 

Total :

      ¥       73,593      ¥       72,256      ¥       22,533  
     

 

 

    

 

 

    

 

 

 

Consumer borrowers

        14,101        13,480        2,770  
     

 

 

    

 

 

    

 

 

 
  

Housing loans

     4,511        3,910        1,401  
     

 

 

    

 

 

    

 

 

 
  

Card loans

     4,123        4,113        590  
     

 

 

    

 

 

    

 

 

 
  

Other

     5,467        5,457        779  
     

 

 

    

 

 

    

 

 

 

Corporate borrowers

        48,479        47,763        13,875  
     

 

 

    

 

 

    

 

 

 

Non-recourse loans

   Japan      5,068        5,068        72  
     

 

 

    

 

 

    

 

 

 
  

The Americas

     5,989        5,988        1,251  
     

 

 

    

 

 

    

 

 

 

Other

   Real estate companies      8,612        8,480        2,140  
     

 

 

    

 

 

    

 

 

 
  

Entertainment companies

     2,429        2,420        840  
     

 

 

    

 

 

    

 

 

 
  

Other

     26,381        25,807        9,572  
     

 

 

    

 

 

    

 

 

 

Purchased loans

        11,013        11,013        5,888  
     

 

 

    

 

 

    

 

 

 

 

– 60 –


Table of Contents
    

December 31, 2016

 
          Millions of yen  

Portfolio segment

  

Class

   Loans
individually
evaluated for
impairment
     Unpaid
principal
balance
     Related
allowance
 

With no related allowance recorded *1 :

      ¥ 6,104      ¥ 6,089      ¥ 0  

Consumer borrowers

        810        799        0  
  

Housing loans

     810        799        0  
  

Card loans

     0        0        0  
  

Other

     0        0        0  

Corporate borrowers

        5,294        5,290        0  

Non-recourse loans

   Japan      0        0        0  
  

The Americas

     0        0        0  

Other

   Real estate companies      0        0        0  
  

Entertainment companies

     182        179        0  
  

Other

     5,112        5,111        0  

Purchased loans

        0        0        0  

With an allowance recorded *2 :

        55,006        53,837        21,055  

Consumer borrowers

        14,755        13,831        2,980  
  

Housing loans

     3,214        2,727        1,346  
  

Card loans

     4,117        4,107        609  
  

Other

     7,424        6,997        1,025  

Corporate borrowers

        31,837        31,592        13,295  

Non-recourse loans

   Japan      278        278        48  
  

The Americas

     5,936        5,935        2,159  

Other

   Real estate companies      7,133        7,066        1,701  
  

Entertainment companies

     1,876        1,868        692  
  

Other

     16,614        16,445        8,695  

Purchased loans

        8,414        8,414        4,780  
     

 

 

    

 

 

    

 

 

 

Total :

      ¥       61,110      ¥       59,926      ¥       21,055  
     

 

 

    

 

 

    

 

 

 

Consumer borrowers

        15,565        14,630        2,980  
     

 

 

    

 

 

    

 

 

 
  

Housing loans

     4,024        3,526        1,346  
     

 

 

    

 

 

    

 

 

 
  

Card loans

     4,117        4,107        609  
     

 

 

    

 

 

    

 

 

 
  

Other

     7,424        6,997        1,025  
     

 

 

    

 

 

    

 

 

 

Corporate borrowers

        37,131        36,882        13,295  
     

 

 

    

 

 

    

 

 

 

Non-recourse loans

   Japan      278        278        48  
     

 

 

    

 

 

    

 

 

 
  

The Americas

     5,936        5,935        2,159  
     

 

 

    

 

 

    

 

 

 

Other

   Real estate companies      7,133        7,066        1,701  
     

 

 

    

 

 

    

 

 

 
  

Entertainment companies

     2,058        2,047        692  
     

 

 

    

 

 

    

 

 

 
  

Other

     21,726        21,556        8,695  
     

 

 

    

 

 

    

 

 

 

Purchased loans

        8,414        8,414        4,780  
     

 

 

    

 

 

    

 

 

 

 

Note:  

Loans held for sale are not included in the table above.

*1

“With no related allowance recorded” represents impaired loans with no allowance for credit losses as all amounts are considered to be collectible.

*2

“With an allowance recorded” represents impaired loans with the allowance for credit losses as all or a part of the amounts are not considered to be collectible.

 

– 61 –


Table of Contents

The Company and its subsidiaries recognize installment loans other than purchased loans and loans to consumer borrowers as impaired loans when principal or interest is past-due 90 days or more, or it is probable that the Company and its subsidiaries will be unable to collect all amounts due according to the contractual terms of the loan agreements due to various debtor conditions, including insolvency filings, suspension of bank transactions, dishonored bills and deterioration of businesses. For non-recourse loans, in addition to these conditions, the Company and its subsidiaries perform an impairment review using financial covenants, acceleration clauses, loan-to-value ratios, and other relevant available information.

For purchased loans, the Company and its subsidiaries recognize them as impaired loans when it is probable that the Company and its subsidiaries will be unable to collect book values of the remaining investment due to factors such as a decline in the real estate collateral value and debtors’ creditworthiness since the acquisition of these loans.

The Company and its subsidiaries consider that loans to consumer borrowers, including housing loans, card loans and other, are impaired when terms of these loans are modified as troubled debt restructurings.

Interest payments received on impaired loans other than purchased loans are recorded as interest income unless the collection of the remaining investment is doubtful at which time payments received are recorded as reductions of principal. For purchased loans, although the acquired assets may remain loans in legal form, collections on these loans often do not reflect the normal historical experience of collecting delinquent accounts, and the need to tailor individual collateral-realization strategies often makes it difficult to reliably estimate the amount, timing, or nature of collections. Accordingly, the Company and its subsidiaries use the cost recovery method of income recognition for such purchased loans regardless of whether impairment is recognized or not.

In common with all classes, impaired loans are individually evaluated for a valuation allowance based on the present value of expected future cash flows, the loan’s observable market price or the fair value of the collateral securing the loans if the loans are collateral-dependent. For non-recourse loans, in principle, the estimated collectible amount is determined based on the fair value of the collateral securing the loans as they are collateral-dependent. Further for certain non-recourse loans, the estimated collectible amount is determined based on the present value of expected future cash flows. The fair value of the real estate collateral securing the loans is determined using appraisals prepared by independent third-party appraisers or our own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flows methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate. We generally obtain a new appraisal once a fiscal year. In addition, we periodically monitor circumstances of the real estate collateral and then obtain a new appraisal in situations involving a significant change in economic and/or physical conditions which may materially affect its fair value. For impaired purchased loans, the Company and its subsidiaries develop the allowance for credit losses based on the difference between the book value and the estimated collectible amount of such loans.

The following table provides information about the average recorded investments in impaired loans and interest income on impaired loans for the nine and three months ended December 31, 2015 and 2016:

 

    

Nine months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

  

Class

   Average Recorded
Investments in
Impaired Loans *
     Interest Income  on
Impaired Loans
     Interest on
Impaired  Loans
Collected in Cash
 

Consumer borrowers

      ¥ 12,838      ¥ 248      ¥ 214  
  

Housing loans

     5,226        140        124  
  

Card loans

     3,898        55        45  
  

Other

     3,714        53        45  

Corporate borrowers

        61,924        785        774  

Non-recourse loans

   Japan      5,147        9        9  
  

The Americas

     13,442        242        242  

Other

   Real estate companies      15,853        166        165  
  

Entertainment companies

     3,856        75        75  
  

Other

     23,626        293        283  

Purchased loans

        13,685        0        0  
     

 

 

    

 

 

    

 

 

 

Total

      ¥       88,447      ¥         1,033      ¥          988  
     

 

 

    

 

 

    

 

 

 

 

– 62 –


Table of Contents
    

Nine months ended December 31, 2016

 
          Millions of yen  

Portfolio segment

  

Class

   Average  Recorded
Investments in
Impaired Loans *
     Interest Income  on
Impaired Loans
     Interest on
Impaired  Loans
Collected in Cash
 

Consumer borrowers

      ¥ 14,791      ¥ 215      ¥ 180  
  

Housing loans

     4,265        84        70  
  

Card loans

     4,116        54        46  
  

Other

     6,410        77        64  

Corporate borrowers

        40,855        481        432  

Non-recourse loans

   Japan      1,479        6        6  
  

The Americas

     5,641        52        52  

Other

   Real estate companies      7,847        156        145  
  

Entertainment companies

     2,234        55        55  
  

Other

     23,654        212        174  

Purchased loans

        9,824        571        571  
     

 

 

    

 

 

    

 

 

 

Total

      ¥       65,470      ¥         1,267      ¥         1,183  
     

 

 

    

 

 

    

 

 

 
    

Three months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

  

Class

   Average Recorded
Investments in
Impaired Loans *
     Interest Income on
Impaired Loans
     Interest on
Impaired Loans
Collected in Cash
 

Consumer borrowers

      ¥ 13,870      ¥ 118      ¥ 110  
  

Housing loans

     5,269        83        77  
  

Card loans

     4,046        17        16  
  

Other

     4,555        18        17  

Corporate borrowers

        52,251        241        238  

Non-recourse loans

   Japan      5,075        4        4  
  

The Americas

     10,417        48        48  

Other

   Real estate companies      11,524        53        52  
  

Entertainment companies

     3,355        17        17  
  

Other

     21,880        119        117  

Purchased loans

        12,125        0        0  
     

 

 

    

 

 

    

 

 

 

Total

      ¥ 78,246      ¥ 359      ¥ 348  
     

 

 

    

 

 

    

 

 

 
    

Three months ended December 31, 2016

 
          Millions of yen  

Portfolio segment

  

Class

   Average  Recorded
Investments in
Impaired Loans *
     Interest Income on
Impaired Loans
     Interest on
Impaired Loans
Collected in Cash
 

Consumer borrowers

      ¥ 15,255      ¥ 72      ¥ 68  
  

Housing loans

     4,069        30        29  
  

Card loans

     4,112        16        16  
  

Other

     7,074        26        23  

Corporate borrowers

        37,055        128        128  

Non-recourse loans

   Japan      281        2        2  
  

The Americas

     5,526        17        17  

Other

   Real estate companies      7,384        42        42  
  

Entertainment companies

     2,096        17        17  
  

Other

     21,768        50        50  

Purchased loans

        8,853        237        237  
     

 

 

    

 

 

    

 

 

 

Total

      ¥ 61,163      ¥ 437      ¥ 433  
     

 

 

    

 

 

    

 

 

 

 

Note:

 

Loans held for sale are not included in the table above.

*

Average balances are calculated on the basis of fiscal beginning and quarter-end balances.

 

– 63 –


Table of Contents

The following table provides information about the credit quality indicators as of March 31, 2016 and December 31, 2016:

 

    

March 31, 2016

 
          Millions of yen  
                 Non-performing         

Portfolio segment

  

Class

   Performing      Loans
individually
evaluated for
impairment
     90+ days
past-due
loans not
individually
evaluated for
impairment
     Subtotal      Total  

Consumer borrowers

      ¥ 1,439,703      ¥ 14,101      ¥ 8,178      ¥ 22,279      ¥ 1,461,982  
   Housing loans      1,131,276        4,511        2,267        6,778        1,138,054  
   Card loans      255,753        4,123        657        4,780        260,533  
   Other      52,674        5,467        5,254        10,721        63,395  

Corporate borrowers

        1,029,381        48,479        0        48,479        1,077,860  

Non-recourse loans

   Japan      14,883        5,068        0        5,068        19,951  
   The Americas      55,271        5,989        0        5,989        61,260  

Other

   Real estate companies      261,558        8,612        0        8,612        270,170  
   Entertainment companies      98,852        2,429        0        2,429        101,281  
   Other      598,817        26,381        0        26,381        625,198  

Purchased loans

        19,511        11,013        0        11,013        30,524  

Direct financing leases

        1,177,580        0        12,556        12,556        1,190,136  
   Japan      831,207        0        7,918        7,918        839,125  
   Overseas      346,373        0        4,638        4,638        351,011  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥ 3,666,175      ¥   73,593      ¥   20,734      ¥      94,327      ¥ 3,760,502  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

December 31, 2016

 
          Millions of yen  
                 Non-performing         

Portfolio segment

  

Class

   Performing      Loans
individually
evaluated for
impairment
     90+ days
past-due
loans not
individually
evaluated for
impairment
     Subtotal      Total  

Consumer borrowers

      ¥ 1,563,754      ¥ 15,565      ¥ 9,094      ¥ 24,659      ¥ 1,588,413  
   Housing loans      1,242,161        4,024        2,095        6,119        1,248,280  
   Card loans      262,260        4,117        1,064        5,181        267,441  
   Other      59,333        7,424        5,935        13,359        72,692  

Corporate borrowers

        1,142,470        37,131        0        37,131        1,179,601  

Non-recourse loans

   Japan      13,917        278        0        278        14,195  
   The Americas      69,104        5,936        0        5,936        75,040  

Other

   Real estate companies      307,304        7,133        0        7,133        314,437  
   Entertainment companies      95,424        2,058        0        2,058        97,482  
   Other      656,721        21,726        0        21,726        678,447  

Purchased loans

        16,412        8,414        0        8,414        24,826  

Direct financing leases

        1,187,804        0        11,683        11,683        1,199,487  
   Japan      849,050        0        6,630        6,630        855,680  
   Overseas      338,754        0        5,053        5,053        343,807  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥ 3,910,440      ¥ 61,110      ¥ 20,777      ¥ 81,887      ¥ 3,992,327  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note:   

Loans held for sale are not included in the table above.

In common with all classes, the Company and its subsidiaries monitor the credit quality indicators as performing and non-performing assets. The category of non-performing assets includes financing receivables for debtors who have filed for insolvency proceedings, whose bank transactions are suspended, whose bills are dishonored, whose businesses have deteriorated, whose repayment is past-due 90 days or more, financing receivables modified as troubled debt restructurings, and performing assets include all other financing receivables. Regarding purchased loans, they are classified as non-performing assets when considered impaired, while all the other loans are included in the category of performing assets.

 

– 64 –


Table of Contents

Out of non-performing assets, the Company and its subsidiaries consider smaller balance homogeneous loans, including housing loans, card loans and other, which are not restructured and direct financing leases, as 90 days or more past-due financing receivables not individually evaluated for impairment, and consider the others as loans individually evaluated for impairment. After the Company and its subsidiaries have set aside provision for those non-performing assets, the Company and its subsidiaries continue to monitor at least on a quarterly basis the quality of any underlying collateral, the status of management of the debtors and other important factors in order to report to management and develop additional provision as necessary.

The following table provides information about the non-accrual and past-due financing receivables as of March 31, 2016 and December 31, 2016:

 

    

March 31, 2016

 
          Millions of yen  
          Past-due financing receivables                

Portfolio segment

  

Class

   30-89 days
past-due
     90 days
or more
past-due
     Total
past-due
     Total
financing
receivables
     Non-accrual  

Consumer borrowers

      ¥ 5,002      ¥ 11,348      ¥ 16,350      ¥ 1,461,982      ¥ 11,348  
   Housing loans      2,283        4,435        6,718        1,138,054        4,435  
   Card loans      503        1,103        1,606        260,533        1,103  
   Other      2,216        5,810        8,026        63,395        5,810  

Corporate borrowers

        3,018        18,944        21,962        1,077,860        31,464  

Non-recourse loans

   Japan      0        4,776        4,776        19,951        4,776  
   The Americas      2,370        400        2,770        61,260        5,924  

Other

   Real estate companies      44        2,727        2,771        270,170        2,727  
   Entertainment companies      0        145        145        101,281        145  
   Other      604        10,896        11,500        625,198        17,892  

Direct financing leases

        6,457        12,556        19,013        1,190,136        12,556  
   Japan      500        7,918        8,418        839,125        7,918  
   Overseas      5,957        4,638        10,595        351,011        4,638  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥      14,477      ¥   42,848      ¥   57,325      ¥ 3,729,978      ¥      55,368  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

December 31, 2016

 
          Millions of yen  
          Past-due financing receivables                

Portfolio segment

  

Class

   30-89 days
past-due
     90 days
or more
past-due
     Total
past-due
     Total
financing
receivables
     Non-accrual  

Consumer borrowers

      ¥ 5,631      ¥ 12,496      ¥ 18,127      ¥ 1,588,413      ¥ 12,496  
   Housing loans      2,227        4,052        6,279        1,248,280        4,052  
   Card loans      448        1,531        1,979        267,441        1,531  
   Other      2,956        6,913        9,869        72,692        6,913  

Corporate borrowers

        4,566        14,681        19,247        1,179,601        23,884  

Non-recourse loans

   Japan      0        0        0        14,195        0  
   The Americas      1,503        5,012        6,515        75,040        5,871  

Other

   Real estate companies      37        1,898        1,935        314,437        1,898  
   Entertainment companies      0        136        136        97,482        136  
   Other      3,026        7,635        10,661        678,447        15,979  

Direct financing leases

        4,221        11,683        15,904        1,199,487        11,683  
   Japan      736        6,630        7,366        855,680        6,630  
   Overseas      3,485        5,053        8,538        343,807        5,053  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥ 14,418      ¥ 38,860      ¥ 53,278      ¥ 3,967,501      ¥ 48,063  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note: Loans held for sale and purchased loans are not included in the table above.

In common with all classes, the Company and its subsidiaries consider financing receivables as past-due financing receivables when principal or interest is past-due 30 days or more. Loans whose terms have been modified are not classified as past-due financing receivables if the principals and interests are not past-due 30 days or more in accordance with the modified terms.

 

– 65 –


Table of Contents

The Company and its subsidiaries suspend accruing revenues on past-due installment loans and direct financing leases when principal or interest is past-due 90 days or more, or earlier, if management determines that their collections are doubtful based on factors such as individual debtors’ creditworthiness, historical loss experience, current delinquencies and delinquency trends. Cash repayments received on non-accrual loans are applied first against past due interest and then any surpluses are applied to principal in view of the conditions of the contract and obligors. The Company and its subsidiaries return to accrual status non-accrual loans and lease receivables when it becomes probable that the Company and its subsidiaries will be able to collect all amounts due according to the contractual terms of these loans and lease receivables, as evidenced by continual payments from the debtors. The period of such continual payments before returning to accrual status varies depending on factors that we consider are relevant in assessing the debtor’s creditworthiness, such as the debtor’s business characteristics and financial conditions as well as relevant economic conditions and trends.

The following table provides information about troubled debt restructurings of financing receivables that occurred during the nine and three months ended December 31, 2015 and 2016:

 

    

Nine months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

  

Class

   Pre-modification
Outstanding
Recorded Investment
     Post-modification
Outstanding
Recorded Investment
 

Consumer borrowers

      ¥ 4,609      ¥ 3,418  
   Housing loans      62        18  
   Card loans      1,819        1,387  
   Other      2,728        2,013  

Corporate borrowers

        156        154  

Non-recourse loans

   The Americas      147        147  

Other

   Other      9        7  
     

 

 

    

 

 

 

Total

      ¥ 4,765      ¥ 3,572  
     

 

 

    

 

 

 
    

Nine months ended December 31, 2016

 
          Millions of yen  

Portfolio segment

  

Class

   Pre-modification
Outstanding
Recorded Investment
     Post-modification
Outstanding
Recorded Investment
 

Consumer borrowers

      ¥ 8,079      ¥ 6,086  
   Housing loans      143        117  
   Card loans      1,578        1,279  
   Other      6,358        4,690  

Corporate borrowers

        539        535  

Other

   Other      539        535  
     

 

 

    

 

 

 

Total

      ¥ 8,618      ¥ 6,621  
     

 

 

    

 

 

 

 

– 66 –


Table of Contents
    

Three months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

  

Class

   Pre-modification
Outstanding
Recorded Investment
     Post-modification
Outstanding
Recorded Investment
 

Consumer borrowers

      ¥ 1,630      ¥ 1,265  
   Housing loans      7        7  
   Card loans      590        458  
   Other      1,033        800  
     

 

 

    

 

 

 

Total

      ¥ 1,630      ¥ 1,265  
     

 

 

    

 

 

 
    

Three months ended December 31, 2016

 
          Millions of yen  

Portfolio segment

  

Class

   Pre-modification
Outstanding
Recorded Investment
     Post-modification
Outstanding
Recorded Investment
 

Consumer borrowers

      ¥ 2,770      ¥ 2,093  
   Housing loans      11        4  
   Card loans      473        371  
   Other      2,286        1,718  

Corporate borrowers

        86        82  

Other

   Other      86        82  
     

 

 

    

 

 

 

Total

      ¥ 2,856      ¥ 2,175  
     

 

 

    

 

 

 

A troubled debt restructuring is defined as a restructuring of a financing receivable in which the creditor grants a concession to the debtor for economic or other reasons related to the debtor’s financial difficulties.

The Company and its subsidiaries offer various types of concessions to our debtors to protect as much of our investment as possible in troubled debt restructurings. For the debtors of non-recourse loans, the Company and its subsidiaries offer concessions including an extension of the maturity date at an interest rate lower than the current market rate for a debt with similar risk characteristics. For the debtors of all financing receivables other than non-recourse loans, the Company and its subsidiaries offer concessions such as a reduction of the loan principal, a temporary reduction in the interest payments, or an extension of the maturity date at an interest rate lower than the current market rate for a debt with similar risk characteristics. In addition, the Company and its subsidiaries may acquire collateral assets from the debtors in troubled debt restructurings to satisfy fully or partially the loan principal or past due interest.

In common with all portfolio segments, financing receivables modified as troubled debt restructurings are recognized as impaired and are individually evaluated for a valuation allowance. In most cases, these financing receivables have already been considered impaired and individually evaluated for allowance for credit losses prior to the restructurings. However, as a result of the restructuring, the Company and its subsidiaries may recognize additional provision for the restructured receivables.

 

– 67 –


Table of Contents

The following table provides information about financing receivables modified as troubled debt restructurings within the previous 12 months from December 31, 2015 and for which there was a payment default during the nine and three months ended December 31, 2015:

 

    

Nine months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

  

Class

   Recorded Investment  

Consumer borrowers

      ¥   90  
   Card loans      59  
   Other      31  
     

 

 

 

Total

      ¥      90  
     

 

 

 
    

Three months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

  

Class

   Recorded Investment  

Consumer borrowers

      ¥   46  
   Card loans      26  
   Other      20  
     

 

 

 

Total

      ¥   46  
     

 

 

 

 

– 68 –


Table of Contents

The following table provides information about financing receivables modified as troubled debt restructurings within the previous 12 months from December 31, 2016 and for which there was a payment default during the nine and three months ended December 31, 2016:

 

    

Nine months ended December 31, 2016

 
          Millions of yen  

Portfolio segment

  

Class

   Recorded Investment  

Consumer borrowers

      ¥ 1,549  
   Card loans      32  
   Other      1,517  
     

 

 

 

Total

      ¥ 1,549  
     

 

 

 
    

Three months ended December 31, 2016

 
          Millions of yen  

Portfolio segment

  

Class

   Recorded Investment  

Consumer borrowers

      ¥ 554  
   Card loans      20  
   Other      534  
     

 

 

 

Total

      ¥ 554  
     

 

 

 

The Company and its subsidiaries consider financing receivables whose terms have been modified in a restructuring as defaulted receivables when principal or interest is past-due 90 days or more in accordance with the modified terms.

In common with all portfolio segments, the Company and its subsidiaries suspend accruing revenues and may recognize additional provision as necessary for the defaulted financing receivables.

As of March 31, 2016 and December 31, 2016, there were no foreclosed residential real estate properties. The carrying amounts of installment loans in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure were ¥601 million and ¥511 million as of March 31, 2016 and December 31, 2016, respectively.

 

– 69 –


Table of Contents
6. Investment in Securities

Investment in securities as of March 31, 2016 and December 31, 2016 consists of the following:

 

     Millions of yen  
     March 31, 2016      December 31, 2016  

Trading securities *

   ¥ 725,821      ¥ 648,322  

Available-for-sale securities

     1,347,890        1,172,098  

Held-to-maturity securities

     114,858        114,714  

Other securities

     156,223        172,712  
  

 

 

    

 

 

 

Total

   ¥ 2,344,792      ¥ 2,107,846  
  

 

 

    

 

 

 

 

*

The amount of assets under management of variable annuity and variable life insurance contracts included in trading securities were ¥704,313 million and ¥612,483 million as of March 31, 2016 and December 31, 2016, respectively.

Other securities consist mainly of non-marketable equity securities, preferred capital shares carried at cost and investment funds carried at an amount that reflects equity income and loss based on the investor’s share. The aggregate carrying amount of other securities accounted for under the cost method totaled ¥27,349 million and ¥25,246 million as of March 31, 2016 and December 31, 2016, respectively. Investments with an aggregate cost of ¥27,125 million and ¥25,230 million, respectively, were not evaluated for impairment because the Company and its subsidiaries did not identify any events or changes in circumstances that might have had a significant adverse effect on the fair value of those investments and it was not practicable to estimate the fair value of the investments.

A certain subsidiary elected the fair value option for investments in foreign government bond securities included in available-for-sale securities, which as of March 31, 2016 and December 31, 2016, were fair valued at ¥988 million and ¥990 million, respectively.

A certain subsidiary elected the fair value option for investments in foreign corporate debt securities included in available-for-sale securities, which as of December 31, 2016, were fair valued at ¥838million.

A certain subsidiary elected the fair value option for certain investments in equity securities included in available-for-sale securities to mitigate volatility in the consolidated statements of income caused by the differences in classification of recognized gain or loss that would otherwise exist between the equity securities and the derivatives used to manage the risk of changes in fair value of these equity securities. As of March 31, 2016 and December 31, 2016, these equity securities were fair valued at ¥16,227 million and ¥16,215 million, respectively.

Certain subsidiaries elected the fair value option for certain investments in a trust and investment funds included in other securities whose net asset values do not represent the fair value of investments due to the illiquid nature of these investments. The subsidiaries manage these investments on a fair value basis and the election of the fair value option enables the subsidiaries to reflect more appropriate assumptions to measure the fair value of these investments. As of March 31, 2016 and December 31, 2016, the fair values of these investments were ¥10,152 million and ¥7,876 million, respectively.

 

– 70 –


Table of Contents

The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale securities and held-to-maturity securities in each major security type as of March 31, 2016 and December 31, 2016 are as follows:

March 31, 2016

 

     Millions of yen  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  

Available-for-sale:

          

Japanese and foreign government bond securities

   ¥ 464,854      ¥ 32,501      ¥ 0     ¥ 497,355  

Japanese prefectural and foreign municipal bond securities

     165,465        4,106        (37     169,534  

Corporate debt securities

     403,349        7,443        (13     410,779  

Specified bonds issued by SPEs in Japan

     3,422        39        0       3,461  

CMBS and RMBS in the Americas

     97,692        1,906        (2,412     97,186  

Other asset-backed securities and debt securities

     63,079        1,744        (6,593     58,230  

Equity securities

     85,452        33,492        (7,599     111,345  
  

 

 

    

 

 

    

 

 

   

 

 

 
     1,283,313        81,231        (16,654     1,347,890  
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

          

Japanese government bond securities and other

     114,858        30,662        0       145,520  
  

 

 

    

 

 

    

 

 

   

 

 

 
   ¥ 1,398,171      ¥ 111,893      ¥ (16,654   ¥ 1,493,410  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

December 31, 2016

 

          
     Millions of yen  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  

Available-for-sale:

          

Japanese and foreign government bond securities

   ¥ 322,083      ¥ 14,789      ¥ (1,105   ¥ 335,767  

Japanese prefectural and foreign municipal bond securities

     173,512        3,325        (1,219     175,618  

Corporate debt securities

     410,485        3,814        (4,640     409,659  

Specified bonds issued by SPEs in Japan

     1,149        13        0       1,162  

CMBS and RMBS in the Americas

     95,668        2,645        (860     97,453  

Other asset-backed securities and debt securities

     74,666        3,218        (1,245     76,639  

Equity securities

     51,966        24,025        (191     75,800  
  

 

 

    

 

 

    

 

 

   

 

 

 
     1,129,529        51,829        (9,260     1,172,098  
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

          

Japanese government bond securities and other

     114,714        27,179        0       141,893  
  

 

 

    

 

 

    

 

 

   

 

 

 
   ¥ 1,244,243      ¥ 79,008      ¥ (9,260   ¥ 1,313,991  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

– 71 –


Table of Contents

The following tables provide information about available-for-sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss portion as of March 31, 2016 and December 31, 2016, respectively:

March 31, 2016

 

     Millions of yen  
     Less than 12 months     12 months or more     Total  
     Fair value      Gross
unrealized
losses
    Fair value      Gross
unrealized
losses
    Fair value      Gross
unrealized
losses
 

Available-for-sale:

               

Japanese prefectural and foreign municipal bond securities

   ¥ 14,821      ¥ (30   ¥ 554      ¥ (7   ¥ 15,375      ¥ (37

Corporate debt securities

     32,969        (13     1,802        0       34,771        (13

CMBS and RMBS in the Americas

     55,226        (2,234     5,002        (178     60,228        (2,412

Other asset-backed securities and debt securities

     14,220        (1,857     18,846        (4,736     33,066        (6,593

Equity securities

     17,040        (7,550     594        (49     17,634        (7,599
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   ¥ 134,276      ¥ (11,684   ¥ 26,798      ¥ (4,970   ¥ 161,074      ¥ (16,654
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2016

 
     Millions of yen  
     Less than 12 months     12 months or more     Total  
     Fair value      Gross
unrealized
losses
    Fair value      Gross
unrealized
losses
    Fair value      Gross
unrealized
losses
 

Available-for-sale:

               

Japanese and foreign government bond securities

   ¥ 44,750      ¥ (1,105   ¥ 0      ¥ 0     ¥ 44,750      ¥ (1,105

Japanese prefectural and foreign municipal bond securities

     48,934        (1,200     255        (19     49,189        (1,219

Corporate debt securities

     195,734        (4,640     0        0       195,734        (4,640

CMBS and RMBS in the Americas

     22,409        (558     18,223        (302     40,632        (860

Other asset-backed securities and debt securities

     5,201        (146     18,849        (1,099     24,050        (1,245

Equity securities

     3,133        (184     79        (7     3,212        (191
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   ¥ 320,161      ¥ (7,833   ¥ 37,406      ¥ (1,427   ¥ 357,567      ¥ (9,260
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The number of investment securities that were in an unrealized loss position as of March 31, 2016 and December 31, 2016 were 259 and 403, respectively. The gross unrealized losses on these securities are attributable to a number of factors including changes in interest rates, credit spreads and market trends.

 

– 72 –


Table of Contents

For debt securities, in the case of the fair value being below the amortized cost, the Company and its subsidiaries consider whether those securities are other-than-temporarily impaired using all available information about their collectability. The Company and its subsidiaries do not consider a debt security to be other-than-temporarily impaired if (1) the Company and its subsidiaries do not intend to sell the debt security, (2) it is not more likely than not that the Company and its subsidiaries will be required to sell the debt security before recovery of its amortized cost basis and (3) the present value of estimated cash flows will fully cover the amortized cost of the security. On the other hand, the Company and its subsidiaries consider a debt security to be other-than-temporarily impaired if any of the above mentioned three conditions are not met.

Debt securities with unrealized loss position mainly include CMBS and RMBS in the Americas, and other asset-backed securities.

The unrealized loss associated with CMBS and RMBS in the Americas and other asset-backed securities is primarily caused by changes in credit spreads and interest rates. In order to determine whether a credit loss exists, the Company and its subsidiaries estimate the present value of anticipated cash flows, discounted at the current yield to accrete the security. The cash flows are estimated based on a number of assumptions such as default rate and prepayment speed, as well as seniority of the security. Then, a credit loss is assessed by comparing the present value of the expected cash flows to the security’s amortized cost basis. Based on that assessment, the Company and its subsidiaries expect to recover the entire amortized cost basis and no credit impairment was identified. Because the Company and its subsidiaries do not intend to sell the investments and it is not more likely than not that the Company and its subsidiaries will be required to sell the investments before recovery of their amortized cost basis, the Company and its subsidiaries do not consider these investments to be other-than-temporarily impaired as of December 31, 2016.

For equity securities with unrealized losses, the Company and its subsidiaries consider various factors to determine whether the decline is other-than-temporary, including the length of time and the extent to which the fair value has been less than the carrying value and the issuer’s specific economic conditions as well as the ability and intent to hold these securities for a period of time sufficient to recover the securities’ carrying amounts. Based on our ongoing monitoring process, the Company and its subsidiaries do not consider these investments to be other-than-temporarily impaired as of December 31, 2016.

The total other-than-temporary impairment with an offset for the amount of the total other-than-temporary impairment recognized in other comprehensive income (loss) for the nine months ended December 31, 2015 and 2016 are as follows:

 

                                                                     
     Millions of yen  
     Nine months  ended
December 31, 2015
    Nine months  ended
December 31, 2016
 

Total other-than-temporary impairment losses

   ¥ 3,954     ¥ 6,363  

Portion of loss recognized in other comprehensive income (before taxes)

     (2      0   
  

 

 

   

 

 

 

Net impairment losses recognized in earnings

   ¥         3,952     ¥     6,363  
  

 

 

   

 

 

 
    

 

– 73 –


Table of Contents

The total other-than-temporary impairment with an offset for the amount of the total other-than-temporary impairment recognized in other comprehensive income (loss) for the three months ended December 31, 2015 and 2016 are as follows:

 

                                                                     
     Millions of yen  
     Three months  ended
December 31, 2015
    Three months  ended
December 31, 2016
 

Total other-than-temporary impairment losses

   ¥ 470     ¥ 151  

Portion of loss recognized in other comprehensive income (before taxes)

      0         0   
  

 

 

   

 

 

 

Net impairment losses recognized in earnings

   ¥        470     ¥        151  
  

 

 

   

 

 

 
    

Total other-than-temporary impairment losses for the nine and three months ended December 31, 2015 related to equity securities, debt securities and other securities. Total other-than-temporary impairment losses for the nine and three months ended December 31, 2016 related to equity securities and other securities.

During the nine months ended December 31, 2015, other-than-temporary impairment losses related to debt securities were recognized mainly on certain other asset-backed securities. Other asset-backed securities have experienced credit losses due to decline in the value of the underlying assets. Because the Company and its subsidiaries do not intend to sell the investments and it is not more likely than not that the Company and its subsidiaries will be required to sell the investments before recovery of their amortized cost basis, the credit loss component is recognized in earnings, and the non-credit loss component is recognized in other comprehensive income (loss), net of applicable income taxes. The credit loss assessment is made by comparing the securities’ amortized cost basis with the portion of the estimated fair value of the underlying assets available to repay the specified bonds, or with the present value of the expected cash flows from the mortgage-backed securities, that were estimated based on a number of assumptions such as seniority of the security.

Roll-forwards of the amount related to credit losses on other-than-temporarily impaired debt securities recognized in earnings for the nine months ended December 31, 2015 and 2016 are as follows:

 

                                                                     
     Millions of yen  
     Nine months  ended
December 31, 2015
    Nine months  ended
December 31, 2016
 

Beginning

   ¥ 2,633     ¥ 1,413  

Addition during the period:

    

Credit loss for which an other-than-temporary impairment was previously recognized

     49       0  

Reduction during the period:

    

For securities sold

     (604     0  

Due to change in intent to sell or requirement to sell

     (661     (22
  

 

 

   

 

 

 

Ending

   ¥        1,417     ¥     1,391  
  

 

 

   

 

 

 

Roll-forwards of the amount related to credit losses on other-than-temporarily impaired debt securities recognized in earnings for the three months ended December 31, 2015 and 2016 are as follows:

 

                                                                     
     Millions of yen  
     Three months  ended
December 31, 2015
    Three months  ended
December 31, 2016
 

Beginning

   ¥ 2,421     ¥ 1,391  

Addition during the period:

    

Credit loss for which an other-than-temporary impairment was previously recognized

     0       0  

Reduction during the period:

    

For securities sold

     (343      0   

Due to change in intent to sell or requirement to sell

     (661     0  
  

 

 

   

 

 

 

Ending

   ¥         1,417     ¥     1,391  
  

 

 

   

 

 

 

 

– 74 –


Table of Contents

The Company and its subsidiaries recorded other-than-temporary impairments related to the non-credit losses arising from foregoing debt securities for CMBS and RMBS in the Americas. These impairments included the amount of unrealized gains or losses for the changes in fair value of the debt securities after recognition of other-than-temporary impairments in earnings. As of March 31, 2016, an unrealized gain of ¥61 million and an unrealized loss of ¥6 million, before taxes, were included and an unrealized gain of ¥39 million and an unrealized loss of ¥4 million, net of taxes, were included in unrealized gains or losses of accumulated other comprehensive income. As of December 31, 2016, an unrealized gain of ¥53 million, before taxes, was included and an unrealized gain of ¥34 million, net of taxes, was included in unrealized gains or losses of accumulated other comprehensive income. As of December 31, 2016, no unrealized loss was included in unrealized gains or losses of accumulated other comprehensive income.

 

7.

Securitization Transactions

The Company and its subsidiaries have securitized various financial assets such as lease receivables and installment loans (commercial mortgage loans, housing loans and other).

In the securitization process, these financial assets are transferred to SPEs, such as trusts and special-purpose companies that issue beneficial interests of the securitization trusts and securities backed by the financial assets to investors. The cash flows collected from these assets transferred to the SPEs are then used to repay these asset-backed beneficial interests and securities. As the transferred assets are isolated from the Company and its subsidiaries, the investors and the SPEs have no recourse to other assets of the Company and its subsidiaries in cases where the debtors or the issuers of the transferred financial assets fail to perform under the original terms of those financial assets.

The Company and its subsidiaries often retain interests in the SPEs in the form of the beneficial interest of the securitization trusts. Those interests that continue to be held include interests in the transferred assets and are often subordinate to other tranche(s) of the securitization. Those beneficial interests that continue to be held by the Company and its subsidiaries are subject to credit risk, interest rate risk and prepayment risk on the securitized financial assets. With regards to these subordinated interests that the Company and its subsidiaries retain, they are subordinated to the senior investments and are exposed to different credit and prepayment risks, since they first absorb the risk of the decline in the cash flows from the financial assets transferred to the SPEs for defaults and prepayment of the transferred assets. If there is any excess cash remaining in the SPEs after payment to investors in the securitization of the contractual rate of returns, most of such excess cash is distributed to the Company and its subsidiaries for payments of the subordinated interests.

Trusts or SPEs used in securitization transactions have been consolidated if the Company and its subsidiaries are the primary beneficiary of the trusts or SPEs.

During the nine months ended December 31, 2015 and 2016, there was no securitization transaction accounted for as a sale.

 

– 75 –


Table of Contents

Quantitative information about delinquencies, impaired loans and components of financial assets sold on securitization and other assets managed together as of March 31, 2016 and December 31, 2016, and quantitative information about net credit loss for the nine and three months ended December 31, 2015 and 2016 are as follows:

 

     Millions of yen  
     Total principal
amount  of
receivables
     Principal amount  of
receivables that are 90 days
or more past-due

and impaired loans
 
     March 31, 2016      December 31, 2016      March 31, 2016      December 31, 2016  

Direct financing leases

   ¥ 1,190,136      ¥ 1,199,487      ¥ 12,556      ¥ 11,683  

Installment loans

     2,592,233        2,808,316        81,771        70,204  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,782,369        4,007,803        94,327        81,887  
  

 

 

    

 

 

    

 

 

    

 

 

 

Direct financing leases sold on securitization

     706        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 3,783,075      ¥ 4,007,803      ¥ 94,327      ¥ 81,887  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Millions of yen  
     Credit loss  
     Nine months  ended
December 31, 2015
     Nine months  ended
December 31, 2016
     Three months  ended
December 31, 2015
     Three months  ended
December 31, 2016
 

Direct financing leases

   ¥ 2,277      ¥ 3,074      ¥ 495      ¥ 1,287  

Installment loans

     10,112        8,613        4,100        2,688  
  

 

 

    

 

 

    

 

 

    

 

 

 
     12,389        11,687        4,595        3,975  
  

 

 

    

 

 

    

 

 

    

 

 

 

Direct financing leases sold on securitization

     0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 12,389      ¥ 11,687      ¥ 4,595      ¥ 3,975  
  

 

 

    

 

 

    

 

 

    

 

 

 

A certain subsidiary originates and sells loans into the secondary market while retaining the obligation to service those loans. In addition, it undertakes obligations to service loans originated by others. The servicing assets related to those servicing activities are included in other assets and roll-forwards of the amount of the servicing assets for the nine and three months ended December 31, 2015 and 2016 are as follows:

 

     Millions of yen  
     Nine months ended
December 31, 2015
    Nine months ended
December 31, 2016
    Three months ended
December 31, 2015
    Three months ended
December 31, 2016
 

Beginning balance

   ¥ 18,376     ¥ 16,852     ¥ 18,158     ¥ 15,136  

Increase mainly from loans sold with servicing retained

     3,508       3,330       1,230       1,549  

Decrease mainly from amortization

     (3,407     (2,776     (941     (997

Increase from the effects of changes in foreign exchange rates

     67       622       97       2,340  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   ¥      18,544     ¥      18,028     ¥ 18,544     ¥ 18,028  
  

 

 

   

 

 

   

 

 

   

 

 

 

The fair value of the servicing assets as of March 31, 2016 and December 31, 2016 are as follows:

 

                         
     Millions of yen  
     March 31, 2016      December 31, 2016  

The fair value of the servicing assets

   ¥ 24,229      ¥ 26,186  

 

– 76 –


Table of Contents
8.

Variable Interest Entities

The Company and its subsidiaries use special purpose companies, partnerships and trusts (hereinafter referred to as SPEs) in the ordinary course of business.

These SPEs are not always controlled by voting rights, and there are cases where voting rights do not exist for these SPEs. The Company and its subsidiaries determine a variable interest entity (hereinafter referred to as VIE) among those SPEs when (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders or (b) as a group, the holders of the equity investment at risk do not have (1) the ability to make decisions about an entity’s activities that most significantly impact the entity’s economic performance through voting rights or similar rights, (2) the obligation to absorb the expected losses of the entity or (3) the right to receive the expected residual returns of the entity.

The Company and its subsidiaries perform a qualitative analysis to identify the primary beneficiary of VIEs. An enterprise that has both of the following characteristics is considered to be the primary beneficiary and therefore results in the consolidation of the VIE:

 

   

The power to direct the activities of a VIE that most significantly impact the entity’s economic performance

 

   

The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE

All facts and circumstances are taken into consideration when determining whether the Company and its subsidiaries have variable interests that would deem it the primary beneficiary and therefore require consolidation of the VIE. The Company and its subsidiaries make ongoing reassessment of whether they are the primary beneficiaries of a VIE.

The following are the items that the Company and its subsidiaries are considering in a qualitative assessment:

 

   

Which activities most significantly impact the economic performance of the VIE and who has the power to direct such activities

 

   

Characteristics of the Company and its subsidiaries’ variable interest or interests and other involvements (including involvement of related parties and de facto agents)

 

   

Involvement of other variable interest holders

 

   

The entity’s purpose and design, including the risks that the entity was designed to create and pass through to its variable interest holders

The Company and its subsidiaries generally consider the following types of involvement to be significant when determining the primary beneficiary:

 

   

Designing the structuring of a transaction

 

   

Providing an equity investment and debt financing

 

   

Being the investment manager, asset manager or servicer and receiving variable fees

 

   

Providing liquidity and other financial support

The Company and its subsidiaries do not have the power to direct activities of the VIEs that most significantly impact the VIEs’ economic performance if that power is shared among multiple unrelated parties, and accordingly do not consolidate such VIEs.

 

– 77 –


Table of Contents

Information about VIEs (consolidated and non-consolidated) for the Company and its subsidiaries are as follows:

 

1.

Consolidated VIEs

March 31, 2016 *4

 

     Millions of yen  

Types of VIEs

   Total
assets  *1
     Total
liabilities  *1
     Assets which
are  pledged as
collateral *2
     Commitments *3  

(a) VIEs for liquidating customer assets

   ¥ 0      ¥ 0      ¥ 0      ¥ 0  

(b) VIEs for acquisition of real estate and real estate development projects for customers

     953        0        0        0  

(c) VIEs for acquisition of real estate for the Company and its subsidiaries’ real estate-related business

     174,854        56,325        113,869        7,000  

(d) VIEs for corporate rehabilitation support business

     2,055        40        0        0  

(e) VIEs for investment in securities

     24,882        9,657        17,336        2,422  

(f) VIEs for securitizing financial assets such as direct financing lease receivable and loan receivable

     381,313        256,620        346,169        0  

(g) VIEs for securitization of loan receivable originated by third parties

     21,550        20,548        21,550        0  

(h) VIEs for power generation projects

        159,593        82,535        88,119        121,390  

(i) Other VIEs

     216,632        97,979        213,466        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 981,832      ¥ 523,704      ¥ 800,509      ¥ 130,812  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2016

 

 

     Millions of yen  

Types of VIEs

   Total
assets  *1
     Total
liabilities  *1
     Assets which
are  pledged as
collateral *2
     Commitments *3  

(a) VIEs for liquidating customer assets

   ¥ 0      ¥ 0      ¥ 0      ¥ 0  

(b) VIEs for acquisition of real estate and real estate development projects for customers

     699        0        0        0  

(c) VIEs for acquisition of real estate for the Company and its subsidiaries’ real estate-related business

     144,190        50,351        91,332        7,000  

(d) VIEs for corporate rehabilitation support business

     1,806        18        0        0  

(e) VIEs for investment in securities

     39,323        3,795        6,899        2,169  

(f) VIEs for securitizing financial assets such as direct financing lease receivable and loan receivable

     389,102        268,664        357,648        0  

(g) VIEs for securitization of loan receivable originated by third parties

     19,811        18,368        19,811        0  

(h) VIEs for power generation projects

     193,956        102,829        121,659        92,506  

(i) Other VIEs

     218,124        89,611        193,710        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,007,011      ¥ 533,636      ¥ 791,059      ¥ 101,675  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*1

The assets of most VIEs are used only to repay the liabilities of the VIEs, and the creditors of the liabilities of most VIEs have no recourse to other assets of the Company and its subsidiaries.

*2

The assets are pledged as collateral by VIE for financing of the VIE.

*3

This item represents remaining balance of commitments that could require the Company and its subsidiaries to provide investments or loans to the VIE.

*4

The amounts as of March 31, 2016 were disclosed according to ASC810 (“Consolidation”) before amendment, and were not adjusted to reflect the Accounting Standards Update 2015-02 (“Amendments to the Consolidation Analysis”—ASC810 (“Consolidation”)).

 

– 78 –


Table of Contents
2.

Non-consolidated VIEs

March 31, 2016 *2

 

      Millions of yen  
            Carrying amount of
the variable interests in
the VIEs held by

the Company and its subsidiaries
        

Types of VIEs

   Total assets      Specified
bonds and

non-recourse
loans
     Investments      Maximum
exposure
to loss *1
 

(a) VIEs for liquidating customer assets

   ¥ 33,406      ¥ 0      ¥ 2,091      ¥ 9,551  

(b) VIEs for acquisition of real estate and real estate development projects for customers

     170,001        4,776        13,039        24,964  

(c) VIEs for acquisition of real estate for the Company and its subsidiaries’ real estate-related business

     0        0        0        0  

(d) VIEs for corporate rehabilitation support business

     0        0        0        0  

(e) VIEs for investment in securities

     2,964,616        0        26,174        47,636  

(f) VIEs for securitizing financial assets such as direct financing lease receivable and loan receivable

     0        0        0        0  

(g) VIEs for securitization of loan receivable originated by third parties

     1,070,683        0        10,671        10,721  

(h) VIEs for power generation projects

     20,007        0        1,182        1,182  

(i) Other VIEs

     104,284        0        4,868        4,868  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 4,362,997      ¥ 4,776      ¥ 58,025      ¥ 98,922  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2016

 

           
      Millions of yen  
            Carrying amount of
the variable interests in
the VIEs held by

the Company and its subsidiaries
        

Types of VIEs

   Total assets      Specified
bonds and

non-recourse
loans
     Investments      Maximum
exposure
to loss *1
 

(a) VIEs for liquidating customer assets

   ¥ 33,060      ¥ 0      ¥ 2,091      ¥ 9,551  

(b) VIEs for acquisition of real estate and real estate development projects for customers

     99,815        0        11,837        12,061  

(c) VIEs for acquisition of real estate for the Company and its subsidiaries’ real estate-related business

     0        0        0        0  

(d) VIEs for corporate rehabilitation support business

     0        0        0        0  

(e) VIEs for investment in securities

     24,455,816        0        82,469        113,396  

(f) VIEs for securitizing financial assets such as direct financing lease receivable and loan receivable

     0        0        0        0  

(g) VIEs for securitization of loan receivable originated by third parties

     1,351,505        0        16,806        16,848  

(h) VIEs for power generation projects

     10,514        0        1,149        1,149  

(i) Other VIEs

     224,361        0        13,730        16,258  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 26,175,071      ¥ 0      ¥ 128,082      ¥ 169,263  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

– 79 –


Table of Contents

 

*1

Maximum exposure to loss includes remaining balance of commitments that could require the Company and its subsidiaries to provide investments or loans to the VIE.

*2

The amounts as of March 31, 2016 were disclosed according to ASC810 (“Consolidation”) before amendment, and were not adjusted to reflect the Accounting Standards Update 2015-02 (“Amendments to the Consolidation Analysis”—ASC810 (“Consolidation”)).

*3

On April 1, 2016, the Company and its subsidiaries adopted the Accounting Standards Update 2015-02 (“Amendments to the Consolidation Analysis”—ASC810 (“Consolidation”)), issued in February 2015. As a result of the adoption, the effect on the non-consolidated VIEs as of April 1, 2016 was an increase of ¥2,401,930 million in total assets, an increase of ¥56,931 million in investments and an increase of ¥69,660 million in maximum exposure to loss. This was due primarily to the increases of ¥2,021,460 million in total assets, ¥49,275 million in investments and ¥62,003 million in maximum exposure to loss, included in “(e) VIEs for investment in securities.”

(a) VIEs for liquidating customer assets

The Company and its subsidiaries may use VIEs in structuring financing for customers to liquidate specific customer assets. The VIEs are typically used to provide a structure that is bankruptcy remote with respect to the customer and the use of VIE structure is requested by such customer. Such VIEs typically acquire assets to be liquidated from the customer, borrow non-recourse loans from financial institutions and have an equity investment made by the customer. By using cash flows from the liquidated assets, these VIEs repay the loan and pay dividends to equity investors if sufficient funds exist.

Variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, are mainly included in other assets in the Company’s condensed consolidated balance sheets. The Company has a commitment agreement by which the Company may be required to make additional investment in certain such non-consolidated VIEs.

(b) VIEs for acquisition of real estate and real estate development projects for customers

Customers and the Company and its subsidiaries are involved with VIEs formed to acquire real estate and/or develop real estate projects. In each case, a customer establishes and makes an equity investment in a VIE that is designed to be bankruptcy remote from the customer. The VIEs acquire real estate and/or develop real estate projects.

The Company and its subsidiaries provide non-recourse loans to such VIEs and hold specified bonds issued by them and/or make investments in them. The Company and its subsidiaries have consolidated certain VIEs because the Company or its subsidiary effectively controls the VIEs by acting as the asset manager of the VIEs.

In the Company’s condensed consolidated balance sheets, assets of consolidated VIEs are mainly included in cash and cash equivalents and liabilities of those consolidated VIEs are mainly included in other liabilities.

With respect to the variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, specified bonds are included in investment in securities, non-recourse loans are included in installment loans, and investments are mainly included in investment in securities, investment in affiliates and other assets in the Company’s condensed consolidated balance sheets. The Company and its subsidiaries have commitment agreements by which the Company and its subsidiaries may be required to provide additional investment in certain non-consolidated VIEs as long as the agreed-upon terms are met. Under these agreements, the Company and its subsidiaries are committed to invest in these VIEs with the other investors based on their respective ownership percentages. The Company and its subsidiaries concluded that the VIEs are not consolidated because the power to direct these VIEs is held by unrelated parties. In some cases, the Company and its subsidiaries concluded that the VIEs are not consolidated because the power to direct these VIEs is shared among multiple unrelated parties.

(c) VIEs for acquisition of real estate for the Company and its subsidiaries’ real estate-related business

The Company and its subsidiaries establish VIEs and acquire real estate to borrow non-recourse loans from financial institutions and simplify the administration activities necessary for the real estate. The Company and its subsidiaries consolidate such VIEs even though the Company and its subsidiaries may not have voting rights if substantially all of such VIEs’ subordinated interests are issued to the Company and its subsidiaries, and therefore the VIEs are controlled by and for the benefit of the Company and its subsidiaries.

 

– 80 –


Table of Contents

The Company and its subsidiaries contributed additional funding to certain consolidated VIEs, since those VIEs had difficulty repaying debt and accounts payable. There was no additional funding or acquisition of subordinated interests during fiscal 2016 and the nine months ended December 31, 2016.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in cash and cash equivalents, restricted cash, investment in operating leases, property under facility operations and other assets, and liabilities of those consolidated VIEs are mainly included in long-term debt. The Company has a commitment agreement by which the Company may be required to make additional investment in certain such consolidated VIEs.

(d) VIEs for corporate rehabilitation support business

Financial institutions, the Company and its subsidiary are involved with VIEs established for the corporate rehabilitation support business. VIEs receive the funds from investors including the financial institutions, the Company and the subsidiary, and purchase loan receivables due from borrowers which have financial problems, but are deemed to have the potential to recover in the future. The servicing operations for the VIEs are conducted by the subsidiary.

The Company and its subsidiary consolidated such VIEs since the Company and the subsidiary have the majority of the investment share of such VIEs, and have the power to direct the activities of the VIEs that most significantly impact the entities’ economic performance through the servicing operations.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in installment loans, and liabilities of those consolidated VIEs are mainly included in other liabilities.

(e) VIEs for investment in securities

The Company and its subsidiaries have interests in VIEs that are investment funds and mainly invest in equity and debt securities. Such VIEs are managed by certain subsidiaries or fund management companies that are independent of the Company and its subsidiaries.

The Company consolidated certain such VIEs since the Company has the majority of the investment share of them, and has the power to direct the activities of those VIEs that most significantly impact the entities’ economic performance through involvement with the design of the VIEs or other means.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in investment in securities and investment in affiliates, and liabilities of those consolidated VIEs are mainly included in other liabilities. A subsidiary has a commitment agreement by which the subsidiary may be required to make additional investment in certain such consolidated VIEs.

Variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, are included in investment in securities in the Company’s condensed consolidated balance sheets. The Company and its subsidiaries have a commitment agreement by which the Company and its subsidiaries may be required to make additional investment in certain such non-consolidated VIEs.

(f) VIEs for securitizing financial assets such as direct financing lease receivable and loan receivable

The Company and its subsidiaries use VIEs to securitize financial assets such as direct financing leases receivables and loans receivables. In the securitization process, these financial assets are transferred to SPEs, and the SPEs issue beneficial interests or securities backed by the transferred financial assets to investors. After the securitization, the Company and its subsidiaries continue to hold a subordinated part of the securities and act as a servicer.

The Company and its subsidiaries consolidated such VIEs since the Company and its subsidiaries have the power to direct the activities that most significantly impact the entity’s economic performance by designing the securitization scheme and conducting servicing activities, and have a responsibility to absorb losses of the VIEs that could potentially be significant to the entities by retaining the subordinated part of the securities.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in restricted cash, investment in direct financing leases and installment loans, and liabilities of those consolidated VIEs are mainly included in long-term debt.

 

– 81 –


Table of Contents

(g) VIEs for securitization of loan receivable originated by third parties

The Company and its subsidiaries invest in CMBS, RMBS and other asset-backed securities originated by third parties. In some cases of such securitization, certain subsidiaries hold the subordinated portion and the subsidiaries act as a special-servicer of the securitization transaction. As the special servicer, the subsidiaries have rights to dispose of real estate collateral related to the securitized commercial mortgage loans.

The subsidiaries consolidate certain of these VIEs when the subsidiaries have the power to direct the activities of the VIEs that most significantly impact the entities’ economic performance through its role as special-servicer, including the right to dispose of the collateral, and have a responsibility to absorb losses of the VIEs that could potentially be significant to the entities by holding the subordinated part of the securities.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in installment loans, and liabilities of those consolidated VIEs are mainly included in long-term debt.

Variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, are included in investment in securities in the Company’s condensed consolidated balance sheets. The Company has a commitment agreement by which the Company may be required to make additional investment in certain such non-consolidated VIEs.

(h) VIEs for power generation projects

The Company and its subsidiaries may use VIEs in power generation projects. VIEs receive the funds from the Company and its subsidiaries, install solar panels on acquired or leased lands, and sell the generated power to electric power companies. The Company and its subsidiaries have consolidated certain VIEs because the Company and its subsidiaries have the majority of the investment shares of such VIEs and effectively control the VIEs by acting as the asset manager of the VIEs.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in restricted cash, property under facility operations and other assets, and liabilities of those consolidated VIEs are mainly included in long-term debt and other liabilities. The Company has commitment agreements by which the Company may be required to make additional investment or execute loans in certain such consolidated VIEs.

Variable interests of non-consolidated VIEs, which the Company has, is included in investment in securities in the Company’s condensed consolidated balance sheets.

(i) Other VIEs

The Company and its subsidiaries are involved with other types of VIEs for various purposes. Consolidated and non-consolidated VIEs of this category are mainly kumiai structures. In addition, certain subsidiaries has consolidated VIEs that are not included in the categories (a) through (h) above, because the subsidiaries hold the subordinated portion of the VIEs and the VIEs are effectively controlled by the subsidiaries.

In Japan, certain subsidiaries provide investment products to their customers that employ a contractual mechanism known as a kumiai, which in part result in the subsidiaries forming a type of SPE. As a means to finance the purchase of aircraft or other large-ticket items to be leased to third parties, the Company and its subsidiaries arrange and market kumiai products to investors, who invest a portion of the funds necessary into the kumiai structure. The remainder of the purchase funds is borrowed by the kumiai structure in the form of a nonrecourse loan from one or more financial institutions. The kumiai investors (and any lenders to the kumiai structure) retain all of the economic risks and rewards in connection with purchasing and leasing activities of the kumiai structure, and all related gains or losses are recorded on the financial statements of the investors in the kumiai. The Company and its subsidiaries are responsible for the arrangement and marketing of these products and may act as servicer or administrator in kumiai transactions. The fee income for the arrangement and administration of these transactions is recognized in the Company’s condensed consolidated statements of income. In some cases, the Company and its subsidiaries make investments in the kumiai or its related SPE, and these VIEs are consolidated because the Company and its subsidiaries have a responsibility to absorb any significant potential loss through the investments and have the power to direct the activities that most significantly impact their economic performance. In other cases, the Company and its subsidiaries are not considered to be the primary beneficiary of the VIEs or kumiais because the Company and its subsidiaries did not make significant investments or guarantee or otherwise undertake any significant financial commitments or exposure with respect to the kumiai or its related SPE.

 

– 82 –


Table of Contents

The Company may use VIEs to finance. The Company transfers its own held assets to SPEs, which borrow non-recourse loan from financial institutions and effectively pledge such assets as collateral. The Company continually holds subordinated interests in the SPEs and performs administrative work of such assets. The Company consolidates such SPEs because the Company has a right to direct the activities of them that most significantly impact their economic performance by setting up the scheme and performing administrative work of the assets and has the obligation to absorb expected losses of them by holding the subordinated interests.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in investment in operating leases, investment in affiliates and office facilities, and liabilities of those consolidated VIEs are mainly included in long-term debt.

Variable interests in non-consolidated VIEs, which the Company and its subsidiaries hold, are mainly included in investment in securities in the Company’s condensed consolidated balance sheets. The Company and its subsidiaries have a commitment agreement by which the Company and its subsidiaries may be required to make additional investment in certain such non-consolidated VIEs.

 

9.

Investment in Affiliates

Investment in affiliates at March 31, 2016 and December 31, 2016 consists of the following:

 

                                                               
     Millions of yen  
   March 31, 2016      December 31, 2016  

Shares

   ¥ 499,922       ¥ 460,109   

Loans

     30,745         29,002   
  

 

 

    

 

 

 
   ¥ 530,667       ¥ 489,111   
  

 

 

    

 

 

 
     
10.

Redeemable Noncontrolling Interests

Changes in redeemable noncontrolling interests for the nine months ended December 31, 2015 and 2016 are as follows:

 

                                                               
     Millions of yen  
   Nine months ended
December 31, 2015
    Nine months ended
December 31, 2016
 

Beginning balance

   ¥ 66,901      ¥ 7,467   

Adjustment of redeemable noncontrolling interests to redemption value

     (1,811     0   

Transaction with noncontrolling interests

     1,004        0   

Comprehensive income

    

Net income

     810        224   

Other comprehensive income (loss)

    

Net change of foreign currency translation adjustments

     1,264        275   

Total other comprehensive income (loss)

     1,264        275   

Comprehensive income

     2,074        499   

Cash dividends

     (11,272     0   

Property dividends

     (3,776     0   

Partial sale of the parent’s ownership interest in subsidiaries that results in the loss of control

     (34,961     0   
  

 

 

   

 

 

 

Ending balance

   ¥ 18,159      ¥     7,966   
  

 

 

   

 

 

 

 

– 83 –


Table of Contents
11.

Accumulated Other Comprehensive Income (Loss)

Changes in each component of accumulated other comprehensive income (loss) for the nine months ended December 31, 2015 and 2016, are as follows:

 

     Nine months ended December 31, 2015  
     Millions of yen  
     Net unrealized gains
(losses) on investment

in securities
    Defined benefit
pension plans
    Foreign
currency
translation
adjustments
    Net unrealized
gains  (losses) on
derivative

instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at March 31, 2015

   ¥ 50,330     ¥ (19,448   ¥ 431     ¥ (940   ¥ 30,373  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on investment in securities, net of tax of ¥(704) million

     3,265                                                                   3,265  

Reclassification adjustment included in net income, net of tax of ¥10,069 million

     (17,480           (17,480

Defined benefit pension plans, net of tax of ¥105 million

                         (358         (358

Reclassification adjustment included in net income, net of tax of ¥(15) million

       245           245  

Foreign currency translation adjustments, net of tax of ¥2,253 million

                                                          (5,683                                (5,683

Reclassification adjustment included in net income, net of tax of ¥0 million

         975         975  

Net unrealized gains on derivative instruments, net of tax of ¥850 million

           (1,943     (1,943

Reclassification adjustment included in net income, net of tax of ¥(527) million

           1,320       1,320  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (14,215     (113     (4,708     (623     (19,659
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income (loss) Attributable to the Noncontrolling Interest

     28       45       (168     (32     (127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0       0       1,264       0       1,264  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   ¥ 36,087     ¥ (19,606   ¥ (5,373   ¥ (1,531   ¥ 9,577  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

– 84 –


Table of Contents
     Nine months ended December 31, 2016  
     Millions of yen  
     Net unrealized gains
(losses) on investment
in securities
    Defined benefit
pension plans
    Foreign
currency
translation
adjustments
    Net unrealized
gains (losses) on
derivative
instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at March 31, 2016

   ¥ 47,185     ¥ (23,884   ¥ (24,766   ¥ (4,757   ¥ (6,222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on investment in securities, net of tax of ¥(494) million

     (1,740                                                                  (1,740

Reclassification adjustment included in net income, net of tax of ¥8,324 million

     (15,132                                    (15,132

Defined benefit pension plans, net of tax of ¥(168) million

                         350           350  

Reclassification adjustment included in net income, net of tax of ¥(118) million

                                327           327  

Foreign currency translation adjustments, net of tax of ¥5,832 million

         (18,448                                (18,448

Reclassification adjustment included in net income, net of tax of ¥13 million

         (80       (80

Net unrealized losses on derivative instruments, net of tax of ¥(592) million

           1,700       1,700  

Reclassification adjustment included in net income, net of tax of ¥457 million

           (1,347     (1,347
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (16,872     677       (18,528     353       (34,370
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transaction with noncontrolling interests

     12       (954     (4,244     0       (5,186
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income (loss) Attributable to the Noncontrolling Interest

     (19     127       (3,224     53       (3,063
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0       0       275       0       275  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   ¥ 30,344     ¥ (24,288   ¥ (44,589   ¥ (4,457   ¥ (42,990
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

– 85 –


Table of Contents

Changes in each component of accumulated other comprehensive income (loss) for the three months ended December 31, 2015 and 2016, are as follows:

 

     Three months ended December 31, 2015  
     Millions of yen  
     Net unrealized gains
(losses) on investment

in securities
    Defined benefit
pension plans
    Foreign
currency
translation
adjustments
    Net unrealized
gains  (losses) on
derivative

instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at September 30, 2015

   ¥ 36,530     ¥ (19,904   ¥ (4,924   ¥ (930   ¥ 10,772  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on investment in securities, net of tax of ¥(501) million

     1,458                                                                   1,458  

Reclassification adjustment included in net income, net of tax of ¥1,232 million

     (1,859           (1,859

Defined benefit pension plans, net of tax of ¥(113) million

                         270           270  

Reclassification adjustment included in net income, net of tax of ¥(4) million

       78                                    78  

Foreign currency translation adjustments, net of tax of ¥1,171 million

                                                          (1,794       (1,794

Reclassification adjustment included in net income, net of tax of ¥0 million

         226         226  

Net unrealized losses on derivative instruments, net of tax of ¥235 million

           (588     (588

Reclassification adjustment included in net income, net of tax of ¥38 million

           (47     (47
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (401     348       (1,568     (635     (2,256
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income (loss) Attributable to the Noncontrolling Interest

     42       50       (1,225     (34     (1,167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0       0       106       0       106  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   ¥ 36,087     ¥ (19,606   ¥ (5,373   ¥ (1,531   ¥ 9,577  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

– 86 –


Table of Contents
     Three months ended December 31, 2016  
     Millions of yen  
     Net unrealized gains
(losses) on investment
in securities
    Defined benefit
pension plans
    Foreign
currency
translation
adjustments
    Net unrealized
gains (losses) on
derivative
instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at September 30, 2016

   ¥ 44,387     ¥ (22,523   ¥ (77,080   ¥ (6,470   ¥ (61,686
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on investment in securities, net of tax of ¥2,663 million

     (8,676                                                                 (8,676

Reclassification adjustment included in net income, net of tax of ¥4,256 million

     (5,343           (5,343

Defined benefit pension plans, net of tax of ¥336 million

                         (931         (931

Reclassification adjustment included in net income, net of tax of ¥(41) million

       109           109  

Foreign currency translation adjustments, net of tax of ¥(4,364) million

         41,351                                  41,351  

Reclassification adjustment included in net income, net of tax of ¥0 million

                                                          (367       (367

Net unrealized losses on derivative instruments, net of tax of ¥(1,261) million

           3,136       3,136  

Reclassification adjustment included in net income, net of tax of ¥335 million

           (983     (983
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (14,019     (822     40,984       2,153       28,296  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transaction with noncontrolling interests

     12       (954     (4,244     0       (5,186
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income (loss) Attributable to the Noncontrolling Interest

     36       (11     3,202       140       3,367  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0       0       1,047       0       1,047  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   ¥ 30,344     ¥ (24,288   ¥ (44,589   ¥ (4,457   ¥ (42,990
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

– 87 –


Table of Contents

Amounts reclassified to net income from accumulated other comprehensive income (loss) in the nine months ended December 31, 2015 and 2016 are as follows:

 

     Nine months ended December 31, 2015

Details about accumulated other
comprehensive income components

   Reclassification
adjustment  included in
net income
   

Consolidated statements of income caption

   Millions of yen    

Net unrealized gains (losses) on investment in securities

    

Sales of investment securities

   ¥ 25,010     Gains on investment securities and dividends

Sales of investment securities

     6,515     Life insurance premiums and related investment income

Amortization of investment securities

     (158   Finance revenues

Amortization of investment securities

     (1,165   Life insurance premiums and related investment income

Others

     (2,653   Write-downs of securities and other
  

 

 

   
     27,549     Total before tax
     (10,069   Tax expenses or benefits
  

 

 

   
   ¥ 17,480     Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 776     See Note 14 “Pension Plans”

Amortization of net actuarial loss

     (997   See Note 14 “Pension Plans”

Amortization of transition obligation

     (39   See Note 14 “Pension Plans”
  

 

 

   
     (260   Total before tax
     15     Tax expenses or benefits
  

 

 

   
   ¥ (245   Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Sales or liquidation

   ¥ (975   Gains on sales of subsidiaries and affiliates and liquidation losses, net
  

 

 

   
     (975   Total before tax
     0     Tax expenses or benefits
  

 

 

   
   ¥ (975   Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 7     Finance revenues/Interest expense

Foreign exchange contracts

     2,618     Other (income) and expense, net

Foreign currency swap agreements

     (4,472  

Finance revenues/Interest expense/

Other (income) and expense, net

  

 

 

   
     (1,847   Total before tax
     527     Tax expenses or benefits
  

 

 

   
   ¥ (1,320   Net of tax
  

 

 

   

 

– 88 –


Table of Contents
     Nine months ended December 31, 2016

Details about accumulated other
comprehensive income components

   Reclassification
adjustment included in

net income
   

Consolidated statements of income caption

   Millions of yen    

Net unrealized gains (losses) on investment in securities

    

Sales of investment securities

   ¥ 16,183     Gains on investment securities and dividends

Sales of investment securities

     14,858     Life insurance premiums and related investment income

Amortization of investment securities

     (415   Finance revenues

Amortization of investment securities

     (967   Life insurance premiums and related investment income

Others

     (6,203   Write-downs of securities and other
  

 

 

   
     23,456     Total before tax
     (8,324   Tax expenses or benefits
  

 

 

   
   ¥ 15,132     Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 766     See Note 14 “Pension Plans”

Amortization of net actuarial loss

     (1,174   See Note 14 “Pension Plans”

Amortization of transition obligation

     (37   See Note 14 “Pension Plans”
  

 

 

   
     (445   Total before tax
     118     Tax expenses or benefits
  

 

 

   
   ¥ (327   Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Sales or liquidation

   ¥ 93     Gains on sales of subsidiaries and affiliates and liquidation losses, net
  

 

 

   
     93     Total before tax
     (13   Tax expenses or benefits
  

 

 

   
   ¥ 80     Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 6     Finance revenues/Interest expense

Foreign exchange contracts

     (135   Other (income) and expense, net

Foreign currency swap agreements

     1,933    

Finance revenues/Interest expense/

Other (income) and expense, net

  

 

 

   
     1,804     Total before tax
     (457   Tax expenses or benefits
  

 

 

   
   ¥ 1,347     Net of tax
  

 

 

   

 

– 89 –


Table of Contents

Amounts reclassified to net income from accumulated other comprehensive income (loss) in the three months ended December 31, 2015 and 2016 are as follows:

 

     Three months ended December 31, 2015

Details about accumulated other
comprehensive income components

   Reclassification
adjustment  included in
net income
   

Consolidated statements of income caption

   Millions of yen    

Net unrealized gains (losses) on investment in securities

    

Sales of investment securities

   ¥ 3,973     Gains on investment securities and dividends

Sales of investment securities

     27     Life insurance premiums and related investment income

Amortization of investment securities

     (56   Finance revenues

Amortization of investment securities

     (430   Life insurance premiums and related investment income

Others

     (423   Write-downs of securities and other
  

 

 

   
     3,091     Total before tax
     (1,232   Tax expenses or benefits
  

 

 

   
   ¥ 1,859     Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 259     See Note 14 “Pension Plans”

Amortization of net actuarial loss

     (328   See Note 14 “Pension Plans”

Amortization of transition obligation

     (13   See Note 14 “Pension Plans”
  

 

 

   
     (82   Total before tax
     4     Tax expenses or benefits
  

 

 

   
   ¥ (78   Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Sales or liquidation

   ¥ (226   Gains on sales of subsidiaries and affiliates and liquidation losses, net
  

 

 

   
     (226   Total before tax
     0     Tax expenses or benefits
  

 

 

   
   ¥ (226   Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 5     Finance revenues/Interest expense

Foreign exchange contracts

     21     Other (income) and expense, net

Foreign currency swap agreements

     59    

Finance revenues/Interest expense/

Other (income) and expense, net

  

 

 

   
     85     Total before tax
     (38   Tax expenses or benefits
  

 

 

   
   ¥ 47     Net of tax
  

 

 

   

 

– 90 –


Table of Contents
     Three months ended December 31, 2016

Details about accumulated other
comprehensive income components

   Reclassification
adjustment included in

net income
   

Consolidated statements of income caption

   Millions of yen    

Net unrealized gains (losses) on investment in securities

    

Sales of investment securities

   ¥ 4,587     Gains on investment securities and dividends

Sales of investment securities

     5,532     Life insurance premiums and related investment income

Amortization of investment securities

     (290   Finance revenues

Amortization of investment securities

     (207   Life insurance premiums and related investment income

Others

     (23   Write-downs of securities and other
  

 

 

   
     9,599     Total before tax
     (4,256   Tax expenses or benefits
  

 

 

   
   ¥ 5,343     Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 255     See Note 14 “Pension Plans”

Amortization of net actuarial loss

     (392   See Note 14 “Pension Plans”

Amortization of transition obligation

     (13   See Note 14 “Pension Plans”
  

 

 

   
     (150   Total before tax
     41     Tax expenses or benefits
  

 

 

   
   ¥ (109   Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Sales or liquidation

   ¥ 367     Gains on sales of subsidiaries and affiliates and liquidation losses, net
  

 

 

   
     367     Total before tax
     0     Tax expenses or benefits
  

 

 

   
   ¥ 367     Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 5     Finance revenues/Interest expense

Foreign exchange contracts

   ¥ (103   Other (income) and expense, net

Foreign currency swap agreements

     1,416    

Finance revenues/Interest expense/

Other (income) and expense, net

  

 

 

   
     1,318     Total before tax
     (335   Tax expenses or benefits
  

 

 

   
   ¥ 983     Net of tax
  

 

 

   

 

– 91 –


Table of Contents
12.

ORIX Corporation Shareholders’ Equity

Information about ORIX Corporation Shareholders’ Equity for the nine months ended December 31, 2015 and 2016 are as follows:

 

(1)

Dividend payments

 

   

Nine months ended December 31, 2015

 

Nine months ended December 31, 2016

Resolution

  The board of directors on May 20, 2015   The board of directors on May 23, 2016

Type of shares

  Common stock   Common stock

Total dividends paid

  ¥47,188 million   ¥31,141 million

Dividend per share

  ¥36.00   ¥23.75

Date of record for dividend

  March 31, 2015   March 31, 2016

Effective date for dividend

  June 3, 2015   June 1, 2016

Dividend resource

  Retained earnings   Retained earnings

 

Resolution

  The board of directors on October 29, 2015   The board of directors on October 26, 2016

Type of shares

  Common stock   Common stock

Total dividends paid

  ¥28,846 million   ¥30,157 million

Dividend per share

  ¥22.00   ¥23.00

Date of record for dividend

  September 30, 2015   September 30, 2016

Effective date for dividend

  December 2, 2015   December 2, 2016

Dividend resource

  Retained earnings   Retained earnings

Total dividends paid by resolution of the board of directors on May 20, 2015 include ¥77 million of dividends paid to the Board Incentive Plan Trust. Total dividends paid by resolution of the board of directors on May 23, 2016 include ¥40 million of dividends paid to the Board Incentive Plan Trust.

Total dividends to be paid by resolution of the board of directors on October 29, 2015 include ¥42 million of dividends to be paid to the Board Incentive Plan Trust. Total dividends to be paid by resolution of the board of directors on October 26, 2016 include ¥57 million of dividends to be paid to the Board Incentive Plan Trust.

 

(2)

There were no applicable dividends for which the date of record was in the nine months ended December 31, 2015 and 2016, and for which the effective date was after December 31, 2015 and 2016.

 

– 92 –


Table of Contents
13.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended December 31, 2015 and 2016 are as follows:

 

                                                                           
     Millions of yen  
     Nine months ended  
December 31, 2015
      Nine months ended  
December 31, 2016
 

Personnel expenses

   ¥ 189,281      ¥ 176,933   

Selling expenses

     49,391       54,145  

Administrative expenses

     74,559       72,323  

Depreciation of office facilities

     3,722       3,879  
  

 

 

   

 

 

 

Total

   ¥ 316,953     ¥ 307,280  
  

 

 

   

 

 

 

Selling, general and administrative expenses for the three months ended December 31, 2015 and 2016 are as follows:

                                                                           
     Millions of yen  
   Three months ended
December 31, 2015
    Three months ended
December 31, 2016
 

Personnel expenses

   ¥ 57,608      ¥ 58,965   

Selling expenses

     16,796       19,041  

Administrative expenses

     24,965       24,230  

Depreciation of office facilities

     1,240       1,345  
  

 

 

   

 

 

 

Total

   ¥ 100,609     ¥ 103,581  
  

 

 

   

 

 

 

 

– 93 –


Table of Contents
14.

Pension Plans

The Company and certain subsidiaries have contributory and non-contributory pension plans covering substantially all of their employees. Those contributory funded pension plans include defined benefit pension plans and defined contribution pension plans. Under the plans, employees are entitled to lump-sum payments at the time of termination of their employment or pension payments. Defined benefit pension plans consist of a plan of which the amounts of such payments are determined on the basis of length of service and remuneration at the time of termination and a cash balance plan.

The Company and its subsidiaries’ funding policy is to contribute annually the amounts actuarially determined. Assets of the plans are invested primarily in interest-bearing securities and marketable equity securities.

Net pension cost of the plans for the nine months ended December 31, 2015 and 2016 consists of the following:

 

                                                                           
     Millions of yen  
     Nine months ended  
December 31, 2015
      Nine months ended  
December 31, 2016
 

Japanese plans:

    

Service cost

   ¥     3,288     ¥     3,856  

Interest cost

     739       508  

Expected return on plan assets

     (1,933     (1,904

Amortization of prior service credit

     (696     (694

Amortization of net actuarial loss (gain)

     (13     709  

Amortization of transition obligation

     37       34  
  

 

 

   

 

 

 

Net periodic pension cost

   ¥ 1,422     ¥ 2,509  
  

 

 

   

 

 

 
     Millions of yen  
   Nine months ended
December 31, 2015
    Nine months ended
December 31, 2016
 

Overseas plans:

    

Service cost

   ¥ 2,820     ¥ 2,417  

Interest cost

     1,273       1,317  

Expected return on plan assets

     (3,429     (2,684

Amortization of prior service credit

     (80     (72

Amortization of net actuarial loss

     1,010       465  

Amortization of transition obligation

     2       3  
  

 

 

   

 

 

 

Net periodic pension cost

   ¥ 1,596     ¥ 1,446  
  

 

 

   

 

 

 

 

– 94 –


Table of Contents

Net pension cost of the plans for the three months ended December 31, 2015 and 2016 consists of the following:

 

                                                                           
     Millions of yen  
   Three months ended
December 31, 2015
    Three months ended
December 31, 2016
 

Japanese plans:

    

Service cost

   ¥ 1,081     ¥ 1,300  

Interest cost

     256       170  

Expected return on plan assets

     (642     (635

Amortization of prior service credit

     (232     (231

Amortization of net actuarial loss (gain)

     (4     236  

Amortization of transition obligation

     13       12  
  

 

 

   

 

 

 

Net periodic pension cost

   ¥        472     ¥        852  
  

 

 

   

 

 

 
     Millions of yen  
   Three months ended
December 31, 2015
    Three months ended
December 31, 2016
 

Overseas plans:

    

Service cost

   ¥ 873     ¥ 790  

Interest cost

     390       437  

Expected return on plan assets

     (1,102     (896

Amortization of prior service credit

     (27     (24

Amortization of net actuarial loss

     332       156  

Amortization of transition obligation

     0       1  
  

 

 

   

 

 

 

Net periodic pension cost

   ¥        466     ¥        464  
  

 

 

   

 

 

 

 

– 95 –


Table of Contents
15.

Life Insurance Operations

Life insurance premiums and related investment income for the nine and three months ended December 31, 2015 and 2016 consist of the following:

 

     Millions of yen  
     Nine months  ended
December 31, 2015
     Nine months  ended
December 31, 2016
 

Life insurance premiums

   ¥ 152,326      ¥ 176,302  

Life insurance related investment income

     8,409        45,096  
  

 

 

    

 

 

 
   ¥ 160,735      ¥ 221,398  
  

 

 

    

 

 

 
     Millions of yen  
       Three months ended  
December 31, 2015
       Three months ended  
December 31, 2016
 

Life insurance premiums

   ¥   51,480      ¥   61,552  

Life insurance related investment income

     38,763        44,110  
  

 

 

    

 

 

 
   ¥ 90,243      ¥ 105,662  
  

 

 

    

 

 

 

Life insurance premiums include reinsurance benefits, net of reinsurance premiums. For the nine and three months ended December 31, 2015 and 2016, reinsurance benefits and reinsurance premiums included in life insurance premiums are as follows:

 

     Millions of yen  
     Nine months  ended
December 31, 2015
    Nine months  ended
December 31, 2016
 

Reinsurance benefits

   ¥     1,302     ¥     2,476  

Reinsurance premiums

     (8,839     (7,441
     Millions of yen  
       Three months ended  
December 31, 2015
      Three months ended  
December 31, 2016
 

Reinsurance benefits

   ¥        511     ¥      979  

Reinsurance premiums

     (2,798     (2,343

The benefits and expenses of life insurance operations included in life insurance costs in the consolidated statements of income are recognized so as to associate with earned premiums over the life of contracts. This association is accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs (principally commissions and certain other expenses relating to policy issuance and underwriting). Amortization charged to income for the nine months ended December 31, 2015 and 2016 amounted to ¥9,153 million and ¥10,234 million, respectively. Also, amortization charged to income for the three months ended December 31, 2015 and 2016 amounted to ¥3,067 million and ¥3,581 million, respectively.

Life insurance premiums and related investment income include net realized and unrealized gains or losses from investment assets under management on behalf of variable annuity and variable life policyholders and, net gains or losses from derivative contracts, which consist of gains or losses from futures, foreign exchange contracts and options held, entered to economically hedge a portion of the minimum guarantee risk relating to variable annuity and variable life insurance contracts. In addition, life insurance costs include the net amount of the changes in fair value of the variable annuity and variable life insurance contracts elected for the fair value option and insurance costs recognized for insurance and annuity payouts as a result of insured events. Certain subsidiaries have elected the fair value option for certain reinsurance contracts to partially offset the changes in fair value recognized in earnings of the policy liabilities and policy account balances attributable to the changes in the minimum guarantee risks of the variable annuity and variable life insurance contracts, and the changes in the fair value of the reinsurance contracts were recorded in life insurance costs.

 

– 96 –


Table of Contents

The above mentioned major gains or losses relating to variable annuity and variable life insurance contracts for the nine and three months ended December 31, 2015 and 2016 are as follows:

 

     Millions of yen  
       Nine months ended
December 31, 2015
      Nine months ended  
December 31, 2016
 

Life insurance premiums and related investment income :

    

Net realized and unrealized gains or losses from investment assets

   ¥ 558      ¥ 33,210   

Net gains or losses from derivative contracts :

     (2,575     (9,669

Futures

     (1,604     (8,401

Foreign exchange contracts

     (194     (180

Options held

     (777     (1,088

Life insurance costs :

    

Changes in the fair value of the policy liabilities and policy account balances

   ¥ (386,851   ¥ (119,063

Insurance costs recognized for insurance and annuity payouts as a result of insured events

     366,198        120,742   

Changes in the fair value of the reinsurance contracts

     3,704        11,699   
     Millions of yen  
     Three months  ended
December 31, 2015
    Three months ended
December 31, 2016
 

Life insurance premiums and related investment income :

    

Net realized and unrealized gains or losses from investment assets

   ¥ 40,253      ¥ 45,834   

Net gains or losses from derivative contracts :

     (4,381     (9,925

Futures

     (3,525     (6,284

Foreign exchange contracts

     31        (2,082

Options held

     (887     (1,559

Life insurance costs :

    

Changes in the fair value of the policy liabilities and policy account balances

   ¥ (67,277   ¥ (39,496

Insurance costs recognized for insurance and annuity payouts as a result of insured events

     86,206        57,720   

Changes in the fair value of the reinsurance contracts

     10,491        11,398   

 

– 97 –


Table of Contents
16.

Write-Downs of Long-Lived Assets

The Company and its subsidiaries perform tests for recoverability on long-lived assets classified as held and used for which events or changes in circumstances indicated that the assets might be impaired. The Company and its subsidiaries consider an asset’s carrying amount as not recoverable when such carrying amount exceeds the undiscounted future cash flows estimated to result from the use and eventual disposition of the asset. The net carrying amount of assets not recoverable is reduced to fair value if lower than the carrying amount.

As of March 31, 2016 and December 31, 2016, the long-lived assets classified as held for sale in the accompanying consolidated balance sheets are as follows.

 

     Millions of yen  
   As of March 31, 2016      As of December 31, 2016  

Investment in operating leases

   ¥ 70,300      ¥ 56,756  

Property under facility operations

     2,811        0  

Other assets

     9,959        0  

The long-lived assets classified as held for sale as of March 31, 2016 are included in Real Estate segment, Investment and Operation segment and Overseas Business segment. The long-lived assets classified as held for sale as of December 31, 2016 are included in Real Estate segment, Investment and Operation segment and Overseas Business segment.

The Company and its subsidiaries determine the fair value using appraisals prepared by independent third party appraisers or our own staff of qualified appraisers, based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flows methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate.

For the nine months ended December 31, 2015 and 2016, the Company and its subsidiaries recognized impairment losses for the difference between carrying amounts and fair values in the amount of ¥4,547 million and ¥4,802 million, respectively, which are reflected as write-downs of long-lived assets. Breakdowns of these amounts are as follows.

 

     Nine months ended
December 31, 2015
     Nine months ended
December 31, 2016
 
   Amount
(Millions of  yen)
     The number of
properties
     Amount
(Millions of  yen)
     The number of
properties
 

Write-downs of the assets held for sale:

           

Office buildings

   ¥ 597        3      ¥ 0        0  

Commercial facilities other than office buildings

     59        1        236        1  

Condominiums

     0        0        317        1  

Land undeveloped or under construction

     22        1        0        0  

Others *

     0        —          1,678        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥    678        —        ¥ 2,231        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

For the “Others”, the number of properties are omitted. Write-downs of long-lived assets for the nine months ended December 31, 2016 include write-downs of ¥1,156 million of aircraft.

 

     Nine months ended
December 31, 2015
     Nine months ended
December 31, 2016
 
   Amount
(Millions of  yen)
     The number of
properties
     Amount
(Millions of  yen)
     The number of
properties
 

Write-downs due to decline in estimated future cash flows:

           

Office buildings

   ¥ 3,026        3      ¥ 1,161        5  

Commercial facilities other than office buildings

     741        2        544        1  

Condominiums

     0        0        69        1  

Land undeveloped or under construction

     0        0        786        5  

Others *

     102        —          11        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 3,869        —        ¥ 2,571        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

For the “Others”, the number of properties are omitted.

 

– 98 –


Table of Contents

Losses of ¥4,411 million in Real Estate segment, ¥124 million in Investment and Operation segment and ¥12 million in Overseas Business segment were recorded for the nine months ended December 31, 2015. Losses of ¥622 million in Real Estate segment and ¥11 million in Investment and Operation segment and ¥3,912 million in Overseas Business segment were mainly recorded for the nine months ended December 31, 2016.

For the three months ended December 31, 2015 and 2016, the Company and its subsidiaries recognized impairment losses for the difference between carrying amounts and fair values in the amount of ¥3,601 million and ¥3,393 million, respectively, which are reflected as write-downs of long-lived assets. Breakdowns of these amounts are as follows.

 

     Three months ended
December 31, 2015
     Three months ended
December 31, 2016
 
   Amount
(Millions of  yen)
     The number of
properties
     Amount
(Millions of  yen)
     The number of
properties
 

Write-downs of the assets held for sale:

           

Office buildings

   ¥ 550        2      ¥ 0        0  

Commercial facilities other than office buildings

     59        1        0        0  

Condominiums

     0        0        0        0  

Land undeveloped or under construction

     0        0        0        0  

Others *

     0        —          1,660        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥    609        —        ¥ 1,660        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

For the “Others”, the number of properties are omitted. Write-downs of long-lived assets for the three months ended December 31, 2016 include write-downs of ¥1,156 million of aircraft.

 

     Three months ended
December 31, 2015
     Three months ended
December 31, 2016
 
   Amount
(Millions of  yen)
     The number of
properties
     Amount
(Millions of  yen)
     The number of
properties
 

Write-downs due to decline in estimated future cash flows:

           

Office buildings

   ¥ 2,890        1      ¥ 403        2  

Commercial facilities other than office buildings

     0        0        544        1  

Condominiums

     0        0        0        0  

Land undeveloped or under construction

     0        0        786        5  

Others *

     102        —          0        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 2,992        —        ¥ 1,733        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

For the “Others”, the number of properties are omitted.

Losses of ¥3,499 million in Real Estate segment and ¥102 Investment and Operation segment were recorded for the three months ended December 31, 2015. Losses of ¥3,393 million in Overseas Business segment was recorded for the three months ended December 31, 2016.

 

– 99 –


Table of Contents
17.

Per Share Data

Reconciliation of the differences between basic and diluted earnings per share (EPS) in the nine and three months ended December 31, 2015 and 2016 is as follows:

During the nine months ended December 31, 2015, the diluted EPS calculation excludes stock option for 4,403 thousand shares, as they were antidilutive. During the nine months ended December 31, 2016, the diluted EPS calculation excludes stock options for 2,720 thousand shares, as they were antidilutive.

During the three months ended December 31, 2015, the diluted EPS calculation excludes stock options for 2,249 thousand shares, as they were antidilutive. During the three months ended December 31, 2016, the diluted EPS calculation excludes stock options for 1,765 thousand shares, as they were antidilutive.

 

     Millions of yen  
     Nine months  ended
December 31, 2015
     Nine months  ended
December 31, 2016
 

Net Income attributable to ORIX Corporation Shareholders

   ¥ 215,364      ¥ 217,118  
  

 

 

    

 

 

 
     Millions of yen  
     Three months  ended
December 31, 2015
     Three months  ended
December 31, 2016
 

Net Income attributable to ORIX Corporation Shareholders

   ¥ 54,066      ¥ 74,968  
  

 

 

    

 

 

 
     Thousands of Shares  
     Nine months ended
December 31, 2015
     Nine months ended
December 31, 2016
 

Weighted-average shares

     1,309,022        1,308,792  

Effect of dilutive securities—

     

Exercise of stock options

     1,363        1,236  
  

 

 

    

 

 

 

Weighted-average shares for diluted EPS computation

     1,310,385        1,310,028  
  

 

 

    

 

 

 
     Thousands of Shares  
     Three months ended
December 31, 2015
     Three months ended
December 31, 2016
 

Weighted-average shares

     1,309,259        1,307,882  

Effect of dilutive securities—

     

Exercise of stock options

     1,338        1,288  
  

 

 

    

 

 

 

Weighted-average shares for diluted EPS computation

     1,310,597        1,309,170  
  

 

 

    

 

 

 
     Yen  
     Nine months ended
December 31, 2015
     Nine months ended
December 31, 2016
 

Earnings per share for net income attributable to ORIX Corporation shareholders:

     

Basic

   ¥ 164.52      ¥ 165.89  

Diluted

   ¥ 164.35      ¥ 165.74  
     Yen  
     Three months ended
December 31, 2015
     Three months ended
December 31, 2016
 

Earnings per share for net income attributable to ORIX Corporation shareholders:

     

Basic

   ¥ 41.30      ¥ 57.32  

Diluted

   ¥ 41.25      ¥ 57.26  

 

Note:  

The Company’s shares held through the Board Incentive Plan Trust are included in the number of treasury stock shares to be deducted in calculation of the weighted-average shares for EPS computation. (2,071,000 and 2,082,551 shares for the nine months ended December 31, 2015 and 2016, 1,946,800 and 2,489,951 shares for the three months ended December 31, 2015 and 2016)

 

– 100 –


Table of Contents
18.

Derivative Financial Instruments and Hedging

Risk management policy

The Company and its subsidiaries manage interest rate risk through asset and liability management systems. The Company and its subsidiaries use derivative financial instruments to hedge interest rate risk and avoid changes in interest rates that could have a significant adverse effect on the Company’s results of operations. As a result of interest rate changes, the fair value and/or cash flow of interest sensitive assets and liabilities will fluctuate. However, such fluctuation will generally be offset by using derivative financial instruments as hedging instruments. Derivative financial instruments that the Company and its subsidiaries use as part of the interest risk management include interest rate swaps.

The Company and its subsidiaries utilize foreign currency borrowings, foreign exchange contracts and foreign currency swap agreements to hedge exchange rate risk that are associated with certain transactions and investments denominated in foreign currencies. Similarly, overseas subsidiaries generally structure their liabilities to match the currency-denomination of assets in each region. A certain subsidiary holds option agreements, futures and foreign exchange contracts for the purpose of economic hedges against minimum guarantee risk of variable annuity and variable life insurance contracts.

By using derivative instruments, the Company and its subsidiaries are exposed to credit risk in the event of nonperformance by counterparties. The Company and its subsidiaries attempt to manage the credit risk by carefully evaluating the content of transactions and the quality of counterparties in advance and regularly monitoring the amount of notional principal, fair value, type of transaction and other factors pertaining to each counterparty.

(a) Cash flow hedges

The Company and its subsidiaries designate interest rate swap agreements, foreign currency swap agreements and foreign exchange contracts as cash flow hedges for variability of cash flows originating from floating rate borrowings and forecasted transactions and for exchange fluctuations.

(b) Fair value hedges

The Company and its subsidiaries use financial instruments designated as fair value hedges to hedge their exposure to interest rate risk and foreign currency exchange risk. The Company and its subsidiaries designate foreign currency swap agreements and foreign exchange contracts to minimize foreign currency exposures on lease receivables, loan receivables and borrowings and others denominated in foreign currency. The Company and its subsidiaries designate interest rate swap to hedge interest rate exposure of the fair values of loan receivables. The Company and certain overseas subsidiaries, which issued medium-term notes or bonds with fixed interest rates, use interest rate swap agreements to hedge interest rate exposure of the fair values of these medium-term notes or bonds. In cases where the medium-term notes were denominated in other than the subsidiaries’ local currencies, foreign currency swap agreements are used to hedge foreign exchange rate exposure. A certain overseas subsidiary uses foreign currency long-term-debt to hedge foreign exchange rate exposure from unrecognized firm commitment.

(c) Hedges of net investment in foreign operations

The Company uses foreign exchange contracts and borrowings and bonds denominated in the subsidiaries’ local currencies to hedge the foreign currency exposure of the net investment in overseas subsidiaries.

(d) Derivatives not designated as hedging instruments

The Company and the subsidiaries entered into interest rate swap agreements, foreign currency swap agreements and foreign exchange contracts for risk management purposes which are not qualified for hedge accounting. A certain subsidiary holds option agreements, futures and foreign exchange contracts for the purpose of economic hedges against minimum guarantee risk of variable annuity and variable life insurance contracts.

 

– 101 –


Table of Contents

The effect of derivative instruments on the consolidated statement of income, pre-tax, for the nine months ended December 31, 2015 is as follows.

(1) Cash flow hedges

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
(effective
portion)
   

Gains (losses) reclassified from accumulated
other comprehensive income (loss) into  income

(effective portion)

   

Gains (losses) recognized in income on derivative
(ineffective portion and amount

excluded from effectiveness testing)

 
     Millions
of yen
   

            Consolidated statements             
of income location

   Millions
of yen
   

            Consolidated statements             
of income location

  Millions
of yen
 

Interest rate swap agreements

   ¥ (1,467   Finance revenues/Interest expense    ¥ 7     —     ¥ 0  

Foreign exchange contracts

     255     Other (income) and expense, net      2,618     —       0  

Foreign currency swap agreements

     (1,581  

Finance revenues/Interest expense/

Other (income) and expense, net

     (4,472   Other (income) and expense, net     444  

(2) Fair value hedges

 

     Gains (losses) recognized in income on derivative and  other    Gains (losses) recognized in income on hedged item
   Millions
of yen
   

Consolidated statements

of income location

   Millions
of yen
   

Consolidated statements

of income location

Interest rate swap agreements

   ¥ (604   Finance revenues/Interest expense    ¥ 604     Finance revenues/Interest expense

Foreign exchange contracts

     3,139     Other (income) and expense, net      (3,139   Other (income) and expense, net

Foreign currency swap agreements

     2,227     Other (income) and expense, net      (2,226   Other (income) and expense, net

Foreign currency long-term debt

     (282   Other (income) and expense, net      282     Other (income) and expense, net

(3) Hedges of net investment in foreign operations

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
and others
(effective
portion)
   

Gains (losses) reclassified from accumulated
other comprehensive income (loss) into  income
(effective portion)

   

Gains (losses) recognized in income on derivative
and others (ineffective portion and amount

excluded from effectiveness testing)

 
     Millions
of yen
   

            Consolidated statements             

of income location

   Millions
of yen
   

            Consolidated statements             

of income location

  Millions
of yen
 

Foreign exchange contracts

   ¥    (813   Gains on sales of subsidiaries and affiliates and liquidation losses, net    ¥    (226   —     ¥     0  

Borrowings and bonds in local currency

     166     —        0     —       0  

(4) Derivatives not designated as hedging instruments

 

      Gains (losses) recognized in income on derivative
      Millions
of yen
   

Consolidated statements of income location

Interest rate swap agreements

   ¥ (38  

Other (income) and expense, net

Futures

     (1,615  

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Foreign exchange contracts

     (231  

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Credit derivatives held

     230    

Other (income) and expense, net

Options held/written and other

     (949  

Other (income) and expense, net

Life insurance premiums and related investment income *

 

*

Futures, foreign exchange contracts and options held/written and other in the above table include gains or losses arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for the nine months ended December 31, 2015 (see Note 15 “Life Insurance Operations”).

 

– 102 –


Table of Contents

The effect of derivative instruments on the consolidated statement of income, pre-tax, for the nine months ended December 31, 2016 is as follows.

(1) Cash flow hedges

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
(effective
portion)
    

Gains (losses) reclassified from accumulated
other comprehensive income (loss) into  income

(effective portion)

   

Gains (losses) recognized in income on derivative
(ineffective portion and amount excluded from

effectiveness testing)

 
     Millions
of yen
    

            Consolidated statements             

of income location

   Millions
of yen
   

            Consolidated statements             

of income location

  Millions
of yen
 

Interest rate swap agreements

   ¥     1,322      Finance revenues/Interest expense    ¥ 6     —     ¥ 0  

Foreign exchange contracts

     144      Other (income) and expense, net      (135   —       0  

Foreign currency swap agreements

     826     

Finance revenues/Interest expense/

Other (income) and expense, net

     1,933     Other (income) and expense, net     385  

(2) Fair value hedges

 

     Gains (losses) recognized in income on derivative and  other    Gains (losses) recognized in income on hedged item
   Millions
of yen
   

Consolidated statements

of income location

   Millions
of yen
   

Consolidated statements

of income location

Interest rate swap agreements

   ¥ (43   Finance revenues/Interest expense    ¥ 43     Finance revenues/Interest expense

Foreign exchange contracts

     (9,787   Other (income) and expense, net      9,787     Other (income) and expense, net

Foreign currency swap agreements

     3,067     Other (income) and expense, net      (3,067   Other (income) and expense, net

Foreign currency long-term debt

     78     Other (income) and expense, net      (78   Other (income) and expense, net

(3) Hedges of net investment in foreign operations

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
and others
(effective
portion)
   

Gains (losses) reclassified from accumulated
other comprehensive income (loss) into  income

(effective portion)

    

Gains (losses) recognized in income on derivative
and others (ineffective portion and amount

excluded from effectiveness testing)

 
       Millions  
of yen
   

            Consolidated statements             

of income location

   Millions
of yen
    

            Consolidated statements             

of income location

  Millions
of yen
 

Foreign exchange contracts

   ¥ (6,142   Gains on sales of subsidiaries and affiliates and liquidation losses, net    ¥     624      —     ¥  0  

Borrowings and bonds in local currency

     945     —        0      —       0  

(4) Derivatives not designated as hedging instruments

 

      Gains (losses) recognized in income on derivative
      Millions
of yen
   

Consolidated statements of income location

Interest rate swap agreements

   ¥ 261    

Other (income) and expense, net

Futures

     (8,201  

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Foreign exchange contracts

     (6,802  

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Other (income) and expense, net

Credit derivatives held

     (60  

Other (income) and expense, net

Options held/written and other

     (370  

Other (income) and expense, net

Life insurance premiums and related investment income *

 

*

Futures, foreign exchange contracts and options held/written and other in the above table include gains or losses arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for the nine months ended December 31, 2016 (see Note 15 “Life Insurance Operations”).

 

– 103 –


Table of Contents

The effect of derivative instruments on the consolidated statement of income, pre-tax, for the three months ended December 31, 2015 is as follows.

(1) Cash flow hedges

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
(effective
portion)
   

Gains (losses) reclassified from accumulated
other comprehensive income (loss) into income

(effective portion)

    

Gains (losses) recognized in income on derivative
(ineffective portion and amount excluded from

effectiveness testing)

 
     Millions
of yen
   

            Consolidated statements            

of income location

   Millions
of yen
    

            Consolidated statements             

of income location

  Millions
of yen
 

Interest rate swap agreements

   ¥ 831     Finance revenues/Interest expense    ¥ 5      —     ¥ 0  

Foreign exchange contracts

     284     Other (income) and expense, net      21      —       0  

Foreign currency swap agreements

     (1,938  

Finance revenues/Interest expense/

Other (income) and expense, net

     59      Other (income) and expense, net     (86

(2) Fair value hedges

 

     Gains (losses) recognized in income on derivative and  other    Gains (losses) recognized in income on hedged item
   Millions
of yen
   

Consolidated statements

of income location

   Millions
of yen
   

Consolidated statements

of income location

Interest rate swap agreements

   ¥ (207   Finance revenues/Interest expense    ¥ 207     Finance revenues/Interest expense

Foreign exchange contracts

     (527   Other (income) and expense, net      527     Other (income) and expense, net

Foreign currency swap agreements

     (523   Other (income) and expense, net      524     Other (income) and expense, net

Foreign currency long-term debt

     146     Other (income) and expense, net      (146   Other (income) and expense, net

(3) Hedges of net investment in foreign operations

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
and others
(effective
portion)
    

Gains (losses) reclassified from accumulated
other comprehensive income (loss) into  income

(effective portion)

   

Gains (losses) recognized in income on derivative
and others (ineffective portion and amount

excluded from effectiveness testing)

 
      Millions 
of yen
    

            Consolidated statements             

of income location

   Millions
of yen
   

            Consolidated statements             

of income location

  Millions
of yen
 

Foreign exchange contracts

   ¥ 1,913      Gains on sales of subsidiaries and affiliates and liquidation losses, net    ¥ (226   —     ¥ 0  

Borrowings and bonds in local currency

     2,226      —        0     —       0  

(4) Derivatives not designated as hedging instruments

 

      Gains (losses) recognized in income on derivative
      Millions
of yen
   

Consolidated statements of income location

Interest rate swap agreements

   ¥ (26  

Other (income) and expense, net

Futures

     (3,751  

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Foreign exchange contracts

     367    

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Credit derivatives held

     67    

Other (income) and expense, net

Options held/written and other

     (1,411  

Other (income) and expense, net

Life insurance premiums and related investment income *

 

*

Futures, foreign exchange contracts and options held/written and other in the above table include gains or losses arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for the three months ended December 31, 2015 (see Note 15 “Life Insurance Operations”).

 

– 104 –


Table of Contents

The effect of derivative instruments on the consolidated statement of income, pre-tax, for the three months ended December 31, 2016 is as follows.

(1) Cash flow hedges

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
(effective
portion)
   

Gains (losses) reclassified from accumulated
other comprehensive income (loss) into income

(effective portion)

   

Gains (losses) recognized in income on derivative
(ineffective portion and  amount
excluded from effectiveness testing)

 
     Millions
of yen
   

            Consolidated statements             

of income location

   Millions
of yen
   

            Consolidated statements             

of income location

  Millions
of yen
 

Interest rate swap agreements

   ¥ 2,216     Finance revenues/Interest expense    ¥ 5     —     ¥ 0  

Foreign exchange contracts

     (683   Other (income) and expense, net      (103   —       0  

Foreign currency swap agreements

       2,864    

Finance revenues/Interest expense/

Other (income) and expense, net

     1,416     Other (income) and expense, net     334  

(2) Fair value hedges

 

     Gains (losses) recognized in income on derivative and  other    Gains (losses) recognized in income on hedged item
   Millions
of yen
   

Consolidated statements

of income location

   Millions
of yen
   

Consolidated statements

of income location

Interest rate swap agreements

   ¥ (15   Finance revenues/Interest expense    ¥ 15     Finance revenues/Interest expense

Foreign exchange contracts

     (28,714   Other (income) and expense, net      28,714     Other (income) and expense, net

Foreign currency swap agreements

     1,591     Other (income) and expense, net      (1,591   Other (income) and expense, net

Foreign currency long-term debt

     22     Other (income) and expense, net      (22   Other (income) and expense, net

(3) Hedges of net investment in foreign operations

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
and others
(effective
portion)
   

Gains (losses) reclassified from accumulated
other comprehensive income (loss) into  income

(effective portion)

   

Gains (losses) recognized in income on derivative
and others (ineffective portion  and amount

excluded from effectiveness testing)

 
     Millions
of yen
   

            Consolidated statements             

of income location

   Millions
of yen
   

            Consolidated statements             

of income location

  Millions
of yen
 

Foreign exchange contracts

   ¥ (52,557   Gains on sales of subsidiaries and affiliates and liquidation losses, net    ¥    367      —     ¥   0  

Borrowings and bonds in local currency

     (22,494   —        0     —       0  

(4) Derivatives not designated as hedging instruments

 

      Gains (losses) recognized in income on derivative
      Millions
of yen
   

Consolidated statements of income location

Interest rate swap agreements

   ¥ 346    

Other (income) and expense, net

Futures

     (6,119  

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Foreign exchange contracts

     (34,582  

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Other (income) and expense, net

Credit derivatives held

     (35  

Other (income) and expense, net

Options held/written and other

     (775  

Other (income) and expense, net

Life insurance premiums and related investment income *

 

*

Futures, foreign exchange contracts and options held/written and other in the above table include gains or losses arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for the three months ended December 31, 2016 (see Note 15 “Life Insurance Operations”).

 

– 105 –


Table of Contents

Notional amounts of derivative instruments and other, fair values of derivative instruments and other before offsetting at March 31, 2016 and December 31, 2016 are as follows.

March 31, 2016

 

          Asset derivatives   Liability derivatives
    Notional
amount
    Fair value    

Consolidated balance sheets
location

  Fair value    

Consolidated balance sheets location

    Millions
of yen
    Millions
of yen
        Millions
of yen
     

Derivatives designated as hedging instruments and other:

         

Interest rate swap agreements

  ¥     257,700     ¥ 80     Other Assets   ¥ 5,686     Other Liabilities

Futures, foreign exchange contracts

    1,035,342       17,636     Other Assets     5,966     Other Liabilities

Foreign currency swap agreements

    96,539       6,571     Other Assets     3,601     Other Liabilities

Foreign currency long-term debt

    225,711       0                     —     0                           —

Derivatives not designated as hedging instruments:

         

Interest rate swap agreements

  ¥ 4,856     ¥ 13     Other Assets   ¥ 235     Other Liabilities

Options held/written and other *

    246,068       8,789     Other Assets     3,637     Other Liabilities

Futures, foreign exchange contracts *

    1,047,878       658     Other Assets     689     Other Liabilities

Credit derivatives held

    3,380       0                     —     56     Other Liabilities

 

*       The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥46,926 million, futures contracts of ¥51,021 million and foreign exchange contracts of ¥20,884 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2016, respectively. Asset derivatives in the above table includes fair value of the options held, futures and foreign exchange contracts before offsetting of ¥3,332 million, ¥25 million and ¥568 million and liability derivatives includes fair value of the futures and foreign exchange contracts before offsetting of ¥417 million and ¥98 million at March 31, 2016, respectively.

 

December 31, 2016

 

          Asset derivatives   Liability derivatives
    Notional
amount
    Fair value    

Consolidated balance sheets
location

  Fair value    

Consolidated balance sheets location

    Millions
of yen
    Millions
of yen
        Millions
of yen
     

Derivatives designated as hedging instruments and other:

         

Interest rate swap agreements

  ¥     251,621     ¥ 84     Other Assets   ¥ 4,827     Other Liabilities

Futures, foreign exchange contracts

    810,189       983     Other Assets     49,790     Other Liabilities

Foreign currency swap agreements

    82,071       7,330     Other Assets     393     Other Liabilities

Foreign currency long-term debt

    210,024       0                     —     0                           —

Derivatives not designated as hedging instruments:

         

Interest rate swap agreements

  ¥ 7,293     ¥ 203     Other Assets   ¥ 172     Other Liabilities

Options held/written and other *

    248,727       7,094     Other Assets     2,332     Other Liabilities

Futures, foreign exchange contracts *

    501,378       1,011     Other Assets     22,676     Other Liabilities

Credit derivatives held

    4,310       0                     —     116     Other Liabilities

 

*

The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥47,203 million, futures contracts of ¥53,680 million and foreign exchange contracts of ¥22,689 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at December 31, 2016, respectively. Asset derivatives in the above table includes fair value of the options held, futures and foreign exchange contracts before offsetting of ¥2,280 million, ¥28 million and ¥176 million and liability derivatives includes fair value of the futures and foreign exchange contracts before offsetting of ¥1,255 million and ¥1,516 million at December 31, 2016, respectively.

 

– 106 –


Table of Contents

Certain of the Company’s derivative instruments contain provisions that require the Company to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company’s credit rating were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment on derivative instruments that are in net liability positions. There are no derivative instruments with credit-risk-related contingent features that are in a liability position on March 31, 2016 and December 31, 2016.

 

19.

Offsetting Assets and Liabilities

The gross amounts recognized, gross amounts offset, and net amounts presented in the consolidated balance sheets regarding to derivative assets and liabilities and other assets and liabilities as of March 31, 2016 and December 31, 2016 are as follows.

March 31, 2016

 

     Millions of yen  
     Gross  amounts
recognized
     Gross  amounts
offset in  the
consolidated
balance sheets
    Net  amounts
presented in
the  consolidated
balance sheets
     Gross amounts not offset in the
consolidated balance sheets  *1
    Net amount  
             Financial
instruments
     Collateral
received/pledged
   

Derivative assets

   ¥ 33,747      ¥ (5,757   ¥ 27,990      ¥ 0      ¥ (3,332   ¥ 24,658  

Reverse repurchase, securities borrowing, and similar arrangements *2

     5,186        (5,186     0        0        0       0  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   ¥ 38,933      ¥ (10,943   ¥ 27,990      ¥ 0      ¥ (3,332   ¥ 24,658  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities

   ¥ 19,870      ¥ (5,757   ¥ 14,113      ¥ 0      ¥ (225   ¥ 13,888  

Repurchase, securities lending, and similar arrangements *2

     5,203        (5,186     17        0        0       17  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   ¥ 25,073      ¥ (10,943   ¥ 14,130      ¥ 0      ¥ (225   ¥ 13,905  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2016

  
     Millions of yen  
     Gross  amounts
recognized
     Gross  amounts
offset in  the
consolidated
balance sheets
    Net  amounts
presented in
the  consolidated
balance sheets
     Gross amounts not offset in the
consolidated balance sheets  *1
    Net amount  
             Financial
instruments
     Collateral
received/pledged
   

Derivative assets

   ¥ 16,705      ¥ (1,306   ¥ 15,399      ¥ 0      ¥ (2,226   ¥ 13,173  

Reverse repurchase, securities borrowing, and similar arrangements *2

     7,451        (7,372     79        0        0       79  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   ¥ 24,156      ¥ (8,678   ¥ 15,478      ¥ 0      ¥ (2,226   ¥ 13,252  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities

   ¥ 80,306      ¥ (1,306   ¥ 79,000      ¥ 0      ¥ (347   ¥ 78,653  

Repurchase, securities lending, and similar arrangements *2

     7,372        (7,372     0        0        0       0  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   ¥ 87,678      ¥ (8,678   ¥ 79,000      ¥ 0      ¥ (347   ¥ 78,653  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

*1

The balances related to enforceable master netting agreements or similar agreements which were not offset in the consolidated balance sheets.

*2

Reverse repurchase agreements and securities borrowing, and similar transactions are reported within other assets in the consolidated balance sheets. Repurchase agreements and securities lending, and similar transactions are reported within other liabilities in the consolidated balance sheets.

 

– 107 –


Table of Contents
20.

Estimated Fair Value of Financial Instruments

The following information is provided to help readers gain an understanding of the relationship between carrying amount of financial instruments reported in the Company’s consolidated balance sheets and the related market or fair value. For derivative financial instruments, see Note 3 “Fair Value Measurements.”

The disclosures do not include investment in direct financing leases, investment in affiliates, pension obligations and insurance contracts and reinsurance contracts except for those classified as investment contracts.

March 31, 2016

 

     Millions of yen  
     Carrying
amount
     Estimated
fair  value
     Level 1      Level 2      Level 3  

Assets:

              

Trading securities

   ¥    725,821      ¥    725,821      ¥      37,592      ¥    688,229      ¥               0  

Cash and cash equivalents

     730,420        730,420        730,420        0        0  

Restricted cash

     80,979        80,979        80,979        0        0  

Installment loans (net of allowance for probable loan losses)

     2,545,542        2,553,006        0        264,452        2,288,554  

Investment in securities:

              

Practicable to estimate fair value

     1,480,499        1,511,161        99,347        1,271,506        140,308  

Not practicable to estimate fair value *1

     138,472        138,472        0        0        0  

Other Assets:

              

Time deposits

     9,843        9,843        0        9,843        0  

Derivative assets *2

     27,990        27,990        0        0        0  

Reinsurance recoverables (Investment contracts)

     93,838        94,656        0        0        94,656  

Liabilities:

              

Short-term debt

   ¥ 349,624      ¥ 349,624      ¥ 0      ¥ 349,624      ¥ 0  

Deposits

     1,398,472        1,400,528        0        1,400,528        0  

Policy liabilities and Policy account balances (Investment contracts)

     306,058        308,064        0        0        308,064  

Long-term debt *3

     3,936,918        3,955,178        0        1,102,332        2,852,846  

Other Liabilities:

              

Derivative liabilities *2

     14,113        14,113        0        0        0  

 

*1

The fair value of investment securities of ¥138,472 million was not estimated, as it was not practical.

*2

It represents the amount after offset under counterparty netting of derivative assets and liabilities. For the information of input level before netting, see Note 3 “Fair Value Measurements.”

*3

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03 (“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

 

– 108 –


Table of Contents

December 31, 2016

 

     Millions of yen  
     Carrying
amount
     Estimated
fair  value
     Level 1      Level 2      Level 3  

Assets:

              

Trading securities

   ¥    648,322      ¥    648,322      ¥      39,030      ¥    606,134      ¥        3,158  

Cash and cash equivalents

     941,326        941,326        941,326        0        0  

Restricted cash

     105,399        105,399        105,399        0        0  

Installment loans (net of allowance for probable loan losses)

     2,759,631        2,777,371        0        267,542        2,509,829  

Investment in securities:

              

Practicable to estimate fair value

     1,306,332        1,333,511        78,172        1,106,475        148,864  

Not practicable to estimate fair value *1

     153,192        153,192        0        0        0  

Other Assets:

              

Time deposits

     4,180        4,180        0        4,180        0  

Derivative assets *2

     15,399        15,399        0        0        0  

Reinsurance recoverables (Investment contracts)

     72,990        74,396        0        0        74,396  

Liabilities:

              

Short-term debt

   ¥ 296,289      ¥ 296,289      ¥ 0      ¥ 296,289      ¥ 0  

Deposits

     1,526,300        1,527,582        0        1,527,582        0  

Policy liabilities and Policy account balances (Investment contracts)

     284,390        285,453        0        0        285,453  

Long-term debt

     3,876,543        3,869,347        0        1,277,719        2,591,628  

Other Liabilities:

              

Derivative liabilities *2

     79,000        79,000        0        0        0  

 

*1

The fair value of investment securities of ¥153,192 million was not estimated, as it was not practical.

*2

It represents the amount after offset under counterparty netting of derivative assets and liabilities. For the information of input level before netting, see Note 3 “Fair Value Measurements.”

 

– 109 –


Table of Contents

Input level of fair value measurement

If active market prices are available, fair value measurement is based on quoted active market prices and classified as Level 1. If active market prices are not available, fair value measurement is based on observable inputs other than quoted prices included within Level 1 such as quoted market prices of similar assets and classified as Level 2. If market prices are not available and there are no observable inputs, then fair value is estimated by using valuation models including discounted cash flow methodologies, commonly used option-pricing models and broker quotes and classified as Level 3, as the valuation models and broker quotes are based on inputs that are unobservable in the market.

Estimation of fair value

The following methods and significant assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate a value:

Cash and cash equivalents, restricted cash, time deposits and short-term debt—The carrying amounts recognized in the balance sheets were determined to be reasonable estimates of their fair values due to their short maturity.

Installment loans—The carrying amounts of floating-rate installment loans with no significant changes in credit risk and which could be repriced within a short-term period were determined to be reasonable estimates of their fair values. The carrying amounts of purchased loans were determined to be reasonable estimates of their fair values because the carrying amounts (net of allowance) are considered to properly reflect the recoverability and value of these loans. For certain homogeneous categories of medium- and long-term fixed-rate loans, such as housing loans, the estimated fair values were calculated by discounting the future cash flows using the current interest rates charged by the Company and its subsidiaries for new loans made to borrowers with similar credit ratings and remaining maturities. Concerning above, if available, estimated fair values were based on quoted market prices or quotations provided by dealers.

Investment in securities—For trading securities and available-for-sale securities other than specified bonds issued by SPEs and certain other mortgage-backed and asset-backed securities, the estimated fair values, which are also the carrying amounts recorded in the balance sheets, were generally based on quoted market prices or quotations provided by dealers. As for the specified bonds issued by the SPEs and certain other mortgage-backed and asset-backed securities included in available-for-sale securities, the Company and its subsidiaries estimated the fair value by using valuation models including discounted cash flow methodologies and broker quotes (see Note 3 Fair Value Measurement). For held-to-maturity securities, the estimated fair values were mainly based on quoted market prices. For certain investment funds included in other securities, the fair values were estimated based on net asset value per share or discounted cash flow methodologies. With regard to other securities other than the investment funds described above, the Company and its subsidiaries have not estimated the fair value, as it is not practicable to do so. Those other securities mainly consist of non-marketable equity securities and preferred capital shares. Because there were no quoted market prices for such other securities and each security has a different nature and characteristics, reasonable estimates of fair values could not be made without incurring excessive costs.

Deposits—The carrying amounts of demand deposits recognized in the consolidated balance sheets were determined to be reasonable estimates of their fair values. The estimated fair values of time deposits were calculated by discounting the future cash flows. The current interest rates offered for the deposits with similar terms and remaining average maturities were used as the discount rates.

Long-term debt—The carrying amounts of long-term debt with floating rates which could be repriced within short-term periods were determined to be reasonable estimates of their fair values. For medium-and long-term fixed-rate debt, the estimated fair values were calculated by discounting the future cash flows. The borrowing interest rates that were currently available to the Company and its subsidiaries offered by financial institutions for debt with similar terms and remaining average maturities were used as the discount rates. Concerning above, if available, estimated fair values were based on quoted market prices or quotations provided by dealers.

Derivatives—For exchange-traded derivatives, fair value is based on quoted market prices. Fair value estimates for other derivatives generally reflect the estimated amounts that the Company and its subsidiaries would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. In estimating the fair value of most of the Company’s and its subsidiaries’ derivatives, estimated future cash flows are discounted using the current interest rate.

Reinsurance recoverables and Policy liabilities and Policy account balances—A certain subsidiary has fixed annuity contracts, variable annuity and variable life insurance contracts, and reinsurance contracts which are classified as investment contracts because they do not expose the subsidiary to mortality or morbidity risks. In estimating the fair value of those contracts, estimated future cash flows are discounted using the current interest rate.

 

– 110 –


Table of Contents
21.

Commitments, Guarantees, and Contingent Liabilities

Commitments—The Company and certain subsidiaries have commitments for the purchase of equipment to be leased, having a cost of ¥1,033 million and ¥780 million as of March 31, 2016 and December 31, 2016, respectively.

The minimum future rentals on non-cancelable operating leases are as follows:

 

     Millions of yen  
     March 31, 2016      December 31, 2016  

Within one year

   ¥ 7,959      ¥ 6,563  

More than one year

     59,282        56,768  
  

 

 

    

 

 

 

Total

   ¥ 67,241      ¥ 63,331  
  

 

 

    

 

 

 

The Company and certain subsidiaries lease office space under operating lease agreements, which are primarily cancelable, and made rental payments totaling ¥10,785 million and ¥10,297 million for the nine months ended December 31, 2015 and 2016, respectively, and ¥3,288 million and ¥3,517 million for the three months ended December 31, 2015 and 2016, respectively.

Certain computer systems of the Company and certain subsidiaries have been operated and maintained under non-cancelable contracts with third-party service providers. For such services, the Company and certain subsidiaries made payments totaling ¥3,461 million and ¥3,433 million for the nine months ended December 31, 2015 and 2016, respectively, and ¥1,222 million and ¥1,215 million for the three months ended December 31, 2015 and 2016, respectively. As of March 31, 2016 and December 31, 2016, the amounts due are as follows:

 

     Millions of yen  
     March 31, 2016      December 31, 2016  

Within one year

   ¥ 3,385      ¥ 5,544  

More than one year

     7,289        8,374  
  

 

 

    

 

 

 

Total

   ¥ 10,674      ¥ 13,918  
  

 

 

    

 

 

 

The Company and certain subsidiaries have commitments to fund estimated construction costs to complete ongoing real estate development projects and other commitments, totaling ¥88,728 million and ¥82,366 million as of March 31, 2016 and December 31, 2016, respectively.

The Company and certain subsidiaries have agreements to commit to execute loans for customers, and to invest in funds, as long as the agreed-upon terms are met. The total unused credit and capital amount available are ¥347,603 million and ¥340,510 million as of March 31, 2016 and December 31, 2016, respectively.

Guarantees—At the inception of a guarantee, the Company and its subsidiaries recognize a liability in the consolidated balance sheets at fair value for the guarantee within the scope of ASC460(“Guarantees”). The following table represents the summary of potential future payments, book value recorded as guarantee liabilities of the guarantee contracts outstanding and maturity of the longest guarantee contracts as of March 31, 2016 and December 31, 2016:

 

     March 31, 2016      December 31, 2016  
     Millions of yen      Fiscal year      Millions of yen      Fiscal year  

Guarantees

   Potential
future
payment
     Book
value of
guarantee
liabilities
     Maturity of
the  longest
contract
     Potential
future
payment
     Book
value of
guarantee
liabilities
     Maturity of
the  longest
contract
 

Corporate loans

   ¥ 396,340      ¥ 5,875        2023      ¥ 454,983      ¥ 6,755        2024  

Transferred loans

     174,322        1,587        2046        154,666        1,181        2047  

Consumer loans

     179,225        21,748        2018        229,981        29,057        2018  

Housing loans

     28,919        5,853        2051        24,185        5,488        2048  

Other

     482        179        2024        1,213        104        2025  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 779,288      ¥ 35,242        —        ¥ 865,028      ¥ 42,585        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

– 111 –


Table of Contents

Guarantee of corporate loans: The Company and certain subsidiaries mainly guarantee corporate loans issued by financial institutions for customers. The Company and the subsidiaries are obliged to pay the outstanding loans when the guaranteed customers fail to pay principal and/or interest in accordance with the contract terms. In some cases, the corporate loans are secured by the guaranteed customers’ assets. Once the Company and the subsidiaries assume the guaranteed customers’ obligation, the Company and the subsidiaries obtain a right to claim the collateral assets. In other cases, certain contracts that guarantee corporate loans issued by financial institutions for customers include contracts that the amounts of performance guarantee are limited to a certain range of guarantee commissions. As of March 31, 2016 and December 31, 2016, total notional amount of the loans subject to such guarantees are ¥1,278,000 million and ¥1,304,000 million, respectively, and book value of guarantee liabilities are ¥1,080 million and ¥1,565 million, respectively. The potential future payment amounts for these guarantees are limited to a certain range of the guarantee commissions, which are less than the total notional amounts of the loans subject to these guarantees. The potential future payment amounts for the contract period are calculated from the guarantee limit which is arranged by financial institutions in advance as to contracts that the amounts of performance guarantee are unlimited to a certain range of guarantee commissions. For this reason, the potential future payment amounts for these guarantees include the amount of the guarantee which may occur in the future, which is larger than the balance of guarantee executed as of the end of fiscal year or the end of interim period. The executed guarantee balance includes defrayment by financial institutions which we bear temporarily at the time of execution, and credit risk for financial institutions until liquidation of this guarantee. Our substantial amounts of performance guarantee except credit risk for financial institutions are limited to our defrayment which is arranged by financial institutions in advance.

Payment or performance risk of the guarantees is considered based on the historical experience of credit events.

There were no significant changes in the payment or performance risk of the guarantees for the nine months ended December 31, 2016.

Guarantee of transferred loans: A subsidiary in the United States is authorized to underwrite, originate, fund, and service multi-family and seniors housing loans without prior approval from Fannie Mae under Fannie Mae’s Delegated Underwriting and Servicing program. As part of this program, Fannie Mae provides a commitment to purchase the loans.

In return for the delegated authority, the subsidiary guarantees the performance of certain housing loans transferred to Fannie Mae and has the payment or performance risk of the guarantees to absorb some of the losses when losses arise from the transferred loans.

There were no significant changes in the payment or performance risk of these guarantees for the nine months ended December 31, 2016.

Guarantee of consumer loans: A certain subsidiary guarantees consumer loans, typically card loans, issued by Japanese financial institutions. The subsidiary is obliged to pay the outstanding obligations when these loans become delinquent generally a month or more.

Payment or performance risk of the guarantees is considered based on the historical experience of credit events.

There were no significant changes in the payment or performance risk of the guarantees for the nine months ended December 31, 2016.

Guarantee of housing loans: The Company and certain subsidiaries guarantee housing loans issued by Japanese financial institutions to third party individuals. The Company and the subsidiaries are typically obliged to pay the outstanding loans when these loans become delinquent three months or more. The housing loans are usually secured by the real properties. Once the Company and the subsidiaries assume the guaranteed parties’ obligation, the Company and the subsidiaries obtain a right to claim the collateral assets.

Payment or performance risk of the guarantees is considered based on the historical experience of credit events.

There were no significant changes in the payment or performance risk of the guarantees for the nine months ended December 31, 2016.

 

– 112 –


Table of Contents

Other guarantees: Other guarantees include the guarantees to financial institutions and the guarantees derived from collection agency agreements. Pursuant to the contracts of the guarantees to financial institutions, a certain subsidiary pays to the financial institutions when customers of the financial institutions become debtors and default on the debts. Pursuant to the agreements of the guarantees derived from collection agency agreements, the Company and certain subsidiaries collect third parties’ debt and pay the uncovered amounts.

Litigation—The Company and certain subsidiaries are involved in legal proceedings and claims in the ordinary course of business. In the opinion of management, none of such proceedings and claims will have a significant impact on the Company’s financial position or results of operations.

Collateral—Other than the assets of the consolidated VIEs pledged as collateral for financing described in Note 8 “Variable Interest Entities”, the Company and certain subsidiaries provide the following assets as collateral for the short-term and long-term debt payables to financial institutions as of March 31, 2016 and December 31, 2016:

 

     Millions of yen  
     March 31, 2016      December 31, 2016  

Minimum lease payments, loans and investment in operating leases

   ¥ 106,118      ¥ 98,739  

Investment in securities

     177,266        172,987  

Property under facility operations

     8,781        4,879  

Other assets

     17,079        17,418  
  

 

 

    

 

 

 

Total

   ¥ 309,244      ¥ 294,023  
  

 

 

    

 

 

 

As of March 31, 2016 and December 31, 2016, ¥25,808 million and ¥34,343 million, respectively, were pledged primarily by investment in securities for collateral deposits, deposit for office, lease and other for real estate related transaction, and assets for liquidation of future rent. In addition, debt liabilities of affiliates amounted to ¥184,950 million and ¥182,122 million, respectively, were secured by investment in affiliates of ¥32,097 million and ¥35,049 million, respectively, as of March 31, 2016 and December 31, 2016.

Under loan agreements relating to short-term and long-term debt from commercial banks and certain insurance companies, the Company and certain subsidiaries are required to provide collateral against these debts at anytime if requested by the lenders. The Company and the subsidiaries did not receive any such requests from the lenders as of December 31, 2016.

 

– 113 –


Table of Contents
22.

Segment Information

Financial information about the operating segments reported below is that which is available by segment and evaluated regularly by the management in deciding how to allocate resources and in assessing performance.

An overview of operations for each of the six segments follows below.

 

Corporate Financial Services

     :      Lending, leasing and fee business.

Maintenance Leasing

     :      Automobile leasing and rentals, car sharing, and test and measurement instruments and IT-related equipment rentals and leasing

Real Estate

     :      Real estate development and rental, facility operation, REIT asset management, and real estate investment advisory services

Investment and Operation

     :      Environment and energy business, principal investment, loan servicing (asset recovery), and concession business

Retail

     :      Life insurance, banking and card loan business

Overseas Business

     :      Leasing, lending, investment in bonds, asset management and ship- and aircraft-related operations

Financial information of the segments for the nine months ended December 31, 2015 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing
     Real
Estate
     Investment
and
Operation
     Retail      Overseas
Business
     Total  

Segment revenues

   ¥      81,475      ¥ 204,743      ¥ 154,691      ¥ 751,084      ¥    208,751      ¥    399,856      ¥ 1,800,600  

Segment profits

     33,841        33,691        44,374        46,672        48,835        116,001        323,414  

Financial information of the segments for the nine months ended December 31, 2016 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing
     Real
Estate
     Investment
and
Operation
     Retail      Overseas
Business
     Total  

Segment revenues

   ¥      75,546      ¥ 202,657      ¥ 153,243      ¥ 870,404      ¥    274,708      ¥    351,733      ¥ 1,928,291  

Segment profits

     26,314        28,642        49,721        68,783        60,055        95,600        329,115  

Financial information of the segments for the three months ended December 31, 2015 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing
     Real
Estate
     Investment
and
Operation
     Retail      Overseas
Business
     Total  

Segment revenues

   ¥      28,763      ¥   68,819      ¥   45,644      ¥ 257,559      ¥    106,350      ¥    122,013      ¥    629,148  

Segment profits

     12,277        10,574        10,657        10,222        16,773        18,120        78,623  

Financial information of the segments for the three months ended December 31, 2016 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing
     Real
Estate
     Investment
and
Operation
     Retail      Overseas
Business
     Total  

Segment revenues

   ¥      23,551      ¥   67,837      ¥   49,159      ¥ 331,362      ¥    123,613      ¥    111,090      ¥    706,612  

Segment profits

     6,440        8,987        14,274        16,742        24,548        44,090        115,081  

 

– 114 –


Table of Contents

Segment assets information as of March 31, 2016 and December 31, 2016 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing
     Real
Estate
     Investment
and
Operation
     Retail      Overseas
Business
     Total  

March 31, 2016

   ¥ 1,049,867      ¥ 731,329      ¥ 739,592      ¥ 704,156      ¥ 3,462,772      ¥ 2,284,733      ¥ 8,972,449  

December 31, 2016

     1,038,857        731,492        680,231        697,591        3,331,594        2,416,885        8,896,650  

The accounting policies of the segments are almost the same as those described in Note 2 “Significant Accounting and Reporting Policies” except for the treatment of income tax expenses, net income attributable to the noncontrolling interests, net income attributable to the redeemable noncontrolling interests, and the consolidation of certain variable interest entities (VIEs).Income taxes are not included in segment profits or losses because the management evaluates segments’ performance on a pre-tax basis. Also, net income attributable to noncontrolling interests and redeemable noncontrolling interests are not included in segment profits or losses because the management evaluates segments’ performance based on profits or losses (per-tax) attributable to ORIX Corporation Shareholders. Since the Company and its subsidiaries evaluate performance for the segments based on profit or loss before income taxes, tax expenses are not included in segment profits or losses. Net income attributable to the noncontrolling interests, net income attributable to the redeemable noncontrolling interests, which are recognized net of tax in the accompanying consolidated statements of income, are adjusted to profit or loss before income tax, when calculating segment profits or losses. Most of selling, general and administrative expenses, including compensation costs that are directly related to the revenue generating activities of each segment, have been accumulated by and charged to each segment. Gains and losses that management does not consider for evaluating the performance of the segments, such as write-downs of certain securities, write-downs of certain long-lived assets and certain foreign exchange gains or losses(included in other (income) and expense, net) are excluded from the segment profits or losses, and are regarded as corporate items.

Assets attributed to each segment are investment in direct financing leases, installment loans, investment in operating leases, investment in securities, property under facility operations, investment in affiliates, inventories, advances for investment in operating leases (included in other assets), advances for investment in property under facility operations (included in other assets) and goodwill and other intangible assets recognized as a result of business combination (included in other assets). This has resulted in the depreciation of office facilities being included in each segment’s profit or loss while the carrying amounts of corresponding assets are not allocated to each segment’s assets. However, the effect resulting from this allocation is not significant.

For those VIEs that are used for securitization and are consolidated, for which the VIE’s assets can be used only to settle related obligations of those VIEs and the creditors (or beneficial interest holders) do not have recourse to other assets of the Company or its subsidiaries, segment assets are measured based on the amount of the Company and its subsidiaries’ net investments in the VIEs, which is different from the amount of total assets of the VIEs, and accordingly, segment revenues are also measured at a net amount representing the revenues earned on the net investments in the VIEs.

Certain gains or losses related to assets and liabilities of consolidated VIEs, which are not ultimately attributable to the Company and its subsidiaries, are excluded from segment profits.

Prior-year amounts have been adjusted for the retrospective application of Accounting Standards Update 2015-03 (“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) on April 1, 2016.

 

– 115 –


Table of Contents

The reconciliation of segment totals to consolidated financial statement amounts is as follows:

 

     Millions of yen  
     Nine months  ended
December 31, 2015
    Nine months  ended
December 31, 2016
 

Segment revenues:

    

Total revenues for segments

   ¥ 1,800,600     ¥ 1,928,291  

Revenues related to corporate assets

     8,488       8,251  

Revenues related to assets of certain VIEs

     4,259       3,327  

Revenues from inter-segment transactions

     (16,267     (14,100
  

 

 

   

 

 

 

Total consolidated revenues

   ¥ 1,797,080     ¥ 1,925,769  
  

 

 

   

 

 

 

Segment profits:

    

Total profits for segments

   ¥ 323,414     ¥ 329,115  

Corporate gains (losses)

     (2,233     (1,812

Gains related to assets or liabilities of certain VIEs

     5,672       27  

Net income attributable to the noncontrolling interests and net income attributable to the redeemable noncontrolling interests, net of applicable tax effect

     7,819       6,766  
  

 

 

   

 

 

 

Total consolidated income before income taxes

   ¥ 334,672     ¥ 334,096  
  

 

 

   

 

 

 
     Millions of yen  
     Three months  ended
December 31, 2015
    Three months  ended
December 31, 2016
 

Segment revenues:

    

Total revenues for segments

   ¥ 629,148     ¥ 706,612  

Revenues related to corporate assets

     1,453       1,284  

Revenues related to assets of certain VIEs

     1,354       1,096  

Revenues from inter-segment transactions

     (5,069     (4,348
  

 

 

   

 

 

 

Total consolidated revenues

   ¥      626,886     ¥      704,644  
  

 

 

   

 

 

 

Segment profits:

    

Total profits for segments

   ¥ 78,623     ¥ 115,081  

Corporate gains (losses)

     (1,152     (2,119

Gains (losses) related to assets or liabilities of certain VIEs

     5,448       (78

Net income attributable to the noncontrolling interests and net income attributable to the redeemable noncontrolling interests, net of applicable tax effect

     1,008       1,977  
  

 

 

   

 

 

 

Total consolidated income before income taxes

   ¥ 83,927     ¥ 114,861  
  

 

 

   

 

 

 

 

– 116 –


Table of Contents
     Millions of yen  
     March 31, 2015     December 31, 2016  

Segment assets:

    

Total assets for segments

   ¥ 8,972,449     ¥ 8,896,650  

Cash and cash equivalents, restricted cash

     811,399       1,046,725  

Allowance for doubtful receivables on direct financing leases and probable loan losses

     (60,071     (59,880

Trade notes, accounts and other receivable

     294,638       270,520  

Other corporate assets

     700,612       702,321  

Assets of certain VIEs

     273,891       286,204  
  

 

 

   

 

 

 

Total consolidated assets

   ¥ 10,992,918     ¥ 11,142,540  
  

 

 

   

 

 

 

The following information represents geographical revenues and income before income taxes, which are attributed to geographic areas, based on the country location of the Company and its subsidiaries.

For the nine months ended December 31, 2015

 

     Millions of yen  
     Japan      The Americas *1      Other *2*3      Total  

Total Revenues

   ¥ 1,384,265      ¥ 143,227      ¥ 269,588      ¥ 1,797,080  

Income before Income Taxes *1

     212,559        61,372        60,741        334,672  

For the nine months ended December 31, 2016

 
     Millions of yen  
     Japan      The Americas *1      Other *2*3      Total  

Total Revenues

   ¥ 1,555,622      ¥ 116,680      ¥ 253,467      ¥ 1,925,769  

Income before Income Taxes *1

     239,166        35,626        59,304        334,096  

For the three months ended December 31, 2015

 
     Millions of yen  
     Japan      The Americas *1      Other *2*3      Total  

Total Revenues

   ¥ 498,982      ¥ 40,351      ¥ 87,553      ¥ 626,886  

Income before Income Taxes *1

     59,005        10,062        14,860        83,927  

For the three months ended December 31, 2016

 
     Millions of yen  
     Japan      The Americas *1      Other *2*3      Total  

Total Revenues

   ¥ 588,151      ¥ 29,382      ¥ 87,111      ¥ 704,644  

Income before Income Taxes *1

     72,695        19,594        22,572        114,861  

 

– 117 –


Table of Contents

 

*1

Mainly the United States

*2

Mainly Asia, Europe, Australasia and Middle East

*3

Robeco, one of the Company’s subsidiaries domiciled in the Netherlands, conducts principally an asset management business. Due to the integrated nature of such business with its customer base spread across the world, “Other” locations include the total revenues and the income before income taxes of Robeco, respectively, for the nine and three months ended December 31, 2015 and 2016. The revenues of Robeco aggregated on a legal entity basis were ¥84,410 million in the Americas and ¥58,748 million in Other for the nine months ended December 31, 2015, and ¥71,914 million in the Americas and ¥56,102 million in Other for the nine months ended December 31, 2016, and ¥27,483 million in the Americas and ¥19,755 million in Other for the three months ended December 31, 2015, and ¥24,730 million in the Americas and ¥19,235 million in Other for the three months ended December 31, 2016.

No single customer accounted for 10% or more of the total revenues for the nine and three months ended December 31, 2015 and 2016.

 

23.

Subsequent Events

There are no material subsequent events.

 

– 118 –