Fair value measurements

12 Months Ended

Mar. 31, 2012

Fair value measurements

13. Fair value measurements

As discussed in Note 2, assets and liabilities subject to the accounting guidance for fair value measurements held by Sony are classified and accounted for as described below.

(1) Assets and liabilities that are measured at fair value on a recurring basis:

The following section describes the valuation techniques used by Sony to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.

Trading securities, available-for-sale securities and other investments

Where quoted prices are available in an active market, securities are classified in level 1 of the fair value hierarchy. Level 1 securities include exchange-traded equities. If quoted market prices are not available for the specific security or the market is inactive, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and mainly classified in level 2 of the hierarchy. Level 2 securities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, such as the majority of government bonds and corporate bonds. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the fair value hierarchy. Level 3 securities do not have actively traded quotes at the balance sheet date and require the use of unobservable inputs, such as indicative quotes from dealers and qualitative input from investment advisors, to value these securities. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow techniques, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation of assumptions that market participants would use in pricing the asset. Level 3 securities primarily include certain hybrid financial instruments and certain private equity investments not classified within levels 1 or 2.

Derivatives

Exchange-traded derivatives valued using quoted prices are classified within level 1 of the fair value hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the majority of Sony’s derivative positions are valued using internally developed models that use as their basis readily observable market parameters — i.e., parameters that are actively quoted and can be validated to external sources, including industry pricing services. Depending on the types and contractual terms of derivatives, fair value can be modeled using a series of techniques, such as the Black-Scholes option pricing model, which are consistently applied. Where derivative products have been established for some time, Sony uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit rating of the counterparty. Further, many of these models do not contain a high level of subjectivity as the techniques used in the models do not require significant judgment, and inputs to the model are readily observable from actively quoted markets. Such instruments are generally classified within level 2 of the fair value hierarchy.

In determining the fair value of Sony’s interest rate swap derivatives, Sony uses the present value of expected cash flows based on market observable interest rate yield curves commensurate with the term of each instrument. For foreign currency derivatives, Sony’s approach is to use forward contract and option valuation models employing market observable inputs, such as spot currency rates, time value and option volatilities. These derivatives are classified within level 2 since Sony primarily uses observable inputs in its valuation of its derivative assets and liabilities.

The fair value of Sony’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011 and 2012 are as follows:

	Yen in millions
	March 31, 2011
									Presentation in the consolidated balance sheets
	Level 1		Level 2		Level 3		Total		Marketable securities		Securities investments and other		Other current assets/ liabilities		Other noncurrent assets/ liabilities
Assets:
Trading securities		189,320		186,482		—		375,802		375,802		—		—		—
Available-for-sale securities
Debt securities
Japanese national government bonds		—		1,143,765		—		1,143,765		71,472		1,072,293		—		—
Japanese local government bonds		—		22,965		—		22,965		3,415		19,550		—		—
Japanese corporate bonds		—		329,057		4,581		333,638		96,745		236,893		—		—
Foreign corporate bonds		—		306,070		19,751		325,821		81,486		244,335		—		—
Other		—		7,933		299		8,232		—		8,232		—		—
Equity securities		141,408		81		—		141,489		—		141,489		—		—
Other investments*1		5,459		4,637		74,026		84,122		—		84,122		—		—
Derivative assets*2		—		15,110		—		15,110		—		—		15,101		9
Total assets		336,187		2,016,100		98,657		2,450,944		628,920		1,806,914		15,101		9
Liabilities:
Derivative liabilities*2		—		33,759		—		33,759		—		—		32,096		1,663
Total liabilities		—		33,759		—		33,759		—		—		32,096		1,663

	Yen in millions
	March 31, 2012
									Presentation in the consolidated balance sheets
	Level 1		Level 2		Level 3		Total		Marketable securities		Securities investments and other		Other current assets/ liabilities		Other noncurrent assets/ liabilities
Assets:
Trading securities		214,036		219,455		—		433,491		433,491		—		—		—
Available-for-sale securities
Debt securities
Japanese national government bonds		—		1,091,451		—		1,091,451		23,267		1,068,184		—		—
Japanese local government bonds		—		33,675		—		33,675		1,405		32,270		—		—
Japanese corporate bonds		—		293,637		1,513		295,150		123,434		171,716		—		—
Foreign corporate bonds		—		359,960		15,291		375,251		75,764		299,487		—		—
Other		—		23,616		309		23,925		—		23,925		—		—
Equity securities		111,517		680		—		112,197		—		112,197		—		—
Other investments*1		5,475		4,592		73,451		83,518		—		83,518		—		—
Derivative assets*2		—		18,518		—		18,518		—		—		18,513		5
Total assets		331,028		2,045,584		90,564		2,467,176		657,361		1,791,297		18,513		5
Liabilities:
Derivative liabilities*2		—		41,218		—		41,218		—		—		40,034		1,184
Total liabilities		—		41,218		—		41,218		—		—		40,034		1,184

*1 Other investments include certain hybrid financial instruments and certain private equity investments.

*2 Derivative assets and liabilities are recognized and disclosed on a gross basis.

There were no significant transfers between levels 1 and 2 for the fiscal year ended March 31, 2011. Transfers into level 1 were 2,169 million yen for the fiscal year ended March 31, 2012 as quoted prices for certain trading securities became available in an active market. Transfers out of level 1 were 7,221 million yen for the fiscal year ended March 31, 2012 as quoted prices for certain trading securities were not available in an active market.

The changes in fair value of level 3 assets and liabilities for the fiscal years ended March 31, 2011 and 2012 are as follows:

	Yen in millions
	Fiscal year ended March 31, 2011
	Assets
	Available-for-sale securities									Other investments
	Debt securities
	Japanese corporate bonds			Foreign corporate bonds			Other
Beginning balance		1,097			17,433			—			73,608
Total realized and unrealized gains (losses):
Included in earnings*1		(13	)		(224	)		—			(3,332	)
Included in other comprehensive income (loss)*2		(18	)		(841	)		(1	)		2,638
Purchases, issuances, sales and settlements		3,515			7,951			300			1,112
Transfers in and/or out of level 3		—			(4,568	)		—			—
Ending balance		4,581			19,751			299			74,026
Changes in unrealized gains (losses) relating to instruments still held at reporting date:
Included in earnings*1		(2	)		10			—			(3,779	)
	Yen in millions
	Fiscal year ended March 31, 2012
	Assets
	Available-for-sale securities									Other investments
	Debt securities
	Japanese corporate bonds			Foreign corporate bonds			Other
Beginning balance		4,581			19,751			299			74,026
Total realized and unrealized gains (losses):
Included in earnings*1		—			27			—			(1,214	)
Included in other comprehensive income (loss)*2		(2	)		271			10			505
Purchases		—			6,994			—			3,144
Settlements		(500	)		(5,961	)		—			(2,784	)
Transfers into level 3*3		2,116			956			—			—
Transfers out of level 3*4		(4,682	)		(6,747	)		—			—
Other		—			—			—			(226	)
Ending balance		1,513			15,291			309			73,451
Changes in unrealized gains (losses) relating to instruments still held at reporting date:
Included in earnings*1		—			(2	)		—			(1,215	)

*1 Earning effects are included in financial services revenue in the consolidated statements of income.

*2 Unrealized gains (losses) are included in unrealized gains (losses) on securities in the consolidated statements of changes in stockholders’ equity.

*3 Certain corporate bonds were transferred into level 3 because differences between fair value determined by indicative quotes from dealers and internally developed prices became significant and the observability of inputs decreased.

*4 Certain corporate bonds were transferred out of level 3 because quoted prices became available.

Level 3 assets include certain hybrid financial instruments for which the price fluctuates primarily based on the main stock index in Japan (Nikkei index), certain private equity investments, and certain domestic and foreign corporate bonds for which quoted prices are not available in a market and where there is less transparency around inputs. In determining the fair value of such assets, Sony uses third-party information such as indicative quotes from dealers without adjustment. For validating the fair values, Sony primarily uses internal models which include management judgment or estimation of assumptions that market participants would use in pricing the asset.

(2) Assets and liabilities that are measured at fair value on a nonrecurring basis:

Sony also has assets and liabilities that are required to be recorded at fair value on a nonrecurring basis when certain circumstances occur. During the fiscal years ended March 31, 2011 and 2012, such measurements of fair value related primarily to the impairments of long-lived assets, the remeasurement of the previously owned equity interests as part of the Game Show Network and Sony Ericsson acquisitions, and the S-LCD impairment.

Long-lived assets impairments

Long-lived assets are measured at the lesser of carrying value or fair value if such assets are held for sale or when there is a determination that the asset is impaired. During the fiscal years ended March 31, 2011 and 2012, Sony recorded impairment losses of 23,735 million yen and 59,583 million yen related to long-lived assets with carrying values prior to impairment of 27,513 million yen and 67,875 million yen; the fair value of the long-lived assets after impairments was 3,778 million yen and 8,292 million yen, respectively. Sony’s determination of fair value was based on the comparable market values or estimated net cash flows which considered prices and other relevant information generated by market transactions involving comparable assets or cash flow projections based upon the most recent business plan. These measurements are classified as level 3 because significant unobservable inputs, such as the conditions of the assets or projections of future cash flows, were considered in the fair value measurements.

Remeasurement of previously owned equity interests

During the fiscal years ended March 31, 2011 and 2012, Sony remeasured to fair value the previously owned equity interests as part of the Game Show Network and Sony Ericsson acquisitions. These measurements are classified as level 3 because significant unobservable inputs, such as projections of future cash flows and market comparables of similar transactions and companies were considered in the fair value measurements. Refer to Note 24.

S-LCD impairment

During the fiscal year ended March 31, 2012, Sony recorded a 60,019 million yen other-than-temporary impairment loss on its share of S-LCD, including the reclassification to net income of foreign currency translation adjustments and the impact of the exchange rate fluctuations between the initial impairment loss and closing of the sale to Samsung. The fair value of the shares of S-LCD after impairment was 71,662 million yen which approximated the cash consideration of 1.07 trillion Korean won subsequently received from Samsung upon its acquisition of Sony’s share of S-LCD. This measurement is classified as level 3 because significant unobservable inputs, primarily the estimate of the cash that would be received upon the sale to Samsung were considered in the fair value measurement. Refer to Note 5.

(3) Financial instruments:

The estimated fair values by fair value hierarchy level of certain financial instruments that are not reported at fair value are summarized as follows:

	Yen in millions
	March 31, 2011
	Estimated fair value								Carrying amount
	Level 1		Level 2		Level 3		Total		Total
Assets:
Housing loans in the banking business		—		714,985		—		714,985		656,047
Total assets		—		714,985		—		714,985		656,047
Liabilities:
Long-term debt including the current portion		—		928,820		—		928,820		921,849
Investment contracts included in policyholders’ account in the life insurance business		—		320,036		—		320,036		322,649
Total liabilities		—		1,248,856		—		1,248,856		1,244,498
	Yen in millions
	March 31, 2012
	Estimated fair value								Carrying amount
	Level 1		Level 2		Level 3		Total		Total
Assets:
Housing loans in the banking business		—		823,668		—		823,668		749,636
Total assets		—		823,668		—		823,668		749,636
Liabilities:
Long-term debt including the current portion		—		1,069,914		—		1,069,914		1,072,709
Investment contracts included in policyholders’ account in the life insurance business		—		338,589		—		338,589		340,600
Total liabilities		—		1,408,503		—		1,408,503		1,413,309

The summary excludes cash and cash equivalents, call loans, time deposits, notes and accounts receivable, trade, call money, short-term borrowings, notes and accounts payable, trade and deposits from customers in the banking business because the carrying values of these financial instruments approximated their fair values due to their short-term nature. The summary also excludes held-to-maturity securities disclosed in Note 7.

Cash and cash equivalents, call loans and call money are classified in level 1. Time deposits, short-term borrowings, deposits from customers in the banking business are classified in level 2. Held-to-maturity securities, included in marketable securities and securities investments and other in the consolidated balance sheets, primarily include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, such as the majority of government bonds and corporate bonds and are substantially all classified in level 2. The fair values of housing loans in the banking business, included in securities investments and other in the consolidated balance sheets, were estimated based on the discounted future cash flows using interest rates reflecting London InterBank Offered Rate base yield curve with a certain risk premium. The fair values of long-term debt including the current portion and investment contracts included in policyholders’ account in the life insurance business were estimated based on either the market value or the discounted future cash flows using Sony’s current incremental borrowing rates for similar liabilities.