Derivative Financial Instruments and Hedging

12 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging

29. Derivative Financial Instruments and Hedging

Risk management policy

The Company and its subsidiaries manage interest rate risk through asset-liability management (“ALM”). 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.

The Company and its subsidiaries have no derivative instruments with credit-risk-related contingent features as of March 31, 2019 and 2020.

(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 exchange contracts to minimize foreign currency exposures on bonds in foreign currencies. The Company and certain overseas subsidiaries use interest rate swap agreements to hedge interest rate exposure of the fair values of National government bonds in foreign currencies.

(c) Hedges of net investment in foreign operations

The Company uses foreign exchange contracts and borrowings and bonds denominated in foreign currencies to hedge the foreign currency exposure of the net investment in overseas subsidiaries.

(d) Derivatives not designated as hedging instruments

The Company and its subsidiaries entered into interest rate swap agreements, futures 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.

The effect of derivative instruments on the consolidated statements of income, pre-tax, for fiscal 2018 is as follows.

(1) Cash flow hedges

	Gains (losses) recognized in other comprehensive income on derivative (effective portion)			Gains (losses) reclassified from 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	¥	(114	)	Finance revenues/Interest expense	¥	132		—	¥	0
Foreign exchange contracts		(566	)	Other (income) and expense		(20	)	—		0
Foreign currency swap agreements		5,620		Finance revenues/Interest expense/Other (income) and expense		3,910		Other (income) and expense		(1,124	)

(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	¥	(393	)	Finance revenues/Interest expense	¥	393		Finance revenues/Interest expense
Foreign exchange contracts		956		Other (income) and expense		(956	)	Other (income) and expense
Foreign currency swap agreements		1,147		Other (income) and expense		(1,147	)	Other (income) and expense

(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 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	¥	(14,300	)		Gains on sales of subsidiaries and affiliates and liquidation losses, net	¥	(3,559	)		—	¥	0
Borrowings and bonds in foreign currencies		8,746			—		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	¥	1,420		Other (income) and expense
Futures		(5,819	)	Gains on investment securities and dividends Life insurance premiums and related investment income*
Foreign exchange contracts		(6,626	)	Gains on investment securities and dividends Life insurance premiums and related investment income* Other (income) and expense
Credit derivatives held		(4	)	Other (income) and expense
Options held/written and other		(291	)	Other (income) and expense Life insurance premiums and related investment income*

* Futures, foreign exchange contracts and options held/written and other in the above table include 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 fiscal 2018 (see Note 26 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income, pre-tax, for fiscal 2019 is as follows.

(1) Cash flow hedges

	Gains (losses) recognized in other comprehensive income on derivative (effective portion)			Gains (losses) reclassified from 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	¥	(4,313	)	Finance revenues/Interest expense	¥	157		—	¥	0
Foreign exchange contracts		115		Other (income) and expense		(156	)	—		0
Foreign currency swap agreements		(1,816	)	Finance revenues/Interest expense/Other (income) and expense		(639	)	—		0

(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	¥	(8,448	)	Finance revenues/Interest expense	¥	8,448	Finance revenues/Interest expense
Foreign exchange contracts		(5,538	)	Other (income) and expense		5,403	Other (income) and expense

(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 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	¥	4,850			Gains on sales of subsidiaries and affiliates and liquidation losses, net	¥	(2,540	)		—	¥	0
Borrowings and bonds in foreign currencies		(5,963	)		—		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	¥	832		Other (income) and expense
Futures		(912	)	Gains on investment securities and dividends Life insurance premiums and related investment income*
Foreign exchange contracts		(6,589	)	Gains on investment securities and dividends Life insurance premiums and related investment income* Other (income) and expense
Credit derivatives held		105		Other (income) and expense
Options held/written and other		710		Other (income) and expense Life insurance premiums and related investment income*

* Futures, foreign exchange contracts and options held/written and other in the above table include gains (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 fiscal 2019 (see Note 26 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income, pre-tax, for fiscal 2020 is as follows.

(1) Cash flow hedges

	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative			Gains (losses) reclassified from other comprehensive income (loss) into income
				Interest expense			Other (income) and expense
Interest rate swap agreements	¥	(11,506	)	¥	775		¥	0
Foreign exchange contracts		(241	)		(119	)		457
Foreign currency swap agreements		3,851			413			(4,349	)

(2) Fair value hedges

	Millions of yen
	Gains (losses) recognized in income on derivative and other						Gains (losses) recognized in income on hedged item
	Life insurance premiums and related investment income			Other (income) and expense			Life insurance premiums and related investment income			Other (income) and expense
Interest rate swap agreements	¥	(19,805	)	¥	0		¥	18,955		¥	0
Foreign exchange contracts		3,656			(187	)		(3,294	)		244

(3) Hedges of net investment in foreign operations

	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative and others		Gains (losses) reclassified from other comprehensive income (loss) into income (Millions of yen)
			Gains on sales of subsidiaries and affiliates and liquidation losses, net		Write-downs of securities		Interest expense
Foreign exchange contracts	¥	15,273	¥	1,594	¥	2,759	¥	4,595
Borrowings and bonds in foreign currencies		13,489		0		0		0

(4) Derivatives not designated as hedging instruments

	Millions of yen
	Gains (losses) recognized in income on derivative (Millions of yen)
	Life insurance premiums and related investment income*		Interest expense		Other (income) and expense
Interest rate swap agreements	¥	0	¥	7	¥	159
Futures		1,257		0		(1,843	)
Foreign exchange contracts		204		4,803		(1,840	)
Credit derivatives held		0		0		(6	)
Options held/written and other		402		0		4,481

* Futures, foreign exchange contracts and options held/written and other in the above table include gains (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 fiscal 2020 (see Note 26 “Life Insurance Operations”).

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income, pre-tax, for fiscal 2020 is as follows.

Fair value hedges

	Millions of yen
	Gains (losses)
	Other (income) and  expense		Interest expense		Life insurance premiums and related investment income
Foreign exchange contracts	¥	0	¥	3	¥	(3,020	)
Options held/written and other		29		0		0

The carrying amount of hedged assets and liabilities recognized in balance sheets in fair value hedges and the cumulative amount of fair value hedging adjustments included in the carrying amount at March 31, 2020 is as follows.

Assets as hedged items in fair value hedges					Liabilities as hedged items in fair value hedges
	Millions of yen						Millions of yen
Consolidated balance sheets location	Carrying amount		The cumulative amount of fair value hedging adjustments included in the carrying amount		Consolidated balance sheets location		Carrying amount		The cumulative amount of fair value hedging adjustments included in the carrying amount
Investment in Securities*	¥	320,344	¥	24,397		—	¥	0	¥	0

* Accumulated fair value hedge adjustments of ¥(1,599) million are included for hedged items for which hedge accounting has been discontinued.

Notional amounts of derivative instruments and other, fair values of derivative instruments and other before offsetting at March 31, 2019 and 2020 are as follows.

March 31, 2019

			Derivative assets				Derivative liabilities
	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	¥	498,874	¥	11		Other Assets	¥	17,320		Other Liabilities
Futures, foreign exchange contracts		505,909		1,888		Other Assets		3,177		Other Liabilities
Foreign currency swap agreements		65,575		1,203		Other Assets		364		Other Liabilities
Foreign currency long-term debt		641,127		0		—		0		—
Derivatives not designated as hedging instruments:
Interest rate swap agreements	¥	60,657	¥	127		Other Assets	¥	119		Other Liabilities
Options held/written and other*		556,668		11,140		Other Assets		2,809		Other Liabilities
Futures, foreign exchange contracts*		320,710		1,119		Other Assets		2,159		Other Liabilities
Credit derivatives held		262		7		Other Assets		10		Other Liabilities

* The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥34,701 million, futures contracts of ¥37,359 million and foreign exchange contracts of ¥13,171 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2019, respectively. Derivative assets in the above table include fair value of the options held, futures contracts and foreign exchange contracts before offsetting of ¥206 million, ¥248 million and ¥30 million and derivative liabilities include fair value of the futures and foreign exchange contracts before offsetting of ¥258 million and ¥173 million at March 31, 2019, respectively.

December 31, 2020

			Derivative assets				Derivative liabilities
	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	¥	494,893	¥	0		—	¥	43,889		Other Liabilities
Options held/written and other		742		28		Other Assets		0		—
Futures, foreign exchange contracts		623,172		7,555		Other Assets		4,365		Other Liabilities
Foreign currency swap agreements		68,840		5,079		Other Assets		137		Other Liabilities
Foreign currency long-term debt		612,536		0		—		0		—
Derivatives not designated as hedging instruments:
Interest rate swap agreements	¥	7,644	¥	0		—	¥	113		Other Liabilities
Options held/written and other*		670,044		21,318		Other Assets		20,004		Other Liabilities
Futures, foreign exchange contracts*		372,948		5,710		Other Assets		5,141		Other Liabilities

* The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥16,754 million, futures contracts of ¥35,875 million and foreign exchange contracts of ¥16,656 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2020, respectively. Derivative assets in the above table include fair value of the options held, futures contracts and foreign exchange contracts before offsetting of ¥598 million, ¥165 million and ¥111 million and derivative liabilities include fair value of the futures and foreign exchange contracts before offsetting of ¥1,564 million and ¥178 million at March 31, 2020, respectively.