14.

Derivative instruments and hedging activities

Sony has certain financial instruments including financial assets and liabilities acquired in the normal course of business. Such financial instruments are exposed to market risk arising from the changes in foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate swap agreements (including interest rate and currency swap agreements). Certain other derivative financial instruments are entered into in the Financial Services segment for asset-liability management (“ALM”) purposes. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. These derivatives generally mature or expire within six months after the balance sheet date. Other than derivatives utilized in the Financial Services segment for ALM, Sony does not use derivative financial instruments for trading or speculative purposes. These derivative transactions utilized for ALM in the Financial Services segment are executed within certain limits in accordance with an internal risk management policy.

Derivative financial instruments held by Sony are classified and accounted for as described below.

Fair value hedges

Both the derivatives designated as fair value hedges and the hedged items are reflected at fair value in the consolidated balance sheets. Changes in the fair value of the derivatives designated as fair value hedges, as well as offsetting changes in the carrying value of the underlying hedged items, are recognized in income. For the fiscal years ended March 31, 2017, 2018 and 2019, these fair value hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.

Cash flow hedges

Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income (“OCI”) and reclassified into earnings when the hedged transaction affects earnings. For the fiscal years ended March 31, 2017, 2018 and 2019, these cash flow hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness for cash flow hedges.

Derivatives not designated as hedges

Changes in the fair value of derivatives not designated as hedges are recognized in income.

A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:

Foreign exchange forward contracts and foreign currency option contracts

Foreign exchange forward contracts and purchased and written foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated or anticipated by Sony’s transactions and accounts receivable and payable denominated in foreign currencies. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.

Sony also entered into foreign exchange forward contracts and range forward contracts which effectively fixed the cash flows from certain forecasted purchase and sale transactions denominated in foreign currencies. Accordingly, these derivatives have been designated as cash flow hedges.

Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.

Foreign exchange forward contracts, foreign currency option contracts and currency swap agreements held by certain subsidiaries in the Financial Services segment are marked-to-market with changes in value recognized in financial services revenue.

Interest rate swap agreements (including interest rate and currency swap agreements)

Interest rate swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments and available-for-sale debt securities resulting from adverse fluctuations in interest rates, foreign currency exchange rates and changes in fair values.

Interest rate swap agreements entered into in the Financial Services segment are used for reducing the risk arising from the changes in the fair value of fixed rate available-for-sale debt securities. These derivatives are considered to be a hedge against changes in the fair value of available-for-sale debt securities in the Financial Services segment. Accordingly, these derivatives have been designated as fair value hedges.

Certain subsidiaries in the Financial Services segment have interest rate swap agreements as part of their ALM, which are marked-to-market with changes in value recognized in financial service revenues.

Any other interest rate swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate debt, are marked-to-market with changes in value recognized in other income and expenses.

Other agreements

Certain subsidiaries in the Financial Services segment have equity future contracts, equity swap agreements, interest rate swaption agreements, other currency contracts and hybrid financial instruments as part of their ALM, which are marked-to-market with changes in value recognized in financial services revenue. The hybrid financial instruments, disclosed in Note 7 as debt securities, contained embedded derivatives that are not required to be bifurcated because the entire instruments are carried at fair value.

The estimated fair values of Sony’s outstanding derivative instruments are summarized as follows:


Derivatives designated as hedging instruments	Yen in millions
	Balance sheet location	Fair value				Balance sheet location	Fair value
		March 31					March 31
	Asset derivatives	2018		2019		Liability derivatives	2018		2019
Interest rate contracts	Prepaid expenses and other current assets		12		10	Current liabilities: Other		160		141
Interest rate contracts	Other assets: Other		286		101	Liabilities: Other		10,281		8,274
Foreign exchange contracts	Prepaid expenses and other current assets		48		131	Current liabilities: Other		1,535		42

			346		242			11,976		8,457


Derivatives not designated as hedging instruments	Yen in millions
	Balance sheet location	Fair value				Balance sheet location	Fair value
		March 31					March 31
	Asset derivatives	2018		2019		Liability derivatives	2018		2019
Interest rate contracts	Prepaid expenses and other current assets		12		39	Current liabilities: Other		299		344
Interest rate contracts	Other assets: Other		1,871		882	Liabilities: Other		3,612		3,637
Foreign exchange contracts	Prepaid expenses and other current assets		34,737		8,807	Current liabilities: Other		17,149		11,549
Foreign exchange contracts	Other assets: Other		366		72	Liabilities: Other		1,281		1,059
Equity contracts	Prepaid expenses and other current assets		2,194		444	Current liabilities: Other		1,407		7,776

			39,180		10,244			23,748		24,365

Total derivatives			39,526		10,486			35,724		32,822

Presented below are the effects of derivative instruments on the consolidated statements of income and the consolidated statements of comprehensive income for the fiscal years ended March 31, 2017, 2018 and 2019.


Derivatives under fair value hedging relationships	Yen in millions
	Location of gains or (losses) recognized in income on derivative instruments	Amounts of gains or (losses) recognized in income on derivative instruments
		Fiscal year ended March 31
		2017			2018			2019
Interest rate contracts	Financial services revenue		1,967			(52	)		(1,835	)
Foreign exchange contracts	Foreign exchange loss, net		(31	)		—			—

Total			1,936			(52	)		(1,835	)


	Yen in millions
Derivatives under cash flow hedging relationships	Affected line item in consolidated statements of income	Fiscal year ended March 31
Derivatives under cash flow hedging relationships	Affected line item in consolidated statements of income	2017			2018			2019
		Amounts recognized in unrealized gains (losses) on derivative instruments in OCI (before tax)
Foreign exchange contracts	—		6,715			(2,295	)		2,315

Total			6,715			(2,295	)		2,315

		Amounts reclassified from unrealized gains (losses) on derivative instruments in accumulated OCI (effective portion) (before tax)
Foreign exchange contracts	Cost of sales		(5,583	)		1,111			(1,093	)

Total			(5,583	)		1,111			(1,093	)


Derivatives not designated as hedging instruments	Yen in millions
	Location of gains or (losses) recognized in income on derivative instruments	Amounts of gains or (losses) recognized in income on derivative instruments
		Fiscal year ended March 31
		2017			2018			2019
Interest rate contracts	Financial services revenue		(935	)		(1,544	)		(3,192	)
Foreign exchange contracts	Financial services revenue		(5,365	)		2,013			(8,198	)
Foreign exchange contracts	Foreign exchange loss, net		12,339			21,370			(7,437	)
Equity contracts	Financial services revenue		(18,597	)		(11,665	)		(7,649	)

Total			(12,558	)		10,174			(26,476	)

The following table summarizes additional information, including notional amounts, for each type of derivative:


	Yen in millions
	March 31, 2018					March 31, 2019
	Notional amount		Fair value			Notional amount		Fair value
Foreign exchange contracts:
Foreign exchange forward contracts		1,105,393		7,071			701,880		(304	)
Currency option contracts purchased		206		1			53,846		179
Currency option contracts written		156		(1	)		58,825		(35	)
Currency swap agreements		1,230,254		4,613			959,777		(5,564	)
Other currency contracts		84,623		3,502			68,513		2,084
Interest rate contracts:
Interest rate swap agreements		398,291		(12,171	)		339,934		(11,346	)
Interest rate swaption agreements		—		—			5,300		(18	)
Equity contracts:
Equity future contracts		106,876		787			58,725		308
Equity swap agreements		—		—			63,107		(7,640	)

All derivatives are recognized as either assets or liabilities in the consolidated balance sheets on a gross basis, but certain subsidiaries have entered into master netting agreements or other similar agreements, which are mainly International Swaps and Derivatives Association (ISDA) Master Agreements. An ISDA Master Agreement is an agreement between two counterparties that may have multiple derivative contracts with each other, and such ISDA Master Agreement may provide for the net settlement of all or a specified group of these derivative contracts, through a single payment, in a single currency, in the event of a default on or affecting any one derivative contract, or a termination event affecting all or a specified group of derivative contracts. Presented below are the effects of offsetting derivative assets, derivative liabilities, financial assets and financial liabilities as of March 31, 2018 and 2019.


	Yen in millions
	As of March 31, 2018
	Gross amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet that are subject to master netting agreements
	Gross amounts presented in the consolidated balance sheet		Financial instruments		Cash collateral		Net amounts
Derivative assets subject to master netting agreements		15,404		7,724		449		7,231
Derivative assets not subject to master netting agreements		24,122						24,122

Total assets		39,526		7,724		449		31,353

Derivative liabilities subject to master netting agreements		34,455		8,326		14,334		11,795
Derivative liabilities not subject to master netting agreements		1,269						1,269
Repurchase, securities lending and similar arrangements		335,586		334,246		—		1,340

Total liabilities		371,310		342,572		14,334		14,404


	Yen in millions
	As of March 31, 2019
	Gross amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet that are subject to master netting agreements
	Gross amounts presented in the consolidated balance sheet		Financial instruments		Cash collateral		Net amounts
Derivative assets subject to master netting agreements		6,855		3,442		136		3,277
Derivative assets not subject to master netting agreements		3,631						3,631

Total assets		10,486		3,442		136		6,908

Derivative liabilities subject to master netting agreements		25,872		3,970		20,191		1,711
Derivative liabilities not subject to master netting agreements		6,950						6,950
Repurchase, securities lending and similar arrangements		432,820		432,820		—		—

Total liabilities		465,642		436,790		20,191		8,661