0001193125-19-219436.txt : 20190813 0001193125-19-219436.hdr.sgml : 20190813 20190813061209 ACCESSION NUMBER: 0001193125-19-219436 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20190813 FILED AS OF DATE: 20190813 DATE AS OF CHANGE: 20190813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORIX CORP CENTRAL INDEX KEY: 0001070304 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS BUSINESS CREDIT INSTITUTION [6159] IRS NUMBER: 000000000 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14856 FILM NUMBER: 191018167 BUSINESS ADDRESS: STREET 1: WORLD TRADE CENTER BLDG. STREET 2: 2-4-1 HAMAMATSU-CHO, MINATO-KU CITY: TOKYO STATE: M0 ZIP: 105 6135 BUSINESS PHONE: 81334353000 MAIL ADDRESS: STREET 1: WORLD TRADE CENTER BLDG. STREET 2: 2-4-1 HAMAMATSU-CHO, MINATO-KU CITY: TOKYO STATE: M0 ZIP: 105 6135 6-K 1 d771135d6k.htm FORM 6-K FORM 6-K
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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 August 2019.

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):  ☐

 

 

 


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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: August 13, 2019

 

By

 

/s/ SHOJI TANIGUCHI

   

Shoji Taniguchi

   

Member of the Board of Directors and Managing Executive Officer

Responsible for Treasury and Accounting Headquarters

Assistant to CEO

   

ORIX Corporation


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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 August 13, 2019, which includes unaudited consolidated financial information prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for the three months ended June 30, 2018 and 2019.

 

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 –


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1.

Information on the Company and its Subsidiaries

(1) Consolidated Financial Highlights

 

     Millions of yen
(except for per share amounts and ratios)
 
     Three months
ended
June 30,
2018
    Three months
ended
June 30,
2019
    Fiscal year
ended
March 31,
2019
 

Total revenues

   ¥ 603,917     ¥ 536,980     ¥ 2,434,864  

Income before income taxes

     110,954       98,860       395,730  

Net income attributable to ORIX Corporation shareholders

     79,947       69,210       323,745  

Comprehensive Income attributable to ORIX Corporation shareholders

     75,118       48,672       310,970  

ORIX Corporation shareholders’ equity

     2,712,205       2,887,070       2,897,074  

Total assets

     11,371,902       12,404,945       12,174,917  

Earnings per share for net income attributable to ORIX Corporation shareholders

      

Basic (yen)

     62.46       54.07       252.92  

Diluted (yen)

     62.41       54.02       252.70  

ORIX Corporation shareholders’ equity ratio (%)

     23.9       23.3       23.8  

Cash flows from operating activities

     97,264       178,635       587,678  

Cash flows from investing activities

     3,570       (334,616     (873,951

Cash flows from financing activities

     (180,123     21,572       166,647  

Cash, Cash Equivalents and Restricted Cash at end of Period

     1,326,933       1,142,830       1,283,580  

 

Notes:

1.

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

  2.

Accounting Standards Update 2016-02 (ASC 842 (“Leases”)) (hereinafter, “new lease standard”) has been adopted since April 1, 2019. For further information, see Note 2 “Significant Accounting and Reporting Policies (ag) New accounting pronouncements.”

(2) Overview of Activities

During the three months ended June 30, 2019, 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, 2019 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.

 

– 2 –


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3.

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

Financial Highlights

Financial Results for the Three Months Ended June 30, 2019

Total revenues

   ¥536,980 million (Down 11% year on year)

Total expenses

   ¥461,329 million (Down 10% year on year)

Income before income taxes

   ¥98,860 million (Down 11% year on year)

Net income attributable to ORIX Corporation Shareholders

   ¥69,210 million (Down 13% year on year)

Earnings per share for net income attributable to ORIX Corporation Shareholders

  

(Basic)

   ¥54.07 (Down 13% year on year)

(Diluted)

   ¥54.02 (Down 13% year on year)

ROE (Annualized) *1

   9.6% (11.9% during the same period in the previous fiscal year)

ROA (Annualized) *2

   2.25% (2.81% during the same period in the previous fiscal year)

 

*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 three months ended June 30, 2019 decreased 11% to ¥536,980 million compared to ¥603,917 million during the same period of the previous fiscal year due to a decrease in sales of goods and real estate due primarily to decreasing revenues generated by subsidiaries in the principal investment business, despite increases in finance revenues.

Total expenses decreased 10% to ¥461,329 million compared to ¥511,922 million during the same period of the previous fiscal year due to a decrease in costs of goods and real estate sold in line with the aforementioned decreased revenues, despite an increase in selling, general and administrative expenses.

In addition, although in equity in net income of affiliates increased, income taxes for the three months ended June 30, 2019 decreased 11% to ¥98,860 million compared to ¥110,954 million during the same period of the previous fiscal year, and net income attributable to ORIX Corporation shareholders decreased 13% to ¥69,210 million compared to ¥79,947 million during the same period of the previous fiscal year.

 

– 3 –


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Segment Information

The Company made DAIKYO INCORPORATED (hereinafter, “DAIKYO”) a wholly-owned subsidiary in fiscal 2019 to complement their respective real estate businesses and to jointly aim for medium- and long-term growth as a comprehensive real estate business. Accordingly, the Company changed the segment classification of DAIKYO from Investment and Operation segment to Real Estate segment. As a result of this change, segment amounts during the same period of the previous fiscal year have been retrospectively reclassified.

The Company and its subsidiaries adopted the new lease standard on April 1, 2019. The impact of the adoption has resulted in gross up of right-of-use assets of investment in operating leases and property under facility operations principally for operating leases, where it is the lessee, such as land leases and office and equipment leases in all of our segments except for Retail segment. Additionally, the amounts of investment in direct financing leases reclassified to net investment in the leases. For further information, see Note 2 “Significant Accounting and Reporting Policies (ag) New accounting pronouncements.”

Total revenues and profits by segment for the three months ended June 30, 2018 and 2019 are as follows:

 

     Millions of yen  
     Three months ended
June 30, 2018
    Three months ended
June 30, 2019
    Change
(revenues)
    Change
(profits)
 
     Segment
Revenues
    Segment
Profits
    Segment
Revenues
    Segment
Profits
    Amount     Percent
(%)
    Amount     Percent
(%)
 

Corporate Financial Services

   ¥ 25,004     ¥ 7,820     ¥ 21,715     ¥ 4,066     ¥ (3,289     (13   ¥ (3,754     (48

Maintenance Leasing

     69,858       9,696       72,581       7,919       2,723       4       (1,777     (18

Real Estate

     113,377       20,494       93,257       4,468       (20,120     (18     (16,026     (78

Investment and Operation

     175,269       13,630       116,665       14,231       (58,604     (33     601       4  

Retail

     102,815       21,785       108,679       21,589       5,864       6       (196     (1

Overseas Business

     118,479       40,006       126,500       48,068       8,021       7       8,062       20  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     604,802       113,431       539,397       100,341       (65,405     (11     (13,090     (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Difference between Segment Total and Consolidated Amounts

     (885     (2,477     (2,417     (1,481     (1,532     —         996       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consolidated Amounts

   ¥ 603,917     ¥ 110,954     ¥ 536,980     ¥ 98,860     ¥ (66,937     (11   ¥ (12,094     (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets by segment as of March 31, 2019 and June 30, 2019 are as follows:

 

     Millions of yen  
     March 31, 2019      June 30, 2019      Change  
     Segment
Assets
     Composition
ratio (%)
     Segment
Assets
     Composition
ratio (%)
     Amount     Percent
(%)
 

Corporate Financial Services

   ¥ 959,725        8      ¥ 1,000,150        8      ¥ 40,425       4  

Maintenance Leasing

     873,775        7        880,680        7        6,905       1  

Real Estate

     720,221        6        813,695        7        93,474       13  

Investment and Operation

     733,612        6        750,321        6        16,709       2  

Retail

     3,571,437        29        3,735,056        30        163,619       5  

Overseas Business

     3,138,928        26        3,094,468        25        (44,460     (1
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     9,997,698        82        10,274,370        83        276,672       3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Difference between Segment Total and Consolidated Amounts

     2,177,219        18        2,130,575        17        (46,644     (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Consolidated Amounts

   ¥ 12,174,917           100      ¥ 12,404,945           100      ¥ 230,028       2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

– 4 –


Table of Contents

Segment information for the three months ended June 30, 2019 is as follows:

Corporate Financial Services Segment: Finance and fee business

In this segment, we are focusing on fee businesses related to life insurance, environment and energy, auto leasing related products and services provided to domestic small- and medium-sized enterprise customers while engaging in highly competitive businesses such as leasing and lending with a focus on profitability. We aim to grow our profit by maximizing synergies with Yayoi, a software service provider in the group, and by utilizing our domestic network to create new businesses.

Segment revenues decreased 13% to ¥21,715 million compared to the same period of the previous fiscal year due to decreases in finance revenues and in services income in line with a decrease in fee income related to life insurance.

As a result of the foregoing and an increase in selling, general and administrative expenses by the adoption of the new lease standard that changed the recognition of some lease related costs from deferred depreciation to one-time expenses, segment profits decreased 48% to ¥4,066 million compared to the same period of the previous fiscal year.

Segment assets increased 4% to ¥1,000,150 million compared to the end of the previous fiscal year due to an increase in investment in operating leases by the adoption of the new lease standard despite a decrease in investment in securities.

Although asset efficiency decreased compared to the same period of the previous fiscal year, we continue diversification of the services income.

 

                                                                                                       
     Three months
ended June 30,
2018
    Three months
ended June 30,
2019
    Change  
    Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Segment Revenues:

        

Finance revenues

   ¥ 7,712     ¥ 5,949     ¥ (1,763     (23

Gains on investment securities and dividends

     238       555       317       133  

Operating leases

     6,012       5,632       (380     (6

Sales of goods and real estate

     1,036       1,369       333       32  

Services income

     10,006       8,210       (1,796     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     25,004       21,715       (3,289     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Expenses:

        

Interest expense

     1,109       936       (173     (16

Costs of operating leases

     3,539       3,659       120       3  

Costs of goods and real estate sold

     427       514       87       20  

Services expense

     2,146       2,601       455       21  

Selling, general and administrative expenses

     9,585       10,791       1,206       13  

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

     246       350       104       42  

Other

     (17     (23     (6     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     17,035       18,828       1,793       11  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Income

     7,969       2,887       (5,082     (64
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Net income (Loss) of Affiliates, and others

     (149     1,179       1,328       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 7,820          ¥ 4,066          ¥ (3,754     (48
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of
March 31,
2019
    As of
June 30,
2019
    Change  
    Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Investment in direct financing leases

   ¥ 403,639     ¥ 0     ¥ (403,639     (100

Net investment in the leases

     0       396,483       396,483       100  

Installment loans

     364,818       361,366       (3,452     (1

Investment in operating leases

     24,143       79,885       55,742       231  

Investment in securities

     31,522       20,300       (11,222     (36

Property under facility operations

     16,973       19,860            2,887       17  

Inventories

     51       123       72       141  

Advances for finance lease and operating lease

     122       62       (60     (49

Investment in affiliates

     16,276       16,776       500       3  

Goodwill, intangible assets acquired in business combinations

     102,181       105,295       3,114       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥      959,725     ¥      1,000,150     ¥ 40,425       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

– 5 –


Table of Contents

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

In the automobile related businesses, which cover a large part of this segment, we aim to increase market share in small- and medium-sized enterprises and individuals as well as large corporate customers by enhancing our competitive advantages coming from our industry-leading number of fleets under management and one-stop automobile-related services. Furthermore, we intend to develop new products and services to adapt to the change of industrial structure and get new business opportunities. In the rental business, we strengthened our engineering solution businesses by developing new services relating to robots and three-dimensional (3D) printing.

Segment revenues increased 4% to ¥72,581 million compared to the same period of the previous fiscal year due to an increase in operating leases revenues.

Segment profits decreased 18% to ¥7,919 million compared to the same period of the previous fiscal year due to an increase in selling, general and administrative expenses by the adoption of the new lease standard that changed the recognition of some lease related costs from deferred depreciation to one-time expenses.

Segment assets increased 1% to ¥880,680 million compared to the end of the previous fiscal year due to an increase in investment in operating leases by the adoption of the new lease standard.

Although asset efficiency decreased compared to the same period of the previous fiscal year, we have maintained stable profitability excluding the impact by the adoption of the new lease standard.

 

                                                                                                       
     Three months
ended June 30,
2018
    Three months
ended June 30,
2019
    Change  
    Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Segment Revenues:

        

Finance revenues

   ¥ 3,439     ¥ 3,705     ¥ 266       8  

Operating leases

     47,915       49,973       2,058       4  

Services income

     17,422       17,448       26       0  

Other

     1,082       1,455       373       34  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     69,858       72,581       2,723       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Expenses:

        

Interest expense

     812       716       (96     (12

Costs of operating leases

     37,206       39,469       2,263       6  

Services expense

     9,864       10,187       323       3  

Selling, general and administrative expenses

     11,448            13,055            1,607       14  

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

     53       78       25       47  

Other

     761       1,145       384       50  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     60,144       64,650       4,506       7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Income

     9,714       7,931       (1,783     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Net income (Loss) of Affiliates, and others

     (18     (12     6       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 9,696     ¥ 7,919     ¥ (1,777     (18
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of
March 31,
2019
    As of
June 30,
2019
    Change  
    Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Investment in direct financing leases

   ¥ 328,424     ¥ 0     ¥ (328,424     (100

Net investment in the leases

     0       325,954       325,954       100  

Investment in operating leases

     525,392       535,265       9,873       2  

Investment in securities

     506       493       (13     (3

Property under facility operations

     988       991       3       0  

Inventories

     587       677       90       15  

Advances for finance lease and operating lease

     669       260       (409     (61

Investment in affiliates

     33       21       (12     (36

Goodwill, intangible assets acquired in business combinations

     17,176       17,019       (157     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥      873,775     ¥      880,680     ¥      6,905       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

– 6 –


Table of Contents

Real Estate Segment: Real estate development, rental and management; facility operation; real estate investment management

In this segment, we aim to promote portfolio rebalancing by selling rental properties into favorable markets and also to expand the scale of our asset management business such as REIT and real estate investment advisory services in order to construct a portfolio that is less affected by changes in the real estate market. We proceed mutual complementation between Daikyo and ORIX real estate businesses, and we also aim to gain stable profits by accumulating expertise through the operation of various facilities such as hotels and Japanese inns and to develop new businesses by taking advantage of our value chain of real estate development and rental, asset management and facility operations.

Segment revenues decreased 18% to ¥93,257 million compared to the same period of the previous fiscal year due to a decrease in services income from significant gains on a sale of property under facility operations that were recognized during the same period of the previous fiscal year.

Segment profits decreased 78% to ¥4,468 million compared to the same period of the previous fiscal year.

Segment assets increased 13% to ¥813,695 million compared to the end of the previous fiscal year due to increases in investment in operating leases and in property under facility operations by the adoption of the new lease standard.

Although asset efficiency decreased compared to the same period of the previous fiscal year, we continuously made new investments in carefully selected areas and properties.

 

                                                                                                       
     Three months
ended June 30,
2018
    Three months
ended June 30,
2019
    Change  
    Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Segment Revenues:

        

Finance revenues

   ¥ 491     ¥ 671     ¥ 180       37  

Operating leases

     12,871       12,986       115       1  

Sales of goods and real estate

     19,445       15,363       (4,082     (21

Services income

     79,766       64,449       (15,317     (19

Other

     804       (212     (1,016     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     113,377       93,257       (20,120     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Expenses:

        

Interest expense

     629       415       (214     (34

Costs of operating leases

     6,444       6,448       4       0  

Costs of goods and real estate sold

     18,348       15,383       (2,965     (16

Services expense

     58,794       54,967       (3,827     (7

Selling, general and administrative expenses

     11,395       11,879       484       4  

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

     13       29       16       123  

Other

     (197     142       339       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     95,426       89,263       (6,163     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Income

     17,951       3,994       (13,957     (78
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Net income (Loss) of Affiliates, and others

     2,543       474       (2,069     (81
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 20,494          ¥ 4,468          ¥ (16,026     (78
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of
March  31,
2019
    As of
June 30,
2019
    Change  
    Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Investment in direct financing leases

   ¥ 35,420     ¥ 0     ¥ (35,420     (100

Net investment in the leases

     0       35,285       35,285       100  

Installment loans

     316       316       0       —    

Investment in operating leases

     242,022       299,844       57,822       24  

Investment in securities

     8,038       7,741       (297     (4

Property under facility operations

     146,100       177,550       31,450       22  

Inventories

     80,920       91,704       10,784       13  

Advances for finance lease and operating lease

     29,946       29,316       (630     (2

Investment in affiliates

     107,072       102,072       (5,000     (5

Advances for property under facility operations

     6,790       6,902       112       2  

Goodwill, intangible assets acquired in business combinations

     63,597       62,965       (632     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥      720,221     ¥      813,695     ¥ 93,474       13  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

– 7 –


Table of Contents

Investment and Operation Segment: Environment and energy, private equity and concession

In the environment and energy business, we aim to increase services revenue by promoting our renewable energy business and our electric power retailing business as a comprehensive energy service provider. In our solar power business, we have secured abundant solar power capacity and are operating many projects, making us one of the largest solar power producers in Japan. We will accelerate our renewable energy business overseas by utilizing the expertise we have gained in the domestic market. In the private equity business, we aim to earn stable profits from investees and sustainable gains on sales through rebalancing our portfolio. We intend to diversify our investment methods and expand our target zone. Regarding the concession business, we aim to strengthen our operations in the three airports, Kansai International Airport, Osaka International Airport and Kobe Airport, and also aim to proactively engage in the operation of public infrastructures other than airports.

Segment revenues decreased 33% to ¥116,665 million compared to the same period of the previous fiscal year due to a decrease in sales of goods by a subsidiary in the private equity business.

Segment profits increased 4% to ¥14,231 million compared to the same period of the previous fiscal year due to the recognition of gains on sales of shares of a subsidiary.

Segment assets increased 2% to ¥750,321 million compared to the end of the previous fiscal year due to an increase in property under facility operations by the adoption of the new lease standard.

Asset efficiency increased compared to the same period of the previous year, and the solar power business in Japan has grown steadily and profit from the concession business has also steadily increased.

 

                                                                                                       
     Three months
ended June 30,
2018
    Three months
ended June 30,
2019
    Change  
    Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Segment Revenues:

        

Finance revenues

   ¥ 2,501     ¥ 1,787     ¥ (714     (29

Gains on investment securities and dividends

     683       318       (365     (53

Sales of goods and real estate

     131,248       68,038       (63,210     (48

Services income

     40,683       46,177       5,494       14  

Other

     154       345       191       124  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     175,269       116,665       (58,604     (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Expenses:

        

Interest expense

     1,692       1,866       174       10  

Costs of goods and real estate sold

     121,992       57,683       (64,309     (53

Services expense

     30,439       34,552       4,113       14  

Selling, general and administrative expenses

     11,622       12,700       1,078       9  

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

     (306     (29     277       —    

Other

     (261     231       492       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     165,178       107,003       (58,175     (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Income

     10,091       9,662       (429     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Net income (Loss) of Affiliates, and others

     3,539       4,569       1,030       29  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 13,630          ¥ 14,231          ¥ 601       4  
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of
March  31,
2019
    As of
June 30,
2019
    Change  
    Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 25,696     ¥ 0     ¥ (25,696     (100

Net investment in the leases

     0       25,455       25,455       100  

Installment loans

     47,573       44,651       (2,922     (6

Investment in operating leases

     5,474       5,431       (43     (1

Investment in securities

     25,786       24,329       (1,457     (6

Property under facility operations

     264,994       298,105       33,111       12  

Inventories

     30,776       29,147       (1,629     (5

Advances for finance lease and operating lease

     1,340       1,256       (84     (6

Investment in affiliates

     161,966       164,736       2,770       2  

Advances for property under facility operations

     11,291       12,994       1,703       15  

Goodwill, intangible assets acquired in business
combinations

     158,716       144,217       (14,499     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥      733,612     ¥      750,321     ¥ 16,709       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

– 8 –


Table of Contents

Retail Segment: Life insurance, banking and card loan

In the life insurance business, we aim to increase the number of policies in force and revenues from insurance premiums by offering simple-to-understand products through sales agencies and online. In the banking business, we aim to increase finance revenues by increasing the balance of outstanding housing loans which is a core of our banking business. In the card loan business, we aim to increase revenues from guarantee fees by expanding guarantees against loans disbursed by other financial institutions. We also aim to increase finance revenues by making loans directly to our customers through our experience and expertise in credit screening.

Based on the aforementioned strategy, segment revenues increased 6% to ¥108,679 million compared to the same period of the previous fiscal year due to increases in life insurance premiums of the life insurance business and finance revenues of the banking business increased with the growth of the businesses.

Segment profits decreased 1% to ¥21,589 million compared to the same period of the previous fiscal year due to an increase in selling, general and administrative expenses of the life insurance business, including improvement of customer service system.

Segment assets increased 5% to ¥3,735,056 million compared to the end of the previous fiscal year due to increases in investment in securities with the growth of the life insurance business and in installment loans with the growth of the banking business.

Although asset efficiency decreased compared to the same period of the previous fiscal year, we have steadily expanded our businesses by increasing the balance of housing loans in the banking business and the number of insurance policies in force in the life insurance business.

 

                                                                                                       
     Three months
ended June  30,
2018
    Three months
ended June  30,
2019
    Change  
    Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Segment Revenues:

        

Finance revenues

   ¥ 18,693     ¥ 19,457     ¥ 764       4  

Life insurance premiums and related investment income

     83,203       88,044       4,841       6  

Other

     919       1,178       259       28  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     102,815       108,679       5,864       6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Expenses:

        

Interest expense

     1,010       1,017       7       1  

Life insurance costs

     57,348       62,293       4,945       9  

Selling, general and administrative expenses

     18,454       19,427       973           5  

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

     3,182       3,074       (108     (3

Other

     1,033       1,274       241       23  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     81,027       87,085       6,058       7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Income

     21,788       21,594       (194     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Net income (Loss) of Affiliates, and others

     (3     (5     (2     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 21,785          ¥ 21,589          ¥ (196     (1
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of
March  31,
2019
    As of
June 30,
2019
    Change  
    Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 42     ¥ 0     ¥ (42     (100

Net investment in the leases

     0       19       19       100  

Installment loans

     2,049,980       2,129,798       79,818       4  

Investment in operating leases

     29,810       29,677       (133     (0

Investment in securities

     1,474,750       1,558,771       84,021       6  

Investment in affiliates

     631       567       (64     (10

Goodwill, intangible assets acquired in business combinations

     16,224       16,224       0       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥   3,571,437     ¥   3,735,056     ¥    163,619       5  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

– 9 –


Table of Contents

Overseas Business Segment: Asset management, aircraft- and ship-related operations, private equity and finance

In the United States, we aim to expand our business areas by engaging in equity investments and fee businesses such as fund management in addition to corporate finance and investments in bonds. In our aircraft-related operations, we are focusing on profit opportunities within operating lease, sales of used aircraft to domestic and overseas investors, and asset management services for the aircraft owned by others. All of these opportunities are backed by the growing demand of passengers and for aircraft. We also aim to promote the expansion of functionality and diversification in our overseas group companies.

Based on the aforementioned strategy, segment revenues increased 7% to ¥126,500 million compared to the same period of the previous fiscal year due to increases in finance revenues in the United States through the acquisition of NXT Capital Group, LLC (hereinafter, “NXT Capital”) which we acquired in the previous fiscal year and in gains on investment securities through selling an investee in Asia.

As a result of the foregoing and an increase in equity in net income of affiliates from Avolon Holdings Limited (hereinafter, “Avolon”), a leading global aircraft leasing company located in Ireland whose shares we acquired in the previous fiscal year, segment profits increased 20% to ¥48,068 million compared to the same period of the previous fiscal year.

Segment assets decreased 1% to ¥3,094,468 million compared to the end of the previous fiscal year due to decreases in investment in securities and in investment in affiliates in the United States.

Asset efficiency kept the same level compared to the same period of the previous fiscal year. we have steadily expanded the asset management business in the United States including NXT Capital, and aircraft-related operations including Avolon.

 

                                                                                                       
     Three months
ended June 30,
2018
     Three months
ended June 30,
2019
     Change  
     Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Segment Revenues:

 

Finance revenues

   ¥ 23,669      ¥ 30,993      ¥ 7,324       31  

Gains on investment securities and dividends

     5,602        12,851        7,249       129  

Operating leases

     29,408        28,235        (1,173     (4

Services income

     58,627        53,966        (4,661     (8

Other

     1,173        455        (718     (61
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     118,479        126,500        8,021       7  
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Expenses:

          

Interest expense

     12,548        18,372        5,824       46  

Costs of operating leases

     15,429        15,940        511       3  

Services expense

     16,596        14,585        (2,011     (12

Selling, general and administrative expenses

     42,832        44,160        1,328       3  

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

     1,808        1,234        (574     (32

Other

     2,194        389        (1,805     (82
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     91,407        94,680        3,273       4  
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Operating Income

     27,072        31,820        4,748       18  
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity in Net income (Loss) of Affiliates, and others

     12,934        16,248        3,314       26  
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 40,006      ¥ 48,068      ¥ 8,062       20  
  

 

 

    

 

 

    

 

 

   

 

 

 
     As of
March 31,
2019
     As of
June 30,
2019
     Change  
     Amount     Percent (%)  
    

 

(Millions of yen, except percentage data)

 

Investment in direct financing leases

   ¥ 362,391      ¥ 0      ¥ (362,391     (100

Net investment in the leases

     0        350,811        350,811       100  

Installment loans

     814,847        835,720        20,873       3  

Investment in operating leases

     509,117        509,252        135       0  

Investment in securities

     385,339        363,440        (21,899     (6

Property under facility operations and servicing assets

     44,149        43,874        (275     (1

Inventories

     3,161        3,299        138       4  

Advances for finance lease and operating lease

     10,932        7,718        (3,214     (29

Investment in affiliates

     556,682        536,192        (20,490     (4

Goodwill, intangible assets acquired in business combinations

     452,310        444,162        (8,148     (2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥ 3,138,928      ¥ 3,094,468      ¥ (44,460     (1
  

 

 

    

 

 

    

 

 

   

 

 

 

 

– 10 –


Table of Contents

(2) Financial Condition

 

                                                                                                       
     As of
March 31,
2019
    As of
June 30,
2019
    Change  
  Amount     Percent (%)  
     (Millions of yen except per share, ratios and percentages)  

Total assets

   ¥ 12,174,917     ¥ 12,404,945     ¥ 230,028       2  

(Segment assets)

     9,997,698       10,274,370       276,672       3  

Total liabilities

     9,211,936       9,449,469       237,533       3  

(Short- and long-term debt)

     4,495,771       4,448,993       (46,778     (1

(Deposits)

     1,927,741       1,987,341       59,600           3  

ORIX Corporation shareholders’ equity

     2,897,074       2,887,070       (10,004     (0

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

     2,263.41       2,255.59       (7.82     (0

ORIX Corporation shareholders’ equity ratio *2

     23.8 %        23.3 %        —         —    

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

     1.6     1.5     —         —    

 

*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 2% to ¥12,404,945 million compared to the balance as of March 31, 2019 due to not only an increase in installment loans, but also increases in investment in operating leases, property under facility operations and office facilities by the adoption of the new lease standard. In addition, segment assets increased 3% to ¥10,274,370 million compared to the balance as of March 31, 2019.

Total liabilities increased due to not only increases in short-term debt and deposits, but also an increase in other liabilities by the adoption of the new lease standard compared to the balance as of March 31, 2019.

Shareholders’ equity remained flat at ¥2,887,070 million compared to the balance as of March 31, 2019.

 

– 11 –


Table of Contents

(3) Liquidity and Capital Resources

We require capital resources for working capital, investment and loan 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 ¥6,436,334 million as of June 30, 2019. 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 June 30, 2019. Procurement from the capital markets is composed of bonds, medium-term notes, commercial paper, payables under securitized lease and loan receivables and other assets (including asset backed securities). The majority of deposits are attributable to ORIX Bank Corporation.

Short-term and long-term debt and deposits

(a) Short-term debt

 

     Millions of yen  
         March 31, 2019              June 30, 2019      

Borrowings from financial institutions

   ¥ 268,488      ¥ 267,462  

Commercial paper

     41,061        69,254  
  

 

 

    

 

 

 

Total short-term debt

   ¥    309,549      ¥    336,716  
  

 

 

    

 

 

 

Short-term debt as of June 30, 2019 was ¥336,716 million, which accounted for 8% of the total amount of short and long-term debt (excluding deposits) as compared to 7% as of March 31, 2019.

While the amount of short-term debt as of June 30, 2019 was ¥336,716 million, the sum of cash and cash equivalents and the unused amount of committed credit facilities as of June 30, 2019 was ¥1,365,515 million.

(b) Long-term debt

 

     Millions of yen  
         March 31, 2019              June 30, 2019      

Borrowings from financial institutions

   ¥ 3,010,880      ¥ 2,968,929  

Bonds

     807,460        801,000  

Medium-term notes

     190,082        179,139  

Payables under securitized lease and loan receivables and other assets

     177,800        163,209  
  

 

 

    

 

 

 

Total long-term debt

   ¥ 4,186,222      ¥ 4,112,277  
  

 

 

    

 

 

 

The balance of long-term debt as of June 30, 2019 was ¥4,112,277 million, which accounted for 92% of the total amount of short and long-term debt (excluding deposits) as compared to 93% as of March 31, 2019.

 

– 12 –


Table of Contents

(c) Deposits

 

     Millions of yen  
         March 31, 2019              June 30, 2019      

Deposits

   ¥ 1,927,741      ¥ 1,987,341  

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, cash equivalents and restricted cash as of June 30, 2019 decreased by ¥140,750 million to ¥1,142,830 million compared to March 31, 2019. New lease standard has been adopted since April 1, 2019. For further information, see Note 2 “Significant Accounting and Reporting Policies (ag) New accounting pronouncements.”

Cash flows provided by operating activities were ¥178,635 million in the three months ended June 30, 2019, up from ¥97,264 million during the same period of the previous fiscal year, primarily resulting an increase in principal payments received under net investment in the leases.

Cash flows used in investing activities were ¥334,616 million in the three months ended June 30, 2019, compared to the inflow of ¥3,570 million during the same period of the previous fiscal year. This change resulted primarily from a decrease in principal payments received under direct financing leases, and a decrease in principal collected on installment loans.

Cash flows provided by financing activities were ¥21,572 million in the three months ended June 30, 2019 compared to the outflow of ¥180,123 million during the same period of the previous fiscal year. This change resulted primarily from a change from a decrease to an increase in debt with maturities of three months or less, and an increase in proceeds from debt with maturities longer than three months.

(5) Challenges to be addressed

There were no significant changes for the three months ended June 30, 2019.

(6) Research and Development Activity

There were no significant changes in research and development activities for the three months ended June 30, 2019.

(7) Major Facilities

There were no significant changes in major facilities for the three months ended June 30, 2019.

 

4.

Material Contracts

Not applicable.

 

– 13 –


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 June 30, 2019 is as follows:

 

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

Increase, net

 

June 30, 2019

 

Increase, net

 

June 30, 2019

 

Increase, net

 

June 30, 2019

0   1,324,629   ¥0   ¥221,111   ¥0   ¥248,290

(2) List of Major Shareholders

Not applicable (this item is not subject to disclosure in quarterly reports for the three months ended June 30, 2019).

 

6.

Directors and Executive Officers

Between the filing date of Form 20-F for the fiscal year ended March 31, 2019 and June 30, 2019, there were no changes of directors and executive officers.

 

– 14 –


Table of Contents
7.

Financial Information

(1) Condensed Consolidated Balance Sheets (Unaudited)

 

     Millions of yen  

Assets

   March 31, 2019     June 30, 2019  

Cash and Cash Equivalents

   ¥ 1,161,032     ¥ 1,025,879  

Restricted Cash

     122,548       116,951  

Investment in Direct Financing Leases

     1,155,632       0  

Net Investment in the Leases

     0       1,134,033  

Installment Loans

     3,277,670       3,371,984  

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

    

March 31, 2019

  ¥38,671 million     

June 30, 2019

  ¥33,720 million     

Allowance for Doubtful Receivables on Finance Leases and Probable Loan Losses

     (58,011     (54,808

Investment in Operating Leases

     1,335,959       1,454,598  

Investment in Securities

     1,928,916       1,977,887  

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

    

March 31, 2019

  ¥27,367 million     

June 30, 2019

  ¥23,943 million     

Property under Facility Operations

     441,632       509,001  

Investment in Affiliates

     842,760       820,455  

Trade Notes, Accounts and Other Receivable

     280,590       288,087  

Inventories

     115,695       125,188  

Office Facilities

     108,390       186,603  

Other Assets

     1,462,104       1,449,087  

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

    

March 31, 2019

  ¥12,449 million     

June 30, 2019

  ¥11,916 million     
    

 

 

   

 

 

 

Total Assets

   ¥ 12,174,917     ¥ 12,404,945  
  

 

 

   

 

 

 

 

Notes:

1.

Accounting Standards Update 2016-02 (ASC 842 (“Leases”)) (hereinafter, “new lease standard”) has been adopted since April 1, 2019, and the amounts of investment in direct financing leases have been reclassified to net investment in the leases. For further information, see Note 2 “Significant Accounting and Reporting Policies (ag) New accounting pronouncements.”

  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, 2019     June 30, 2019  

Cash and Cash Equivalents

   ¥ 4,437     ¥ 3,227  

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

     15,058       0  

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

     0       11,399  

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

     185,988       208,062   

Investment in Operating Leases

     82,405        62,365  

Property under Facility Operations

     203,933       226,450  

Investment in Affiliates

     52,079       52,028  

Other

     100,101       98,211  
  

 

 

   

 

 

 
   ¥      644,001     ¥      661,742  
  

 

 

   

 

 

 

 

– 15 –


Table of Contents
     Millions of yen  

Liabilities and Equity

   March 31, 2019     June 30, 2019  

Liabilities:

    

Short-Term Debt

   ¥ 309,549     ¥ 336,716  

Deposits

     1,927,741       1,987,341  

Trade Notes, Accounts and Other Payable

     293,480       221,843  

Policy Liabilities and Policy Account Balances

     1,521,355       1,535,631  

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

    

March 31, 2019

   ¥360,198 million     

June 30, 2019

   ¥347,173 million     

Current and Deferred Income Taxes

     355,843       368,004  

Long-Term Debt

     4,186,222       4,112,277  

Other Liabilities

     617,746       887,657  
     

 

 

   

 

 

 

Total Liabilities

     9,211,936       9,449,469  
     

 

 

   

 

 

 

Redeemable Noncontrolling Interests

     9,780       9,513  
     

 

 

   

 

 

 

Commitments and Contingent Liabilities

    

Equity:

    

Common Stock

     221,111       221,111  

Additional Paid-in Capital

     257,625       257,911  

Retained Earnings

     2,555,585       2,565,833  

Accumulated Other Comprehensive Income (Loss)

     (61,343     (81,881

Treasury Stock, at Cost

     (75,904     (75,904
     

 

 

   

 

 

 

ORIX Corporation Shareholders’ Equity

     2,897,074       2,887,070  

Noncontrolling Interests

     56,127       58,893  
     

 

 

   

 

 

 

Total Equity

     2,953,201       2,945,963  
     

 

 

   

 

 

 

Total Liabilities and Equity

   ¥ 12,174,917     ¥ 12,404,945  
     

 

 

   

 

 

 

 

Notes:

1.

New lease standard has been adopted since April 1, 2019. For further information, see Note 2 “Significant Accounting and Reporting Policies (ag) New accounting pronouncements.”

  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, 2019     June 30, 2019  

Short-term Debt

   ¥ 580     ¥ 580  

Trade Notes, Accounts and Other Payable

     7,339       2,217  

Long-term Debt

     418,631       396,615  

Other

     16,480       43,098  
  

 

 

   

 

 

 
   ¥      443,030      ¥      442,510   
  

 

 

   

 

 

 

 

– 16 –


Table of Contents

(2) Condensed Consolidated Statements of Income (Unaudited)

 

     Millions of yen  
     Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Revenues:

    

Finance revenues

   ¥        56,559     ¥        62,497  

Gains on investment securities and dividends

     7,507       13,543  

Operating leases

     95,279       95,591  

Life insurance premiums and related investment income

     82,859       87,690  

Sales of goods and real estate

     154,455       87,152  

Services income

     207,258       190,507  
  

 

 

   

 

 

 

Total revenues

     603,917        536,980  
  

 

 

   

 

 

 

Expenses:

    

Interest expense

     20,149       26,166  

Costs of operating leases

     62,737       65,096  

Life insurance costs

     57,013       61,761  

Costs of goods and real estate sold

     142,721       75,432  

Services expense

     118,111       117,326  

Other (income) and expense, net

     1,063       (596

Selling, general and administrative expenses

     105,156       111,408  

Provision for doubtful receivables and probable loan losses

     4,946       4,716  

Write-downs of long-lived assets

     26       20  

Write-downs of securities

     0       0  
  

 

 

   

 

 

 

Total expenses

     511,922       461,329  
  

 

 

   

 

 

 

Operating Income

     91,995       75,651  

Equity in Net Income of Affiliates

     5,173       12,983  

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

     13,786       9,204  

Bargain Purchase Gain

     0       1,022  
  

 

 

   

 

 

 

Income before Income Taxes

     110,954       98,860  

Provision for Income Taxes

     30,922       28,956  
  

 

 

   

 

 

 

Net Income

     80,032       69,904  
  

 

 

   

 

 

 

Net Income Attributable to the Noncontrolling Interests

     34       385  
  

 

 

   

 

 

 

Net Income Attributable to the Redeemable Noncontrolling Interests

     51       309  
  

 

 

   

 

 

 

Net Income Attributable to ORIX Corporation Shareholders

   ¥ 79,947     ¥  69,210  
  

 

 

   

 

 

 

 

 

     Yen  
     Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Amounts per Share of Common Stock for Net Income Attributable to ORIX Corporation Shareholders:

    

Basic:

   ¥    62.46      ¥        54.07   

Diluted:

   ¥  62.41     ¥  54.02  

 

– 17 –


Table of Contents

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

 

     Millions of yen  
     Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Net Income

   ¥          80,032      ¥                69,904   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

    

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

     238       5,235  

Net change of debt valuation adjustments

     (3     132  

Net change of defined benefit pension plans

     (13     339  

Net change of foreign currency translation adjustments

     (4,736     (23,940

Net change of unrealized gains (losses) on derivative instruments

     (30     (3,879
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     (4,544     (22,113
  

 

 

   

 

 

 

Comprehensive Income

     75,488       47,791  
  

 

 

   

 

 

 

Comprehensive Income (Loss) Attributable to the Noncontrolling Interests

     23       (903
  

 

 

   

 

 

 

Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     347       22  
  

 

 

   

 

 

 

Comprehensive Income Attributable to ORIX Corporation Shareholders

   ¥ 75,118     ¥ 48,672  
  

 

 

   

 

 

 

 

– 18 –


Table of Contents

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

Three months ended June 30, 2018

 

     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
 

Balance at March 31, 2018

   ¥ 220,961      ¥ 267,291      ¥ 2,315,283     ¥ (45,566   ¥ (75,545   ¥ 2,682,424     ¥ 116,450     ¥ 2,798,874  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative effect of adopting Accounting Standards Update 2014-09

           405           405       354       759  

Cumulative effect of adopting Accounting Standards Update 2016-01

           2,899       (2,899       0       0       0  

Cumulative effect of adopting Accounting Standards Update 2016-16

           3,772           3,772       0       3,772  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2018

   ¥ 220,961      ¥ 267,291      ¥ 2,322,359     ¥ (48,465   ¥ (75,545   ¥ 2,686,601     ¥ 116,804     ¥ 2,803,405  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution to subsidiaries

                 0       1,417       1,417  

Transaction with noncontrolling interests

        141          (1       140       6,883       7,023  

Comprehensive income, net of tax:

                  

Net income

           79,947           79,947       34       79,981  

Other comprehensive income (loss)

                  

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

             238         238       0       238  

Net change of debt valuation adjustments

             (3       (3     0       (3

Net change of defined benefit pension plans

             (12       (12     (1     (13

Net change of foreign currency translation adjustments

             (5,015       (5,015     (17     (5,032

Net change of unrealized gains (losses) on derivative instruments

             (37       (37     7       (30
              

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

                 (4,829     (11     (4,840
              

 

 

   

 

 

   

 

 

 

Total comprehensive income

                 75,118       23       75,141  
              

 

 

   

 

 

   

 

 

 

Cash dividends

           (49,984         (49,984     (2,382     (52,366

Exercise of stock options

     150        75              225       0       225  

Acquisition of treasury stock

               (0     (0     0       (0

Other, net

        106        (1         105       0       105  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

   ¥ 221,111      ¥ 267,613      ¥ 2,352,321     ¥ (53,295   ¥ (75,545   ¥ 2,712,205     ¥ 122,745     ¥ 2,834,950  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Three months ended June 30, 2019

 

 

     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
 

Balance at March 31, 2019

   ¥ 221,111      ¥ 257,625      ¥ 2,555,585     ¥ (61,343   ¥ (75,904   ¥ 2,897,074     ¥ 56,127     ¥ 2,953,201  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution to subsidiaries

                 0       5,348       5,348  

Transaction with noncontrolling interests

        74              74       (1,154     (1,080

Comprehensive income (loss), net of tax:

                  

Net income

           69,210           69,210       385       69,595  

Other comprehensive income (loss)

                  

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

             5,238         5,238       (3     5,235  

Net change of debt valuation adjustments

             132         132       0       132  

Net change of defined benefit pension plans

             339         339       0       339  

Net change of foreign currency translation adjustments

             (22,382       (22,382     (1,271     (23,653

Net change of unrealized gains (losses) on derivative instruments

             (3,865       (3,865     (14     (3,879
              

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

                 (20,538     (1,288     (21,826
              

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

                 48,672       (903     47,769  
              

 

 

   

 

 

   

 

 

 

Cash dividends

           (58,962         (58,962     (525     (59,487

Exercise of stock options

                 0       0       0  

Acquisition of treasury stock

               (0     (0     0       (0

Other, net

        212              212       0       212  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2019

   ¥ 221,111      ¥ 257,911      ¥ 2,565,833     ¥ (81,881   ¥ (75,904   ¥ 2,887,070     ¥ 58,893     ¥ 2,945,963  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:   Changes in the redeemable noncontrolling interests are not included in this table. For further information, see Note 12 “Redeemable Noncontrolling Interests.”

 

– 19 –


Table of Contents

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

 

                                                                   
    Millions of yen  
    Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Cash Flows from Operating Activities:

   

Net income

  ¥ 80,032     ¥ 69,904  

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

   

Depreciation and amortization

    70,803       74,117  

Principal payments received under net investment in the leases

    0       113,164  

Provision for doubtful receivables and probable loan losses

    4,946       4,716  

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

    (4,271     (12,153

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

    (13,786     (9,204

Bargain purchase gain

    0       (1,022

Gains on sales of securities other than trading

    (5,336     (11,743

Gains on sales of operating lease assets

    (10,265     (10,036

Write-downs of long-lived assets

    26       20  

Write-downs of securities

    0       0  

Decrease in trading securities

    27,056       10,672  

Increase in inventories

    (11,295     (7,813

Decrease in trade notes, accounts and other receivable

    9,004       9,361  

Decrease in trade notes, accounts and other payable

    (20,698     (46,555

Increase (Decrease) in policy liabilities and policy account balances

    (553     14,276  

Other, net

    (28,399     (19,069
 

 

 

   

 

 

 

Net cash provided by operating activities

    97,264       178,635  
 

 

 

   

 

 

 

Cash Flows from Investing Activities:

   

Purchases of lease equipment

    (206,576     (218,563

Principal payments received under direct financing leases

    116,113       0  

Installment loans made to customers

    (321,154     (382,872

Principal collected on installment loans

    336,482       249,368  

Proceeds from sales of operating lease assets

    71,969       66,324  

Investment in affiliates, net

    (8,470     3,818  

Proceeds from sales of investment in affiliates

    26,675       18,221  

Purchases of available-for-sale debt securities

    (170,907     (199,916

Proceeds from sales of available-for-sale debt securities

    95,734       95,385  

Proceeds from redemption of available-for-sale debt securities

    32,090       47,439  

Purchases of equity securities other than trading

    (27,810     (9,824

Proceeds from sales of equity securities other than trading

    36,960       13,530  

Purchases of property under facility operations

    (16,229     (5,305

Acquisitions of subsidiaries, net of cash acquired

    74       (56

Sales of subsidiaries, net of cash disposed

    350       7,190  

Other, net

    38,269       (19,355
 

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    3,570       (334,616
 

 

 

   

 

 

 

Cash Flows from Financing Activities:

   

Net increase (decrease) in debt with maturities of three months or less

    (83,711     18,151  

Proceeds from debt with maturities longer than three months

    156,779       204,258  

Repayment of debt with maturities longer than three months

    (241,706     (209,787

Net increase in deposits due to customers

    32,860       59,857  

Cash dividends paid to ORIX Corporation shareholders

    (49,984     (58,962

Acquisition of treasury stock

    (0     (0

Contribution from noncontrolling interests

    9,006       4,719  

Purchases of shares of subsidiaries from noncontrolling interests

    (918     (709

Net increase in call money

    0       5,000  

Other, net

    (2,449     (955
 

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (180,123     21,572  
 

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash

    1,105       (6,341
 

 

 

   

 

 

 

Net decrease in Cash, Cash Equivalents and Restricted Cash

    (78,184     (140,750
 

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash at Beginning of Period

    1,405,117       1,283,580  
 

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash at End of Period

  ¥ 1,326,933     ¥ 1,142,830  
 

 

 

   

 

 

 

 

Notes:

 

1.

 

New lease standard has been adopted since April 1, 2019, and the amounts of investment in direct financing leases have been reclassified to net investment in the leases. For further information, see Note 2 “Significant Accounting and Reporting Policies (ag) New accounting pronouncements.”

 

2.

 

The following tables provide information about Cash, Cash Equivalents and Restricted Cash which are included in the Company’s consolidated balance sheets as of June 30, 2018 and June 30, 2019, respectively.

 

                                                                   
    Millions of yen  
    June 30, 2018     June 30, 2019  

Cash and Cash Equivalents

  ¥ 1,228,846     ¥ 1,025,879  

Restricted Cash

    98,087       116,951  
 

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash

  ¥ 1,326,933     ¥ 1,142,830   
 

 

 

   

 

 

 

 

– 20 –


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 generally accepted accounting principles in the United States (“U.S. GAAP”), except for the accounting for stock splits.

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 consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our March 31, 2019 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) Revenue recognition for revenue from contracts with customers

Under U.S. GAAP, revenues from contracts with customers such as sales of goods and real estate, and services income are recognized to depict the transfer of promised goods or services to customers in the amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services.

Under Japanese GAAP, revenues are generally recognized when cash or monetary assets are received as a consideration by sales of goods or rendering of services in accordance with realization principle.

(b) Initial direct costs

Under U.S. GAAP, initial direct costs of sales-type leases and direct financing leases are mainly being deferred and amortized as a yield adjustment over the life of the related lease by using interest method. Initial direct costs of operating leases are being deferred and amortized as a straight-line basis over the life of the related lease.

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

(c) Operating leases

Under U.S. GAAP, revenues from operating leases are recognized on a straight-line basis over the contract terms. 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.

(d) Accounting for life insurance operations

Under U.S. GAAP, certain costs related directly to the successful acquisition of new (or renewal of) insurance contracts are 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, 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.

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

Under U.S. GAAP, goodwill and indefinite-lived intangible assets 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.

(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.

 

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(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) 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, 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.

In addition, under U.S. GAAP, restricted cash is required to be added to the balance of cash and cash equivalents.

(i) Transfer of financial assets

Under U.S. GAAP, an entity is required to perform analysis to determine whether or not to consolidate trusts or special purpose companies, collectively 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.

In addition, if the transferor transfers a portion of financial assets, the transaction is not accounted for as a sale but accounted for as a secured borrowing unless each interest held by the transferor and transferee meets the definition of a participating interest and the transfer of a portion of financial assets meets criteria for derecognition of transferred financial assets.

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.

In addition, if the transferor transfers a portion of financial assets, the enterprise accounts for the transaction as a sale and recognizes a gain or loss on the sale into earnings when the transfer of a portion of financial assets meets criteria for derecognition of transferred financial assets.

(j) Investment in securities

Under U.S. GAAP, unrealized gains and losses from all of equity securities are generally recognized in income.

Under Japanese GAAP, such unrealized gains and losses from equity securities other than trading are to be recognized in other comprehensive income (loss), net of applicable income taxes.

(k) 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. The portion of the total change in the fair value of the financial liability that results from a change in the instrument-specific credit risk is to be recognized in other comprehensive income (loss), net of applicable income taxes.

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

(l) Lessee’s lease

Under U.S. GAAP, right-of-use (hereinafter, “ROU”) assets and lease liabilities from the lessee’s lease transaction are generally recognized on the balance sheet.

Under Japanese GAAP, operating leases from the lessee’s lease transaction are off-balanced.

 

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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 include VIEs 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, the determination and periodic reassessment of the unguaranteed residual value for finance leases and operating leases, the determination and reassessment of insurance policy liabilities and deferred policy acquisition costs, the determination of the allowance for doubtful receivables on finance leases and probable loan losses, the recognition and measurement of impairment of long-lived assets, the recognition and measurement of impairment of investment in securities, the determination of the valuation allowance for deferred tax assets and the evaluation of tax positions, the assessment and measurement of effectiveness in hedging relationship using derivative financial instruments, the determination of benefit obligation and net periodic pension cost and the recognition and measurement of impairment of goodwill and indefinite-lived intangible assets.

(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 year to all assets and liabilities. Income and expenses are translated at the average rates of exchange prevailing during the fiscal year. 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 other comprehensive income (loss), net of applicable income taxes, arise from the translation of foreign currency financial statements into Japanese yen.

(d) Revenue recognition

The Company and its subsidiaries recognize revenues from only contracts with customers, such as sales of goods and real estate, and services income, based on the following five steps;

Step 1: Identify the contract(s) with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

 

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In accordance with these steps, revenues are recognized to depict the transfer of promised goods or services to customers in the amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenues are recognized net of discount, incentives and estimated sales returns. In case that the Company and its subsidiaries receive payment from customers before satisfying performance obligations, the amounts are recognized as contract liabilities. In transactions that involve third parties, if the Company and its subsidiaries control the goods or services before they are transferred to the customers, revenue is recognized on gross amount as the principal.

Excluding the aforementioned policy, the policies as specifically described hereinafter are applied for each of revenue items.

Finance Revenues—Finance revenues mainly include revenues from finance leases, installment loans, and financial guarantees.

(1) Revenues from finance leases

Lessor leases consist of leases for various equipment types, including office equipment, industrial machinery, transportation equipment and real estates. Net investment in the leases includes sales-type leases and direct-financing leases. Interest income on net investment in the leases is recognized over the life of each respective lease using the interest method. Sales-type leases and direct financing leases are full-payout leases. Leases not qualifying as sales-type leases or direct financing leases are accounted for as operating leases and related revenue is recognized on an equality over the lease term. In providing leasing services, the Company and its subsidiaries execute supplemental businesses, such as paying insurance and handling taxes on leased assets on behalf of lessees. The estimated unguaranteed residual value represents estimated proceeds from the disposition of equipment at the time the lease is terminated. Initial direct costs of sales-type leases and direct financing leases are being deferred and amortized as a yield adjustment over the life of the related lease. The unamortized balance of initial direct costs of sales-type leases and direct financing leases is reflected as a component of net investment in the 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) Revenues from financial guarantees

At the inception of a guarantee, fair value for the guarantee is recognized as a liability in the consolidated balance sheets. The Company and its subsidiaries recognize revenue mainly over the term of guarantee by a systematic and rational amortization method as the Company and the subsidiaries are released from the risk of the obligation.

(4) 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 finance 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 net investment in the 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 debtors’ creditworthiness, such as the debtors’ business characteristics and financial conditions as well as relevant economic conditions and trends.

 

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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.

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 ¥634,478 million and ¥636,369 million as of March 31, 2019 and June 30, 2019, 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.

(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 include 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 investment 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. 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 are 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 the 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 agent commissions, except for recurring policy maintenance costs and certain variable costs and expenses for underwriting policies.

 

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

The allowance for doubtful receivables on finance 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.

Developing the allowance for doubtful receivables on finance 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 finance 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 finance 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 finance leases and probable loan losses considering the prior charge-off experience and primarily 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, mega solar 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

Equity securities are generally reported at fair value with unrealized gains and losses included in income. Equity securities without readily determinable fair values are recorded at its cost minus impairment, if any, plus or minus changes resulting from observable price changes under the election of the measurement alternative, except for investments which are valued at net asset value per share.

Equity securities elected to apply the measurement alternative are written down to its fair value with losses included in income if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value.

In addition, investments included in equity securities that are accounted for under the equity method are recorded at fair value with unrealized gains and losses included in income if certain subsidiaries elect the fair value option.

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

Available-for-sale debt 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 for investments which are recorded at fair value with unrealized gains and losses included in income by electing the fair value option.

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

 

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For debt securities other than trading, 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 security 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 security 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.

(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 for tax loss 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. The Company and its subsidiaries release to earnings stranded income tax effects in accumulated other comprehensive income (loss) resulting from changes in tax laws or rates or changes in judgment about realization of a valuation allowance on a specific identification basis when the individual items are completely sold or terminated. 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 three months ended June 30, 2018 and 2019 were approximately 27.9% and 29.3%, respectively. 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 31.5%. 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 tax rates on certain subsidiaries and the effect of investor taxes on earnings of subsidiaries.

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 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 SPEs that issue asset-backed beneficial interests and securities to the investors.

 

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SPEs used in securitization transactions are consolidated if the Company and its subsidiaries are the primary beneficiary of the SPEs, and the transfers of the financial assets to those consolidated SPEs are not accounted for as sales. Assets held by 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.

The Company and certain subsidiaries originate and sell loans into the secondary market, while retaining the obligation to service those loans. In addition, a certain subsidiary 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 changes in the fair value of hedged assets or liabilities through the consolidated statements of income, or recorded in other comprehensive income (loss), net of applicable income taxes.

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), net of applicable income taxes, 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), net of applicable income taxes, 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 are recorded in the foreign currency translation adjustments account within other comprehensive income (loss), net of applicable income taxes.

Starting from this fiscal year, the Company and its subsidiaries select either the amortization approach or the fair value approach, depending on the type of hedging activity, for the initial value of the component excluded from the assessment of effectiveness, and recognize it through the consolidated statements of income. When the amortization approach is adopted, the change in fair value is recognized in earnings using a systematic and rational method over the life of the hedging instrument and then any difference between the change in fair value and the amount recognized in earnings is recognized in other comprehensive income (loss), net of applicable income taxes. When the fair value approach is adopted, the change in the fair value is immediately recognized through the consolidated statements of income. In the past fiscal year, the change in fair value of the component excluded from the assessment of effectiveness and the ineffective portion of qualified hedges were immediately recognized through the consolidated statements of income.

For all hedging relationships that are designated and qualified 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 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.

 

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(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 stock-based compensation expense as consideration for services provided by employees based on the fair value on the grant date. The costs are recognized over the requisite 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 June 30, 2019 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.

(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, deposits held on behalf of third parties in the aircraft-related business 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 market value determined on an individual basis, except loans held for sale for which the fair value option was elected. A subsidiary elected the fair value option on its loans held for sale. 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, 2019 and June 30, 2019 were ¥54,311 million and ¥47,999 million, respectively. There were ¥38,671 million and ¥33,720 million of loans held for sale as of March 31, 2019 and June 30, 2019, respectively, measured at fair value by electing the fair value option.

 

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(r) Property under facility operations

Property under facility operations consist primarily of operating facilities (including hotels, 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 ¥102,185 million and ¥100,485 million as of March 31, 2019 and June 30, 2019, 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 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 merchandise 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 average method. As of March 31, 2019 and June 30, 2019, residential condominiums under development were ¥55,860 million and ¥65,253 million, respectively, and completed residential condominiums and merchandise for sale were ¥59,835 million and ¥59,935 million, respectively.

The Company and its subsidiaries recorded ¥41 million and ¥99 million of write-downs principally on completed residential condominiums and merchandise for sale for the three months ended June 30, 2018 and 2019, respectively, primarily resulting from a decrease in expected sales price. These write-downs were recorded in costs of goods and real estate sold and included in Real Estate segment and 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 ¥54,499 million and ¥61,386 million as of March 31, 2019 and June 30, 2019, respectively.

(v) Right-of-use assets

The Company and its subsidiaries record the ROU assets recognized from the lessee’s lease transaction as investment in operating leases, property under facility operations and office facilities. Lease liabilities are included in other liabilities.

ROU assets are stated at cost less accumulated amortization. ROU assets of finance leases are amortized mainly on a straight-line basis over the lease term. ROU assets of operating leases are amortized over the lease term by the fixed term operating cost minus the interest cost. Amortization of ROU assets of finance leases and operating leases expenses are included in costs of operating leases, services expenses, selling, general and administrative expenses.

(w) Other assets

Other assets consist primarily of goodwill and other intangible assets in acquisitions, reinsurance recoverables in relation to reinsurance contracts, deferred insurance policy acquisition costs which are amortized over the contract periods, leasehold deposits, advance payments made in relation to construction of real estate under operating leases and property under facility operations, prepaid benefit cost, servicing assets, derivative assets, contract assets related to real estate contract works and deferred tax assets.

(x) 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 separately identifiable 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.

 

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The Company and its subsidiaries perform an impairment test for goodwill and any indefinite-lived intangible assets 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, if any. 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 intangible 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 intangible 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.

The amount of goodwill was ¥430,679 million and ¥419,688 million as of March 31, 2019 and June 30, 2019, respectively.

The amount of other intangible assets was ¥427,098 million and ¥416,901 million as of March 31, 2019 and June 30, 2019, respectively.

(y) 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.

(z) Other Liabilities

Other liabilities include primarily lease liabilities recognized from the lessee’s lease transaction, accrued expenses related to interest and bonus, accrued benefit liability, advances received from lessees in relation to lease contracts, deposits received from real estate transaction, contract liabilities mainly related to automobile maintenance services and software services, and derivative liabilities.

(aa) Capitalization of interest costs

The Company and its subsidiaries capitalized interest costs primarily related to specific environmental assets and long-term real estate development projects.

 

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(ab) Advertising

The costs of advertising are expensed as incurred.

(ac) 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. Diluted earnings per share is calculated by reflecting the potential dilution that could occur if securities or other contracts issuing common stock were exercised or converted into common stock.

(ad) 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 the 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.

(ae) 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.

(af) 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.

(ag) New accounting pronouncements

In February 2016, Accounting Standards Update 2016-02 (ASC 842 (“Leases”)) was issued, and related amendments were issued thereafter. These Updates require a lessee to recognize most leases on the balance sheet. Lessor accounting remains substantially similar to current U.S. GAAP but with some changes. These Updates require an entity to disclose more information about leases than under the current disclosure requirements. The Company and its subsidiaries adopted these Updates, including Accounting Standards Update 2019-01, on April 1, 2019 and used the beginning of the fiscal year of adoption as the date of initial adoption. Consequently, financial information of comparative periods has not been updated and the disclosures required under the new lease standard are not provided for periods before April 1, 2019.

The new lease standard provides a number of optional practical expedients in transition. The Company and its subsidiaries have elected the “package of practical expedients”, which permits the Company and its subsidiaries to not reassess under the new lease standard the prior conclusions about lease identification, lease classification and initial direct costs. The Company and its subsidiaries have elected other new lease standard’s available transitional practical expedients. The new lease standard also provides practical expedients for an entity’s ongoing accounting. The Company and its subsidiaries have elected the short-term lease recognition exemption mainly for vehicle and office equipment leases. Consequently, for those leases that meet the requirements, the Company and its subsidiaries have not recognized ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company and its subsidiaries also have elected the practical expedient to not separate lease and non-lease components for part of leases as lessors. The Company and its subsidiaries have expanded their disclosures regarding lessee and lessor.

 

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The impact of the adoption of these Updates has resulted in a gross up of ROU assets and corresponding lease liabilities principally for operating leases, such as land leases and office and equipment leases where it is the lessee. The effect of the adoption of these Updates on the Company and its subsidiaries’ financial position at the adoption date was increases of ROU assets of ¥ 134,345 million in investment in operating leases, ¥ 77,989 million in property under facility operations, ¥ 75,805 million in office facilities and lease liabilities of ¥ 284,867 million in other liabilities in the consolidated balance sheet as of April 1, 2019. ROU assets in investment in operating leases, property under facility operations and office facilities were ¥ 130,670 million, ¥ 76,454 million and ¥ 74,574 million, respectively, and lease liabilities in other liabilities were ¥ 277,935 million as of June 30, 2019. In the consolidated statements of cash flows, cash receipts from lessor’s finance leases have been reclassified from principal payments received under direct financing leases of cash flows from investing activities to principal payments received under net investment in the leases of cash flows from operating activities.

In June 2016, Accounting Standards Update 2016-13 (“Measurement of Credit Losses on Financial Instruments”—ASC 326 (“Financial Instruments—Credit Losses”)) was issued, and related amendments were issued thereafter. These Updates significantly change 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 these Updates. These Updates also make targeted amendments to the current impairment model for available-for-sale debt securities. These Updates are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in these Updates 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 will adopt these Updates on April 1, 2020. Although the allowance for credit losses is expected to increase by adopting these Updates, the Company and its subsidiaries continue to evaluate the effect that the adoption of these Updates will have on the Company and its subsidiaries’ results of operations or financial position, as well as changes in disclosures required by these Updates.

In January 2017, Accounting Standards Update 2017-04 (“Simplifying the Test for Goodwill Impairment”—ASC 350 (“Intangible—Goodwill and Other”)) was issued. This Update eliminates 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 eliminates 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 on or after January 1, 2017. The Company and its subsidiaries will adopt this Update on April 1, 2020. Generally, the effect of adopting this Update on the Company and its subsidiaries’ results of operation or financial position will depend on the outcomes of future goodwill impairment tests.

In August 2017, Accounting Standards Update 2017-12 (“Targeted Improvements to Accounting for Hedging Activities”—ASC 815 (“Derivatives and Hedging”)) was issued, and related amendments were issued thereafter. These Updates change the recognition and presentation requirements of hedge accounting including eliminating the requirements to separately measure and report hedge ineffectiveness and presenting the entire change in the fair value of the hedging instrument that affects earnings in the same income statement line as the hedged item. The Company and its subsidiaries adopted these Updates on April 1, 2019. The adoption of these Updates had no material effect on the Company and its subsidiaries’ results of operations or financial position.

In August 2018, Accounting Standards Update 2018-12 (“Targeted Improvements to the Accounting for Long-Duration Contracts”—ASC 944 (“Financial Services—Insurance”)) was issued. This Update changes the recognition, measurement, presentation and disclosure requirements for long duration contracts issued by an insurance entity. This Update requires an insurance entity to review and, if there is a change, update cash flow assumptions at least annually and to update discount rate used for liability for future policy benefits at each reporting date for nonparticipating traditional long-duration and limited-payment contracts. The effect of updating the discount rate is recognized in other comprehensive income (loss). This Update also requires market risk benefits to be measured at fair value, and simplifies amortization of deferred acquisition costs. Furthermore, this Update requires additional disclosures for long-duration contracts. This Update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early application is permitted. For the liability for future policy benefits and deferred acquisition costs, this Update is applied to contracts in force as of beginning of the earliest period presented (hereinafter, “the transition date” of this Update) on a modified retrospective basis, and an insurance entity may elect to apply retrospectively. For the market risk benefits, this Update is applied retrospectively at the transition date, and the difference between fair value and carrying value requires an adjustment to retained earnings at the transition date. The cumulative effect of changes in the instrument-specific credit risk between contract inception date and the transition date should be recognized in accumulated other comprehensive income at the transition date. The Company and its subsidiaries will adopt this Update on April 1, 2021. 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, as well as changes in disclosures required by this Update.

 

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In August 2018, Accounting Standards Update 2018-13 (“Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”—ASC 820 (“Fair Value Measurement”)) was issued. This Update modifies and adds the disclosure requirements for Fair Value Measurements. This Update also removes disclosure requirements of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. This Update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted. An entity is also permitted to early adopt any removed or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. Removals and modifications of disclosure requirements should be mainly applied retrospectively to all periods presented upon their effective date, while the additional disclosure requirements should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The Company and its subsidiaries early adopted the removals of disclosure requirements from the three months ended September 30, 2018. The Company and its subsidiaries will adopt the modifications and additions of disclosure requirements from fiscal 2021. Since this Update relates to disclosure requirements, the adoption will not have an effect on the Company and its subsidiaries’ results of operations or financial position.

In August 2018, Accounting Standards Update 2018-14 (“Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”—ASC 715-20 (“Compensation—Retirement Benefits—Defined Benefit Plans—General”)) was issued. This Update adds and clarifies the disclosure requirements for Pension Plans, and removes certain disclosure requirements such as the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This Update is effective for fiscal years ending after December 15, 2020. The amendments in this Update should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company and its subsidiaries will adopt this Update from fiscal 2021. Since this Update relates to disclosure requirements, the adoption will not have an effect on the Company and its subsidiaries’ results of operations or financial position.

 

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3.

Fair Value Measurements

The Company and its subsidiaries classify and prioritize 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.

The Company and its subsidiaries differentiate 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 debt securities, available-for-sale debt securities, certain equity securities, derivatives, certain reinsurance recoverables, and variable annuity and variable life insurance contracts at fair value on a recurring basis.

 

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The following tables present recorded amounts of major financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and June 30, 2019:

March 31, 2019

 

     Millions of yen  
     Total
Carrying
Value in
Consolidated
Balance Sheets
    Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities

(Level  1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

          

Loans held for sale *1

   ¥ 38,671     ¥ 0      ¥ 38,671      ¥ 0  

Trading debt securities

     1,564       0        1,564        0  

Available-for-sale debt securities:

     1,264,244       24,831        1,138,966        100,447  

Japanese and foreign government bond securities *2

     430,851       3,227        427,624        0  

Japanese prefectural and foreign municipal bond securities

     193,305       0        190,417        2,888  

Corporate debt securities *3

     487,997       21,604        459,235        7,158  

CMBS and RMBS in the Americas

     61,479       0        61,479        0  

Other asset-backed securities and debt securities

     90,612       0        211        90,401  

Equity securities *4*5

     425,593       68,631        295,769        61,193  

Derivative assets:

     15,495       299        9,924        5,272  

Interest rate swap agreements

     138       0        138        0  

Options held/written and other

     11,140       0        5,868        5,272  

Futures, foreign exchange contracts

     3,007       299        2,708        0  

Foreign currency swap agreements

     1,203       0        1,203        0  

Credit derivatives written

     7       0        7        0  

Netting *6

     (1,497     0        0        0  

Net derivative assets

     13,998       0        0        0  

Other assets:

     12,449       0        0        12,449  

Reinsurance recoverables *7

     12,449       0        0        12,449  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,758,016     ¥ 93,761      ¥ 1,484,894      ¥ 179,361  
  

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities:

          

Derivative liabilities:

   ¥ 25,958     ¥ 522      ¥ 25,436      ¥ 0  

Interest rate swap agreements

     17,439       0        17,439        0  

Options held/written and other

     2,809       0        2,809        0  

Futures, foreign exchange contracts

     5,336       522        4,814        0  

Foreign currency swap agreements

     364       0        364        0  

Credit derivatives held

     10       0        10        0  

Netting *6

     (1,497     0        0        0  

Net derivative Liabilities

     24,461       0        0        0  

Policy Liabilities and Policy Account Balances:

     360,198       0        0        360,198  

Variable annuity and variable life insurance contracts *8

     360,198       0        0        360,198  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 386,156     ¥ 522      ¥ 25,436      ¥ 360,198  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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June 30, 2019

 

     Millions of yen  
     Total
Carrying
Value in
Consolidated
Balance Sheets
    Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities

(Level  1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

          

Loans held for sale *1

   ¥ 33,720     ¥ 0      ¥ 33,720      ¥ 0  

Trading debt securities

     2,267       0        2,267        0  

Available-for-sale debt securities:

     1,326,614       20,977        1,226,236        79,401  

Japanese and foreign government bond securities *2

     525,542       3,139        522,403        0  

Japanese prefectural and foreign municipal bond securities

     183,374       0        180,569        2,805  

Corporate debt securities *3

     492,739       17,838        470,925        3,976  

CMBS and RMBS in the Americas

     52,131       0        52,131        0  

Other asset-backed securities and debt securities

     72,828       0        208        72,620  

Equity securities *4 *5

     415,936       68,675        285,361        61,900  

Derivative assets:

     26,889       28        12,846        14,015  

Interest rate swap agreements

     58       0        58        0  

Options held/written and other

     16,830       0        2,815        14,015  

Futures, foreign exchange contracts

     7,412       28        7,384        0  

Foreign currency swap agreements

     2,589       0        2,589        0  

Netting *6

     (4,193     0        0        0  

Net derivative assets

     22,696       0        0        0  

Other assets:

     11,916       0        0        11,916  

Reinsurance recoverables *7

     11,916       0        0        11,916  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,817,342     ¥ 89,680      ¥ 1,560,430      ¥ 167,232  
  

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities:

          

Derivative liabilities:

   ¥ 42,616     ¥ 477      ¥ 42,139      ¥ 0  

Interest rate swap agreements

     25,565       0        25,565        0  

Options held/written and other

     13,724       0        13,724        0  

Futures, foreign exchange contracts

     2,932       477        2,455        0  

Foreign currency swap agreements

     378       0        378        0  

Credit derivatives held

     17       0        17        0  

Netting *6

     (4,193     0        0        0  

Net derivative Liabilities

     38,423       0        0        0  

Policy Liabilities and Policy Account Balances:

     347,173       0        0        347,173  

Variable annuity and variable life insurance contracts *8

     347,173       0        0        347,173  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   ¥ 389,789     ¥ 477      ¥ 42,139      ¥ 347,173  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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*1

A certain subsidiary elected the fair value option on certain loans held for sale. 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 gains of ¥183 million and ¥536 million from the change in the fair value of the loans for the three months ended June 30, 2018 and 2019, respectively. No gains or losses were recognized in earnings during the three months ended June 30, 2018 and 2019 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, 2019, were ¥37,865 million and ¥38,671 million, respectively, and the amount of the aggregate fair value exceeded the amount of aggregate unpaid principal balance by ¥806 million. The amounts of aggregate unpaid principal balance and aggregate fair value of the loans held for sale as of June 30, 2019, were ¥32,412 million and ¥33,720 million, respectively, and the amount of the aggregate fair value exceeded the amount of aggregate unpaid principal balance by ¥1,308 million. As of March 31, 2019 and June 30, 2019, there were no loans that are 90 days or more past due or, in non-accrual status.

*2

A certain subsidiary elected the fair value option for investments in foreign government bond securities included in available-for-sale debt securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were losses of ¥19 million and ¥1 million from the change in the fair value of those investments for the three months ended June 30, 2018 and 2019, respectively. The amounts of aggregate fair value elected the fair value option were ¥420 million and ¥402 million as of March 31, 2019 and June 30, 2019, respectively.

*3

A certain subsidiary elected the fair value option for investments in foreign corporate debt securities included in available-for-sale debt securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were gains of ¥39 million and ¥444 million from the change in the fair value of those investments for the three months ended June 30, 2018 and 2019, respectively. The amounts of aggregate fair value elected the fair value option were ¥21,136 million and ¥17,838 million as of March 31, 2019 and June 30, 2019, respectively.

*4

Certain subsidiaries elected the fair value option for certain investments in investment funds included in equity securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were gains of ¥254 million and ¥209 million from the change in the fair value of those investments for the three months ended June 30, 2018 and 2019, respectively. The amounts of aggregate fair value elected the fair value option were ¥5,811 million and ¥5,703 million as of March 31, 2019 and June 30, 2019, respectively.

*5

The amounts of investment funds measured at net asset value per share which are not included in the above tables were ¥12,100 million and ¥12,251 million as of March 31, 2019 and June 30, 2019, 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 ¥12,449 million and ¥11,916 million as of March 31, 2019 and June 30, 2019, respectively. For the effect of changes in the fair value of those reinsurance contracts on earnings during the three months ended June 30, 2018 and 2019, see Note 17 “Life Insurance Operations.”

*8

Certain subsidiaries 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 the 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 the 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 ¥360,198 million and ¥347,173 million as of March 31, 2019 and June 30, 2019, respectively. For the effect of changes in the fair value of the variable annuity and variable life insurance contracts on earnings during the three months ended June 30, 2018 and 2019, see Note 17 “Life Insurance Operations.”

 

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The following tables present the reconciliation of financial assets and liabilities (net) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2018 and 2019:

Three months ended June 30, 2018

 

    Millions of yen  
  Balance at
April 1,
2018
    Gains or losses
(realized/unrealized)
    Purchases *3     Sales     Settlements *4     Transfers
in and/
or out of
Level 3
(net)
    Balance at
June 30,
2018
    Change in
unrealized
gains or losses
included in
earnings  for
assets and
liabilities still
held at
June 30,
2018 *1
 
  Included in
earnings *1
    Included in
other
comprehensive
income *2
    Total  

Available-for-sale debt securities

  ¥ 120,917     ¥ 1,129     ¥ (3,730   ¥ (2,601   ¥ 320     ¥ 0     ¥ (4,541   ¥          0     ¥ 114,095     ¥ 16  

Corporate debt securities

    3,037       0       2       2       0       0       (194     0       2,845       0  

CMBS and RMBS in the Americas

    36,010       1,089       (11,225     (10,136     0       0       0       0       25,874       (20

Other asset-backed securities and debt securities

    81,870       40       7,493       7,533       320       0       (4,347     0       85,376       36  

Equity securities

    37,879       159       635       794       14,639       (10,039     0       0       43,273       81  

Investment funds

    37,879       159       635       794       14,639       (10,039     0       0       43,273       81  

Derivative assets and liabilities (net)

    2,291       (2,261     0       (2,261     1,226                 0       (786     0       470       (2,261

Options held/written and other

    2,291       (2,261     0       (2,261     1,226       0       (786     0       470       (2,261

Other asset

    15,008       (2,315     0       (2,315     1,018       0       (146     0       13,565       (2,315

Reinsurance recoverables *5

    15,008       (2,315     0       (2,315     1,018       0       (146     0       13,565       (2,315

Policy Liabilities and Policy Account Balances

    444,010       (147     (3     (150     0       0       (24,705     0       419,455       (146

Variable annuity and variable life insurance contracts *6

    444,010       (147     (3     (150     0       0       (24,705     0        419,455       (146

 

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Table of Contents

Three months ended June 30, 2019

 

    Millions of yen  
  Balance at
April 1,
2019
    Gains or losses
(realized/unrealized)
    Purchases *3     Sales     Settlements *4     Transfers
in and/
or out of
Level 3
(net)
    Balance at
June 30,
2019
    Change in
unrealized
gains or losses
included in
earnings  for
assets and
liabilities still
held at
June 30,
2019 *1
 
  Included in
earnings *1
    Included in
other
comprehensive
income *2
    Total  

Available-for-sale debt securities

  ¥ 100,447     ¥ 1,021     ¥   (1,696   ¥ (675   ¥   6,151     ¥   (3,822   ¥ (19,709   ¥ (2,991   ¥ 79,401     ¥ 289  

Japanese prefectural and foreign municipal bond securities

    2,888       0       (83     (83     0       0       0       0       2,805       0  

Corporate debt securities

    7,158       0       3       3       0       (194     0       (2,991     3,976       0  

Other asset-backed securities and debt securities

    90,401       1,021       (1,616     (595     6,151       (3,628     (19,709     0       72,620       289  

Equity securities

    61,193       872       (1,821     (949     2,900       (831     (413     0       61,900       456  

Investment funds

    61,193       872       (1,821     (949     2,900       (831     (413     0       61,900       456  

Derivative assets and liabilities (net)

    5,272       9,077       (334     8,743       0       0       0       0       14,015       9,077  

Options held/written and other

    5,272       9,077       (334        8,743       0       0       0       0       14,015       9,077  

Other asset

    12,449       (1,249     0       (1,249     788       0       (72     0       11,916       (1,249

Reinsurance recoverables *5

    12,449       (1,249     0       (1,249     788       0       (72     0       11,916       (1,249

Policy Liabilities and Policy Account Balances

    360,198       313       184       497       0       0       (12,528     0       347,173       312  

Variable annuity and variable life insurance contracts *6

    360,198       313       184       497       0       0       (12,528     0       347,173       312  

 

*1

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

*2

Unrealized gains and losses from available-for-sale debt securities are included in “Net change of unrealized gains (losses) on investment in securities” and “Net change of foreign currency translation adjustments”, unrealized gains and losses from equity securities are included mainly in “Net change of foreign currency translation adjustments”, unrealized gains and losses from policy liabilities and policy account balances are included in “Net change of debt valuation adjustments.”

*3

Increases resulting from an acquisition of a subsidiary and 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

“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.”

*6

“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 June 30, 2018. In the three months ended June 30, 2019, corporate debt securities totaling ¥2,991 million were transferred from Level 3 to Level 2, since the inputs became observable.

 

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The following tables present recorded amounts of assets measured at fair value on a nonrecurring basis during year ended March 31, 2019 and the three months ended June 30, 2019. These assets are measured at fair value on a nonrecurring basis mainly to recognize impairment:

Year ended March 31, 2019

 

     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

   ¥ 3,839      ¥         0      ¥ 3,839      ¥ 0  

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

     6,630        0        0        6,630  

Investment in operating leases and property under facility operations

     12,901        0        0        12,901  

Certain investments in affiliates

     2,897        0        0        2,897  
  

 

 

    

 

 

    

 

 

    

 

 

 
   ¥ 26,267      ¥ 0      ¥ 3,839      ¥ 22,428  
  

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2019

 

     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

   ¥ 820      ¥         0      ¥ 820      ¥ 0  

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

     3,753        0        0        3,753  
  

 

 

    

 

 

    

 

 

    

 

 

 
   ¥   4,573      ¥ 0      ¥    820      ¥   3,753  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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.

 

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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.

Trading debt securities and available-for-sale debt securities

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 such as 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 debt 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.

 

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Table of Contents

Equity 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. Certain subsidiaries elected the fair value option for investments in some funds. In addition, a certain subsidiary measures its investment held by the investment company which is owned by the subsidiary at fair value. These investment funds are classified as Level 3, because the subsidiaries measure their fair value based on discounted cash flow methodologies using inputs that are unobservable in the market and broker quotes.

Derivatives

For exchange-traded derivatives, fair value is based on quoted market prices, and accordingly, classified as Level 1. For non-exchange 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 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.

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. 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.

 

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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, 2019 and June 30, 2019.

 

     March 31, 2019
     Millions of yen                 
     Fair value     

        Valuation technique(s)        

  

Significant

unobservable inputs

  

Range

(Weighted average)

Assets:

           

Available-for-sale debt securities:

                                                                                                                                                     

Japanese prefectural and foreign municipal bond securities

   ¥ 2,888      Discounted cash flows    Discount rate    8.5%
            (8.5%)

Corporate debt securities

     2,162      Discounted cash flows    Discount rate    0.1% – 1.3%
            (0.8%)
     4,996      Appraisals/Broker quotes    —      —  

Other asset-backed securities and debt securities

     23,651      Discounted cash flows    Discount rate    0.2% – 51.2%
            (8.3%)
         Probability of default    0.6% – 1.6%
            (0.8%)
     66,750      Appraisals/Broker quotes    —      —  

Equity securities:

           

Investment funds

     6,012      Internal cash flows    Discount rate    0.0% – 65.0%
            (11.3%)
     32,702      Discounted cash flows    Discount rate    3.8% – 17.0%
            (14.1%)
     22,479      Appraisals/Broker quotes    —      —  

Derivative assets:

           

Options held/written and other

     5,005      Discounted cash flows    Discount rate    0.0% – 15.0%
            (8.6%)
     267      Appraisals/Broker quotes    —      —  

Other assets:

           

Reinsurance recoverables

     12,449      Discounted cash flows    Discount rate    (0.1)% – 0.4%
            (0.1%)
         Mortality rate    0.0% – 100.0%
            (1.3%)
         Lapse rate    1.5% – 24.0%
            (16.2%)
        

Annuitization rate

(guaranteed minimum

   0.0% – 100.0%
         annuity benefit)    (99.9%)
  

 

 

          

Total

   ¥ 179,361           
  

 

 

          

Liabilities:

           

Policy liabilities and Policy Account Balances:

           

Variable annuity and variable life insurance contracts

   ¥ 360,198      Discounted cash flows    Discount rate    (0.1)% – 0.4%
            (0.1%)
         Mortality rate    0.0% – 100.0%
            (1.3%)
         Lapse rate    1.5% – 54.0%
            (16.0%)
        

Annuitization rate

(guaranteed minimum

      0.0% – 100.0%
         annuity benefit)    (80.3%)
  

 

 

          

Total

   ¥ 360,198           
  

 

 

          

 

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Table of Contents
     June 30, 2019
     Millions of yen                 
     Fair value     

        Valuation technique(s)        

  

Significant

unobservable inputs

  

Range

(Weighted average)

Assets:

                                                                                                                                                     

Available-for-sale debt securities:

           

Japanese prefectural and foreign municipal bond securities

   ¥ 2,805      Discounted cash flows    Discount rate    8.5%
   (8.5%)

Corporate debt securities

     1,967      Discounted cash flows    Discount rate    0.1% – 1.4%
   (0.9%)
     2,009      Appraisals/Broker quotes    —      —  

Other asset-backed securities and debt securities

     18,854      Discounted cash flows    Discount rate    1.0% – 51.2%
   (10.6%)
         Probability of default    1.6%
         (1.6%)
     53,766      Appraisals/Broker quotes    —      —  

Equity securities:

           

Investment funds

     5,930      Internal cash flows    Discount rate    0.0% – 65.0%
   (10.5%)
     33,710      Discounted cash flows    Discount rate    3.8% – 17.5%
   (15.7%)
     22,260      Appraisals/Broker quotes    —      —  

Derivative assets:

           

Options held/written and other

     13,809      Discounted cash flows    Discount rate    0.0% – 15.0%
   (8.9%)
     206      Appraisals/Broker quotes    —      —  

Other assets:

           

Reinsurance recoverables

     11,916      Discounted cash flows    Discount rate    (0.2)% – 0.4%
   (0.1%)
         Mortality rate    0.0% – 100.0%
         (1.3%)
         Lapse rate    1.5% – 14.0%
         (7.1%)
         Annuitization rate   
         (guaranteed minimum annuity benefit)    0.0% – 100.0%
         (100.0%)
  

 

 

          

Total

   ¥ 167,232           
  

 

 

          

Liabilities:

           

Policy liabilities and Policy Account Balances:

           

Variable annuity and variable life insurance contracts

   ¥ 347,173      Discounted cash flows    Discount rate    (0.2)% – 0.4%
   (0.1%)
         Mortality rate    0.0% – 100.0%
         (1.3%)
         Lapse rate    1.5% – 30.0%
         (7.0%)
         Annuitization rate   
         (guaranteed minimum annuity benefit)       0.0% – 100.0%
         (80.4%)
  

 

 

          

Total

   ¥ 347,173           
  

 

 

          

 

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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 during year ended March 31, 2019 and the three months ended June 30, 2019.

 

     Year ended March 31, 2019
     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)

   ¥ 6,630      Direct capitalization    Capitalization rate    5.8% – 8.2%
            (6.3%)
      Appraisals    —      —  

Investment in operating leases and property under facility operations

     2,345      Discounted cash flows    Discount rate    7.3%
            (7.3%)
     10,556      Appraisals    —      —  

Certain investments in affiliates

     334     

Business enterprise value

multiples

   —      —  
      Discounted cash flows    Discount rate    14.0%
            (14.0%)
     2,563      Appraisals    —      —  
  

 

 

          
   ¥   22,428           
  

 

 

          
     Three months ended June 30, 2019
     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)

   ¥ 3,753      Direct capitalization    Capitalization rate    5.7% – 6.9%
            (6.0%)
      Appraisals    —      —  
  

 

 

          
   ¥ 3,753           
  

 

 

          

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 main valuation methodologies used for assets and liabilities measured at fair value.

 

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4.

Acquisitions and Divestitures

(1) Acquisitions

There were no material acquisitions during the three months ended June 30, 2018 and 2019.

As a result of the reassessment of the provisional purchase price allocation during the three month ended June 30, 2019, the Company recognized bargain purchase gains of ¥1,022 million associated with two of its acquisitions executed in the three months ended March 31, 2019. The bargain purchase gains could possibly be adjusted because their purchase price allocation have not been completed yet.

(2) Divestitures

Gains on sales of subsidiaries and affiliates and liquidation losses, net for the three months ended June 30, 2018 and 2019 amounted to ¥13,786 million and ¥9,204 million, respectively. Gains on sales of subsidiaries and affiliates and liquidation losses, net for the three months ended June 30, 2018 mainly consisted of ¥13,764 million in Overseas Business segment. Gains on sales of subsidiaries and affiliates and liquidation losses, net for the three months ended June 30, 2019 mainly consisted of ¥7,279 million in Overseas Business segment and ¥1,935 million in Investment and Operation segment.

(3) Determination of divestitures

During fiscal 2019, the Company has determined to sell ORIX Living Corporation, which is a consolidated subsidiary of the Company. The sale is expected to be completed during fiscal 2020. In the Company’s consolidated balance sheets as of March 31, 2019 and June 30, 2019, the assets or debts of the business are mainly recognized as property under facility operations of ¥42,595 million and ¥46,995 million, respectively, and other liabilities of ¥23,078 million and ¥27,875 million, respectively. Neither gain nor loss was recognized as the related assets and liabilities are classified as held for sale. These related assets and liabilities are included in Real Estate segment.

 

5.

Revenues from Contracts with Customers

The following table provides information about revenues from contracts with customers, and other sources of revenue for the three months ended June 30, 2018 and 2019 are as follows;

 

     Millions of yen      Millions of yen  
     Three months ended in
June 30, 2018
     Three months ended in
June 30, 2019
 

Revenues from contracts with customers

   ¥ 347,850      ¥ 275,437  

Other revenues *

     256,067        261,543  
  

 

 

    

 

 

 

Total revenues

   ¥ 603,917      ¥ 536,980  
  

 

 

    

 

 

 

 

*

Other revenues are not in the scope of revenue from contracts with customers, such as life insurance premiums and related investment income, operating leases, finance revenues that include interest income, and others.

The Company and its subsidiaries recognize revenues when control of the promised goods or services is transferred to our customers, in the amounts that reflect the consideration we expect to receive in exchange for those goods or services. Revenues are recognized net of discounts, incentives and estimated sales returns. Amount to be collected for third party is deducted from revenues. The Company and its subsidiaries evaluate whether we are principal or agent on distinctive goods or services. In transaction that third party concerns, if the Company and its subsidiaries control the goods or services before they are transferred to customers, revenue is recognized on gross amount as the principal. There is no significant variability in considerations included in revenues, except for the performance fees regarding asset management business hereinafter, and there is no significant financing component in considerations on transactions.

For further information about breakdowns of revenues disaggregated by goods or services category and geographical location by segment, see Note 24 “Segment Information.”

 

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Revenue recognition criteria on each goods or services category are mainly as follows:

Sales of goods

The Company and its subsidiaries sell various goods such as precious metals, medical equipment, accounting software and other to customers. Revenues from sales of goods are recognized when there is a transfer of control of the product to customers. The Company and its subsidiaries determine transfer of control based on when the products are shipped or delivered to customers, or inspected by customers.

Real estate sales

Certain subsidiaries are involved in developing and selling real estates. Revenues from sale of detached houses and residential condominiums are recognized when the real estate is delivered to customers.

Asset management and servicing

Certain subsidiaries offer customers investment management services for their financial assets, asset management as well as maintenance and administrative services for their real estate properties. Furthermore, the Company and its subsidiaries perform servicing on behalf of customers. Revenues from asset management and servicing primarily include management fees, servicing fees, and performance fees. Management and servicing fees are recognized over the contract period with customers, since the customers simultaneously receive and consume the benefits provided by the performance as the subsidiaries perform. 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 contract terms. Servicing fees are calculated based on the predetermined percentages of the amount in assets under management in accordance with contract terms. Fees based on the performance of the assets under management are recognized when the performance obligations are satisfied, to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The performance fee is estimated by using the most likely amount method, in accordance with contract terms. Servicing fees related to financial assets that the Company and its subsidiaries had originated and transferred to investors, are not in the scope of revenue from contracts with customers due to the fees are accounted for servicing assets and liabilities.

Automobile related services

Certain subsidiaries mainly provide automobile maintenance services to customers, as automobile related services. In the service, since customers simultaneously receive and consume the benefits provided by the performance as the subsidiaries perform, revenues are recognized over the contract period with customers. For measurement of progress, the cost incurred is used, because that reasonably describes transfer of control of services to customers. The subsidiaries receive payments from customers before satisfying performance obligations, and the amounts are reported in other liabilities on the consolidated balance sheets as contract liabilities.

Facilities operation

The Company and its subsidiaries are running hotels, Japanese inns, training facilities, senior housings and other facilities. Revenues from these operations are recognized over the customers’ usage period of the facilities, since customers simultaneously receive and consume the benefits provided by the performance as the Company and its subsidiaries perform. The value transferred to customers is directly measured based on the usage period. With respect to operation of senior housing and other facilities, certain subsidiaries receive payments from customers before satisfying performance obligations, and the amounts are reported in other liabilities on the consolidated balance sheets as contract liabilities. Gains on sale of property under facility operations are not in the scope of revenue from contracts with customers due to the gains are transfers of nonfinancial assets to counterparties that are not our customers.

Environment and energy services

The Company and its subsidiaries offer services that provide electric power for business operators’ factories, office buildings and other facilities. Revenues from electric power supply by purchasing electricity or running power plants are recognized over the contracted distribution period with customers, since customers simultaneously receive and consume the benefits provided by the performance as the Company and its subsidiaries perform. The value transferred to customers is directly measured based on electricity usage by customers. Furthermore, certain subsidiaries are running waste processing facilities. Revenues from resources and waste processing business are primarily recognized over the service contract period with customers, since customers simultaneously receive and consume the benefits provided by the performance as the subsidiaries perform. The value transferred to customers is directly measured based on the amount of resources and waste to be processed.

 

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Real estate management and brokerage

The Company and its subsidiaries mainly offer management of condominiums, office buildings, and facilities and other, to customers, as real estate management and brokerage business. Since customers simultaneously receive and consume the benefits provided by the performance as the Company and its subsidiaries perform, revenues from these services are recognized over the contract period with customers. Direct measurement of the value transferred to customers based on time elapsed, is used as method of measuring progress. The Company and its subsidiaries receive payments from customers before satisfying performance obligations, and the amounts are reported in other liabilities on the consolidated balance sheets as contract liabilities.

Real estate contract work

Certain subsidiaries offer repair and contract work for condominiums, office buildings, and facilities, and other, to customers. The work is held on the real estate where customers own or rent, and the subsidiaries’ performance creates the asset that the customers’ control as the asset is created or enhanced. Additionally, the performance does not create an asset with an alternative use to the subsidiaries, and the subsidiaries have a substantial enforceable right to payment for performance completed to date so that revenues are recognized over the contract work period. For measurement of progress, the cost incurred is used, because that reasonably describes transfer of control of services to customers. The subsidiaries recognize contract assets regarding a part of performance obligations that the subsidiaries performed, and the amounts are reported in other assets on the consolidated balance sheets. Furthermore, the subsidiaries receive payments from customers before satisfying performance obligations, and the amounts are reported in other liabilities on the consolidated balance sheets as contract liabilities.

Other

The Company and its subsidiaries have been developing a variety of businesses. Main revenue streams are as follows;

Maintenance services of software, measurement equipment and other:

Certain subsidiaries offer accounting software maintenance services and support, and maintenance of measurement equipment to customers. Revenues from these services are recognized over the contract period with customers, since customers simultaneously receive and consume the benefits provided by the performance as the subsidiaries perform. For measurement of progress, the cost incurred is used, because that reasonably describes transfer of control of services to customers. The subsidiaries receive payments from customers before satisfying performance obligations, and the amounts are reported in other liabilities on the consolidated balance sheets as contract liabilities.

Fee business:

The Company and its subsidiaries are involved in insurance policy referrals and other agency business. Commission revenues from these businesses are primarily recognized when the contract between our customers and their client is signed.

The following table provides information about balances from contracts with customers as of March 31, 2019 and June 30, 2019.

 

     Millions of yen  
     March 31, 2019      June 30, 2019  

Trade Notes, Accounts and Other Receivable

   ¥ 161,884      ¥ 148,289  

Contract assets (Included in Other Assets)

     2,277        4,530  

Contract liabilities (Included in Other Liabilities)

     45,371        46,692  

For the three months ended June 30, 2018 and 2019, there were not significant changes in contract assets and contract liabilities.

For the three months ended June 30, 2018, revenue amounted to ¥16,814 million was included in contract liabilities as of the beginning of this fiscal year. For the three months ended June 30, 2019, revenue amounted to ¥13,861 million was included in contract liabilities.

As of June 30, 2019, transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) is mainly related to automobile related services, facilities operation, real estate sales and amounted to ¥152,017 million. Remaining term for the obligations ranges up to 28 years. Furthermore, automobile related services primarily constitute the performance obligations that are unsatisfied (or partially unsatisfied) will be recognized as revenue over the next 10 years. The Company and its subsidiaries applied practical expedients in the disclosure, and performance obligations for contracts that have an original expected duration of one year or less and contracts under which the value transferred to a customer is directly measured and recognized as revenue by the amount it has a right to invoice to the customer are not included. The transaction price allocated to unsatisfied performance obligations does not include the estimate of material variable consideration.

 

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6.

Leases

(1) Lessor

Lessor leases consist of leases for various equipment types, including office equipment, industrial machinery, transportation equipment and real estates. Net investment in the leases includes sales-type leases and direct-financing leases. Interest income on net investment in the leases is recognized over the life of each respective lease using the interest method. Sales-type leases and direct financing leases are full-payout leases. Leases not qualifying as sales-type leases or direct financing leases are accounted for as operating leases and related revenue is recognized on an equality over the lease term. In providing leasing services, the Company and its subsidiaries execute supplemental businesses, such as paying insurance and handling taxes on leased assets on behalf of lessees.

Some of the contracts include options to extend or to terminate the lease. The Company and its subsidiaries take such options into account to determine the lease term when it is reasonably certain that it will exercise these options. The majority of the lease contracts do not contain bargain purchase options for their customers.

The estimated unguaranteed residual value represents estimated proceeds from the disposition of equipment at the time the lease is terminated. The estimated unguaranteed residual value is based on market value of used equipment, estimates of when and how much equipment will become obsolete, and actual recovery being experienced for similar used equipment. The Company and its subsidiaries may need to recognize additional valuation losses if the estimates differ from actual trends in equipment valuation and the secondhand market, and may incur losses if the estimated residual amounts are unable to collect. The risk of loss on leased assets relating to the estimated unguaranteed residual value of the leased assets is monitored through projections of the estimated unguaranteed residual value at lease origination and periodic review of estimated unguaranteed residual value.

Initial direct costs of sales-type leases and direct financing leases are mainly 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 of sales-type leases and direct financing leases is reflected as a component of net investment in leases. Initial direct costs of operating leases are being deferred and amortized as a straight-line basis over the life of the related lease. The unamortized balance of initial direct costs is reflected as a component of investment in operating leases.

When auto leases are bundled with maintenance contracts, considerations on contracts are allocated based upon the estimated standalone selling prices of the lease and non-lease components. Lease components generally include product and financing cost, and non-lease components generally consist of maintenance contracts.

Certain subsidiary is running senior housings, and applying practical expedients, to not separate non-lease components from the associated lease component. In this service, ASC 606 is applied to the entire contract because the consideration related to non-lease components accounts for the majority of contract consideration. Revenues from these operations are recognized over the customers’ usage period of the facilities, since customers simultaneously receive and consume the benefits provided by the performance as the subsidiary perform. The value transferred to customers is directly measured based on the usage period.

Lease income for the three months ended June 30, 2019 are as follows:

 

     Millions of yen        
     Three months ended
June 30, 2019
       

Lease income—net investment in the leases

  

Interest income

   ¥ 13,283  

Other

     474  

Lease income—operating leases *

     95,591                                             
  

 

 

   

Total lease income

   ¥                        109,348     
  

 

 

 

 

*

Gains from the disposition of real estate under operating leases included in operating lease revenues are ¥4,351 million, and gains from the disposition of operating lease assets other than real estate included in operating lease revenues are ¥5,685 million for the three months ended June 30, 2019.

Lease income from net investment in the leases is included in finance revenues in the consolidated statements of income.

 

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Net investment in the leases at June 30, 2019 consists of the following:

 

     Millions of yen    

             

 
     June 30, 2019  

Lease receivables

   ¥ 1,102,459  

Unguaranteed residual value

     26,246  

Initial direct costs

     5,328  
  

 

 

 

Total

   ¥ 1,134,033   
  

 

 

 

Investment in operating leases at June 30, 2019 consists of the following:

 

 

     Millions of yen    

             

 
     June 30, 2019  

Transportation equipment

   ¥ 1,306,758  

Measuring and information-related equipment

     261,785  

Real estate

     329,672  

Other

     31,010  
  

 

 

 
     1,929,225  

Accumulated depreciation

     (636,369
  

 

 

 

Net

     1,292,856  

Right-of-use assets (operating leases)

     130,670  

Accrued rental receivables

     31,072  
  

 

 

 

Total

   ¥ 1,454,598  
  

 

 

 

Costs of operating leases include depreciation and various expenses (insurance, property tax and other). Depreciation and various expenses for the three months ended June 30, 2019 are as follows:

 

 

     Millions of yen    

             

 
     Three months ended
June 30, 2019
 

Depreciation expenses

   ¥ 51,366  

Various expenses

     13,730  
  

 

 

 

Total

   ¥                          65,096     
  

 

 

 

Remaining lease receivables of net investment in the leases (including residual value guarantees) range up to 19 years at June 30, 2019. Remaining lease receivables of the operating lease contracts range up to 62 years at June 30, 2019. At June 30, 2019, the amounts due in each of the next five years and thereafter are as follows:

 

 

     Millions of yen  

Years ending June 30,

   Net investment in the leases     Operating leases  

2020

   ¥ 440,359     ¥ 274,034  

2021

     305,014       194,604  

2022

     206,051       136,960  

2023

     121,659       89,648  

2024

     70,712       54,304  

Thereafter

     94,252       137,720  
  

 

 

   

 

 

 

Total lease payments

     1,238,047     ¥                 887,270     
  

 

 

   

 

 

 

Less imputed interest

     (135,588  
  

 

 

   

Total lease receivables

   ¥ 1,102,459    
  

 

 

   

 

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Table of Contents

(2) Lessee

The Company and its subsidiaries determine if an arrangement is a lease at inception of each contract. The Company and its subsidiaries have operating and finance leases for various assets including lands, office buildings, warehouses, employees’ accommodations, and vehicles. Some of the lease arrangements include options to extend or terminate lease term. The Company and its subsidiaries take such options into account to determine the lease term when it is reasonably certain that it will exercise these options. The Company and its subsidiaries’ lease arrangements do not contain material residual value guarantees or material restrictive covenants. As a rate implicit in the most of the leases cannot be readily determinable, the Company and its subsidiaries use incremental borrowing rate based on the information available at commencement to determine the present values of lease payments.

The component of lease expense for the three months ended June 30, 2019 are as follows:

 

     Millions of yen        
     Three months ended
June 30, 2019
       

Finance lease cost

  

Depreciation expenses of right-of-use assets

   ¥ 318  

Interest expenses of lease liabilities

     134  
  

 

 

 
     452  
  

 

 

 

Operating lease cost

     11,199  

Short-term lease cost

     504  

Variable lease cost

     283  

Sublease income

     (1,145         
  

 

 

   

Total

   ¥                   11,293     
  

 

 

 

Supplemental cash flow information related to leases for the three months ended June 30, 2019 are as follows:

 

 

     Millions of yen  
     Three months ended June 30, 2019  
     Finance leases     Operating leases  

Cash paid for amounts included in the measurements of lease liabilities:

    

Cash flows from operating activities

   ¥ 134     ¥                   10,695  

Cash flows from financing activities

     301          0  
  

 

 

   

 

 

 

Right-of-use assets obtained in exchange for lease liabilities:

   ¥                               401      ¥ 5,607     
  

 

 

   

 

 

 

Supplemental balance sheet information related to lessee leases at June 30, 2019 are as follows:

 

 

     Millions of yen,
except lease term and discount rate
 
     June 30, 2019  
     Finance leases     Operating leases  

Investment in operating leases

   ¥ 0     ¥                 130,670  

Property under facility operations

     8,918       76,454  

Office facilities

     43       74,574  
  

 

 

   

 

 

 

Total right-of-use assets

     8,961       281,698  
  

 

 

   

 

 

 

Other liabilities

     10,496       277,935  
  

 

 

   

 

 

 

Total lease liabilities

   ¥                   10,496     ¥ 277,935  
  

 

 

   

 

 

 

Weighted average remaining lease term

     17 years       14 years  
  

 

 

   

 

 

 

Weighted average discount rate

     4.55     1.09
  

 

 

   

 

 

 

 

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Table of Contents

At June 30, 2019, the amounts of lease liabilities related to lessee leases due in each of the next five years and thereafter are as follows:

 

     Millions of yen  

Years ending June 30,

   Finance leases     Operating leases  

2020

   ¥ 1,113     ¥ 55,195  

2021

     1,098       33,752  

2022

     1,094       25,499  

2023

     1,089       23,370  

2024

     1,077       20,751  

Thereafter

     9,808       141,947  
  

 

 

   

 

 

 

Total lease payments

     15,279       300,514  
  

 

 

   

 

 

 

Less imputed interest

     (4,783     (22,579
  

 

 

   

 

 

 

Total lease liabilities

   ¥                          10,496        ¥                 277,935     
  

 

 

   

 

 

 

 

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7.

Credit Quality of Financing Receivables and the Allowance for Credit Losses

The Company and its subsidiaries 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

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 finance 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.

The following table provides information about the allowance for credit losses as of March 31, 2019, for the three months ended June 30, 2018 and 2019:

 

     Three months ended June 30, 2018  
     Millions of yen  
     Loans     Finance
leases
    Total  
     Consumer     Corporate     Purchased
loans *1
 
    Non-recourse
loans
    Other  

Allowance for credit losses:

            

Beginning balance

   ¥ 21,196     ¥ 688     ¥ 18,407     ¥ 4,292     ¥ 10,089     ¥ 54,672  

Provision (Reversal)

     3,411       (101     1,059       (185     762       4,946  

Charge-offs

     (2,502     0       (159     (38     (640     (3,339

Recoveries

     211       0       67       80       48       406  

Other *2

     (17     10       334       1       (53     275  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   ¥ 22,299     ¥ 597     ¥ 19,708     ¥ 4,150     ¥ 10,206     ¥ 56,960  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     3,183       50       9,219       2,722       0       15,174  

Not individually evaluated for impairment

     19,116       547       10,489       1,428       10,206       41,786  

Financing receivables:

            

Ending balance

   ¥ 1,756,411     ¥   63,559     ¥    954,929     ¥ 18,865     ¥ 1,177,749     ¥ 3,971,513  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     21,198       249       22,163       4,773       0       48,383  

Not individually evaluated for impairment

     1,735,213       63,310       932,766       14,092       1,177,749       3,923,130  

 

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Table of Contents
     March 31, 2019  
     Millions of yen  
     Loans              
           Corporate     Purchased
loans *1
    Finance
leases
    Total  
     Consumer     Non-recourse
loans
    Other  

Allowance for credit losses:

            

Ending balance

   ¥ 21,195     ¥ 919     ¥ 20,662     ¥ 3,186     ¥ 12,049     ¥ 58,011  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     3,372       166       8,276       1,917       0       13,731  

Not individually evaluated for impairment

     17,823       753       12,386       1,269       12,049       44,280  

Financing receivables:

            

Ending balance

   ¥ 1,906,022     ¥ 99,028     ¥ 1,201,893     ¥ 16,416     ¥ 1,155,632     ¥ 4,378,991  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     23,163       4,448       27,452       3,764       0       58,827  

Not individually evaluated for impairment

     1,882,859       94,580       1,174,441       12,652       1,155,632       4,320,164  
     Three months ended June 30, 2019  
     Millions of yen  
     Loans              
           Corporate     Purchased
loans *1
    Finance
leases
    Total  
     Consumer     Non-recourse
loans
    Other  

Allowance for credit losses:

            

Beginning balance

   ¥ 21,195     ¥ 919     ¥ 20,662     ¥ 3,186     ¥ 12,049     ¥ 58,011  

Provision (Reversal)

     3,293       59       477       (38     925       4,716  

Charge-offs

     (3,967     (1     (2,148     (90     (859     (7,065

Recoveries

     121       0       78       7       10       216  

Other *3

     (20     (25     (814     (28     (183     (1,070
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   ¥ 20,622     ¥ 952     ¥ 18,255     ¥ 3,037     ¥ 11,942     ¥ 54,808  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     3,410       259       6,313       1,821       0       11,803  

Not individually evaluated for impairment

     17,212       693       11,942       1,216       11,942       43,005  

Financing receivables:

            

Ending balance

   ¥ 1,982,162     ¥ 103,068     ¥ 1,223,428     ¥ 15,327     ¥ 1,134,033     ¥ 4,458,018  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     23,676       2,735       24,120       3,635       0       54,166  

Not individually evaluated for impairment

     1,958,486       100,333       1,199,308       11,692       1,134,033       4,403,852  

 

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.

*3

Other mainly includes foreign currency translation adjustments and a decrease in allowance related to a sale of a subsidiary.

 

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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 finance 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 finance 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 finance 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.

 

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Table of Contents

The following table provides information about the impaired loans as of March 31, 2019 and June 30, 2019:

 

    

March 31, 2019

 
          Millions of yen  

Portfolio segment

  

Class

   Loans
individually
evaluated for
impairment
     Unpaid
principal
balance
     Related
allowance
 

With no related allowance recorded *1

      ¥ 17,593      ¥ 17,521      ¥ 0  

Consumer borrowers

        1,158        1,111        0  
  

Housing loans

     589        542        0  
  

Card loans

     0        0        0  
  

Other

     569        569        0  

Corporate borrowers

        16,329        16,304        0  

Non-recourse loans

   Japan      232        232        0  
  

The Americas

     3,404        3,404        0  

Other

   Real estate companies      887        887        0  
  

Entertainment companies

     0        0        0  
  

Other

     11,806        11,781        0  

Purchased loans

        106        106        0  

With an allowance recorded *2

        41,234        40,234        13,731  

Consumer borrowers

        22,005        21,401        3,372  
  

Housing loans

     3,845        3,639        835  
  

Card loans

     3,945        3,937        633  
  

Other

     14,215        13,825        1,904  

Corporate borrowers

        15,571        15,175        8,442  

Non-recourse loans

   Japan      0        0        0  
  

The Americas

     812        812        166  

Other

   Real estate companies      1,493        1,480        419  
  

Entertainment companies

     1,382        1,374        490  
  

Other

     11,884        11,509        7,367  

Purchased loans

        3,658        3,658        1,917  
     

 

 

    

 

 

    

 

 

 

Total

      ¥ 58,827      ¥ 57,755      ¥ 13,731  
     

 

 

    

 

 

    

 

 

 

Consumer borrowers

        23,163        22,512        3,372  
     

 

 

    

 

 

    

 

 

 
  

Housing loans

     4,434        4,181        835  
     

 

 

    

 

 

    

 

 

 
  

Card loans

     3,945        3,937        633  
     

 

 

    

 

 

    

 

 

 
  

Other

     14,784        14,394        1,904  
     

 

 

    

 

 

    

 

 

 

Corporate borrowers

        31,900        31,479        8,442  
     

 

 

    

 

 

    

 

 

 

Non-recourse loans

   Japan      232        232        0  
     

 

 

    

 

 

    

 

 

 
  

The Americas

     4,216        4,216        166  
     

 

 

    

 

 

    

 

 

 

Other

   Real estate companies      2,380        2,367        419  
     

 

 

    

 

 

    

 

 

 
  

Entertainment companies

     1,382        1,374        490  
     

 

 

    

 

 

    

 

 

 
  

Other

     23,690        23,290        7,367  
     

 

 

    

 

 

    

 

 

 

Purchased loans

        3,764        3,764        1,917  
     

 

 

    

 

 

    

 

 

 

 

– 57 –


Table of Contents
    

June 30, 2019

 
          Millions of yen  

Portfolio segment

  

Class

   Loans
individually
evaluated for
impairment
     Unpaid
principal
balance
     Related
allowance
 

With no related allowance recorded *1

      ¥ 15,529      ¥ 15,465      ¥ 0  

Consumer borrowers

        1,231        1,186        0  
   Housing loans      622        577        0  
   Card loans      0        0        0  
   Other      609        609        0  

Corporate borrowers

        14,192        14,173        0  

Non-recourse loans

   Japan      227        227        0  
   The Americas      1,356        1,356        0  

Other

   Real estate companies      230        230        0  
   Entertainment companies      0        0        0  
   Other      12,379        12,360        0  

Purchased loans

        106        106        0  

With an allowance recorded *2

        38,637        37,561        11,803  

Consumer borrowers

        22,445        21,748        3,410  
   Housing loans      3,751        3,485        803  
   Card loans      3,916        3,907        633  
   Other      14,778        14,356        1,974  

Corporate borrowers

        12,663        12,284        6,572  

Non-recourse loans

   Japan      0        0        0  
  

The Americas

     1,152        1,152        259  

Other

   Real estate companies      1,424        1,410        433  
  

Entertainment companies

     945        937        470  
  

Other

     9,142        8,785        5,410  

Purchased loans

        3,529        3,529        1,821  
     

 

 

    

 

 

    

 

 

 

Total

      ¥ 54,166      ¥ 53,026      ¥ 11,803  
     

 

 

    

 

 

    

 

 

 

Consumer borrowers

        23,676        22,934        3,410  
     

 

 

    

 

 

    

 

 

 
  

Housing loans

     4,373        4,062        803  
     

 

 

    

 

 

    

 

 

 
  

Card loans

     3,916        3,907        633  
     

 

 

    

 

 

    

 

 

 
  

Other

     15,387        14,965        1,974  
     

 

 

    

 

 

    

 

 

 

Corporate borrowers

        26,855        26,457        6,572  
     

 

 

    

 

 

    

 

 

 

Non-recourse loans

   Japan      227        227        0  
     

 

 

    

 

 

    

 

 

 
  

The Americas

     2,508        2,508        259  
     

 

 

    

 

 

    

 

 

 

Other

   Real estate companies      1,654        1,640        433  
     

 

 

    

 

 

    

 

 

 
  

Entertainment companies

     945        937        470  
     

 

 

    

 

 

    

 

 

 
  

Other

     21,521        21,145        5,410  
     

 

 

    

 

 

    

 

 

 

Purchased loans

        3,635        3,635        1,821  
     

 

 

    

 

 

    

 

 

 

 

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.

 

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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.

 

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Table of Contents

The following table provides information about the average recorded investments in impaired loans and interest income on impaired loans for the three months ended June 30, 2018 and 2019:

 

       Three months ended June 30, 2018  
              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

        ¥ 20,055      ¥ 108      ¥ 84  
       Housing loans        4,266        41        39  
       Card loans        4,030        17        12  
       Other        11,759        50        33  

Corporate borrowers

          22,773        46        35  

Non-recourse loans

       Japan        252        2        2  
       The Americas        1,746        0        0  

Other

       Real estate companies        2,505        9        9  
       Entertainment companies        1,577        15        9  
       Other        16,693        20        15  

Purchased loans

          4,937        32        31  
       

 

 

    

 

 

    

 

 

 

Total

        ¥ 47,765      ¥ 186      ¥ 150  
       

 

 

    

 

 

    

 

 

 
       Three months ended June 30, 2019  
              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

        ¥ 23,421      ¥ 107      ¥ 79  
       Housing loans        4,404        25        24  
       Card loans        3,931        17        12  
       Other        15,086        65        43  

Corporate borrowers

          29,379        30        28  

Non-recourse loans

       Japan        230        2        2  
       The Americas        3,362        0        0  

Other

       Real estate companies        2,017        9        9  
       Entertainment companies        1,164        7        7  
       Other        22,606        12        10  

Purchased loans

          3,700        32        32  
       

 

 

    

 

 

    

 

 

 

Total

        ¥ 56,500      ¥ 169      ¥ 139  
       

 

 

    

 

 

    

 

 

 

 

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.

 

– 60 –


Table of Contents

The following table provides information about the credit quality indicators as of March 31, 2019 and June 30, 2019:

 

      

March 31, 2019

 
            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

        ¥ 1,870,447      ¥ 23,163      ¥ 12,412      ¥ 35,575      ¥ 1,906,022  
    

Housing loans

     1,593,005        4,434        1,388        5,822        1,598,827  
    

Card loans

     239,523        3,945        1,671        5,616        245,139  
    

Other

     37,919        14,784        9,353        24,137        62,056  

Corporate borrowers

          1,269,021        31,900        0        31,900        1,300,921  

Non-recourse loans

     Japan      48,881        232        0        232        49,113  
    

The Americas

     45,699        4,216        0        4,216        49,915  

Other

     Real estate companies      352,669        2,380        0        2,380        355,049  
    

Entertainment companies

     64,665        1,382        0        1,382        66,047  
    

Other

     757,107        23,690        0        23,690        780,797  

Purchased loans

          12,652        3,764        0        3,764        16,416  

Finance leases

          1,140,825        0        14,807        14,807        1,155,632  
    

Japan

     787,081        0        6,158        6,158        793,239  
    

Overseas

     353,744        0        8,649        8,649        362,393  
       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

        ¥ 4,292,945      ¥ 58,827      ¥ 27,219      ¥ 86,046      ¥ 4,378,991  
       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
      

June 30, 2019

 
            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

        ¥ 1,948,093      ¥ 23,676      ¥ 10,393      ¥ 34,069      ¥ 1,982,162  
    

Housing loans

     1,680,283        4,373        736        5,109        1,685,392  
    

Card loans

     231,746        3,916        1,361        5,277        237,023  
    

Other

     36,064        15,387        8,296        23,683        59,747  

Corporate borrowers

          1,299,641        26,855        0        26,855        1,326,496  

Non-recourse loans

     Japan      48,521        227        0        227        48,748  
    

The Americas

     51,812        2,508        0        2,508        54,320  

Other

     Real estate companies      359,662        1,654        0        1,654        361,316  
    

Entertainment companies

     62,331        945        0        945        63,276  
    

Other

     777,315        21,521        0        21,521        798,836  

Purchased loans

          11,692        3,635        0        3,635        15,327  

Finance leases

          1,118,843        0        15,190        15,190        1,134,033  
    

Japan

     777,187        0        6,033        6,033        783,220  
    

Overseas

     341,656        0        9,157        9,157        350,813  
       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

        ¥ 4,378,269      ¥ 54,166      ¥ 25,583      ¥ 79,749      ¥ 4,458,018  
       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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.

 

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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 finance 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, 2019 and June 30, 2019:

 

     March 31, 2019  
            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

      ¥ 5,783      ¥ 15,647      ¥ 21,430      ¥ 1,906,022      ¥ 15,647  
     Housing loans        1,721        2,654        4,375        1,598,827        2,654  
     Card loans        548        2,127        2,675        245,139        2,127  
     Other        3,514        10,866        14,380        62,056        10,866  

Corporate borrowers

        4,960        13,753        18,713        1,300,921        27,979  

Non-recourse loans

     Japan        0        0        0        49,113        0  
     The Americas        2,925        2,457        5,382        49,915        3,818  

Other

     Real estate companies        2        552        554        355,049        1,392  
     Entertainment companies        0        663        663        66,047        663  
     Other        2,033        10,081        12,114        780,797        22,106  

Finance leases

        7,181        14,807        21,988        1,155,632        14,807  
     Japan        679        6,158        6,837        793,239        6,158  
     Overseas        6,502        8,649        15,151        362,393        8,649  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥     17,924      ¥     44,207      ¥     62,131      ¥     4,362,575      ¥     58,433  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2019  
            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

      ¥ 5,504      ¥ 13,716      ¥ 19,220      ¥ 1,982,162      ¥ 13,716  
     Housing loans        1,524        1,923        3,447        1,685,392        1,923  
     Card loans        530        1,812        2,342        237,023        1,812  
     Other        3,450        9,981        13,431        59,747        9,981  

Corporate borrowers

        6,435        14,880        21,315        1,326,496        23,231  

Non-recourse loans

     Japan        0        0        0        48,748        0  
     The Americas        2,110        2,508        4,618        54,320        2,508  

Other

     Real estate companies        6        542        548        361,316        542  
     Entertainment companies        0        246        246        63,276        246  
     Other        4,319        11,584        15,903        798,836        19,935  

Finance leases

        9,730        15,190        24,920        1,134,033        15,190  
     Japan        821        6,033        6,854        783,220        6,033  
     Overseas        8,909        9,157        18,066        350,813        9,157  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥ 21,669      ¥ 43,786      ¥ 65,455      ¥ 4,442,691      ¥ 52,137  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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.

 

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The Company and its subsidiaries suspend accruing revenues on past-due installment loans and finance 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 three months ended June 30, 2018 and 2019:

 

    

Three months ended June 30, 2018

 
          Millions of yen  

Portfolio segment

  

Class

   Pre-modification
outstanding
recorded investment
     Post-modification
outstanding
recorded investment
 

Consumer borrowers

      ¥ 3,192      ¥ 2,258  
   Housing loans      26        14  
   Card loans      525        344  
   Other      2,641        1,900  

Corporate borrowers

        2,728        2,728  

Other

   Other      2,728        2,728  
     

 

 

    

 

 

 

Total

      ¥ 5,920      ¥ 4,986  
     

 

 

    

 

 

 
    

Three months ended June 30, 2019

 
          Millions of yen  

Portfolio segment

  

Class

   Pre-modification
outstanding
recorded investment
     Post-modification
outstanding
recorded investment
 

Consumer borrowers

      ¥ 2,963      ¥ 2,239  
   Housing loans      2        1  
   Card loans      467        342  
   Other      2,494        1,896  

Corporate borrowers

        56        56  

Other

   Other      56        56  
     

 

 

    

 

 

 

Total

      ¥ 3,019      ¥ 2,295  
     

 

 

    

 

 

 

 

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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.

The following table provides information about financing receivables modified as troubled debt restructurings within the previous 12 months from June 30, 2018 and for which there was a payment default during the three months ended June 30, 2018:

 

     Three months ended June 30, 2018  
            Millions of yen  

Portfolio segment

   Class      Recorded investment  

Consumer borrowers

                               ¥ 471  
     Card loans        20  
     Other        451  
     

 

 

 

Total

      ¥     471  
     

 

 

 

The following table provides information about financing receivables modified as troubled debt restructurings within the previous 12 months from June 30, 2019 and for which there was a payment default during the three months ended June 30, 2019:

 

     Three months ended June 30, 2019  
            Millions of yen  

Portfolio segment

   Class      Recorded investment  

Consumer borrowers

                               ¥ 524  
     Card loans        16  
     Other        508  
     

 

 

 

Total

      ¥     524  
     

 

 

 

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, 2019 and June 30, 2019, 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 ¥251 million and ¥489 million as of March 31, 2019 and June 30, 2019, respectively.

 

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8.

Investment in Securities

Investment in securities as of June 30, 2018 and 2019 consists of the following:

 

     Millions of yen  
     March 31, 2019      June 30, 2019  

Equity securities *

   ¥ 549,047      ¥ 535,172  

Trading debt securities

     1,564        2,267  

Available-for-sale debt securities

     1,264,244        1,326,614  

Held-to-maturity debt securities

     114,061        113,834  
  

 

 

    

 

 

 

Total

   ¥ 1,928,916      ¥ 1,977,887  
  

 

 

    

 

 

 

 

*

The amount of assets under management of variable annuity and variable life insurance contracts included in equity securities were ¥324,220 million and ¥312,750 million as of March 31, 2019 and June 30, 2019, respectively. The amount of investment funds that are accounted for under the equity method included in equity securities were ¥75,923 million and ¥72,159 million as of March 31, 2019 and June 30, 2019, respectively. The amount of investment funds elected for the fair value option included in equity securities were ¥5,811 million and ¥5,703 million as of March 31, 2019 and June 30, 2019, respectively.

Gains and losses realized from the sale of equity securities and net unrealized holding gains (losses) on equity securities are included in gains on investment securities and dividends, life insurance premiums and related investment income, and write-downs of securities. For further information, see Note 17 “Life Insurance Operations.” Net unrealized holding gains (losses) on equity securities held as of June 30, 2018 and 2019 were gains of ¥173 million and ¥2,166 million, respectively, for the three months ended June 30, 2018 and 2019, which did not include net unrealized holding gains (losses) on the both investment funds above mentioned.

Equity securities include non-marketable equity securities and preferred equity securities, etc. elected for the measurement alternative. Upward or downward adjustments resulting from observable price changes are included in gains on investment securities and dividends and life insurance premiums and related investment income. Impairments are included in write-downs of securities. The following tables provide information about impairment and upward or downward adjustments resulting from observable price changes as of March 31, 2019 and June 30, 2019, and for the three months ended June 30, 2018 and 2019.

 

     Millions of yen  
     March 31, 2019      Three months ended June 30, 2018  
     Carrying value      Accumulated
impairments
and downward
adjustments
    Accumulated
upward
adjustments
     Impairments
and downward
adjustments
    Upward
adjustments
 

Equity securities measured using the measurement alternative

   ¥ 35,431      ¥ (1,688   ¥ 18      ¥ 0     ¥ 0  
     Millions of yen  
     June 30, 2019      Three months ended June 30, 2019  
     Carrying value      Accumulated
impairments
and downward
adjustments
    Accumulated
upward
adjustments
     Impairments
and downward
adjustments
    Upward
adjustments
 

Equity securities measured using the measurement alternative

   ¥ 34,826      ¥ (1,573   ¥ 18      ¥ (2   ¥ 1  

Gains and losses realized from the sale of trading debt securities and net unrealized holding gains (losses) on trading debt securities are included in gains on investment securities and dividends. Net unrealized holding gains (losses) on trading debt securities held as of June 30, 2018 and 2019 were losses of ¥73 million and gains of ¥49 million, respectively, for the three months ended June 30, 2018 and 2019.

 

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Certain subsidiaries elected the fair value option for certain investments in investment funds included in equity 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, 2019 and June 30, 2019, these investments were fair valued at ¥5,811 million and ¥5,703 million, respectively.

A certain subsidiary elected the fair value option for investments in foreign government bond securities included in available-for-sale debt securities to mitigate volatility in the consolidated statements of income caused by the difference in recognition of gain or loss that would otherwise exist between the foreign government bond securities and the derivatives used to reduce the risks of fluctuations in market interest rates and exchange rates on these foreign government bond securities. As of March 31, 2019 and June 30, 2019, these investments were fair valued at ¥420 million and ¥402 million, respectively.

A certain subsidiary elected the fair value option for investments in foreign corporate debt securities included in available-for-sale debt securities to mitigate volatility in the consolidated statements of income caused by the difference in recognition of gain or loss that would otherwise exist between the foreign corporate debt securities and the derivatives used to reduce the risks of fluctuations in market interest rates and exchange rates on these foreign corporate debt securities. As of March 31, 2019 and June 30, 2019, these investments were fair valued at ¥21,136 million and ¥17,838 million, respectively.

 

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The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale debt securities and held-to-maturity debt securities in each major security type as of March 31, 2019 and June 30, 2019 are as follows:

March 31, 2019

 

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

Available-for-sale debt securities:

          

Japanese and foreign government bond securities

   ¥ 416,218      ¥ 20,133      ¥ (5,500   ¥ 430,851  

Japanese prefectural and foreign municipal bond securities

     189,792        3,749        (236     193,305  

Corporate debt securities

     485,156        5,205        (2,364     487,997  

CMBS and RMBS in the Americas

     59,954        2,566        (1,041     61,479  

Other asset-backed securities and debt securities

     88,620        3,381        (1,389     90,612  
  

 

 

    

 

 

    

 

 

   

 

 

 
     1,239,740        35,034        (10,530     1,264,244  
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity debt securities:

          

Japanese government bond securities and other

     114,061        30,265        0       144,326  
  

 

 

    

 

 

    

 

 

   

 

 

 
   ¥ 1,353,801      ¥ 65,299      ¥ (10,530   ¥ 1,408,570  
  

 

 

    

 

 

    

 

 

   

 

 

 

June 30, 2019

 

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

Available-for-sale debt securities:

          

Japanese and foreign government bond securities

   ¥ 506,815      ¥ 28,547      ¥ (9,820   ¥ 525,542  

Japanese prefectural and foreign municipal bond securities

     179,058        4,418        (102     183,374  

Corporate debt securities

     487,458        7,527        (2,246     492,739  

CMBS and RMBS in the Americas

     50,689        2,574        (1,132     52,131  

Other asset-backed securities and debt securities

     70,902        3,144        (1,218     72,828  
  

 

 

    

 

 

    

 

 

   

 

 

 
     1,294,922        46,210        (14,518     1,326,614  
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity debt securities:

          

Japanese government bond securities and other

     113,834        32,516        0       146,350  
  

 

 

    

 

 

    

 

 

   

 

 

 
   ¥ 1,408,756      ¥ 78,726      ¥ (14,518   ¥ 1,472,964  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The following tables provide information about available-for-sale debt securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2019 and June 30, 2019, respectively:

March 31, 2019

 

     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 debt securities:

               

Japanese and foreign government bond securities

   ¥ 51,551      ¥ (1,119   ¥ 98,830      ¥ (4,381   ¥ 150,381      ¥ (5,500

Japanese prefectural and foreign municipal bond securities

     1,329        (35     4,510        (201     5,839        (236

Corporate debt securities

     9,156        (18     68,924        (2,346     78,080        (2,364

CMBS and RMBS in the Americas

     10,194        (362     7,147        (679     17,341        (1,041

Other asset-backed securities and debt securities

     10,253        (411     28,748        (978     39,001        (1,389
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   ¥ 82,483      ¥ (1,945   ¥ 208,159      ¥ (8,585   ¥ 290,642      ¥ (10,530
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

June 30, 2019

 

  
     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 debt securities:

               

Japanese and foreign government bond securities

   ¥ 77,284      ¥ (2,749   ¥ 99,082      ¥ (7,071   ¥ 176,366      ¥ (9,820

Japanese prefectural and foreign municipal bond securities

     270        (0     2,682        (102     2,952        (102

Corporate debt securities

     10,954        (41     41,231        (2,205     52,185        (2,246

CMBS and RMBS in the Americas

     3,812        (319     8,103        (813     11,915        (1,132

Other asset-backed securities and debt securities

     5,155        (103     29,974        (1,115     35,129        (1,218
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   ¥ 97,475      ¥ (3,212   ¥ 181,072      ¥ (11,306   ¥ 278,547      ¥ (14,518
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The number of investment securities that were in an unrealized loss position as of March 31, 2019 and June 30, 2019 were 199 and 169, respectively. The gross unrealized losses on these debt securities are attributable to a number of factors including changes in interest rates, credit spreads and market trends.

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 foreign government bond securities and corporate debt securities in Japan and overseas.

 

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Table of Contents

The unrealized loss associated with government bond securities and corporate debt securities are primarily due to changes in the market interest rates, currency exchange rates and risk premium. Considering all available information to assess the collectability of those investments (such as the financial condition of and business prospects for the issuers), the Company and its subsidiaries believe that the Company and its subsidiaries are able to recover the entire amortized cost basis of those investments. 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 at June 30, 2019.

There were no other-than-temporary impairment losses recognized in other comprehensive income (loss) and earnings for the three months ended June 30, 2018 and 2019.

For debt securities held as of June 30, 2018 and 2019, roll-forwards of the amount of accumulated other-than-temporary impairments related to credit losses for the three months ended June 30, 2018 and 2019 are as follows. The amount mainly consists of CMBS and RMBS in the Americas and foreign municipal bond securities:

 

     Millions of yen  
     Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Beginning

   ¥ 1,021     ¥ 2,102  

Reduction during the period:

    

For securities sold or redeemed

     (22     0  
  

 

 

   

 

 

 

Ending

   ¥ 999     ¥ 2,102  
  

 

 

   

 

 

 

In addition, the non-credit loss component on the other-than-temporary impaired debt securities above mentioned is recognized in other comprehensive income (loss), net of applicable income taxes. 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. Unrealized gains and unrealized losses recorded in accumulated other comprehensive income (loss) on these debt securities as of March 31, 2019 and June 30, 2019 were not material.

 

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9.

Transfer of Financial Assets

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

In the securitization process, these financial assets are transferred to SPEs 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 have continuing involvement with transferred financial assets by retaining the servicing arrangements and the 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. SPEs used in securitization transactions have been consolidated if the Company and its subsidiaries are the primary beneficiary of the SPEs.

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.

For the three months ended June 30, 2018 and 2019, the amount of installment loans that has been derecognized due to new securitization and transfer of loans were ¥79,801 million and ¥133,048 million, respectively. For the three months ended June 30, 2018 and 2019, gains (losses) from the securitization and transfer of loans were ¥2,814 million and ¥4,075 million, respectively, which is included in finance revenues in the consolidated statements of income.

A certain subsidiary originates and sells loans into the secondary market while retaining the obligation to service those loans. In addition, the subsidiary undertakes obligations to service loans originated by others. The servicing assets related to those servicing activities are included in other assets in the consolidated balance sheets and roll-forwards of the amount of the servicing assets for the three months ended June 30, 2018 and 2019 are as follows:

 

     Millions of yen  
     Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Beginning balance

   ¥ 28,756     ¥ 31,572  

Increase mainly from loans sold with servicing retained

     1,108       1,998  

Decrease mainly from amortization

     (1,197     (1,204

Increase (Decrease) from the effects of changes in foreign exchange rates

     1,162       (925
  

 

 

   

 

 

 

Ending balance

   ¥ 29,829     ¥ 31,441  
  

 

 

   

 

 

 

The fair value of the servicing assets as of March 31, 2019 and June 30, 2019 are as follows:

    
     Millions of yen  
     March 31, 2019     June 30, 2019  

Beginning balance

   ¥ 35,681     ¥ 39,846  

Ending balance

   ¥ 39,846     ¥ 38,474  

 

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Table of Contents
10.

Variable Interest Entities

The Company and its subsidiaries use 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, “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; and

 

   

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 factors 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; and

 

   

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; and

 

   

providing liquidity and other financial support.

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

 

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Table of Contents

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

 

1.

Consolidated VIEs

March 31, 2019

 

     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

     2,014        0        0        0  

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

     94,404        31,208        49,587        0  

(d) VIEs for corporate rehabilitation support business

     564        30        0        0  

(e) VIEs for investment in securities

     72,347        121        42        0  

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

     228,859        175,115        228,859        0  

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

     2,264        2,729        2,264        0  

(h) VIEs for power generation projects

     282,739        195,915        242,937        54,533  

(i) Other VIEs

     149,333        45,082        120,312        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 832,524      ¥ 450,200      ¥ 644,001      ¥ 54,533  
  

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2019

 

     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

     2,008        0        0        0  

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

     91,185        17,285        18,068        0  

(d) VIEs for corporate rehabilitation support business

     386        9        0        0  

(e) VIEs for investment in securities

     62,051        91        0        0  

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

     242,583        159,954        242,583        0  

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

     2,688        3,361        2,688        0  

(h) VIEs for power generation projects

     308,021        219,395        268,642        56,035  

(i) Other VIEs

     151,521        53,139        129,761        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 860,443      ¥ 453,234      ¥ 661,742      ¥ 56,035  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*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.

 

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2.

Non-consolidated VIEs

March 31, 2019

 

     Millions of yen  
            Carrying amount of the variable interests
in the VIEs held by

the Company  and its subsidiaries
        

Types of VIEs

   Total assets      Non-recourse loans      Investments      Maximum
exposure
to loss *
 

(a) VIEs for liquidating customer assets

   ¥ 8,524      ¥ 0      ¥ 991      ¥ 991  

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

     34,872        0        3,426        3,426  

(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

     3,493,461        0        60,329        81,337  

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

     0        0        0        0  

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

     982,353        0        21,768        21,776  

(h) VIEs for power generation projects

     26,495        0        1,783        1,783  

(i) Other VIEs

     391,602        3,200        32,569        37,947  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 4,937,307      ¥ 3,200      ¥ 120,866      ¥ 147,260  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

June 30, 2019

 

 

     Millions of yen  
            Carrying amount of the variable interests
in the VIEs held by
the Company and its subsidiaries
        

Types of VIEs

   Total assets      Non-recourse loans      Investments      Maximum
exposure
to loss *
 

(a) VIEs for liquidating customer assets

   ¥ 8,524      ¥ 0      ¥ 991      ¥ 991  

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

     39,012        0        2,164        2,164  

(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

     3,626,294        0        58,325        78,423  

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

     0        0        0        0  

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

     885,039        0        19,952        19,960  

(h) VIEs for power generation projects

     26,430        0        1,861        1,861  

(i) Other VIEs

     371,809        3,004        31,642        35,692  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 4,957,108      ¥ 3,004      ¥ 114,935      ¥ 139,091  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

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.

 

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(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 has, are mainly included in other assets in the Company’s consolidated balance sheets.

(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 consolidated balance sheets, assets of consolidated VIEs are mainly included in cash and cash equivalents and investment in affiliates.

Variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, are mainly included in investment in securities, investment in affiliates and other assets in the Company’s consolidated balance sheets. 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.

In the Company’s consolidated balance sheets, assets of the consolidated VIEs are mainly included in cash and cash equivalents, restricted cash, investment in operating leases, investment in securities, property under facility operations and other assets, and liabilities of those consolidated VIEs are mainly included in long-term debt and other liabilities.

(d) VIEs for corporate rehabilitation support business

Financial institutions, the Company and its subsidiaries 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 subsidiaries consolidated such VIEs since the Company and its subsidiaries 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 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.

 

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(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.

Certain subsidiaries consolidated certain such VIEs since the subsidiaries 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 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 trade notes, accounts and other payable.

Variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, are included in investment in securities in the Company’s consolidated balance sheets. The Company and its subsidiaries have commitment agreements 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 finance lease receivable and loan receivable

The Company and its subsidiaries use VIEs to securitize financial assets such as finance lease 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 consolidated balance sheets, assets of the consolidated VIEs are mainly included in restricted cash, net investment in the leases and installment loans, and liabilities of those consolidated VIEs are mainly included in long-term debt.

(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 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 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.

 

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(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, construct solar power stations and thermal power stations 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 consolidated balance sheets, assets of the consolidated VIEs are mainly included in cash and cash equivalents, restricted cash, property under facility operations and other assets, and liabilities of those consolidated VIEs are mainly included in trade notes, accounts and other payable, long-term debt, and other liabilities. The Company and certain subsidiaries have commitment agreements by which the Company and the subsidiary 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, are included in investment in affiliates in the Company’s 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 have 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 non-recourse 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 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.

The Company may use VIEs for financing. 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 consolidated balance sheets, assets of the consolidated VIEs are mainly included in investment in operating leases, investment in affiliates, office facilities and other assets, 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 have, non-recourse loans are included in installment loans, and investments are mainly included in investment in securities in the Company’s consolidated balance sheets. Certain subsidiaries have commitment agreements by which the Company and its subsidiaries may be required to make additional investment in certain such non-consolidated VIEs.

 

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11.

Investment in Affiliates

Investment in affiliates at March 31, 2019 and June 30, 2019 consists of the following:

 

     Millions of yen  
     March 31, 2019     June 30, 2019  

Shares

   ¥ 789,638     ¥ 768,957  

Loans and others

     53,122       51,498  
  

 

 

   

 

 

 
   ¥ 842,760     ¥ 820,455  
  

 

 

   

 

 

 

 

12.  Redeemable Noncontrolling Interests

 

Changes in redeemable noncontrolling interests for the three months ended June 30, 2018 and 2019 are as follows:

 

   

 

     Millions of yen  
     Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Beginning balance

   ¥     7,420     ¥     9,780  

Comprehensive income

    

Net income

     51       309  

Other comprehensive income (Loss)

    

Net change of foreign currency translation adjustments

     296       (287

Total other comprehensive income (Loss)

     296       (287

Comprehensive income

     347       22  

Dividends

     (294     (289
  

 

 

   

 

 

 

Ending balance

   ¥   7,473     ¥   9,513  
  

 

 

   

 

 

 

 

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Table of Contents
13.

Accumulated Other Comprehensive Income (Loss)

Changes in each component of accumulated other comprehensive income (loss) attributable to ORIX Corporation Shareholders for the three months ended June 30, 2018 and 2019, are as follows:

 

     Three months ended June 30, 2018  
     Millions of yen  
     Net
unrealized

gains (losses)
on
investment

in securities
    Debt
valuation
adjustments
    Defined
benefit
pension plans
    Foreign
currency
translation
adjustments
    Net
unrealized

gains (losses)
on derivative
instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at March 31, 2018

   ¥ 10,465     ¥ 0     ¥ (20,487   ¥ (31,806   ¥ (3,738   ¥ (45,566
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative effect of adopting Accounting Standards Update 2016-01

     (3,250     351       0       0       0       (2,899
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2018

     7,215       351       (20,487     (31,806     (3,738     (48,465
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on investment in securities, net of tax of ¥(908) million

     2,618               2,618  

Reclassification adjustment included in net income, net of tax of ¥777 million

     (2,380             (2,380

Debt valuation adjustments, net of tax of ¥(3) million

       2             2  

Reclassification adjustment included in net income, net of tax of ¥3 million

       (5           (5

Defined benefit pension plans, net of tax of ¥(19) million

         13           13  

Reclassification adjustment included in net income, net of tax of ¥10 million

         (26         (26

Foreign currency translation adjustments, net of tax of ¥4,454 million

           (4,736       (4,736

Reclassification adjustment included in net income, net of tax of ¥0 million

           0         0  

Net unrealized gains (losses) on derivative instruments, net of tax of ¥247 million

             (806     (806

Reclassification adjustment included in net income, net of tax of ¥(243) million

             776       776  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     238       (3     (13     (4,736     (30     (4,544
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transaction with noncontrolling interests

     0       0       (1     0       0       (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income (Loss) Attributable to the Noncontrolling Interest

     0       0       (1     (17     7       (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0       0       0       296       0       296  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

   ¥ 7,453     ¥ 348     ¥ (20,500   ¥ (36,821   ¥ (3,775   ¥ (53,295
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Three months ended June 30, 2019  
     Millions of yen  
     Net
unrealized

gains (losses)
on
investment

in securities
    Debt
valuation
adjustments
    Defined
benefit
pension plans
    Foreign
currency
translation
adjustments
    Net
unrealized

gains (losses)
on derivative
instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at March 31, 2019

   ¥ 17,389     ¥ 582     ¥ (27,902   ¥ (43,558   ¥ (7,854   ¥ (61,343
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on investment in securities, net of tax of ¥(2,825) million

     7,513               7,513  

Reclassification adjustment included in net income, net of tax of ¥927 million

     (2,278             (2,278

Debt valuation adjustments, net of tax of ¥(55) million

       138             138  

Reclassification adjustment included in net income, net of tax of ¥3 million

       (6           (6

Defined benefit pension plans, net of tax of ¥(62) million

         197           197  

Reclassification adjustment included in net income, net of tax of ¥(51) million

         142           142  

Foreign currency translation adjustments, net of tax of ¥(6,470) million

           (24,718       (24,718

Reclassification adjustment included in net income, net of tax of ¥(355) million

           778         778  

Net unrealized gains (losses) on derivative instruments, net of tax of ¥1,263 million

             (3,883     (3,883

Reclassification adjustment included in net income, net of tax of ¥(1) million

             4       4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     5,235       132       339       (23,940     (3,879     (22,113
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income (Loss) Attributable to the Noncontrolling Interest

     (3     0       0       (1,271     (14     (1,288
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Other Comprehensive Income (Loss) Attributable to the Redeemable Noncontrolling Interests

     0       0       0       (287     0       (287
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2019

   ¥ 22,627     ¥ 714     ¥ (27,563   ¥ (65,940   ¥ (11,719   ¥ (81,881
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Amounts reclassified to net income from accumulated other comprehensive income (loss) in the three months ended June 30, 2018 and 2019 are as follows:

 

     Three months ended June 30, 2018

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 debt securities

   ¥ 2,525     Gains on investment securities and dividends

Sales of debt securities

     1,059     Life insurance premiums and related investment income

Amortization of debt securities

     (362   Finance revenues

Amortization of debt securities

     (65   Life insurance premiums and related investment income
  

 

 

   
     3,157     Total before income tax
     (777   Income tax (expense) or benefit
  

 

 

   
   ¥ 2,380     Net of tax
  

 

 

   

Debt valuation adjustments

    

Fulfillment of policy liabilities and amortization of policy account balances

   ¥ 8     Life insurance costs
  

 

 

   
     8     Total before income tax
     (3   Income tax (expense) or benefit
  

 

 

   
   ¥ 5     Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 268     See Note 16 “Pension Plans”

Amortization of net actuarial loss

     (231   See Note 16 “Pension Plans”

Amortization of transition obligation

     (1   See Note 16 “Pension Plans”
  

 

 

   
     36     Total before income tax
     (10   Income tax (expense) or benefit
  

 

 

   
   ¥ 26     Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 127     Finance revenues/Interest expense

Foreign exchange contracts

     23     Other (income) and expense, net

Foreign currency swap agreements

     (1,169  

Finance revenues/Interest expense/

Other (income) and expense, net

  

 

 

   
     (1,019   Total before income tax
     243     Income tax (expense) or benefit
  

 

 

   
   ¥ (776   Net of tax
  

 

 

   

 

– 80 –


Table of Contents
     Three months ended June 30, 2019

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 debt securities

   ¥ 1,666     Gains on investment securities and dividends

Sales of debt securities

     1,471     Life insurance premiums and related investment income

Amortization of debt securities

     130     Finance revenues

Amortization of debt securities

     (62   Life insurance premiums and related investment income
  

 

 

   
     3,205     Total before income tax
     (927   Income tax (expense) or benefit
  

 

 

   
   ¥ 2,278     Net of tax
  

 

 

   

Debt valuation adjustments

    

Fulfillment of policy liabilities and amortization of policy account balances

   ¥ 9     Life insurance costs
  

 

 

   
     9     Total before income tax
     (3   Income tax (expense) or benefit
  

 

 

   
   ¥ 6     Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 244     See Note 16 “Pension Plans”

Amortization of net actuarial loss

     (437   See Note 16 “Pension Plans”
  

 

 

   
     (193   Total before income tax
     51     Income tax (expense) or benefit
  

 

 

   
   ¥ (142   Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Foreign exchange contracts

   ¥ (1,133   Interest expense/Other (income) and expense, net
  

 

 

   
     (1,133   Total before income tax
     355     Income tax (expense) or benefit
  

 

 

   
   ¥ (778   Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 60     Interest expense/Other (income) and expense, net

Foreign exchange contracts

     (66   Interest expense

Foreign currency swap agreements

     1     Interest expense/Other (income) and expense, net
  

 

 

   
     (5   Total before income tax
     1     Income tax (expense) or benefit
  

 

 

   
   ¥ (4   Net of tax
  

 

 

   

 

– 81 –


Table of Contents
14.

ORIX Corporation Shareholders’ Equity

Information about ORIX Corporation Shareholders’ Equity for the three months ended June 30, 2018 and 2019 are as follows:

 

(1)

Dividend payments

 

   

Three months ended June 30, 2018

 

Three months ended June 30, 2019

Resolution

  The board of directors on May 21, 2018   The board of directors on May 22, 2019

Type of shares

  Common stock   Common stock

Total dividends paid

  ¥49,984 million   ¥58,962 million

Dividend per share

  ¥39.00   ¥46.00

Date of record for dividend

  March 31, 2018   March 31, 2019

Effective date for dividend

  June 5, 2018   June 3, 2019

Dividend resource

  Retained earnings   Retained earnings

Total dividends paid includes ¥64 million of dividends paid to the Board Incentive Plan Trust for the three months ended June 30, 2018. Total dividends paid includes ¥83 million of dividends paid to the Board Incentive Plan Trust for the three months ended June 30, 2019.

 

(2)

There were no applicable dividends for which the date of record was in the three months ended June 30, 2018, and for which the effective date was after June 30, 2018.

There were no applicable dividends for which the date of record was in the three months ended June 30, 2019, and for which the effective date was after June 30, 2019.

 

15.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2018 and 2019 are as follows:

 

     Millions of yen  
       Three months ended    
June 30, 2018
         Three months ended    
June 30, 2019
 

Personnel expenses

   ¥ 62,425      ¥ 64,795  

Selling expenses

     17,287        16,740  

Administrative expenses

     24,357        28,108  

Depreciation of office facilities

     1,087        1,765  
  

 

 

    

 

 

 

Total

   ¥ 105,156      ¥ 111,408  
  

 

 

    

 

 

 

 

– 82 –


Table of Contents
16.

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 debt securities and marketable equity securities.

Net periodic pension cost for the three months ended June 30, 2018 and 2019 consists of the following:

The components of net periodic pension cost other than the service cost component are included in personnel expenses, which is included in selling, general and administrative expenses in the consolidated statements of income.

 

    Millions of yen  
        Three months ended    
June 30, 2018
        Three months ended    
June 30, 2019
 

Japanese plans:

   

Service cost

  ¥ 1,382     ¥ 1,438  

Interest cost

    175       145  

Expected return on plan assets

    (681     (694

Amortization of prior service credit

    (222     (205

Amortization of net actuarial loss

    211       289  

Amortization of transition obligation

    0       0  
 

 

 

   

 

 

 

Net periodic pension cost

  ¥ 865     ¥ 973  
 

 

 

   

 

 

 
    Millions of yen  
    Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Overseas plans:

   

Service cost

  ¥ 802     ¥ 890  

Interest cost

    491       434  

Expected return on plan assets

    (1,096     (1,096

Amortization of prior service credit

    (46     (39

Amortization of net actuarial loss

    20       148  

Amortization of transition obligation

    1       0  
 

 

 

   

 

 

 

Net periodic pension cost

  ¥ 172     ¥ 337  
 

 

 

   

 

 

 

 

– 83 –


Table of Contents
17.

Life Insurance Operations

Life insurance premiums and related investment income for the three months ended June 30, 2018 and 2019 consist of the following:

 

     Millions of yen  
          Three months ended    
June 30, 2018
          Three months ended    
June 30, 2019
 

Life insurance premiums

   ¥     75,036       ¥ 81,294  

Life insurance related investment income *

     7,823        6,396  
  

 

 

    

 

 

 
   ¥ 82,859      ¥ 87,690   
  

 

 

    

 

 

 

 

*

Life insurance related investment income for the three months ended June 30, 2018 and 2019 include net unrealized holding gains of ¥4,711 million and ¥1,613 million on equity securities held as of June 30, 2018 and 2019, respectively.

Life insurance premiums include reinsurance benefits, net of reinsurance premiums. For the three months ended June 30, 2018 and 2019, reinsurance benefits and reinsurance premiums included in life insurance premiums are as follows:

 

     Millions of yen  
         Three months ended    
June 30, 2018
        Three months ended    
June 30, 2019
 

Reinsurance benefits

   ¥       597     ¥      573  

Reinsurance premiums

     (1,382     (1,393

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 directly relating to policy issuance and underwriting). Amortization charged to income for the three months ended June 30, 2018 and 2019 amounted to ¥4,292 million and ¥4,465 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.

The portion of the total change in the fair value of variable annuity and variable life insurance contracts that results from a change in the instrument-specific credit risk is recognized in other comprehensive income (loss), net of applicable income taxes.

The above mentioned gains or losses relating to variable annuity and variable life insurance contracts for the three months ended June 30, 2018 and 2019 are as follows:

 

     Millions of yen  
         Three months ended    
June 30, 2018
        Three months ended    
June 30, 2019
 

Life insurance premiums and related investment income:

    

Net realized and unrealized gains or losses from investment assets

   ¥ 5,451     ¥ 1,926  

Net gains or losses from derivative contracts:

     (1,129     427  

Futures

     (569     245  

Foreign exchange contracts

     (227     230  

Options held

     (333     (48

Life insurance costs:

    

Changes in the fair value of the policy liabilities and policy account balances

   ¥ (24,558   ¥ (12,841

Insurance costs recognized for insurance and annuity payouts as a result of insured events

     24,705       12,528  

Changes in the fair value of the reinsurance contracts

     1,443       533  

 

– 84 –


Table of Contents
18.

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, 2019 and June 30, 2019, the long-lived assets and liabilities associated with those assets classified as held for sale in the accompanying consolidated balance sheets are as follows.

 

     Millions of yen  
   As of March 31, 2019      As of June 30, 2019  

Investment in operating leases

   ¥ 24,956      ¥ 29,698  

Property under facility operations

     44,473        47,241  

Other assets

     19        40  

Other liabilities

     0        12,343  

The long-lived assets classified as held for sale as of March 31, 2019 are included in Corporate Financial Services segment, Real Estate segment, Investment and Operation segment and Overseas Business segment. The long-lived assets and liabilities associated with those assets classified as held for sale as of June 30, 2019 are included in Corporate Financial Services segment, Real Estate 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 three months ended June 30, 2018 and 2019, the Company and its subsidiaries recognized impairment losses for the difference between carrying amounts and fair values in the amount of ¥26 million and ¥20 million, respectively, which are reflected as write-downs of long-lived assets. Breakdowns of these amounts are as follows.

 

     Three months ended
June 30, 2018
     Three months ended
June 30, 2019
 
     Amount
(Millions of yen)
     The number of
properties
     Amount
(Millions of yen)
     The number of
properties
 

Write-downs of the assets held for sale:

           

Commercial facilities other than office buildings

   ¥ 0        0      ¥ 0        0  

Others *

     0        —          0        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 0        —        ¥ 0        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

For the “Others,” the number of properties is omitted.

 

     Three months ended
June 30, 2018
     Three months ended
June 30, 2019
 
     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:

           

Commercial facilities other than office buildings

   ¥ 16        1      ¥ 20        1  

Others *

     10        —          0        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 26        —        ¥ 20        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

For the “Others,” the number of properties is omitted.

Losses of ¥16 million in Real Estate segment and ¥10 million in Overseas Business segment were recorded for the three months ended June 30, 2018. A loss of ¥20 million in Real Estate segment was recorded for the three months ended June 30, 2019.

 

– 85 –


Table of Contents
19.

Per Share Data

Reconciliation of the differences between basic and diluted earnings per share (EPS) in the three months ended June 30, 2018 and 2019 is as follows:

During the three months ended June 30, 2018 and 2019, there were no stock options which were antidilutive.

 

     Millions of yen  
     Three months ended
June 30, 2018
     Three months ended
June 30, 2019
 

Net Income attributable to ORIX Corporation shareholders

   ¥ 79,947      ¥ 69,210  
  

 

 

    

 

 

 
     Thousands of Shares  
     Three months ended
June 30, 2018
     Three months ended
June 30, 2019
 

Weighted-average shares

     1,280,054        1,279,961  

Effect of dilutive securities—

     

Exercise of stock options

     987        1,135  
  

 

 

    

 

 

 

Weighted-average shares for diluted EPS computation

     1,281,041        1,281,096  
  

 

 

    

 

 

 
     Yen  
   Three months ended
June 30, 2018
     Three months ended
June 30, 2019
 

Earnings per share for net income attributable to ORIX Corporation shareholders:

     

Basic

   ¥ 62.46      ¥ 54.07  

Diluted

     62.41        54.02  

 

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 (1,651,443 and 1,823,993 shares for the three months ended June 30, 2018 and 2019).

 

– 86 –


Table of Contents
20.

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 June 30, 2019.

(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.

 

– 87 –


Table of Contents

The effect of derivative instruments on the consolidated statements of income, pre-tax, for the three months ended June 30, 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

   ¥ (42    Finance revenues/Interest expense    ¥      127       —      ¥    0

Foreign exchange contracts

     69      Other (income) and expense, net             23      —            0

Foreign currency swap agreements

     (1,080    Finance revenues/Interest expense/Other (income) and expense, net      (1,169    —            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

   ¥ 693      Finance revenues/Interest expense    ¥ (693    Finance revenues/Interest expense

Foreign exchange contracts

     (1,392    Other (income) and expense, net      1,392      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

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

   ¥ 6,614      Gains on sales of subsidiaries and affiliates and liquidation losses, net    ¥ 0       —      ¥    0

Borrowings and bonds in foreign currencies

     (10,999    —        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

   ¥    508    Other (income) and expense, net         

Futures

     (730)   

Gains on investment securities and dividends

Life insurance premiums and related investment income *

        

Foreign exchange contracts

     (1,893)   

Gains on investment securities and dividends

Life insurance premiums and related investment income *

Other (income) and expense, net

        

Credit derivatives held

     (59)    Other (income) and expense, net         

Options held/written and other

     (1,004)   

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 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 June 30, 2018 (see Note 17 “Life Insurance Operations”).

 

– 88 –


Table of Contents

The effect of derivative instruments on the consolidated statements of income, pre-tax, for the three months ended June 30, 2019 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, net
 

Interest rate swap agreements

   ¥ (2,933   ¥      60     ¥ (0

Foreign exchange contracts

     232       (66     0  

Foreign currency swap agreements

     (2,445     2       (1

(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, net
     Life insurance premiums
and related investment
income
    Other (income) and
expense, net
 

Interest rate swap agreements

   ¥ (5,215   ¥ 0      ¥ 5,068     ¥ 0  

Foreign exchange contracts

     1,597       46        (1,695     (50

(3) Hedges of net investment in foreign operations

 

     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, net
 

Foreign exchange contracts

   ¥ 2,314     ¥ 1,126      ¥  7   

Borrowings and bonds in foreign currencies

     17,156        0        0   

(4) Derivatives not designated as hedging instruments

 

     Millions of yen  
     Gains (losses) recognized in income on derivative  
     Life insurance premiums and
related investment income *
    Interest expense      Other (income) and expense, net  

Interest rate swap agreements

   ¥ 0     ¥ 2      ¥ 62  

Futures

     245       0        724  

Foreign exchange contracts

     501       1,338        (6,641

Credit derivatives held

     0       0        (7

Options held/written and other

     (48     0        485  

 

*

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 the three months ended June 30, 2019 (see Note 17 “Life Insurance Operations”).

 

– 89 –


Table of Contents

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income, pre-tax, for the three months ended June 30, 2019 is as follows.

Fair value hedges

 

     Millions of yen  
     Gains (losses) reclassified from
other comprehensive income (loss) into
income
 
     Life insurance premiums and related
investment income
 

Foreign exchange contracts

   ¥ 579  

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 June 30, 2019 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  

Consolideted balance

sheets location

   Carrying amount      The cumulative
amount of fair value
hedging adjustments
included in the
carrying amount
     Consolideted balance
sheets location
     Carrying amount      The cumulative
amount of fair value
hedging adjustments
included in the
carrying amount
 

Investment in Securities *

   ¥ 255,274      ¥ 12,578        —        ¥ 0      ¥ 0  

 

*

Accumulated fair value hedge adjustments of ¥(388) million are included for hedged items for which hedge accounting has been discontinued.

 

– 90 –


Table of Contents

Notional amounts of derivative instruments and other, fair values of derivative instruments and other before offsetting at March 31, 2019 and June 30, 2019 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.

June 30, 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

  ¥     472,914     ¥ 0       ¥ 25,450     Other Liabilities

Options held/written and other *

    933       14     Other Assets     0    

Futures, foreign exchange contracts

    540,646       4,447     Other Assets     1,769     Other Liabilities

Foreign currency swap agreements

    66,038       2,589     Other Assets     378     Other Liabilities

Foreign currency long-term debt

    616,190       0         0    

Derivatives not designated as hedging instruments:

         

Interest rate swap agreements

  ¥ 58,957     ¥ 58     Other Assets   ¥ 115     Other Liabilities

Options held/written and other *

    546,168       16,816     Other Assets     13,724     Other Liabilities

Futures, foreign exchange contracts *

    354,798       2,965     Other Assets     1,163     Other Liabilities

Credit derivatives held

    157       0         17     Other Liabilities

 

*

The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥31,081 million, futures contracts of ¥37,495 million and foreign exchange contracts of ¥10,754 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at June 30, 2019, respectively. Derivative assets in the above table includes fair value of the options held, futures contracts and foreign exchange contracts before offsetting of ¥152 million, ¥13 million and ¥130 million and derivative liabilities includes fair value of the futures and foreign exchange contracts before offsetting of ¥151 million and ¥5 million at June 30, 2019, respectively.

 

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21.

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, 2019 and June 30, 2019 are as follows.

March 31, 2019

 

     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 *
    Net amount  
     Financial
instruments
    Collateral
received/pledged
 

Derivative assets

   ¥ 15,495      ¥ (1,497   ¥ 13,998      ¥ (196   ¥ 0     ¥ 13,802  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   ¥ 15,495      ¥ (1,497   ¥ 13,998      ¥ (196   ¥ 0     ¥ 13,802  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Derivative liabilities

   ¥ 25,958      ¥ (1,497   ¥ 24,461      ¥ (8,353   ¥ (79   ¥ 16,029  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

   ¥ 25,958      ¥ (1,497   ¥ 24,461      ¥ (8,353   ¥ (79   ¥ 16,029  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

June 30, 2019

  
     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 *
    Net amount  
     Financial
instruments
    Collateral
received/pledged
 

Derivative assets

   ¥ 26,889      ¥ (4,193   ¥ 22,696      ¥ (147   ¥ (267   ¥ 22,282  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   ¥ 26,889      ¥ (4,193   ¥ 22,696      ¥ (147   ¥ (267   ¥ 22,282  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Derivative liabilities

   ¥ 42,616      ¥ (4,193   ¥ 38,423      ¥ (10,251   ¥ 0     ¥ 28,172  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

   ¥ 42,616      ¥ (4,193   ¥ 38,423      ¥ (10,251   ¥ 0     ¥ 28,172  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

*

The balances related to enforceable master netting agreements or similar agreements which were not offset in the consolidated balance sheets.

 

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22.

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. The disclosures do not include net investment in the leases, investment in affiliates, pension obligations and insurance contracts and reinsurance contracts except for those classified as investment contracts.

March 31, 2019

 

     Millions of yen  
     Carrying
amount
     Estimated
fair value
     Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   ¥ 1,161,032      ¥ 1,161,032      ¥ 1,161,032      ¥ 0      ¥ 0  

Restricted cash

     122,548        122,548        122,548        0        0  

Installment loans (net of allowance for probable loan losses)

     3,231,708        3,228,750        0        199,590        3,029,160  

Equity securities *1

     425,593        425,593        68,631        295,769        61,193  

Trading debt securities

     1,564        1,564        0        1,564        0  

Available-for-sale debt securities

     1,264,244        1,264,244        24,831        1,138,966        100,447  

Held-to-maturity debt securities

     114,061        144,326        0        120,714        23,612  

Other Assets:

              

Time deposits

     4,754        4,754        0        4,754        0  

Derivative assets *2

     13,998        13,998        0        0        0  

Reinsurance recoverables (Investment contracts)

     29,989        30,400        0        0        30,400  

Liabilities:

              

Short-term debt

   ¥ 309,549      ¥ 309,549      ¥ 0      ¥ 309,549      ¥ 0  

Deposits

     1,782,198        1,782,753        0        1,782,753        0  

Policy liabilities and Policy account balances (Investment contracts)

     244,497        244,653        0        0        244,653  

Long-term debt

     4,186,222        4,199,341        0        1,158,287        3,041,054  

Other Liabilities:

              

Derivative liabilities *2

     24,461        24,461        0        0        0  

 

*1

The amount of ¥12,100 million of investment funds measured at net asset value per share is not included.

*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.”

 

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June 30, 2019

 

     Millions of yen  
     Carrying
amount
     Estimated
fair value
     Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   ¥ 1,025,879      ¥ 1,025,879      ¥ 1,025,879      ¥ 0      ¥ 0  

Restricted cash

     116,951        116,951        116,951        0        0  

Installment loans (net of allowance for probable loan losses)

     3,329,118        3,336,889        0        191,632        3,145,257  

Equity securities *1

     415,936        415,936        68,675        285,361        61,900  

Trading debt securities

     2,267        2,267        0        2,267        0  

Available-for-sale debt securities

     1,326,614        1,326,614        20,977        1,226,236        79,401  

Held-to-maturity debt securities

     113,834        146,350        0        122,037        24,313  

Other Assets:

              

Time deposits

     3,584        3,584        0        3,584        0  

Derivative assets *2

     22,696        22,696        0        0        0  

Reinsurance recoverables (Investment contracts)

     29,614        29,955        0        0        29,955  

Liabilities:

              

Short-term debt

   ¥ 336,716      ¥ 336,716      ¥ 0      ¥ 336,716      ¥ 0  

Deposits

     1,873,330        1,872,986        0        1,872,986        0  

Policy liabilities and Policy account balances (Investment contracts)

     240,702        240,876        0        0        240,876  

Long-term debt

     4,112,277        4,136,973        0        1,017,869        3,119,104  

Other Liabilities:

              

Derivative liabilities *2

     38,423        38,423        0        0        0  

 

*1

The amount of ¥12,251 million of investment funds measured at net asset value per share is not included.

*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.”

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.

 

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23.

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 ¥210 million and ¥64 million as of March 31, 2019 and June 30, 2019, respectively.

The minimum future rentals on non-cancelable operating leases as of March 31, 2019 are as follows:

 

Years ending March 31,

   Millions of yen  

2020

   ¥ 7,694  

2021

     6,647  

2022

     5,923  

2023

     5,434  

2024

     4,802  

Thereafter

     34,485  
  

 

 

 

Total

   ¥ 64,985  
  

 

 

 

The Company and certain subsidiaries lease lands under fixed-term land lease agreements, which are cancelable when certain conditions are met. The future maximum lease commitment under such arrangements at March 31, 2019 totals ¥57,388 million through March 31, 2024 and ¥64,222 million thereafter.

The Company and certain subsidiaries lease office space under operating lease agreements, which are primarily cancelable, and made rental payments totaling ¥17,564 million in fiscal 2019.

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 ¥1,228 million and ¥1,734 million for the three months ended June 30, 2018 and 2019, respectively. As of March 31, 2019 and June 30, 2019, the amounts due are as follows:

 

                   
     Millions of yen  
     March 31, 2019       June 30, 2019   

Within one year

   ¥ 4,323      ¥ 4,459  

More than one year

     3,185        3,067  
  

 

 

    

 

 

 

Total

   ¥ 7,508      ¥    7,526  
  

 

 

    

 

 

 

The Company and certain subsidiaries have commitments to fund estimated construction costs and so forth to complete ongoing real estate development projects and other commitments, totaling ¥121,647 million and ¥130,042 million as of March 31, 2019 and June 30, 2019, 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 ¥375,238 million and ¥383,681 million as of March 31, 2019 and June 30, 2019, respectively.

 

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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, 2019 and June 30, 2019:

 

     March 31, 2019      June 30, 2019  
     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

   ¥ 500,499      ¥ 6,707        2026      ¥ 487,561      ¥ 6,297        2026  

Transferred loans

     175,623        1,436        2059        179,472        1,384        2059  

Consumer loans

     343,119        42,400        2030        342,507        42,612        2030  

Housing loans

     40,395        4,701        2048        15,269        4,625        2048  

Other

     263        1        2024        296        1        2024  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,059,899      ¥ 55,245        —        ¥ 1,025,105      ¥ 54,919        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2019 and June 30, 2019, total notional amount of the loans subject to such guarantees are ¥1,089,000 million and ¥1,094,000 million, respectively, and book value of guarantee liabilities are ¥2,559 million and ¥2,469 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 have been no significant changes in the payment or performance risk of the guarantees for the three months ended June 30, 2019.

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 three months ended June 30, 2019.

As of March 31, 2019 and June 30, 2019, the total outstanding principal amount of loans transferred under the Delegated Underwriting and Servicing program, for which the subsidiary guarantees to absorb some of the losses, were ¥593,062 million and ¥586,281 million, respectively.

 

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Guarantee of consumer loans: A certain subsidiary guarantees consumer loans, typically card loans, issued by Japanese financial institutions. The subsidiary is obligated 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 three months ended June 30, 2019.

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 three months ended June 30, 2019.

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 10 “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, 2019 and June 30, 2019:

 

     Millions of yen  
     March 31, 2019      June 30, 2019  

Minimum lease payments, loans and investment in operating leases

   ¥ 109,210      ¥ 109,545  

Investment in securities

     160,408        162,515  

Property under facility operations

     31,264        30,845  

Other assets and other

     28,895        26,641  
  

 

 

    

 

 

 

Total

   ¥ 329,777      ¥ 329,546  
  

 

 

    

 

 

 

As of March 31, 2019 and June 30, 2019, debt liabilities were secured by shares of subsidiaries, which were eliminated through consolidation adjustment, of ¥33,280 million and ¥73,170 million, respectively, and debt liabilities of affiliates were secured by investment in affiliates of ¥49,125 million and ¥52,157 million, respectively. In addition, ¥46,029 million and ¥47,660 million, respectively, were pledged primarily by investment in securities for collateral deposits and deposit for real estate transaction as of March 31, 2019 and June 30, 2019.

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 any time if requested by the lenders. The Company and the subsidiaries did not receive any such requests from the lenders as of June 30, 2019.

 

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24. Segment Information

Financial information about the operating segments reported below is that which is available by segment and evaluated regularly by the chief operating decision maker 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

     :      Finance and fee business

Maintenance Leasing

     :      Automobile leasing and rentals, car-sharing; test and measurement instruments and IT-related equipment rentals and leasing

Real Estate

     :      Real estate development, rental and management; facility operation; real estate investment management

Investment and Operation

     :      Environment and energy, private equity and concession

Retail

     :      Life insurance, banking and card loan

Overseas Business

     :      Asset management, aircraft- and ship-related operations, private equity and finance

The Company made DAIKYO a wholly-owned subsidiary in fiscal 2019 to complement their respective real estate businesses and to jointly aim for medium- and long-term growth as a comprehensive real estate business. Accordingly, the Company changed the segment classification of DAIKYO from Investment and Operation segment to Real Estate segment. As a result of this change, segment amounts during the same period of the previous fiscal year have been retrospectively reclassified.

The Company and its subsidiaries adopted the new lease standard on April 1, 2019. The impact of the adoption has resulted in gross up of ROU assets of investment in operating leases and property under facility operations principally for operating leases, where it is the lessee, such as land leases and office and equipment leases in all of our segments except for retail segment. For further information, see Note 2 “Significant Accounting and Reporting Policies (ag) New accounting pronouncements.”

Financial information of the segments for the three months ended June 30, 2018 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing
     Real
Estate
     Investment
and
Operation
     Retail      Overseas
Business
     Total  

Segment revenues

   ¥      25,004      ¥   69,858      ¥ 113,377      ¥   175,269      ¥    102,815      ¥    118,479      ¥      604,802  

Segment profits

     7,820        9,696        20,494        13,630        21,785        40,006        113,431  

Financial information of the segments for the three months ended June 30, 2019 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing
     Real
Estate
     Investment
and
Operation
     Retail      Overseas
Business
     Total  

Segment revenues

   ¥      21,715      ¥   72,581      ¥   93,257      ¥   116,665      ¥    108,679      ¥    126,500      ¥      539,397  

Segment profits

     4,066        7,919        4,468        14,231        21,589        48,068        100,341  

Segment assets information as of March 31, 2019 and June 30, 2019 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing
     Real
Estate
     Investment
and
Operation
     Retail      Overseas
Business
     Total  

March 31, 2019

   ¥ 959,725      ¥ 873,775      ¥ 720,221      ¥   733,612      ¥ 3,571,437      ¥ 3,138,928      ¥ 9,997,698  

June 30, 2019

     1,000,150        880,680        813,695        750,321        3,735,056        3,094,468        10,274,370  

 

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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. 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 (pre-tax) attributable to ORIX Corporation Shareholders. Income taxes are not included in segment profits or losses because the management evaluates segments’ performance on a pre-tax basis. Additionally, 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 taxes, 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 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 net investment in the leases, installment loans, investment in operating leases, investment in securities, property under facility operations, investment in affiliates, inventories, advances for finance lease and operating lease (included in other assets), advances for property under facility operations (included in other assets), goodwill, intangible assets acquired in business combinations (included in other assets) and servicing assets (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.

 

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The reconciliation of segment totals to consolidated financial statement amounts is as follows:

Significant items to be reconciled are segment revenues, segment profits and segment assets. Other items do not have a significant difference between segment amounts and consolidated amounts.

 

     Millions of yen  
     Three months ended
June 30, 2018
    Three months ended
June 30, 2019
 

Segment revenues:

    

Total revenues for segments

   ¥ 604,802     ¥ 539,397  

Revenues related to corporate assets

     3,766       3,258  

Revenues from inter-segment transactions

     (4,651     (5,675
  

 

 

   

 

 

 

Total consolidated revenues

   ¥ 603,917     ¥ 536,980  
  

 

 

   

 

 

 

Segment profits:

    

Total profits for segments

   ¥ 113,431     ¥ 100,341  

Corporate profits (losses)

     (2,588     (2,237

Net income attributable to the noncontrolling interests and net income attributable to the redeemable noncontrolling interests

     111       756  
  

 

 

   

 

 

 

Total consolidated income before income taxes

   ¥ 110,954     ¥ 98,860  
  

 

 

   

 

 

 
     Millions of yen  
     March 31, 2019     June 30, 2019  

Segment assets:

    

Total assets for segments

   ¥ 9,997,698     ¥ 10,274,370  

Cash and cash equivalents, restricted cash

     1,283,580       1,142,830  

Allowance for doubtful receivables on finance leases and probable loan losses

     (58,011     (54,808

Trade notes, accounts and other receivable

     280,590       288,087  

Other corporate assets

     671,060       754,466  
  

 

 

   

 

 

 

Total consolidated assets

   ¥ 12,174,917     ¥ 12,404,945  
  

 

 

   

 

 

 

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.

 

     Millions of yen  
     Three months ended June 30, 2018  
     Japan      The Americas *1      Other *2      Total  

Total Revenues

   ¥ 485,406      ¥ 48,590      ¥ 69,921      ¥ 603,917  

Income before Income Taxes

     70,263        28,868        11,823        110,954  
     Millions of yen  
     Three months ended June 30, 2019  
     Japan      The Americas *1      Other *2      Total  

Total Revenues

   ¥ 410,693      ¥ 50,449      ¥ 75,838      ¥ 536,980  

Income before Income Taxes

     52,427        20,078        26,355        98,860  

 

*1

Mainly the United States

*2

Mainly Asia, Europe, Australasia and Middle East

 

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Table of Contents

Disaggregation of revenues for revenues from contracts with customers, by goods and services category and geographical location is as follows:

For the three months ended June 30, 2018

 

     Millions of yen  
     Three months ended June 30, 2018  
     Reportable segments      Corporate
revenue and
intersegment
transactions
    Total
revenues
 
     Corporate
Financial
Services
     Maintenance
Leasing
     Real Estate      Investment
and
Operation
     Retail      Overseas
Business
     Total  

Goods or services category

                         

Sales of goods

   ¥ 1,036      ¥ 1,068      ¥ 1,523      ¥ 131,248      ¥ 0      ¥ 1,067      ¥ 135,942      ¥ 485     ¥ 136,427  

Real estate sales

     0        0        17,922        0        0        106        18,028        0       18,028  

Asset management and servicing

     0        0        1,400        117        44        48,011        49,572        (14     49,558  

Automobile related services

     122        15,179        0        51        0        4,180        19,532        (94     19,438  

Facilities operation

     0        0        25,296        0        0        930        26,226        0       26,226  

Environment and energy services

     851        0        59        30,790        0        233        31,933        (200     31,733  

Real estate management and brokerage

     0        0        26,012        0        0        0        26,012        (462     25,550  

Real estate contract work

     0        0        13,312        0        0        0        13,312        0       13,312  

Other

     9,033        2,243        904        9,725        682        4,194        26,781        797       27,578  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues from contracts with customers

     11,042        18,490        86,428        171,931        726        58,721        347,338        512       347,850  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Geographical location

                         

Japan

     11,042        18,420        86,428        171,931        726        1,272        289,819        1,089       290,908  

The Americas

     0        0        0        0        0        29,260        29,260        0       29,260  

Other

     0        70        0        0        0        28,189        28,259        (577     27,682  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues from contracts with customers

     11,042        18,490        86,428        171,931        726        58,721        347,338        512       347,850  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other revenues *

     13,962        51,368        26,949        3,338        102,089        59,758        257,464        (1,397     256,067  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment revenues / Total revenues

   ¥ 25,004      ¥ 69,858      ¥ 113,377      ¥ 175,269      ¥ 102,815      ¥ 118,479      ¥ 604,802      ¥ (885   ¥ 603,917  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

For the three months ended June 30, 2019

 

     Millions of yen  
     Three months ended June 30, 2019  
     Reportable segments      Corporate
revenue and
intersegment
transactions
    Total
revenues
 
     Corporate
Financial
Services
     Maintenance
Leasing
     Real Estate      Investment
and
Operation
     Retail      Overseas
Business
     Total  

Goods or services category

                         

Sales of goods

   ¥ 1,369      ¥ 1,462      ¥ 832      ¥ 68,038      ¥ 0      ¥ 229      ¥ 71,930      ¥ 465     ¥ 72,395  

Real estate sales

     0        0        14,531        0        0        226        14,757        0       14,757  

Asset management and servicing

     0        0        2,067        83        38        43,585        45,773        (20     45,753  

Automobile related services

     126        15,041        0        69        0        4,398        19,634        (93     19,541  

Facilities operation

     0        0        20,415        0        0        129        20,544        (0     20,544  

Environment and energy services

     824        0        0        35,525        0        238        36,587        (180     36,407  

Real estate management and brokerage

     0        0        26,176        0        0        0        26,176        (528     25,648  

Real estate contract work

     0        0        14,092        0        0        0        14,092        (384     13,708  

Other

     7,260        2,407        1,069        10,500        979        4,023        26,238        446       26,684  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues from contracts with customers

     9,579        18,910        79,182        114,215        1,017        52,828        275,731        (294     275,437  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Geographical location

                         

Japan

     9,579        18,643        79,182        113,950        1,017        1,330        223,701        280       223,980  

The Americas

     0        0        0        0        0        24,831        24,831        0       24,831  

Other

     0        267        0        265        0        26,667        27,199        (574     26,626  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues from contracts with customers

     9,579        18,910        79,182        114,215        1,017        52,828        275,731        (294     275,437  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other revenues *

     12,136        53,671        14,075        2,450        107,662        73,672        263,666        (2,123     261,543  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment revenues / Total revenues

   ¥ 21,715      ¥ 72,581      ¥ 93,257      ¥ 116,665      ¥ 108,679      ¥ 126,500      ¥ 539,397      ¥ (2,417   ¥ 536,980  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

*

Other revenues include revenues that are not in the scope of revenue from contracts with customers, such as life insurance premiums and related investment income, operating leases, finance revenues that include interest income, and others.

 

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Table of Contents
25.

Subsequent Events

There are no material subsequent events.

 

– 103 –