FORM 6-K
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

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

THE SECURITIES EXCHANGE Act of 1934

For the month of February 2016.

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   x        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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Table of Document(s) Submitted

 

1.

 

This is an English translation of ORIX Corporation’s quarterly financial report (shihanki houkokusho) as filed with the Kanto Financial Bureau in Japan on February 12, 2016, which includes unaudited consolidated financial information prepared in accordance with generally accepted accounting principles in the United States for the three and nine months ended December 31, 2014 and 2015.

  


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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: February 12, 2016

 

By

 

/s/ Kazuo Kojima

   

Kazuo Kojima

   

Director

   

Deputy President and Chief Financial Officer

   

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 February 12, 2016, which includes unaudited consolidated financial information prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for the three and nine months ended December 31, 2014 and 2015.

 

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.

This document contains non-GAAP financial measures, including adjusted long-term debt, adjusted total assets and adjusted ORIX Corporation shareholders’ equity, as well as other measures and ratios calculated on the basis thereof. These non-GAAP financial measures should not be considered in isolation or as a substitute for the most directly comparable financial measures included in our consolidated financial statements presented in accordance with U.S. GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures are included in this document.

The Company believes that it will be considered a “passive foreign investment company” for U.S. Federal income tax purposes in the year to which these consolidated financial results relate and for the foreseeable future by reason of the composition of its assets and the nature of its income. A U.S. holder of the shares or ADSs of the Company is therefore 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.

 

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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)
 
     As of and for
the nine
months ended
December 31,
2014
    As of and for
the nine
months ended
December 31,
2015
    As of and for
the fiscal
year ended

March 31,
2015
 

Total revenues

   ¥ 1,572,040      ¥ 1,797,080      ¥ 2,174,283   

Income before income taxes and discontinued operations

     278,277        334,672        344,017   

Net income attributable to ORIX Corporation shareholders

     185,405        215,364        234,948   

Comprehensive Income attributable to ORIX Corporation shareholders

     219,552        194,568        265,187   

ORIX Corporation shareholders’ equity

     2,105,640        2,273,448        2,152,198   

Total assets

     11,380,467        11,064,619        11,443,628   

Earnings per share for net income attributable to ORIX Corporation shareholders

      

Basic (yen)

     141.61        164.52        179.47   

Diluted (yen)

     141.40        164.35        179.21   

ORIX Corporation shareholders’ equity ratio (%)

     18.5        20.5        18.8   

Cash flows from operating activities

     167,095        357,265        257,611   

Cash flows from investing activities

     (242,316     (302,503     (467,801

Cash flows from financing activities

     17,067        (70,272     213,432   

Cash and cash equivalents at end of period

     771,158        809,600        827,518   
     Millions of yen
(except for per share amounts)
       
     Three months
ended
December 31,
2014
    Three months
ended
December 31,
2015
       

Total revenues

   ¥ 616,405      ¥ 626,886     

Net income attributable to ORIX Corporation shareholders

     44,106        54,066     

Earnings per share for net income attributable to ORIX Corporation shareholders

      

Basic (yen)

     33.71        41.30     

 

Notes:

    1.     

Prior-year amounts have been adjusted retrospectively to eliminate a lag period that previously existed between DAIKYO INCORPORATED (hereinafter, “DAIKYO”) and the Company in fiscal 2015.

    2.     

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

(2) Overview of Activities

During the nine months ended December 31, 2015, 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, 2015 and the other information in that annual report, including, but not limited to, the Company’s consolidated financial statements and related notes and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” The Company’s business activities, financial condition and results of operations and the trading prices of the Company’s securities could be adversely affected by any of those factors or other factors.

3. Material Contracts

Not applicable.

 

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4. Analysis of Financial Results and Condition

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

(1) Qualitative Information Regarding Consolidated Financial Results

Economic Environment

The world economy has been suppressed with low level of growth due primarily to falling primary commodity prices such as price of crude oil and fluctuations in financial markets. Moderate economic growth is expected among developed countries. Meanwhile, economic growth in emerging and developing countries is expected to be weak and economic unevenness among such countries continues to widen. In addition, political and geopolitical tensions in certain regions need to be monitored carefully.

The Japanese economy, despite a positive corporate earning environment, remains at a standstill and its economic outlook looks increasingly unclear due primarily to economic slowdown in emerging countries.

Financial Highlights

Financial Results for the Nine Months Ended December 31, 2015

Total revenues

  ¥1,797,080 million (Up 14% year on year)

Total expenses

  ¥1,544,464 million (Up 13% year on year)

Income before income taxes and discontinued operations

     ¥334,672 million (Up 20% year on year)

Net income attributable to ORIX Corporation Shareholders

     ¥215,364 million (Up 16% year on year)

Earnings per share for net income attributable to ORIX Corporation Shareholders

 

(Basic)

      ¥164.52 (Up 16% year on year)

(Diluted)

      ¥164.35 (Up 16% year on year)

ROE (Annualized) *1

            13.0% (12.3% during the same period in the previous fiscal year)

ROA (Annualized) *2

            2.55% (2.42% 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 nine months ended December 31, 2015 increased 14% to ¥1,797,080 million compared to ¥1,572,040 million during the same period of the previous fiscal year. Finance revenues increased due primarily to an increase in the average balance of installment loans. In addition, sales of goods and real estate increased due primarily to revenues generated by subsidiaries acquired during the previous fiscal year. Meanwhile, life insurance premiums and related investment income decreased compared to the same period of the previous fiscal year due to a significant decrease in investment income from variable annuity and variable life insurance contracts held by Hartford Life Insurance K.K. (hereinafter, “HLIKK”), in line with a significant market improvement during the previous fiscal year. HLIKK was merged into ORIX Life Insurance Corporation on July 1, 2015

Total expenses increased 13% to ¥1,544,464 million compared to ¥1,364,148 million during the same period of the previous fiscal year. Costs of goods and real estate sold increased in line with the aforementioned revenue increases. Selling, general and administrative expenses also increased due to an increase in the number of consolidated subsidiaries. On the other hand, life insurance costs decreased due to a reversal of liability reserve in line with the aforementioned decrease in investment income from variable annuity and variable life insurance contracts.

Equity in net income of affiliates increased due primarily to an increase in the income from real estate joint ventures in Japan. Gains on sales of subsidiaries and affiliates and liquidation losses, net increased compared to the same period of the previous fiscal year due primarily to the recognition of a gain on partial divestment of shares of Houlihan Lokey, Inc. (hereinafter, “HL”), in connection with its initial public offering in the United States, becoming an equity method affiliate.

 

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As a result of the foregoing, income before income taxes and discontinued operations for the nine months ended December 31, 2015 increased 20% to ¥334,672 million compared to ¥278,277 million during the same period of the previous fiscal year, and net income attributable to ORIX Corporation shareholders increased 16% to ¥215,364 million compared to ¥185,405 million during the same period of the previous fiscal year.

Segment Information

Total revenues and profits by segment for the nine months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
     Change
(revenues)
    Change
(profits)
 
     Segment
Revenues
    Segment
Profits
     Segment
Revenues
    Segment
Profits
    

 

Amount

 

    Percent
(%)
   

 

Amount

 

    Percent
(%)
 

Corporate Financial Services

   ¥ 61,069      ¥ 18,661       ¥ 81,475      ¥ 33,841       ¥ 20,406        33      ¥ 15,180        81   

Maintenance Leasing

     198,246        31,578         204,743        33,691         6,497        3        2,113        7   

Real Estate

     147,208        22,481         154,691        44,374         7,483        5        21,893        97   

Investment and Operation

     429,687        23,007         751,084        46,672         321,397        75        23,665        103   

Retail

     335,252        96,570         208,751        48,835         (126,501     (38     (47,735     (49

Overseas Business

     406,545        84,786         399,856        116,001         (6,689     (2     31,215        37   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1,578,007        277,083         1,800,600        323,414         222,593        14        46,331        17   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Difference between Segment Total and Consolidated Amounts

     (5,967     1,194         (3,520     11,258         2,447        —          10,064        843   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Consolidated Amounts

   ¥ 1,572,040      ¥ 278,277       ¥ 1,797,080      ¥ 334,672       ¥ 225,040        14      ¥ 56,395        20   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets by segment as of March 31, 2015 and December 31, 2015 are as follows:

 

     Millions of yen  
     March 31, 2015      December 31, 2015      Change  
     Segment
Assets
     Composition
ratio (%)
     Segment
Assets
     Composition
ratio (%)
    

 

Amount

 

    Percent
(%)
 

Corporate Financial Services

   ¥ 1,132,468         9.9       ¥ 1,058,719         9.6       ¥ (73,749     (7

Maintenance Leasing

     662,851         5.8         717,811         6.5         54,960        8   

Real Estate

     835,386         7.3         744,869         6.7         (90,517     (11

Investment and Operation

     660,014         5.8         628,939         5.7         (31,075     (5

Retail

     3,700,635         32.3         3,511,492         31.7         (189,143     (5

Overseas Business

     2,178,895         19.0         2,279,558         20.6         100,663        5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     9,170,249         80.1         8,941,388         80.8         (228,861     (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Difference between Segment Total and Consolidated Amounts

     2,273,379         19.9         2,123,231         19.2         (150,148     (7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Consolidated Amounts

   ¥ 11,443,628         100.0       ¥ 11,064,619         100.0       ¥ (379,009     (3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total segment profits for the nine month ended December 31, 2015 increased 17% to ¥323,414 million compared to ¥277,083 million during the same period of the previous fiscal year. While profits from Retail segment decreased compared to the same period of the previous fiscal year, Overseas Business, Investment and Operation, Real Estate, and Corporate Financial Services segments contributed the most to the increase in total segment profits, and Maintenance Leasing segment continued to show strong performance.

In addition, during the three-month period ended March 31, 2015, the closing date of the accounting period of DAIKYO, which is included in Investment and Operation segment, changed in order to eliminate a lag period that previously existed between DAIKYO and the Company. Based on this change, the financial statements for the same period of the previous fiscal year have been adjusted retrospectively.

 

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Segment information for the nine months ended December 31, 2015 is as follows:

Corporate Financial Services Segment: Lending, leasing and fee business

The Japanese economy, despite a positive corporate earning environment, remains at a standstill and its economic outlook is becoming increasingly unclear due primarily to economic slowdown in emerging countries. Loans extended by financial institutions continue to increase and interest rates on loans remain at low levels.

Segment revenues increased 33% to ¥81,475 million compared to ¥61,069 million during the same period of the previous fiscal year due to increases in sales of goods and services income resulting primarily from revenue generated by Yayoi Co., Ltd. (hereinafter, “Yayoi”), which we acquired on December 22, 2014, and robust fee business generated from domestic small and medium-sized enterprise customers. In addition, recognition of gains on sales of investment securities increased, offsetting a decrease in finance revenues in line with the decreased average investment in direct financing leases and installment loan balances.

While segment expenses increased compared to the same period of the previous fiscal year due primarily to an increase in selling, general and administrative expenses following the consolidation of Yayoi, segment profits increased 81% to ¥33,841 million compared to ¥18,661 million during the same period of the previous fiscal year.

Segment assets decreased 7% to ¥1,058,719 million compared to the end of the previous fiscal year due primarily to decreases in investment in direct financing leases, installment loans, and investment in securities.

 

     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
    Change  
         Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Segment Revenues:

        

Finance revenues

   ¥ 26,991      ¥ 26,070      ¥ (921     (3

Operating leases

     18,443        19,168        725        4   

Services income

     13,575        25,832        12,257        90   

Gains on investment securities and dividends, and other

     2,060        10,405        8,345        405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     61,069        81,475        20,406        33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Expenses:

        

Interest expense

     6,456        5,515        (941     (15

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

     603        (1,208     (1,811     —     

Other than the above

     35,744        43,870        8,126        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     42,803        48,177        5,374        13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Income

     18,266        33,298        15,032        82   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     395        543        148        37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 18,661      ¥ 33,841      ¥    15,180        81   
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of March 31, 2015     As of December 31, 2015     Change  
         Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 461,704      ¥ 427,451      ¥ (34,253     (7

Installment loans

     461,277        422,750        (38,527     (8

Investment in operating leases

     30,329        29,638        (691     (2

Investment in securities

     45,415        39,038        (6,377     (14

Property under facility operations

     5,930        11,448        5,518        93   

Inventories

     55        66        11        20   

Advances for investment in operating leases

     202        1,652        1,450                   718   

Investment in affiliates

     20,875        22,170                   1,295        6   

Advances for property under facility operations

     772        80        (692     (90

Goodwill and other intangible assets acquired in business combinations

     105,909        104,426        (1,483     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥            1,132,468      ¥            1,058,719      ¥ (73,749     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

In line with an increase in capital investment resulted from improved corporate earnings, revenue has been growing by providing high value added services targeting demands in capital investment and cost reduction. Japanese automobile leasing industry has been experiencing the same level of the number of new auto leases in the nine months ended December 31, 2015 as the same period of the previous fiscal year.

Segment revenues increased 3% to ¥204,743 million from ¥198,246 million during the same period of the previous fiscal year due primarily to increases in operating leases revenues and finance revenues resulting from the steady expansion of assets in the automobile business and in services income derived from value-added services such as maintenance.

Despite an increase in segment expenses due primarily to increases in the costs of operating leases, services expense, and selling, general and administrative expenses, which were in line with revenue growth, segment profits increased 7% to ¥33,691 million compared to ¥31,578 million during the same period of the previous fiscal year.

Segment assets increased 8% to ¥717,811 million compared to the end of the previous fiscal year due primarily to a steady increase in leasing assets mainly in the automobile business.

 

     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
    Change  
         Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Segment Revenues:

        

Finance revenues

   ¥ 7,951      ¥ 8,938      ¥ 987        12   

Operating leases

     140,393        141,987        1,594        1   

Services income

     46,966        50,768        3,802        8   

Sales of goods and real estate, and other

     2,936        3,050        114        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     198,246        204,743        6,497        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Expenses:

        

Interest expense

     2,813        2,646        (167     (6

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

     151        (9     (160     —     

Other than the above

     163,676        168,446        4,770        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     166,640        171,083                   4,443        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Income

     31,606        33,660        2,054        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (28     31        59        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 31,578      ¥ 33,691      ¥      2,113        7   
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of March 31, 2015     As of December 31, 2015     Change  
         Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 184,907      ¥ 229,519      ¥ 44,612        24   

Investment in operating leases

     473,035        483,198        10,163        2   

Investment in securities

     1,130        1,221        91        8   

Property under facility operations

     576        664        88                     15   

Inventories

     463        414        (49     (11

Advances for investment in operating leases

     241        261        20        8   

Investment in affiliates

     2,074        2,109        35        2   

Goodwill and other intangible assets acquired in business combinations

     425        425        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥               662,851      ¥               717,811      ¥ 54,960        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

Office rents and vacancy rates in the Japanese office building market continue to show signs of improvement led by the Tokyo area. J-REITs and foreign investors remain active in property acquisitions. Furthermore, due to an increase in the number of tourists from abroad, we are also seeing increases in the occupancy rates and average daily rates of hotels and Japanese inns.

Segment revenues increased 5% to ¥154,691 million compared to ¥147,208 million during the same period of the previous fiscal year due primarily to an increase in services income from the facility operation business and an increase in gains on sale of real estate in the residential development business, despite a decrease in rental revenues, which are included in operating leases revenues, in line with a decrease in the balance of real estate assets.

Segment expenses decreased compared to the same period of the previous fiscal year due primarily to a decrease in write-downs of long-lived assets and to decreases in interest expense and costs of operating leases in line with decreased assets.

As a result of the foregoing and an increase in equity in net income of affiliates from real estate joint ventures, segment profits increased 97% to ¥44,374 million compared to ¥22,481 million during the same period of the previous fiscal year.

Segment assets decreased 11% to ¥744,869 million compared to the end of the previous fiscal year due primarily to a decrease in investment in operating leases, which resulted from sales of rental properties, and a decrease in installment loans and investment in securities.

 

     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
     Change  
           Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Segment Revenues:

          

Finance revenues

   ¥ 3,171       ¥ 6,113       ¥ 2,942        93   

Operating leases

     55,851         50,124         (5,727     (10

Services income

     81,563         86,733         5,170        6   

Sales of goods and real estate, and other

     6,623         11,721         5,098        77   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     147,208         154,691         7,483        5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Expenses:

          

Interest expense

     5,479         3,674         (1,805     (33

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

     14,687         4,298         (10,389     (71

Other than the above

     107,844         107,463         (381     (0
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     128,010         115,435         (12,575     (10
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Operating Income

     19,198         39,256         20,058                   104   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     3,283         5,118         1,835        56   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 22,481       ¥ 44,374       ¥    21,893        97   
  

 

 

    

 

 

    

 

 

   

 

 

 
     As of March 31, 2015      As of December 31, 2015      Change  
           Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 22,277       ¥ 21,139       ¥ (1,138     (5

Installment loans

     22,811         5,068         (17,743     (78

Investment in operating leases

     423,825         375,461         (48,364     (11

Investment in securities

     21,718         9,439         (12,279     (57

Property under facility operations

     172,207         181,328         9,121        5   

Inventories

     12,484         3,862         (8,622     (69

Advances for investment in operating leases

     44,666         36,457         (8,209     (18

Investment in affiliates

     91,275         92,506                    1,231        1   

Advances for property under facility operations

     12,055         7,676         (4,379     (36

Goodwill and other intangible assets acquired in business combinations

     12,068         11,933         (135     (1
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥               835,386       ¥               744,869       ¥ (90,517     (11
  

 

 

    

 

 

    

 

 

   

 

 

 

 

– 7 –


Table of Contents

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

In the Japanese environment and energy-related business, even though the government is reassessing its renewable energy purchase program, the significance of renewable energy in the mid-to-long term is on the rise with investment targets expanding beyond solar power generation projects to include wind and geothermal power generation projects. In addition, as illustrated by the increase in the number of domestic initial public offerings, the capital markets environment continues to be favorable.

Segment revenues increased 75% to ¥751,084 million compared to ¥429,687 million during the same period of the previous fiscal year due primarily to significant increase in sales of goods and real estate contributed by subsidiaries acquired during the previous fiscal year, an increase in the number of condominiums sold by DAIKYO and an increase in the amount of services income from environment and energy-related business.

Segment expenses also increased compared to the same period of the previous fiscal year due to an increase in expenses in connection with acquired subsidiaries, including DAIKYO, and the environment and energy-related business, each of which increased in line with segment revenues expansion.

As a result of the foregoing and the recognition of gains on sales of shares of subsidiaries, segment profits increased 103% to ¥46,672 million compared to ¥23,007 million during the same period of the previous fiscal year.

Segment assets decreased 5% to ¥628,939 million compared to the end of the previous fiscal year due primarily to decreases in installment loans, investment in securities, other intangible assets and inventories, despite an increase in property under facility operations in the environment and energy-related business.

 

     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
    Change  
        Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Segment Revenues:

         

Finance revenues

   ¥ 11,587       ¥ 10,396      ¥ (1,191     (10

Gains on investment securities and dividends

     6,864         10,115        3,251        47   

Sales of goods and real estate

     220,728         527,625        306,897        139   

Services income

     183,583         195,800        12,217        7   

Operating leases, and other

     6,925         7,148        223        3   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Segment Revenues

     429,687         751,084        321,397        75   
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment Expenses:

         

Interest expense

     2,660         2,598        (62     (2

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

     765         (346     (1,111     —     

Other than the above

     407,686         714,048        306,362        75   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Segment Expenses

     411,111         716,300        305,189        74   
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment Operating Income

     18,576         34,784        16,208        87   
  

 

 

    

 

 

   

 

 

   

 

 

 

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

     4,431         11,888        7,457        168   
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment Profits

   ¥ 23,007       ¥ 46,672      ¥    23,665                   103   
  

 

 

    

 

 

   

 

 

   

 

 

 
     As of March 31, 2015      As of December 31, 2015     Change  
        Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 15,092       ¥ 19,131      ¥ 4,039        27   

Installment loans

     93,196         79,177        (14,019     (15

Investment in operating leases

     23,388         23,616        228        1   

Investment in securities

     112,896         76,724        (36,172     (32

Property under facility operations

     90,895         116,772        25,877        28   

Inventories

     116,549         103,888        (12,661     (11

Advances for investment in operating leases

     16         4        (12     (75

Investment in affiliates

     51,108         59,302                   8,194        16   

Advances for property under facility operations

     30,861         34,008        3,147        10   

Goodwill and other intangible assets acquired in business combinations

     126,013         116,317        (9,696     (8
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Segment Assets

   ¥               660,014       ¥               628,939      ¥ (31,075     (5
  

 

 

    

 

 

   

 

 

   

 

 

 

 

– 8 –


Table of Contents

Retail Segment: Life insurance, banking and card loan business

Although the life insurance business is affected by macroeconomic factors such as domestic population decline, we are seeing increasing numbers of companies developing new products in response to the rising demand for medical insurance. In the consumer finance sector, banks and other lenders are increasing their assets to further secure new revenue streams and the competition in the lending business continues to intensify.

Segment revenues decreased 38% to ¥208,751 million compared to ¥335,252 million during the same period of the previous fiscal year due to recognition of a gain on sale of shares of Monex Group Inc. in the three months ended June 30, 2014, and a significant decrease in investment income from variable annuity and variable life insurance contracts held by HLIKK due to a significant market improvement during the previous fiscal year, offsetting an increase in finance revenues in the banking business.

Segment expenses decreased compared to the same period of the previous fiscal year due primarily to a reversal of liability reserve for the aforementioned decrease in investment income of HLIKK.

As a result of the foregoing and the recognition of a bargain purchase gain resulted from the acquisition of HLIKK in the three months ended September 30, 2014, segment profits decreased 49% to ¥48,835 million compared to ¥96,570 million during the same period of the previous fiscal year.

Segment assets decreased 5% to ¥3,511,492 million compared to the end of the previous fiscal year due to a substantial decrease in investment in securities held by HLIKK, offsetting an increase in installment loans in the banking business.

 

     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
     Change  
           Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Segment Revenues:

          

Finance revenues

   ¥ 39,589       ¥ 41,184       ¥             1,595        4   

Life insurance premiums and related investment income

     276,231         161,565         (114,666     (42

Services income and other

     19,432         6,002         (13,430     (69
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     335,252         208,751         (126,501     (38
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Expenses:

          

Interest expense

     4,351         3,526         (825     (19

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

     2,819         5,714         2,895                   103   

Other than the above

     268,056         151,473         (116,583     (43
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     275,226         160,713         (114,513     (42
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Operating Income

     60,026         48,038         (11,988     (20
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     36,544         797         (35,747     (98
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 96,570       ¥ 48,835       ¥ (47,735     (49
  

 

 

    

 

 

    

 

 

   

 

 

 
     As of March 31, 2015      As of December 31, 2015      Change  
           Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 2,740       ¥ 1,506       ¥ (1,234     (45

Installment loans

     1,376,710         1,454,319         77,609        6   

Investment in operating leases

     50,587         49,462         (1,125     (2

Investment in securities

     2,246,912         1,986,764         (260,148     (12

Investment in affiliates

     3,785         766         (3,019     (80

Goodwill and other intangible assets acquired in business combinations

     19,901         18,675         (1,226     (6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥            3,700,635       ¥            3,511,492       ¥ (189,143     (5
  

 

 

    

 

 

    

 

 

   

 

 

 

 

– 9 –


Table of Contents

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

The world economy has been suppressed with low level of growth due to primarily to falling primary commodity prices such as price of crude oil and fluctuations in financial markets. Moderate economic growth is expected among developed countries. Meanwhile, economic growth in emerging and developing countries is expected to be weak and economic unevenness among such countries continues to widen.

Segment revenues decreased 2% to ¥399,856 million compared to ¥406,545 million during the same period of the previous fiscal year due to the deconsolidation of HL, despite increases in finance revenues in the Americas and gains on sales of investment securities and operating leases revenues in Asia.

Segment expenses were flat compared to the same period of the previous fiscal year due to the deconsolidation of HL, despite an increase in costs of operating leases.

Segment profits increased 37% to ¥116,001 million compared to ¥84,786 million in the same period of the previous fiscal year due primarily to the recognition of a gain on partial divestment of HL shares in connection with its initial public offering in the United States.

Segment assets increased 5% to ¥2,279,558 million compared to the end of the previous fiscal year due primarily to an increase in investment in operating leases by aircraft-related operations and an increase in installment loans in the Americas and Asia.

 

     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
     Change  
           Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Segment Revenues:

          

Finance revenues

   ¥ 46,497       ¥ 55,885       ¥ 9,388        20   

Gains on investment securities and dividends

     14,030         13,805         (225     (2

Operating leases

     60,032         67,321         7,289        12   

Services income

     235,271         198,603         (36,668     (16

Sales of goods and real estate, and other

     50,715         64,242         13,527        27   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Revenues

     406,545         399,856         (6,689     (2
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Expenses:

          

Interest expense

     22,400         24,186         1,786        8   

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

     9,118         6,679         (2,439     (27

Other than the above

     303,647         305,354         1,707        1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Expenses

     335,165         336,219         1,054        0   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Operating Income

     71,380         63,637         (7,743     (11
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     13,406         52,364         38,958                   291   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment Profits

   ¥ 84,786       ¥ 116,001       ¥    31,215        37   
  

 

 

    

 

 

    

 

 

   

 

 

 
     As of March 31, 2015      As of December 31, 2015      Change  
           Amount     Percent (%)  
     (Millions of yen, except percentage data)  

Investment in direct financing leases

   ¥ 386,567       ¥ 364,114       ¥ (22,453     (6

Installment loans

     344,108         388,672         44,564        13   

Investment in operating leases

     278,665         359,661         80,996        29   

Investment in securities

     404,322         380,158         (24,164     (6

Property under facility operations

     26,867         26,441         (426     (2

Inventories

     35,925         38,633         2,708        8   

Advances for investment in operating leases

     4,434         5,987                    1,553        35   

Investment in affiliates

     209,027         303,910         94,883        45   

Advances for property under facility operations

     0         127         127        —     

Goodwill and other intangible assets acquired in business combinations

     488,980         411,855         (77,125     (16
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Segment Assets

   ¥            2,178,895       ¥            2,279,558       ¥ 100,663        5   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

– 10 –


Table of Contents

(2) Financial Condition

 

     As of
March 31,
2015
    As of
December 31,
2015
    Change  
       Amount

 

    Percent
(%)
 
   (Millions of yen except per share, ratios and percentages)  

Total assets

   ¥ 11,443,628      ¥ 11,064,619      ¥ (379,009     (3

(Segment assets)

     9,170,249        8,941,388        (228,861     (2

Total liabilities

     9,058,656        8,604,702        (453,954     (5

(Short- and long-term debt)

     4,417,730        4,342,767        (74,963     (2

(Deposits)

     1,287,380        1,385,662        98,282        8   

ORIX Corporation shareholders’ equity

     2,152,198        2,273,448        121,250        6   

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

     1,644.60        1,736.43        91.83        6   

ORIX Corporation shareholders’ equity ratio*2

     18.8     20.5     —          —     

Adjusted ORIX Corporation shareholders’ equity ratio*3

     19.3     21.1     —          —     

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

     2.1     1.9     —          —     

Adjusted D/E ratio*3

     1.9     1.8     —          —     

 

*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.

*3

Adjusted ORIX Corporation shareholders’ equity ratio and Adjusted D/E ratio are non-GAAP financial measures presented on an adjusted basis which excludes the effect of consolidating certain variable interest entities (VIEs) on our assets or liabilities and reverses the cumulative effect on our retained earnings of such consolidation, which resulted from applying the accounting standards for the consolidation of VIEs under ASU 2009-16 and ASU 2009-17, effective April 1, 2010. For a discussion of these and other non-GAAP financial measures, including a quantitative reconciliation to the most directly comparable GAAP financial measures, please see “5. Non-GAAP Financial Measures.”

Total assets decreased 3% to ¥11,064,619 million compared to ¥11,443,628 million at the end of the previous fiscal year. Installment loans increased due primarily to an increase in banking business in Japan and corporate lending in the Americas. In addition, investment in operating leases increased due primarily to purchases of aircrafts in the Overseas Business segment. Meanwhile, investment in securities decreased due primarily to surrender of variable annuity and variable life insurance contracts held by HLIKK. Segment assets decreased 2% to ¥8,941,388 million compared to the end of the previous fiscal year.

We manage our balance of interest-bearing liabilities at an appropriate level taking into account the condition of assets, our liquidity on hand as well as the domestic and overseas financial environments. As a result, long- and short-term debt decreased and deposits increased compared to the end of the previous fiscal year. In addition, policy liabilities and policy account balances decreased compared to the end of the previous fiscal year due to a decrease in liability reserve in line with the surrender of variable annuity and variable life insurance contracts held by HLIKK as mentioned above.

Shareholders’ equity increased 6% to ¥2,273,448 million compared to the end of the previous fiscal year due primarily to an increase in retained earnings.

 

– 11 –


Table of Contents

(3) Liquidity and Capital Resources

We require capital resources for working capital and investment and lending in our businesses. We accordingly prioritize funding stability, maintaining adequate liquidity, and reducing capital costs. We formulate and execute on funding policies that are resilient to sudden deterioration 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. In implementation, we adjust our funding plan based on changes in the external funding environment and our funding needs in light of our business activities, and endeavor to maintain flexibility in our funding activities.

We have endeavored to diversify our funding sources, promote longer liability maturities, stagger interest and principal repayment dates, and otherwise maintain sufficient liquidity and reinforce our funding stability.

Our funding was comprised of borrowings from financial institutions, direct fund procurement from capital markets, and deposits. ORIX Group’s total funding including that from short- and long-term debt and deposits on a consolidated basis was ¥5,728,429 million as of December 31, 2015.

Borrowings were procured from a diverse range of financial institutions including major banks, regional banks, foreign banks and life and casualty insurance companies. The number of financial institutions from which we procured borrowings exceeded 200 as of December 31, 2015. Procurement from the capital markets was composed of bonds, medium-term notes, commercial paper, payables under securitized leases, loan receivables and other assets (including asset backed securities). ORIX Group accepts deposits for funding purposes, with the majority of deposits attributable to ORIX Bank Corporation.

In an effort to promote longer liability maturities and diversify our funding sources, during the nine months ended December 31, 2015, we issued ¥35,000 million of five-year domestic straight bonds to retail investors in Japan, and also US$300 million, Thai baht 2,000 million and Korean won 110,000 million of straight bonds outside Japan. We intend to continue to strengthen our financial condition, while maintaining an appropriate funding mix.

Short-term and long-term debt and deposits

(a) Short-term debt

 

     Millions of yen  
     March 31, 2015      December 31, 2015  

Borrowings from financial institutions

   ¥    195,164       ¥    203,588   

Commercial paper

     89,621         73,679   
  

 

 

    

 

 

 

Total short-term debt

   ¥ 284,785       ¥ 277,267   
  

 

 

    

 

 

 

Short-term debt as of December 31, 2015 was ¥277,267 million, which accounted for 6% of the total amount of short and long-term debt (excluding deposits) as compared to 6% as of March 31, 2015.

While the amount of short-term debt as of December 31, 2015 was ¥277,267 million, the sum of cash and cash equivalents and the unused amount of committed credit facilities as of December 31, 2015 was ¥1,223,192 million.

(b) Long-term debt

 

     Millions of yen  
     March 31, 2015      December 31, 2015  

Borrowings from financial institutions

   ¥ 2,687,434       ¥ 2,681,769   

Bonds

     1,118,766         1,011,826   

Medium-term notes

     35,110         65,850   

Payables under securitized lease, loan receivables and other assets

     291,635         306,055   
  

 

 

    

 

 

 

Total long-term debt

   ¥ 4,132,945       ¥ 4,065,500   
  

 

 

    

 

 

 

 

– 12 –


Table of Contents

The balance of long-term debt as of December 31, 2015 was ¥4,065,500 million, which accounted for 94% of the total amount of short and long-term debt (excluding deposits) as compared to 94% as of March 31, 2015. On an adjusted basis, our ratio of long-term debt to total debt (excluding deposits) was 93% as of December 31, 2015 as compared to 93% as of March 31, 2015. This ratio is a non-GAAP financial measure presented on an adjusted basis that excludes payables under securitized leases, loan receivables and other assets. For a discussion of this and other non-GAAP financial measures including reconciliations to the most directly comparable financial measures presented in accordance with GAAP, see “5. Non-GAAP Financial Measures.”

(c) Deposits

 

     Millions of yen  
     March 31, 2015      December 31, 2015  

Deposits

   ¥ 1,287,380       ¥ 1,385,622   

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

(4) Summary of Cash Flows

Cash and cash equivalents as of December 31, 2015 decreased by ¥17,918 million to ¥809,600 million compared to March 31, 2015.

Cash flows provided by operating activities were ¥357,265 million in the nine months ended December 31, 2015, up from ¥167,095 million during the same period of the previous fiscal year, primarily resulting from an increase in net income, and a larger decrease in trading securities compared to the same period of the previous fiscal year.

Cash flows used in investing activities were ¥302,503 million in the nine months ended December 31, 2015, up from ¥242,316 million during the same period of the previous fiscal year. This change was primarily due to an increase in purchases of lease equipment, but partially offset by a decrease in investment in affiliates compared to the same period of the previous fiscal year.

Cash flows used in financing activities were ¥70,272 million in the nine months ended December 31, 2015 compared to the cash inflows of ¥17,067 million during the same period of the previous fiscal year. This change was primarily due to a net decrease in debt with maturities of three months or less compared to a net increase during the same period of the previous fiscal year, and an increase in cash dividends paid to ORIX Corporation shareholders, but partially offset by a larger net increase in deposits due to customers compared to the same period of the previous fiscal year.

(5) Challenges to be addressed

There were no significant changes for the nine months ended December 31, 2015.

(6) Research and Development Activity

There were no significant changes in research and development activity for the nine months ended December 31, 2015.

(7) Major facilities

For a building (Roppongi, Minato-ku, Tokyo), which was presented as office building as of March 31, 2015, the type of the facility as of December 31, 2015 is changed to operating lease property.

Except for this, there were no significant changes in major facilities for the nine months ended December 31, 2015.

 

– 13 –


Table of Contents
5.

Non-GAAP Financial Measures

Section 4 “Analysis of Financial Results and Condition” contains certain financial measures presented on a basis not in accordance with U.S. GAAP (commonly referred to as non-GAAP financial measures), including adjusted long-term debt, adjusted ORIX Corporation shareholders’ equity and adjusted total assets, as well as other measures or ratios calculated based on those measures, presented on an adjusted basis, which excludes payables under securitized leases, loan receivables and other assets and reverses the cumulative effect on retained earnings of applying the accounting standards for the consolidation of VIEs under ASU 2009-16 and ASU 2009-17, effective April 1, 2010.

Our management believes these non-GAAP financial measures provide investors with additional meaningful comparisons between our financial condition as of December 31, 2015, as compared to prior periods. Effective April 1, 2010, we adopted ASU 2009-16 and ASU 2009-17, which changed the circumstances under which we are required to consolidate certain VIEs. Our adoption of these accounting standards caused a significant increase in our consolidated assets and liabilities and a decrease in our retained earnings without affecting the net cash flow and economic effects of our investments in such consolidated VIEs. Accordingly, our management believes that providing certain financial measures that exclude the impact of consolidating certain VIEs on our assets and liabilities as a supplement to financial information calculated in accordance with U.S. GAAP enhances understanding of the overall picture of our current financial position and enables investors to evaluate our historical financial and business trends without the large balance sheet fluctuation caused by our adoption of these accounting standards.

We provide these non-GAAP financial measures as supplemental information to our consolidated financial statements prepared in accordance with U.S. GAAP, and they should not be considered in isolation or as substitutes for the most directly comparable U.S. GAAP measures.

The tables set forth below provide reconciliations of these non-GAAP financial measures to the most directly comparable financial measures presented in accordance with U.S. GAAP as reflected in our consolidated financial statements for the periods provided.

 

          2015  
          As of March 31,     As of December 31,  
          (Millions of yen, except percentage data)  

Total assets

   (a)    ¥ 11,443,628      ¥ 11,064,619   

Deduct: Payables under securitized leases, loan receivables and other assets*

        291,635        306,055   

Adjusted total assets

   (b)      11,151,993        10,758,564   

Short-term debt

   (c)      284,785        277,267   

Long-term debt

   (d)      4,132,945        4,065,500   

Deduct: Payables under securitized leases, loan receivables and other assets*

        291,635        306,055   

Adjusted long-term debt

   (e)      3,841,310        3,759,445   

Long- and short-term debt (excluding deposits)

   (f)=(c)+(d)      4,417,730        4,342,767   

Adjusted short- and long-term debt (excluding deposits)

   (g)=(c)+(e)      4,126,095        4,036,712   

ORIX Corporation shareholders’ equity

   (h)      2,152,198        2,273,448   

Deduct: The cumulative effect on retained earnings of applying the accounting standards for the consolidation of VIEs under ASU 2009-16 and ASU 2009-17, effective April 1, 2010

        (3,060     (588

Adjusted ORIX Corporation shareholders’ equity

   (i)      2,155,258        2,274,036   

ORIX Corporation shareholders’ equity ratio

   (h)/(a)      18.8     20.5

Adjusted ORIX Corporation shareholders’ equity ratio

   (i)/(b)      19.3     21.1

D/E ratio

   (f)/(h)      2.1     1.9

Adjusted D/E ratio

   (g)/(i)      1.9     1.8

Long-term debt ratio

   (d)/(f)      94     94

Adjusted long-term debt ratio

   (e)/(g)      93     93

 

*

These deductions represent amounts recorded as liabilities and included in long-term debt on the consolidated balance sheets.

 

– 14 –


Table of Contents
6.

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 Additional Paid-in Capital

The number of issued shares, the amount of common stock and additional paid-in capital for the three months ended December 31, 2015 is as follows:

 

In thousands     Millions of yen  
Number of issued shares     Common stock     Additional paid-in capital  

Increase, net

    December 31, 2015     Increase, net     December 31, 2015     Increase, net     December 31, 2015  
  9        1,324,058      ¥ 10      ¥ 220,469      ¥ 10      ¥ 247,648   

(2) List of Major Shareholders

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

 

7.

Directors and Executive Officers

Between the filing date of Form 20-F for the fiscal year ended March 31, 2015 and December 31, 2015, the personnel changes of the directors and the executive officers are as follows:

(1) Departures

 

Name

  

Title

  

Areas of duties

   The day of retirement

Eiji Mitani

   Corporate Senior Vice President   

Kinki Sales Headquarters

Group Kansai Deputy Representative

   December 31, 2015

Shigeki Seki

   Executive Officer    Human Resources and Corporate Administration Headquarters    December 31, 2015

Tsukasa Kimura

   Executive Officer    Energy and Eco Services Business Headquarters    December 31, 2015

Ryuhei Sakamoto

   Executive Officer   

Treasury Headquarters

Airport Operation Project Office

   December 31, 2015

Masatoshi Kemmochi

   Group Senior Vice President    Vice Chairman, ORIX Real Estate Corporation    December 31, 2015

 

– 15 –


Table of Contents

(2) Change of Position

 

Name

  

New Position

  

Ex-Position

   The day of change

Satoru Katahira

  

Corporate Senior Vice President,

Head of OQL Business and Sales Promotion Headquarters

Responsible for IT Planning Office

Responsible for Public Sector Project Management Department

President, ORIX Business Center Okinawa Corporation

  

Corporate Senior Vice President,

Head of OQL Business and Regional Business Headquarters

Head of Sales Promotion Headquarters

Responsible for IT Planning Office

President, ORIX Business Center Okinawa Corporation

   October 1, 2015

Yoshiyuki Yamaya

  

Director,

Representative Executive Officer,

Deputy President

Responsible for Retail Segment

Responsible for Retail Business
Planning Office

Responsible for Concession Business Development Department

Responsible for Airport Operation
Project Office

President, ORIX Credit Corporation

  

Director,

Representative Executive Officer,

Deputy President

Responsible for Retail Segment

Responsible for Retail Business
Planning Office

Responsible for Concession Business Development Department

President, ORIX Credit Corporation

   November 12, 2015

Ryuhei Sakamoto

  

Executive Officer,

Deputy Head of Treasury Headquarters

Responsible for Airport Operation Project Office

  

Executive Officer,

Deputy Head of Treasury Headquarters

   November 12, 2015

 

– 16 –


Table of Contents
8.

Financial Information

(1) Condensed Consolidated Balance Sheets (Unaudited)

 

     Millions of yen  

Assets

   March 31,
2015
    December 31,
2015
 

Cash and Cash Equivalents

   ¥ 827,518      ¥ 809,600   

Restricted Cash

     85,561        83,402   

Investment in Direct Financing Leases

     1,216,454        1,207,133   

Installment Loans

     2,478,054        2,567,316   
(The amounts of ¥15,361 million as of March 31, 2015 and ¥11,781 million as of December 31, 2015 are measured at fair value by electing the fair value option under ASC 825.)     

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

     (72,326     (60,172

Investment in Operating Leases

     1,296,220        1,339,430   

Investment in Securities

     2,846,257        2,443,474   
(The amounts of ¥16,891 million as of March 31, 2015 and ¥23,056 million as of December 31, 2015 are measured at fair value by electing the fair value option under ASC 825.)     

Property under Facility Operations

     278,100        318,125   

Investment in Affiliates

     378,087        480,791   

Trade Notes, Accounts and Other Receivable

     348,404        272,115   

Inventories

     165,540        146,948   

Office Facilities

     131,556        120,722   

Other Assets

     1,464,203        1,335,735   
(The amounts of ¥36,038 million as of March 31, 2015 and ¥32,334 million as of December 31, 2015 are measured at fair value by electing the fair value option under ASC 825.)     
  

 

 

   

 

 

 

Total Assets

   ¥ 11,443,628      ¥ 11,064,619   
  

 

 

   

 

 

 

 

Note:

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,
2015
     December 31,
2015
 

Cash and Cash Equivalents

   ¥ 5,242       ¥ 4,395   

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

     153,951         144,539   

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

     171,163         213,275   

Investment in Operating Leases

     252,234         241,928   

Property under Facility Operations

     39,153         49,395   

Investment in Affiliates

     11,905         65,124   

Other

     93,983         83,449   
  

 

 

    

 

 

 
   ¥      727,631       ¥      802,105   
  

 

 

    

 

 

 

 

– 17 –


Table of Contents
     Millions of yen  

Liabilities and Equity

   March 31,
2015
    December 31,
2015
 

Liabilities:

    

Short-Term Debt

   ¥ 284,785      ¥ 277,267   

Deposits

     1,287,380        1,385,662   

Trade Notes, Accounts and Other Payable

     335,936        245,993   

Policy Liabilities and Policy Account Balances

     2,073,650        1,723,609   
(The amounts of ¥1,254,483 million as of March 31, 2015 and ¥867,632 million as of December 31, 2015 are measured at fair value by electing the fair value option under ASC 825.)     

Current and Deferred Income Taxes

     345,514        377,123   

Long-Term Debt

     4,132,945        4,065,500   

Other Liabilities

     598,446        529,548   
  

 

 

   

 

 

 

Total Liabilities

     9,058,656        8,604,702   
  

 

 

   

 

 

 

Redeemable Noncontrolling Interests

     66,901        18,159   
  

 

 

   

 

 

 

Commitments and Contingent Liabilities

    

Equity:

    

Common Stock

     220,056        220,469   

Additional Paid-in Capital

     255,595        255,782   

Retained Earnings

     1,672,585        1,813,704   

Accumulated Other Comprehensive Income

     30,373        9,577   

Treasury Stock, at Cost

     (26,411     (26,084
  

 

 

   

 

 

 

ORIX Corporation Shareholders’ Equity

     2,152,198        2,273,448   

Noncontrolling Interests

     165,873        168,310   
  

 

 

   

 

 

 

Total Equity

     2,318,071        2,441,758   
  

 

 

   

 

 

 

Total Liabilities and Equity

   ¥ 11,443,628      ¥ 11,064,619   
  

 

 

   

 

 

 

 

 

Note:

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,
2015
     December 31,
2015
 

Trade Notes, Accounts and Other Payable

   ¥ 2,100       ¥ 1,596   

Long-Term Debt

     454,216         485,941   

Other

     7,792         7,191   
  

 

 

    

 

 

 
   ¥      464,108       ¥      494,728   
  

 

 

    

 

 

 

 

– 18 –


Table of Contents

(2) Condensed Consolidated Statements of Income (Unaudited)

 

     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Revenues:

    

Finance revenues

   ¥ 139,332      ¥ 152,614   

Gains on investment securities and dividends

     37,965        33,017   

Operating leases

     279,348        284,396   

Life insurance premiums and related investment income

     276,112        160,735   

Sales of goods and real estate

     280,188        609,783   

Services income

     559,095        556,535   
  

 

 

   

 

 

 

Total revenues

                 1,572,040                    1,797,080   
  

 

 

   

 

 

 

Expenses:

    

Interest expense

     54,844        54,025   

Costs of operating leases

     177,960        183,695   

Life insurance costs

     225,299        101,206   

Costs of goods and real estate sold

     250,807        546,915   

Services expense

     311,830        328,264   

Other (income) and expense, net

     8,408        (1,033

Selling, general and administrative expenses

     306,883        316,953   

Provision for doubtful receivables and probable loan losses

     6,289        5,940   

Write-downs of long-lived assets

     15,512        4,547   

Write-downs of securities

     6,316        3,952   
  

 

 

   

 

 

 

Total expenses

     1,364,148        1,544,464   
  

 

 

   

 

 

 

Operating Income

     207,892        252,616   

Equity in Net Income of Affiliates

     14,077        25,044   

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

     20,226        57,012   

Bargain Purchase Gain

     36,082        0   
  

 

 

   

 

 

 

Income before Income Taxes and Discontinued Operations

     278,277        334,672   

Provision for Income Taxes

     84,283        111,489   
  

 

 

   

 

 

 

Income from Continuing Operations

     193,994        223,183   

Discontinued Operations:

    

Income from discontinued operations, net

     463        0   

Provision for income taxes

     (166     0   
  

 

 

   

 

 

 

Discontinued operations, net of applicable tax effect

     297        0   
  

 

 

   

 

 

 

Net Income

     194,291        223,183   
  

 

 

   

 

 

 

Net Income Attributable to the Noncontrolling Interests

     5,542        7,009   
  

 

 

   

 

 

 

Net Income Attributable to the Redeemable Noncontrolling Interests

     3,344        810   
  

 

 

   

 

 

 

Net Income Attributable to ORIX Corporation Shareholders

   ¥                185,405      ¥                215,364   
  

 

 

   

 

 

 

 

Notes:

 

1.

  

Prior-year amounts have been adjusted for the retrospective elimination of a lag period that previously existed between DAIKYO and ORIX in fiscal 2015. For further information, see Note 1 “Significant Accounting and Reporting Policies (ah) Elimination of a lag period.”

 

2.

  

Pursuant to ASC 205-20 (“Presentation of Financial Statements—Discontinued Operations”), the results of operations which meet the criteria for discontinued operations are reported as a separate component of income, and those related amounts that had been previously reported are reclassified.

 

– 19 –


Table of Contents
     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Income attributable to ORIX Corporation shareholders:

    

Income from continuing operations

   ¥                185,108      ¥                215,364   

Discontinued operations

     297        0   
  

 

 

   

 

 

 

Net income attributable to ORIX Corporation shareholders

   ¥ 185,405      ¥ 215,364   
     Yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

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

    

Basic:

    

Income from continuing operations

   ¥ 141.38      ¥ 164.52   

Discontinued operations

     0.23        0   
  

 

 

   

 

 

 

Net income attributable to ORIX Corporation shareholders

   ¥ 141.61      ¥ 164.52   

Diluted:

    

Income from continuing operations

   ¥ 141.17      ¥ 164.35   

Discontinued operations

     0.23        0   
  

 

 

   

 

 

 

Net income attributable to ORIX Corporation shareholders

   ¥    141.40      ¥   164.35   

 

– 20 –


Table of Contents
     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Revenues:

    

Finance revenues

   ¥ 48,149      ¥ 51,370   

Gains on investment securities and dividends

     6,643        1,700   

Operating leases

     97,454        93,066   

Life insurance premiums and related investment income

     138,173        90,243   

Sales of goods and real estate

     122,012        214,357   

Services income

     203,974        176,150   
  

 

 

   

 

 

 

Total revenues

     616,405        626,886   
  

 

 

   

 

 

 

Expenses:

    

Interest expense

     18,119        18,167   

Costs of operating leases

     60,189        61,255   

Life insurance costs

     116,702        69,406   

Costs of goods and real estate sold

     109,405        195,454   

Services expense

     105,351        110,384   

Other (income) and expense, net

     6,401        (5,588

Selling, general and administrative expenses

     109,809        100,609   

Provision for doubtful receivables and probable loan losses

     4,314        2,992   

Write-downs of long-lived assets

     8,630        3,601   

Write-downs of securities

     4,562        470   
  

 

 

   

 

 

 

Total expenses

     543,482        556,750   
  

 

 

   

 

 

 

Operating Income

     72,923        70,136   

Equity in Net Income of Affiliates

     3,852        13,188   

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

     369        603   
  

 

 

   

 

 

 

Income before Income Taxes and Discontinued Operations

     77,144        83,927   

Provision for Income Taxes

     29,269        28,853   
  

 

 

   

 

 

 

Income from Continuing Operations

     47,875        55,074   

Discontinued Operations:

    

Income from discontinued operations, net

     0        0   

Provision for income taxes

     0        0   
  

 

 

   

 

 

 

Discontinued operations, net of applicable tax effect

     0        0   
  

 

 

   

 

 

 

Net Income

     47,875        55,074   
  

 

 

   

 

 

 

Net Income Attributable to the Noncontrolling Interests

     2,453        1,463   
  

 

 

   

 

 

 

Net Income (Loss) Attributable to the Redeemable Noncontrolling Interests

     1,316        (455
  

 

 

   

 

 

 

Net Income Attributable to ORIX Corporation Shareholders

   ¥                  44,106      ¥                  54,066   
  

 

 

   

 

 

 

 

Notes:

 

1.

 

Prior-year amounts have been adjusted for the retrospective elimination of a lag period that previously existed between DAIKYO and ORIX in fiscal 2015. For further information, see Note 1 “Significant Accounting and Reporting Policies (ah) Elimination of a lag period.”

 

2.

 

Pursuant to ASC 205-20 (“Presentation of Financial Statements—Discontinued Operations”), the results of operations which meet the criteria for discontinued operations are reported as a separate component of income, and those related amounts that had been previously reported are reclassified.

 

– 21 –


Table of Contents
     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Income attributable to ORIX Corporation shareholders:

    

Income from continuing operations

   ¥ 44,106      ¥ 54,066   

Discontinued operations

     0        0   
  

 

 

   

 

 

 

Net income attributable to ORIX Corporation shareholders

   ¥                  44,106      ¥                  54,066   
     Yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

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

    

Basic:

    

Income from continuing operations

   ¥ 33.71      ¥ 41.30   

Discontinued operations

     0        0   
  

 

 

   

 

 

 

Net income attributable to ORIX Corporation shareholders

   ¥ 33.71      ¥ 41.30   

Diluted:

    

Income from continuing operations

   ¥ 33.67      ¥ 41.25   

Discontinued operations

     0        0   
  

 

 

   

 

 

 

Net income attributable to ORIX Corporation shareholders

   ¥     33.67      ¥     41.25   

 

– 22 –


Table of Contents

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

 

     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Net Income

   ¥ 194,291      ¥ 223,183   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

    

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

     6,606        (14,215

Net change of defined benefit pension plans

     (13,275     (113

Net change of foreign currency translation adjustments

     55,811        (4,708

Net change of unrealized losses on derivative instruments

     (890     (623
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     48,252        (19,659
  

 

 

   

 

 

 

Comprehensive Income

     242,543        203,524   
  

 

 

   

 

 

 

Comprehensive Income Attributable to the Noncontrolling Interests

     10,266        6,882   
  

 

 

   

 

 

 

Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     12,725        2,074   
  

 

 

   

 

 

 

Comprehensive Income Attributable to ORIX Corporation Shareholders

   ¥ 219,552      ¥ 194,568   
  

 

 

   

 

 

 
     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Net Income

   ¥ 47,875      ¥ 55,074   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

    

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

     9,376        (401

Net change of defined benefit pension plans

     (13,509     348   

Net change of foreign currency translation adjustments

     40,587        (1,568

Net change of unrealized losses on derivative instruments

     (828     (635
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     35,626        (2,256
  

 

 

   

 

 

 

Comprehensive Income

     83,501        52,818   
  

 

 

   

 

 

 

Comprehensive Income Attributable to the Noncontrolling Interests

     6,604        296   
  

 

 

   

 

 

 

Comprehensive Income (Loss) Attributable to the Redeemable Noncontrolling Interests

     7,273        (349
  

 

 

   

 

 

 

Comprehensive Income Attributable to ORIX Corporation Shareholders

   ¥ 69,624      ¥ 52,871   
  

 

 

   

 

 

 

 

– 23 –


Table of Contents

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

Nine months ended December 31, 2014

 

    Millions of yen  
    ORIX Corporation Shareholders’ Equity              
        Common    
Stock

 

      Additional  
Paid-in
Capital

 

        Retained    
Earnings

 

    Accumulated
Other
Comprehensive
Income (Loss)
        Treasury    
Stock

 

    Total ORIX
Corporation
Shareholders’
Equity
    Noncontrolling
Interests

 

    Total
      Equity      

 

 

Beginning Balance

  ¥ 219,546      ¥ 255,449      ¥ 1,468,172      ¥ 38      ¥ (23,859   ¥ 1,919,346      ¥ 177,019      ¥ 2,096,365   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution to subsidiaries

              0        25,297        25,297   

Transaction with noncontrolling interests

      (504       96          (408     (13,226     (13,634

Comprehensive income, net of tax:

               

Net income

        185,405            185,405        5,542        190,947   

Other comprehensive income (loss)

               

Net change of unrealized gains on investment in securities

          5,628          5,628        978        6,606   

Net change of defined benefit pension plans

          (12,078       (12,078     (1,197     (13,275

Net change of foreign currency translation adjustments

          41,424          41,424        5,006        46,430   

Net change of unrealized losses on derivative instruments

          (827       (827     (63     (890
           

 

 

   

 

 

   

 

 

 

Total other comprehensive income

              34,147        4,724        38,871   
           

 

 

   

 

 

   

 

 

 

Total comprehensive income

              219,552        10,266        229,818   
           

 

 

   

 

 

   

 

 

 

Cash dividends

        (30,117         (30,117     (3,262     (33,379

Exercise of stock options

    505        491              996        0        996   

Acquisition of treasury stock

            (3,423     (3,423     0        (3,423

Disposal of treasury stock

      (625     (142       767        0        0        0   

Other, net

      (2     (304         (306     0        (306
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  ¥ 220,051      ¥ 254,809      ¥ 1,623,014      ¥ 34,281      ¥ (26,515   ¥ 2,105,640      ¥ 196,094      ¥ 2,301,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months ended December 31, 2015

 

  

    Millions of yen  
    ORIX Corporation Shareholders’ Equity              
    Common
Stock

 

    Additional
Paid-in
Capital

 

    Retained
Earnings

 

    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock

 

    Total ORIX
Corporation
Shareholders’
Equity
    Noncontrolling
Interests

 

    Total
Equity

 

 

Beginning Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution to subsidiaries

              0        6,719        6,719   

Transaction with noncontrolling interests

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

Comprehensive income, net of tax:

               

Net income

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

Other comprehensive income (loss)

               

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

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

Net change of defined benefit pension plans

          (158       (158     45        (113

Net change of foreign currency translation adjustments

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

Net change of unrealized losses on derivative instruments

          (591       (591     (32     (623
           

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

              (20,796     (127     (20,923
           

 

 

   

 

 

   

 

 

 

Total comprehensive income

              194,568        6,882        201,450   
           

 

 

   

 

 

   

 

 

 

Cash dividends

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

Exercise of stock options

    413        409              822        0        822   

Acquisition of treasury stock

            (2     (2     0        (2

Disposal of treasury stock

      (185     (31       329        113        0        113   

Other, net

      156        1,820            1,976        0        1,976   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

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

 

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Table of Contents

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

 

     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Cash Flows from Operating Activities:

    

Net income

   ¥ 194,291      ¥ 223,183   

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

    

Depreciation and amortization

     169,692        181,206   

Provision for doubtful receivables and probable loan losses

     6,289        5,940   

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

     (13,864     (24,024

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

     (20,226     (57,012

Bargain Purchase Gain

     (36,082     0   

Gains on sales of available-for-sale securities

     (22,874     (31,524

Gains on sales of operating lease assets

     (33,073     (32,717

Write-downs of long-lived assets

     15,512        4,547   

Write-downs of securities

     6,316        3,952   

Decrease (increase) in restricted cash

     (11,754     8,800   

Decrease in trading securities

     272,277        387,164   

Decrease (increase) in inventories

     (20,692     15,524   

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

     513        (6,510

Decrease in trade notes, accounts and other payable

     (2,309     (59,336

Decrease in policy liabilities and policy account balances

     (323,396     (350,041

Other, net

     (13,525     88,113   
  

 

 

   

 

 

 

Net cash provided by operating activities

     167,095        357,265   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Purchases of lease equipment

     (636,638     (696,943

Principal payments received under direct financing leases

     346,703        372,679   

Installment loans made to customers

     (813,837     (808,708

Principal collected on installment loans

     727,476        710,848   

Proceeds from sales of operating lease assets

     200,948        181,309   

Investment in affiliates, net

     (75,721     (19,502

Proceeds from sales of investment in affiliates

     13,601        15,773   

Purchases of available-for-sale securities

     (717,401     (745,150

Proceeds from sales of available-for-sale securities

     438,854        415,389   

Proceeds from redemption of available-for-sale securities

     326,571        313,052   

Purchases of held-to-maturity securities

     (396     (395

Purchases of other securities

     (22,882     (14,799

Proceeds from sales of other securities

     32,050        34,460   

Purchases of property under facility operations

     (43,607     (65,468

Acquisitions of subsidiaries, net of cash acquired

     (70,499     (22,096

Sales of subsidiaries, net of cash disposed

     47,600        37,576   

Other, net

     4,862        (10,528
  

 

 

   

 

 

 

Net cash used in investing activities

     (242,316     (302,503
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

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

     11,634        (60,045

Proceeds from debt with maturities longer than three months

     902,183        910,123   

Repayment of debt with maturities longer than three months

     (904,570     (944,805

Net increase in deposits due to customers

     43,613        98,285   

Cash dividends paid to ORIX Corporation shareholders

     (30,117     (76,034

Contribution from noncontrolling interests

     3,816        4,672   

Cash dividends paid to redeemable noncontrolling interests

     (1,622     (11,272

Net increase in call money

     1,500        17,000   

Other, net

     (9,370     (8,196
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     17,067        (70,272
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     11,273        (2,408
  

 

 

   

 

 

 

Net decrease in Cash and Cash Equivalents

     (46,881     (17,918
  

 

 

   

 

 

 

Cash and Cash Equivalents at Beginning of Period

     818,039        827,518   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   ¥ 771,158      ¥ 809,600   
  

 

 

   

 

 

 

 

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Table of Contents

Notes to Consolidated Financial Statements

 

1.

Overview of Accounting Principles Utilized

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

These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our March 31, 2015 consolidated financial statements on Form 20-F.

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

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

(a) Initial direct costs

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

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

(b) Operating leases

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

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

(c) Accounting for life insurance operations

Under U.S. GAAP, based on ASC 944 (“Financial Services—Insurance”), certain costs related directly to the successful acquisition of new (or renewal of) insurance contracts, or deferred policy acquisition costs, are being deferred and amortized over the respective policy periods in proportion to anticipated premium revenue.

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

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

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

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

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

(e) Accounting for contingent consideration in business combination

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

 

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Table of Contents

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

(f) Accounting for pension plans

Under U.S. GAAP, the Company and its subsidiaries apply ASC 715 (“Compensation—Retirement Benefits”) and record pension costs based on the amounts determined using actuarial methods. The net actuarial gain (loss) is amortized using a corridor test.

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

(g) Reporting on discontinued operations

Under U.S. GAAP, in accordance with ASC 205-20 (“Presentation of Financial Statements—Discontinued Operations”), the financial results of discontinued operations and disposal gain or loss, net of applicable income tax effects, are presented as a separate line item from continuing operations in the consolidated statements of income. Results of these discontinued operations from prior periods are reclassified as income from discontinued operations in each prior period presented in the accompanying consolidated statements of income and consolidated statements of cash flows.

Under Japanese GAAP, there are no rules on reporting discontinued operations and the amounts are not presented separately from continuing operations.

(h) 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.

(i) Classification in consolidated statements of cash flows

Classification in the statements of cash flows under U.S. GAAP is based on ASC 230 (“Statement of Cash Flows”), which differs from Japanese GAAP. As significant differences, purchase of lease equipment and principal payments received under direct financing leases, proceeds from sales of operating lease assets, installment loans made to customers and principal collected on installment loans (excluding issues and collections of loans held for sale) are included in “Cash Flows from Investing Activities” under U.S. GAAP while they are classified as “Cash Flows from Operating Activities” under Japanese GAAP.

(j) Securitization of financial assets

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

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

(k) Fair value option

Under U.S. GAAP, an entity is permitted to elect at specified election dates to measure eligible financial assets and liabilities at their fair value and to report subsequent changes in the fair value in earnings.

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

 

– 27 –


Table of Contents
2.

Significant Accounting and Reporting Policies

(a) Principles of consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Investments in affiliates, where the Company has the ability to exercise significant influence by way of 20% - 50% ownership or other means, are accounted for by using the equity method. Where the Company holds majority voting interests but noncontrolling shareholders have substantive participating rights to decisions that occur as part of the ordinary course of their business, the equity method is applied pursuant to ASC 810-10-25-2 to 14 (“Consolidation—The Effect of Noncontrolling Rights on Consolidation”). In addition, the consolidated financial statements also include variable interest entities to which the Company and its subsidiaries are primary beneficiaries pursuant to ASC 810 (“Consolidation”).

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

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

(b) Use of estimates

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

(c) Foreign currencies translation

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

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

(d) Recognition of revenues

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

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

 

– 28 –


Table of Contents

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

(1) Revenues from direct financing leases

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

(2) Revenues from installment loans

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

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

(3) Non-accrual policy

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

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

 

– 29 –


Table of Contents

Operating leasesRevenues from operating leases are recognized on a straight-line basis over the contract terms. Investment in operating leases is recorded at cost less accumulated depreciation, which was ¥506,801 million and ¥530,585 million as of March 31, 2015 and December 31, 2015, 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 how much equipment will become obsolete and actual recovery being experienced for similar used equipment.

Sales of goods and real estate

(1) Sales of goods

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

(2) Real estate sales

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

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

(1) Revenues from asset management and servicing

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

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

(2) Revenues from automobile maintenance services

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

 

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Table of Contents

(e) Insurance and reinsurance transactions

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

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

The insurance contracts sold by a certain subsidiary consist of variable annuity, variable life and fixed annuity insurance contracts. The subsidiary manages investment assets on behalf of variable annuity and variable life policyholders, which consist of equity securities and are included in investments in securities in the consolidated balance sheets. These investment assets are measured at fair value with realized and unrealized gains or losses recognized in life insurance premiums and related investment income in the consolidated statements of income. The subsidiary elected the fair value option for the entire variable annuity and variable life insurance contracts in accordance with ASC 825 (“Financial Instruments”) and changes in the fair value are recognized in life insurance costs.

The subsidiary provides minimum guarantees to variable annuity and variable life policyholders where it is exposed to the risk of compensating losses incurred by the policyholders to the extent required by the contracts. To avoid the risk, a portion of the minimum guarantee risk related to variable annuity and variable life insurance contracts is ceded to the reinsurance companies and the remaining risk is economically hedged by entering into derivative contracts (See Note 19 “Derivative financial instruments and hedging”). The reinsurance contracts do not relieve the subsidiary from the obligation as the primary obligor to compensate certain losses incurred by the policyholders, and the default of the reinsurance companies may impose additional losses on the subsidiary. Certain subsidiaries have elected the fair value option under ASC 825 (“Financial Instruments”) for certain reinsurance contracts relating to variable annuity and variable life insurance contracts, which is included in other assets in the consolidated balance sheets.

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

ASC 944 (“Financial Services—Insurance”) requires insurance companies to defer certain costs related directly to the successful acquisition of new or renewal insurance contracts, or deferred policy acquisition costs, and amortize them over the respective policy periods in proportion to anticipated premium revenue. These deferred policy acquisition costs consist primarily of first-year commissions, except for recurring policy maintenance costs and certain variable costs and expenses for underwriting policies.

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

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

 

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

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

(g) Impairment of long-lived assets

The Company and its subsidiaries have followed ASC 360 (“Property, Plant, and Equipment”). Under ASC 360, long-lived assets to be held and used in operations, including tangible assets and intangible assets being amortized, consisting primarily of office buildings, condominiums, golf courses and other properties under facility operations, shall be tested for recoverability whenever events or changes in circumstances indicate that the assets might be impaired. When the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those assets, the net carrying amount of assets not recoverable is reduced to fair value if lower than the carrying amount. The Company and its subsidiaries determine the fair value using appraisals prepared by independent third party appraisers or our own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flows methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate.

(h) Investment in securities

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

Available-for-sale securities are reported at fair value, and unrealized gains or losses are recorded in accumulated other comprehensive income (loss), net of applicable income taxes, except investments which are recorded at fair value with unrealized gains and losses included in income by electing the fair value option under ASC 825 (“Financial Instruments”).

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

Other securities are recorded at cost or carrying value that reflects equity income and loss based on the Company’s share, except investments which are recorded at fair value with unrealized gains and losses included in income by electing the fair value option under ASC 825 (“Financial Instruments”).

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

 

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

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

(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 and discontinued operations. 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 and discontinued operations for the full fiscal year.

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

The effective income tax rates including discontinued operations for the nine months ended December 31, 2014 and 2015 were 30.3% and 33.3%, respectively. These rates are 37.9% and 34.4% for the three months ended December 31, 2014 and 2015, respectively. For the nine months ended December 31, 2014, the Company and its subsidiaries in Japan were subject to a National Corporate tax of approximately 26%, an Inhabitant tax of approximately 5% and a deductible Enterprise tax of approximately 8%, which in the aggregate result in a statutory income tax rate of approximately 35.9%. For the nine months ended December 31, 2015, as a result of the tax reforms as discussed in the following paragraph, the National Corporation tax was reduced from approximately 26% to approximately 24% and accordingly, the statutory income tax rate was reduced to approximately 33.5%. The effective income tax rate is different from the statutory tax rate primarily because of certain non-deductible expenses for tax purposes, non-taxable income for tax purposes, the effect of lower income tax rates on foreign subsidiaries and a life insurance subsidiary in Japan, a change in valuation allowance and the bargain purchase gain.

 

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On March 31, 2015, the 2015 tax reform bill was passed by the National Diet of Japan. From a fiscal years beginning on April 1, 2015, the national tax rate and the local business tax rate were reduced, and as a result, the combined statutory income tax rate for the fiscal year beginning on April 1, 2015 was reduced from approximately 35.9% to approximately 33.5%, and the combined statutory income tax rate for a fiscal years beginning on April 1, 2016 will be further reduced to approximately 32.9%. In addition, tax loss carry-forward rules were amended, and the deductible amount of tax losses carried forward for the fiscal years beginning on April 1, 2015 and April 1, 2016 became limited to 65% of taxable income for the year, compared to 80% for the previous fiscal year. From the fiscal years beginning on April 1, 2017, the deductible limit of tax losses carried forward will be further reduced to 50% of taxable income for the year, while from fiscal years beginning on April 1, 2017, the tax loss carry-forward period will be extended from nine years to ten years.

The Company and its subsidiaries 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 the tax position that meets the recognition threshold at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the taxing authority. The Company and its subsidiaries present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carryforward, or similar tax loss or tax credit carryforward, rather than as a liability. The Company and its subsidiaries classify penalties and interest expense related to income taxes as part of provision for income taxes in the condensed consolidated statements of income.

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

(j) Securitized assets

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

In accordance with ASC 860 (“Transfers and Servicing”) and ASC 810 (“Consolidation”), trusts or SPEs used in securitization transactions are consolidated if the Company and its subsidiaries are the primary beneficiary of the trusts or SPEs, and the transfers of the financial assets to those consolidated trusts and SPEs are not accounted for as sales. Assets held by consolidated trusts or consolidated SPEs continue to be accounted for as lease receivables or loan receivables, as they were before the transfer, and asset-backed beneficial interests and securities issued to the investors are accounted for as debt. When the Company and its subsidiaries have transferred financial assets to a transferee that is not subject to consolidation, the Company and its subsidiaries account for the transfer as a sale if control over the transferred assets is surrendered.

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

(k) Derivative financial instruments

The Company and its subsidiaries apply ASC 815 (“Derivatives and Hedging”), and all derivatives held by the Company and its subsidiaries are recognized 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 that are not hedges must be adjusted to fair value through the consolidated statements of income. If a derivative is a hedge, then depending on its nature, changes in its fair value will be either offset against change in the fair value of hedged assets or liabilities through the consolidated statements of income, or recorded in other comprehensive income (loss).

 

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

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

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

Changes in the fair value of derivatives that are held for trading purposes or held for the purpose of economic hedges, and the ineffective portion of changes in fair value of derivatives that qualify as a hedge, are recorded in earnings.

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

(l) Pension plans

The Company and certain subsidiaries have contributory and non-contributory pension plans covering substantially all of their employees. The Company and its subsidiaries apply ASC 715 (“Compensation—Retirement Benefits”), and 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 apply ASC 718 (“Compensation—Stock Compensation”). ASC 718 requires, with limited exception, that the cost of employee services received in exchange for an award of equity instruments be measured based on the grant-date fair value. The costs are recognized over the requisite employee service period.

(n) Stock splits

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

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

In the United States, stock splits in comparable circumstances are considered to be stock dividends and are accounted for by transferring from retained earnings to common stock and additional paid-in capital amounts equal to the fair market value of the shares issued. Common stock is increased by the par value of the shares and additional paid-in capital is increased by the excess of the market value over par value of the shares issued. Had such stock splits made prior to October 1, 2001 been accounted for in this manner, additional paid-in capital as of December 31, 2015 would have increased by approximately ¥24,674 million, with a corresponding decrease in retained earnings. Total ORIX Corporation shareholders’ equity would remain unchanged. Stock split on May 19, 2000 was excluded from the above amounts because the stock split was not considered to be a stock dividend under U.S. GAAP.

 

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(o) Cash and cash equivalents

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

(p) Restricted cash

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

(q) Installment loans

Certain loans, for which the Company and certain subsidiaries have the intent and ability to sell to outside parties in the foreseeable future, are considered held for sale and are carried at the lower of cost or fair value determined on an individual basis, except loans held for sale for which the fair value option under ASC 825 (“Financial Instruments”) was elected. A certain subsidiary elected the fair value option under ASC 825 on its loans held for sale originated on or after October 1, 2011. The certain 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, 2015 and December 31, 2015 were ¥15,613 million and ¥12,285 million, respectively. There were ¥15,361 million and ¥11,781 million of loans held for sale as of March 31, 2015 and December 31, 2015, respectively, measured at fair value by electing the fair value option.

(r) Property under facility operations

Property under facility operations consist primarily of operating facilities (including golf courses, hotels and training facilities and senior housings) and environmental assets (including mega solar), which are stated at cost less accumulated depreciation, and depreciation is calculated mainly on a straight-line basis over the estimated useful lives of the assets. Accumulated depreciation was ¥60,999 million and ¥65,240 million as of March 31, 2015 and December 31, 2015, respectively.

(s) Trade notes, accounts and other receivable

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

(t) Inventories

Inventories consist primarily of residential condominiums under development, completed residential condominiums (including those waiting to be delivered to buyers under the contract for sale), and merchandise for sale. Residential condominiums under development are carried at cost less any impairment losses, and completed residential condominiums and merchandises for sale are stated at the lower of cost or fair value less cost to sell. The cost of inventories that are unique and not interchangeable is determined on the specific identification method and the cost of other inventories is principally determined on the first-in first-out (FIFO) method. As of March 31, 2015, and December 31, 2015, residential condominiums under development were ¥97,320 million and ¥87,124 million, respectively, and completed residential condominiums and merchandises for sale were ¥68,220 million and ¥59,824 million, respectively.

The company and its subsidiaries recorded ¥4,040 million and ¥34 million of write-downs principally on residential condominiums under development for the nine months ended December 31, 2014 and 2015, respectively, resulting from an increase in development costs and/or a decrease in expected sales price. The amounts of such write-downs for the three months ended December 31, 2014 and 2015 were ¥975 million and ¥5 million respectively. These write-downs were principally recorded in costs of goods and real estate sold and included in the Real Estate segment and the Investment and Operation segment.

(u) Office facilities

Office facilities are stated at cost less accumulated depreciation. Depreciation is calculated on a declining-balance basis or straight-line basis over the estimated useful lives of the assets. Accumulated depreciation was ¥44,443 million and ¥43,805 million as of March 31, 2015 and December 31, 2015, respectively.

 

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(v) Other assets

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

(w) Goodwill and other intangible assets

The Company and its subsidiaries have followed ASC 805 (“Business Combinations”) and ASC 350 (“Intangibles”).

ASC 805 requires that all business combinations be accounted for using the acquisition method. It also requires that intangible assets acquired in a business combination be recognized apart from goodwill if the intangible assets meet one of two criteria—either the contractual-legal criterion or the separability criterion. Goodwill is measured as an excess of the aggregate of consideration transferred and the fair value of noncontrolling interests over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed in the business combination measured at fair value. The Company and its subsidiaries would recognize a bargain purchase gain when the amount of recognized net assets exceeds the sum of consideration transferred and the fair value of noncontrolling interests. In a business combination achieved in stages, the Company and its subsidiaries remeasure their previously held equity interest at their acquisition-date fair value and recognize the resulting gain or loss, if any, in earnings.

ASC 350 establishes how intangible assets (other than those acquired in a business combination) should be accounted for upon acquisition. It also addresses how goodwill and other intangible assets should be accounted for subsequent to their acquisition. Goodwill and intangible assets that have indefinite useful lives are not amortized but tested at least annually for impairment. 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 may 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. If, after assessing the totality of events or circumstances, it is determined 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, the Company and/or subsidiaries perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit falls below its carrying amount, then the Company and/or subsidiaries perform the second step of the goodwill impairment test by comparing 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 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.

The Company and its subsidiaries may perform a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the Company and/or subsidiaries conclude that it is not more likely than not that the indefinite-lived asset is impaired, then the Company and/or subsidiaries do not perform the quantitative impairment test. However, if the Company and/or subsidiaries conclude otherwise, 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. 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.

Intangible assets with finite lives are amortized over their useful lives and tested for impairment in accordance with ASC 360 (“Property, Plant, and Equipment”).

The amount of goodwill was ¥372,615 million and ¥319,056 million as of March 31, 2015 and December 31, 2015, respectively.

The amount of other intangible assets was ¥425,012 million and ¥388,323 million as of March 31, 2015 and December 31, 2015, respectively.

 

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(x) Trade notes, accounts and other payable

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

(y) Other Liabilities

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

(z) Capitalization of interest costs

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

(aa) Advertising

The costs of advertising are expensed as incurred.

(ab) Discontinued operations

In April 2014, Accounting Standards Update 2014-08 (“Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”—ASC 205 (“Presentation of Financial Statements”) and ASC 360 (“Property, Plant, and Equipment”)) was issued. This Update requires an entity to report a disposal or a classification as held for sale of a component of an entity or a group of components of an entity in discontinued operations if it represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The Company and its subsidiaries early adopted this Update on April 1, 2014. In accordance with this Update, the Company and its subsidiaries report a disposal of a component or a group of components of the Company and its subsidiaries in discontinued operations if the disposal represents a strategic shift which has (or will have) a major effect on the Company and its subsidiaries’ operations and financial results when the component or group of components is disposed by sale or classified as held for sale on or after April 1, 2014.

Accounting Standards Update 2014-08 does not apply retrospectively to a disposal or a classification as held for sale of a component or a group of components of the Company and its subsidiaries which have previously been reported in the financial statements. Accordingly, during the nine months ended December 31, 2014, the Company and its subsidiaries continue to report gains on sales and the results of operations of subsidiaries and business units, which were classified as held for sale at March 31, 2014, as income from discontinued operations in the accompanying condensed consolidated statements of income in accordance with ASC 205-20 prior to the early adoption of the update.

(ac) Earnings per share

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

(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 that subsidiary are accounted for as equity transactions. On the other hand, in a transaction that results in the loss of control, the gain or loss recognized in income includes the realized gain or loss related to the portion of ownership interest sold and the gain or loss on the remeasurement to fair value of the interest retained.

(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 in accordance with provisions including EITF Topic No. D-98 (ASC 480-10-s99-3A) (“Classification and Measurement of Redeemable Securities”).

 

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(af) Issuance of stock by an affiliate

When an affiliate issues stock 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 January 2014, Accounting Standards Update 2014-04 (“Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure”—ASC 310-40 (“Receivables—Troubled Debt Restructurings by Creditors”)) was issued. This Update clarifies when a creditor is considered to have received physical possession resulting from an in substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan. Additionally, this Update requires an entity to disclose the amount of foreclosed residential real estate property and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2014. The amendments should be applied on either a prospective basis or a modified retrospective basis. Early adoption is permitted. The Company and its subsidiaries adopted this Update on April 1, 2015. The adoption had no material effect on the Company and its subsidiaries’ results of operations or financial position.

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

 

   

Identify the contract(s) with a customer

 

   

Identify the performance obligations in the contract

 

   

Determine the transaction price

 

   

Allocate the transaction price to the performance obligations in the contract

 

   

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

This Update requires an entity to disclose more information about contracts with customers than under the current disclosure requirements. The Update is effective for fiscal years, and interim periods within those years beginning after December 15, 2017. Early adoption is permitted only for the fiscal year beginning after December 15, 2016, and interim periods within the fiscal year. An entity should apply the amendments in this Update using either a retrospective method or a cumulative-effect method. The entity using the retrospective method may elect some optional expedients to simplify a full retrospective basis. The entity using the cumulative-effect method would recognize the cumulative effect of initially applying this Update as an adjustment to the opening balance of retained earnings or net assets at the date of initial application. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

In June 2014, Accounting Standards Update 2014-11 (“Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”—ASC 860 (“Transfers and Servicing”)) was issued. This Update requires an entity to account for repurchase-to-maturity transactions as secured borrowings. This Update eliminates the guidance on repurchase financing transactions in ASC 860-10-40-42 through 40-47 and requires the transferor and transferee to symmetrically account for the initial transfer of the financial asset as a sale (provided that derecognition conditions are met) and purchase, respectively. Additionally, this Update requires new disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings. The Company and its subsidiaries adopted this Update for accounting on January 1, 2015, and for new disclosure on April 1, 2015. The adoption had no effect on the Company and its subsidiaries’ results of operations or financial position.

In June 2014, Accounting Standards Update 2014-12 (“Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”—ASC 718 (“Compensation—Stock Compensation”)) was issued. This Update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015. The amendments in this Update should be applied on either a prospective basis or a modified retrospective basis. Early adoption is permitted. The adoption is not expected to have a material effect on the Company and its subsidiaries’ results of operations or financial position.

 

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In August 2014, Accounting Standards Update 2014-13 (“Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity”—ASC 810 (“Consolidation”)) was issued. This Update permits the parent of the consolidated collateralized financing entity (“CFE”) within the scope of this Update to measure the CFE’s financial assets and liabilities based on either the fair value of the financial assets or financial liabilities, whichever has the more observable inputs. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015. Early adoption is permitted as of the beginning of a fiscal year. An entity should apply the amendments in this Update using either a modified retrospective approach or a full retrospective approach. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

In August 2014, Accounting Standards Update 2014-14 (“Classification of Certain Government—Guaranteed Mortgage Loans Upon Foreclosure”—ASC 310-40 (“Receivables—Troubled Debt Restructurings by Creditors”)) was issued. This Update requires creditors to classify certain foreclosed government guaranteed mortgage loans as a receivable from the guarantor that is measured at the amount expected to be recovered under the guarantee, without treating the guarantee as a separate unit of account. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2014. An entity should apply the amendments in this Update using either a prospective transition method or a modified retrospective transition method. The transition method must be consistent with that applied by the entity for Accounting Standards Update 2014-04 (“Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure”—ASC 310-40 (“Receivables—Troubled Debt Restructurings by Creditors”)). Early adoption is permitted only if the entity has already adopted Accounting Standards Update 2014-04. The Company and its subsidiaries adopted this Update on April 1, 2015. The adoption had no effect on the Company and its subsidiaries’ results of operations or financial position.

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

In November 2014, Accounting Standards Update 2014-16 (“Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity”—ASC 815 (“Derivatives and Hedging”)) was issued. This Update requires an issuer or an investor of hybrid financial instruments issued in the form of a share to determine whether the nature of the host contract is more akin to debt or to equity by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The amendments in this Update should be applied on a modified retrospective basis to all existing hybrid financial instruments in the form of a share as of the beginning of the fiscal year of adoption. Retrospective application is permitted to all relevant prior periods. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

In January 2015, Accounting Standards Update 2015-01 (“Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”—ASC 225-20 (“Income Statement—Extraordinary and Unusual Items”)) was issued. This Update eliminates the concept of extraordinary items from U.S. GAAP, but does not change the current presentation and disclosure requirements for material events or transactions that are unusual in nature or infrequent in occurrence. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015. The amendments in this Update should be applied on either a prospective basis or a retrospective basis. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. Generally, the effect of adopting this Update on the Company and its subsidiaries’ results of operations will depend on future transactions.

 

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In February 2015, Accounting Standards Update 2015-02 (“Amendments to the Consolidation Analysis”—ASC 810 (“Consolidation”)) was issued. This Update requires an entity to change the way to evaluate whether reporting entities should consolidate limited partnerships and similar legal entities, fees paid to a decision maker or service provider are variable interest in a VIE, and variable interests in a VIE held by related parties of the reporting entity require the reporting entity to consolidate the VIE. Additionally, the amendments in this Update rescind the indefinite deferral of FASB Statement No.167 (“Amendments to FASB Interpretation No.46(R)”), included in Accounting Standards Update 2010-10 (ASC 810 (“Consolidation”)) for certain investment companies and similar entities. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015. A reporting entity is permitted to apply the amendments in this Update using either a modified retrospective approach or a full retrospective approach. Early adoption is permitted. If an entity adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

In April 2015, Accounting Standards Update 2015-03 (“Simplifying the Presentation of Debt Issuance Costs”—ASC 835-30 (“Interest—Imputation of Interest”)) was issued. This Update requires that debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, similar to the presentation of debt discounts or premiums. This Update is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015. Retrospective application is required to all relevant prior periods. Early adoption is permitted for financial statements that have not been previously issued. The Company and its subsidiaries are currently evaluating the effect that the adoption of this Update will have on the Company and its subsidiaries’ results of operations or financial position.

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

In September 2015, Accounting Standards Update 2015-16 (“Simplifying the Accounting for Measurement-Period Adjustments”—ASC 805 (“Business Combinations”)) was issued. This Update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This Update is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update. Early application is permitted for financial statements that have not yet been issued. Generally, the effect of adopting this Update on the Company and its subsidiaries’ results of operations and financial position will depend on future transactions.

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

(ah) Elimination of lag period

Since its acquisition on February 27, 2014, the Company had been consolidating DAIKYO on a lag basis. In order to reflect DAIKYO’s financial position and results of operations and cash flows in the Company’s consolidated financial statements in a concurrent manner, the Company eliminated the lag period and has aligned the fiscal year end of DAIKYO with the Company’s fiscal year end of March 31 during the year ended March 31, 2015.

 

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Because the elimination of a lag period represents a change in accounting principle, the Company retrospectively adjusted the prior year’s consolidated financial statements for the effects of the lag accounting.

The segment information in the Note 23 “Segment Information” has been restated giving effect to these changes to conform to DAIKYO’s fiscal year end of March 31, 2015.

(ai) Major items of the consolidated statements of income

The following table provides information about “Finance revenues” for the nine and three months ended December 31, 2014 and 2015:

 

     Millions of yen  
     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
 

Direct financing leases

   ¥ 45,343       ¥ 50,538   

Interest on loans

     83,089         89,751   

Interest on investment securities

     8,458         9,465   

Other

     2,442         2,860   
  

 

 

    

 

 

 

Finance revenues

   ¥           139,332       ¥           152,614   
  

 

 

    

 

 

 
     Millions of yen  
     Three months ended
December 31, 2014
     Three months ended
December 31, 2015
 

Direct financing leases

   ¥ 15,518       ¥ 15,506   

Interest on loans

     28,638         31,458   

Interest on investment securities

     3,154         3,463   

Other

     839         943   
  

 

 

    

 

 

 

Finance revenues

   ¥             48,149       ¥             51,370   
  

 

 

    

 

 

 

 

The following table provides information about Gains on sales of real estate under operating leases included in “Operating leases” for the nine and three months ended December 31, 2014 and 2015:

 

     Millions of yen  
     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
 

Gains on sales of real estate under operating leases

   ¥             18,826       ¥             18,405   
     Millions of yen  
     Three months ended
December 31, 2014
     Three months ended
December 31, 2015
 

Gains on sales of real estate under operating leases

   ¥ 9,703       ¥ 3,711   

 

The following table provides information about “Sales of goods and real estate” and “Costs of goods and real estate sold” for the nine and three months ended December 31, 2014 and 2015:

 

     Millions of yen  
      Nine months ended 
 December 31, 2014 
      Nine months ended 
 December 31, 2015 
 

Sales of goods

   ¥ 223,895       ¥ 514,144   

Real estate sales

     56,293         95,639   
  

 

 

    

 

 

 

Sales of goods and real estate

   ¥ 280,188       ¥ 609,783   
  

 

 

    

 

 

 

Costs of goods sold

   ¥ 194,188       ¥ 465,688   

Costs of real estate sales

     56,619         81,227   
  

 

 

    

 

 

 

Costs of goods and real estate sold

   ¥           250,807       ¥           546,915   
  

 

 

    

 

 

 

 

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     Millions of yen  
     Three months ended
December 31, 2014
     Three months ended
December 31, 2015
 

Sales of goods

   ¥ 104,213       ¥ 190,519   

Real estate sales

     17,799         23,838   
  

 

 

    

 

 

 

Sales of goods and real estate

   ¥ 122,012       ¥ 214,357   
  

 

 

    

 

 

 

Costs of goods sold

   ¥ 91,931       ¥ 175,345   

Costs of real estate sales

     17,474         20,109   
  

 

 

    

 

 

 

Costs of goods and real estate sold

   ¥           109,405       ¥           195,454   
  

 

 

    

 

 

 

The following table provides information about “Services income” and “Services expense” for the nine and three months ended December 31, 2014 and 2015:

 

     Millions of yen  
     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
 

Revenues from asset management and servicing

   ¥ 160,128       ¥ 156,036   

Revenues from automobile related business

     49,870         57,989   

Revenues from facilities management related business

     89,044         84,954   

Revenues from environment and energy related business

     46,280         62,179   

Revenues from real estate management and contract work

     120,019         121,905   

Revenues from commissions for M&A advisory services, financing advice, financial restructuring advisory services and related services

     55,211         22,983   

Other

     38,543         50,489   
  

 

 

    

 

 

 

Services income

   ¥ 559,095       ¥ 556,535   
  

 

 

    

 

 

 

Expenses from asset management and servicing

   ¥ 38,704       ¥ 42,795   

Expenses from automobile related business

     32,103         35,205   

Expenses from facilities management related business

     75,117         70,319   

Expenses from environment and energy related business

     38,178         51,142   

Expenses from real estate management and contract work

     108,702         108,280   

Other

     19,026         20,523   
  

 

 

    

 

 

 

Services expense

   ¥           311,830       ¥           328,264   
  

 

 

    

 

 

 
     Millions of yen  
     Three months ended
December 31, 2014
     Three months ended
December 31, 2015
 

Revenues from asset management and servicing

   ¥ 68,174       ¥ 50,804   

Revenues from automobile related business

     17,500         19,904   

Revenues from facilities management related business

     30,907         28,532   

Revenues from environment and energy related business

     14,032         20,851   

Revenues from real estate management and contract work

     39,836         39,994   

Revenues from commissions for M&A advisory services, financing advice, financial restructuring advisory services and related services

     23,327         0   

Other

     10,198         16,065   
  

 

 

    

 

 

 

Services income

   ¥ 203,974       ¥ 176,150   
  

 

 

    

 

 

 

Expenses from asset management and servicing

   ¥ 13,648       ¥ 14,144   

Expenses from automobile related business

     11,334         12,453   

Expenses from facilities management related business

     25,648         24,265   

Expenses from environment and energy related business

     11,768         16,567   

Expenses from real estate management and contract work

     35,953         35,297   

Other

     7,000         7,658   
  

 

 

    

 

 

 

Services expense

   ¥ 105,351       ¥ 110,384   
  

 

 

    

 

 

 

 

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3.

Fair Value Measurements

The Company and its subsidiaries adopted ASC 820 (“Fair Value Measurement”). This Codification Section defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

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

 

Level 1:

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

Level 2:

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

Level 3:

  Unobservable inputs for the assets or liabilities.

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

 

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The following table presents recorded amounts of major financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2015:

March 31, 2015

 

     Millions of yen  
     Total
Carrying
Value in
Consolidated
Balance Sheets

 

    Quoted Prices
in Active
Markets for
Identical Assets
and Liabilities

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

 

     Significant
Unobservable
Inputs
(Level 3)

 

 

Assets:

          

Loans held for sale*1

   ¥ 15,361      ¥ 0       ¥ 15,361       ¥ 0   

Trading securities

     1,190,131        50,902         1,139,229         0   

Available-for-sale securities

     1,356,840        130,519         1,129,270         97,051   

Japanese and foreign government bond securities

     527,592        0         527,592         0   

Japanese prefectural and foreign municipal bond securities

     161,477        0         161,477         0   

Corporate debt securities

     287,613        0         287,613         0   

Specified bonds issued by SPEs in Japan

     7,280        0         0         7,280   

CMBS and RMBS in the Americas

     69,976        0         47,318         22,658   

Other asset-backed securities and debt securities

     147,970        0         81,718         66,252   

Equity securities*2

     154,932        130,519         23,552         861   

Other securities

     8,723        0         0         8,723   

Investment funds*3

     8,723        0         0         8,723   

Derivative assets

     25,123        6         13,247         11,870   

Interest rate swap agreements

     890        0         890         0   

Options held/written and other

     12,103        0         233         11,870   

Futures, foreign exchange contracts

     5,719        6         5,713         0   

Foreign currency swap agreements

     6,411        0         6,411         0   

Netting*4

     (2,858     0         0         0   

Net derivative assets

     22,265        0         0         0   

Other assets

     36,038        0         0         36,038   

Reinsurance recoverables*5

     36,038        0         0         36,038   
  

 

 

   

 

 

    

 

 

    

 

 

 
   ¥ 2,632,216      ¥ 181,427       ¥ 2,297,107       ¥ 153,682   
  

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities:

          

Derivative liabilities

   ¥ 29,619      ¥ 762       ¥ 28,857       ¥ 0   

Interest rate swap agreements

     1,221        0         1,221         0   

Options written and other

     6,177        0         6,177         0   

Futures, foreign exchange contracts

     12,268        762         11,506         0   

Foreign currency swap agreements

     9,788        0         9,788         0   

Credit derivatives held

     165        0         165         0   

Netting*4

     (2,858     0         0         0   

Net derivative liabilities

     26,761        0         0         0   

Accounts Payable

     5,533        0         0         5,533   

Contingent consideration

     5,533        0         0         5,533   

Policy Liabilities and Policy Account Balances

     1,254,483        0         0         1,254,483   

Variable annuity and variable life insurance contracts*6

     1,254,483        0         0         1,254,483   
  

 

 

   

 

 

    

 

 

    

 

 

 
   ¥ 1,289,635      ¥ 762       ¥ 28,857       ¥ 1,260,016   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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December 31, 2015

 

     Millions of yen  
     Total
Carrying
Value in
Consolidated
Balance Sheets

 

    Quoted Prices
in Active
Markets for
Identical Assets
and Liabilities
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)

 

     Significant
Unobservable
Inputs

(Level 3)

 

 

Assets:

          

Loans held for sale*1

   ¥ 11,781      ¥ 0       ¥ 11,781       ¥ 0   

Trading securities

     803,155        44,258         758,897         0   

Available-for-sale securities

     1,367,020        114,162         1,147,856         105,002   

Japanese and foreign government bond securities

     498,793        0         498,793         0   

Japanese prefectural and foreign municipal bond securities

     175,501        0         175,501         0   

Corporate debt securities

     407,171        0         407,166         5   

Specified bonds issued by SPEs in Japan

     5,841        0         0         5,841   

CMBS and RMBS in the Americas

     88,375        0         51,632         36,743   

Other asset-backed securities and debt securities

     63,128        0         715         62,413   

Equity securities*2

     128,211        114,162         14,049         0   

Other securities

     9,844        0         0         9,844   

Investment funds*3

     9,844        0         0         9,844   

Derivative assets

     24,574        447         19,525         4,602   

Interest rate swap agreements

     164        0         164         0   

Options held/written and other

     5,784        0         1,182         4,602   

Futures, foreign exchange contracts

     9,106        447         8,659         0   

Foreign currency swap agreements

     9,421        0         9,421         0   

Credit derivative held

     99        0         99         0   

Netting*4

     (3,445     0         0         0   

Net derivative assets

     21,129        0         0         0   

Other assets

     32,334        0         0         32,334   

Reinsurance recoverables*5

     32,334        0         0         32,334   
  

 

 

   

 

 

    

 

 

    

 

 

 
   ¥ 2,248,708      ¥ 158,867       ¥ 1,938,059       ¥ 151,782   
  

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities:

          

Derivative liabilities

   ¥ 12,633      ¥ 332       ¥ 12,301       ¥ 0   

Interest rate swap agreements

     2,698        0         2,698         0   

Options written and other

     1,373        0         1,373         0   

Futures, foreign exchange contracts

     3,603        332         3,271         0   

Foreign currency swap agreements

     4,925        0         4,925         0   

Credit derivatives held

     34        0         34         0   

Netting*4

     (3,445     0         0         0   

Net derivative liabilities

     9,188        0         0         0   

Policy Liabilities and Policy Account Balances

     867,632        0         0         867,632   

Variable annuity and variable life insurance contracts*6

     867,632        0         0         867,632   
  

 

 

   

 

 

    

 

 

    

 

 

 
   ¥ 880,265      ¥ 332       ¥ 12,301       ¥    867,632   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

*1

A certain subsidiary elected the fair value option under ASC 825 (“Financial Instrument”) on the loans held for sale originated on or after October 1, 2011. These loans are multi-family and seniors housing loans and are sold to Federal National Mortgage Association (“Fannie Mae”) or institutional investors. Included in “Other (income) and expense, net” in the consolidated statements of income were losses of ¥428 million and ¥667 million from the change in the fair value of the loans for the nine months ended December 31, 2014 and 2015, respectively. Included in “Other (income) and expense, net” in the consolidated statements of income were losses of ¥373 million and ¥691 million from the change in the fair value of the loans for the three months ended December 31, 2014 and 2015, respectively. No gains or losses were recognized in earnings during the nine months ended December 31, 2014 and 2015, 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, 2015, were ¥14,431 million and ¥15,361 million, respectively, and the amount of aggregate fair value exceeded the amount of aggregate unpaid principal balance by ¥930 million. The amounts of aggregate unpaid principal balance and aggregate fair value of the loans held for sale as of December 31, 2015, were ¥11,030 million and ¥11,781 million, respectively, and the amount of aggregate fair value exceeds the amount of aggregate unpaid principal balance by ¥751 million. As of March 31, 2015 and December 31, 2015, there were no loans that are 90 days or more past due, in non-accrual status, or both.

 

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*2

A certain subsidiary elected the fair value option under ASC 825 (“Financial Instruments”) for investments in equity securities included in available-for-sale securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a gain of ¥450 million and a loss of ¥161 million from the change in the fair value of those investments for the nine months ended December 31, 2014 and 2015, respectively. Included in “Gains on investment securities and dividends” in the consolidated statements of income were gains of ¥214 million and ¥155 million from the change in the fair value of those investments for the three months ended December 31, 2014 and 2015, respectively. The amounts of aggregate fair value elected the fair value option were ¥8,168 million and ¥13,212 million as of March 31, 2015 and December 31, 2015, respectively.

*3

Certain subsidiaries elected the fair value option under ASC 825 (“Financial Instruments”) for investments in some funds. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a gain of ¥868 million and a loss of ¥90 million from the change in the fair value of those investments for the nine months ended December 31, 2014 and 2015. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a gain of ¥360 million and a loss of ¥74 million from the change in the fair value of those investments for the three months ended December 31, 2014 and 2015. The amounts of aggregate fair value were ¥8,723 million and ¥9,844 million as of March 31, 2015 and December 31, 2015, respectively.

*4

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

*5

Certain subsidiaries elected the fair value option under ASC 825 (“Financial Instruments”) for certain reinsurance contracts held. The fair value of the reinsurance contracts elected for the fair value option in other assets was ¥36,038 million and ¥32,334 million as of March 31, 2015 and December 31, 2015, respectively. For the effect of changes in the fair value of those reinsurance recoverables on earnings during the nine and three months ended December 31, 2014 and 2015, see Note 15 “Life Insurance Operations.”

*6

A certain subsidiary elected the fair value option under ASC 825 (“Financial Instruments”) for the entire variable annuity and variable life insurance contracts held in order to match the earnings recognized for the changes in fair value of policy liabilities and policy account balances with earnings recognized for gains or losses from the investment assets managed on behalf of variable annuity and variable life policyholders, derivative contracts and the changes in fair value of reinsurance contracts. The fair value of the variable annuity and variable life insurance contracts elected for the fair value option in policy liabilities and policy account balances was ¥1,254,483 million and ¥867,632 million as of March 31, 2015 and December 31, 2015, respectively. For the effect of changes in the fair value of the variable annuity and variable life insurance contracts on earnings during the nine and three months ended December 31, 2014 and 2015, see Note 15 “Life Insurance Operations.”

 

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Table of Contents

Changes in economic conditions or valuation methodologies may require the transfer of assets and liabilities from one fair value level to another. In such instances, the Company and its subsidiaries recognize the transfer at the beginning of the quarter during which the transfers occur. The Company and its subsidiaries evaluate the significance of transfers between levels based upon size of the transfer relative to total assets, total liabilities or total earnings. For the nine months ended December 31, 2014 and 2015, there were no transfers between Level 1 and Level 2.

The following table presents the reconciliation for financial assets and liabilities (net) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended December 31, 2014 and 2015:

Nine months ended December 31, 2014

 

    Millions of yen  
      Balance at  
April 1,
2014

 

 

    Gains or losses
(realized/unrealized)
    Purchases *3

 

 

      Sales  

 

 

    Settlements *4

 

 

    Transfers
in and/
or out of
Level 3
(net) *5

 

    Balance at
December 31,
2014

 

    Change in
unrealized
gains or losses
included in
earnings for
assets and
liabilities
still held at
December 31,
2014 *1
 
       Included in 
earnings *1

 

 

    Included in
other
comprehensive
income *2

 

 

          Total      

 

 

             

Available-for-sale securities

  ¥      84,001      ¥ (1,252   ¥  8,219      ¥ 6,967      ¥ 42,688      ¥ (1,097   ¥ (19,565   ¥ (20,438   ¥ 92,556      ¥ (1,397

Corporate debt securities

    661        9        7        16        0        (15     (503     0        159        0   

Specified bonds issued by SPEs in Japan

    6,772        4        102        106        1,700        0        (1,239     0        7,339        4   

CMBS and RMBS in the Americas

    17,833        107        2,767        2,874        21,820        (469     (2,958     (20,438     18,662        (8

Other asset- backed securities and debt securities

    58,735        (1,372     5,343        3,971        19,168        (613     (14,865     0        66,396        (1,393

Other securities

    6,317        854        1,272        2,126        5,699        (4,587     0        0        9,555        854   

Investment funds

    6,317        854        1,272        2,126        5,699        (4,587     0        0        9,555        854   

Derivative assets and liabilities (net)

    2,486        (12,638     0        (12,638     25,947        0        (4,093     0        11,702        (12,638

Options held/written and other

    2,486        (12,638     0        (12,638     25,947                0        (4,093     0        11,702        (12,638

Other assets

    0        (24,332     0        (24,332     69,403        0        (356     0        44,715        (24,332

Reinsurance recoverables *6

    0        (24,332     0        (24,332     69,403        0        (356     0        44,715        (24,332

Accounts payable

    2,833        (11,408     0        (11,408     0        0        (47     0        14,194        (11,408

Contingent consideration

    2,833        (11,408     0        (11,408     0        0        (47     0        14,194        (11,408

Policy Liabilities and Policy Account Balances

    0        (102,424     0        (102,424     1,765,443        0        (428,522     0        1,439,345        (102,424

Variable annuity and variable life insurance contracts *7

    0        (102,424     0        (102,424     1,765,443        0        (428,522     0        1,439,345        (102,424
                   

Nine months ended December 31, 2015

 

  

 
    Millions of yen  
          Gains or losses
(realized/unrealized)
    Purchases *3

 

    Sales

 

    Settlements *4

 

    Transfers
in and/

or out of
Level 3
(net) *5

 

    Balance at
December 31,
2015

 

    Change in
unrealized
gains or losses
included in
earnings for
assets and
liabilities still
held at
December 31,
2015 *1
 
    Balance at
April 1,
2015

 

 

    Included in
earnings *1

 

    Included in
other
comprehensive
income *2

 

 

    Total

 

             

Available-for-sale securities

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

Corporate debt securities

    0        1        0        1        5        (1     0        0        5        0   

Specified bonds issued by SPEs in Japan

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

CMBS and RMBS in the Americas

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

Other asset- backed securities and debt securities

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

Equity securities

    861        0        8        8        0        0        0        (869     0        0   

Other securities

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

Investment funds

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

Derivative assets and liabilities (net)

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

Options held/written and other

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

Other asset

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

Reinsurance recoverables *6

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

Accounts payable

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

Contingent consideration

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

Policy Liabilities and Policy Account Balances

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

Variable annuity and variable life insurance contracts *7

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

 

*1

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

*2

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

*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. A decrease resulting from the elapse of the computation period of the contingent consideration is included.

*5

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

*6

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

*7

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

 

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Table of Contents

For the nine months ended December 31, 2014, CMBS totaling ¥20,438 million were transferred from Level 3 to Level 2, since the inputs such as trading price and/or bid price became observable due to the market returning to active and the bonds invested being more liquid with actual observable trades and/or active dealer bids. For the nine months ended December 31, 2015, equity securities totaling ¥869 million were transferred from Level 3 to Level 2, since the inputs became observable.

Changes in economic conditions or valuation methodologies may require the transfer of assets and liabilities from one fair value level to another. In such instances, the Company and its subsidiaries recognize the transfer at the beginning of the quarter during which the transfers occur. The Company and its subsidiaries evaluate the significance of transfers between levels based upon size of the transfer relative to total assets, total liabilities or total earnings. For the three months ended December 31, 2014 and 2015, there were no transfers between Level 1 and Level 2.

The following table presents the reconciliation for financial assets and liabilities (net) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 31, 2014 and 2015:

Three months ended December 31, 2014

 

    Millions of yen  
    Balance at
September 30,
2014

 

    Gains or losses
(realized/unrealized)
    Purchases *3

 

    Sales

 

    Settlements *4

 

    Transfers
in and/
or out of
Level 3
(net)

 

    Balance at
December 31,
2014

 

    Change in
unrealized
gains or losses
included in
earnings for
assets and
liabilities
still held at
December 31,
2014 *1
 
      Included in
earnings *1

 

    Included in
other
comprehensive
income *2

 

    Total

 

             

Available-for-sale securities

  ¥ 76,793      ¥ 48      ¥  3,670      ¥ 3,718      ¥ 16,344      ¥ (469   ¥ (3,830   ¥ 0      ¥ 92,556      ¥ (1,019

Corporate debt securities

    156        2        3        5        0        0        (2     0        159        0   

Specified bonds issued by SPEs in Japan

    6,340        1        18        19        1,000        0        (20     0        7,339        1   

CMBS and RMBS in the Americas

    9,260        163        1,435        1,598        9,077        (469     (804     0        18,662        (26

Other asset- backed securities and debt securities

    61,037        (118     2,214        2,096        6,267        0        (3,004     0        66,396        (994

Other securities

    9,105        379        824        1,203        497        (1,250     0        0        9,555        379   

Investment funds

    9,105        379        824        1,203        497        (1,250     0        0        9,555        379   

Derivative assets and liabilities (net)

    15,556        (3,831     0        (3,831     1,988        0        (2,011     0        11,702        (3,831

Options held/written and other

    15,556        (3,831     0        (3,831     1,988        0        (2,011     0        11,702        (3,831

Other assets

    55,500        (12,957     0        (12,957     2,373        0        (201     0        44,715        (12,957

Reinsurance recoverables *5

    55,500        (12,957     0        (12,957     2,373        0        (201     0        44,715        (12,957

Accounts payable

    5,912        (8,282     0        (8,282     0        0        0        0        14,194        (8,282

Contingent consideration

    5,912        (8,282     0        (8,282     0        0        0        0        14,194        (8,282

Policy liabilities and Policy Account Balances

    1,575,331        (70,678     0        (70,678     0        0        (206,664     0        1,439,345        (70,678

Variable annuity and variable life insurance contracts *6

    1,575,331        (70,678     0        (70,678     0        0        (206,664     0        1,439,345        (70,678

 

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Table of Contents

Three months ended December 31, 2015

 

    Millions of yen  
    Balance at
September 30,
2015

 

    Gains or losses
(realized/unrealized)
    Purchases *3

 

    Sales

 

    Settlements *4

 

    Transfers
in and/
or out of
Level 3
(net) *5

 

    Balance at
December 31,
2015

 

    Change in
unrealized
gains or losses
included in
earnings for
assets and
liabilities
still held at
December 31,
2015 *1
 
    Included in
earnings *1

 

    Included in
other
comprehensive
income *2

 

 

    Total

 

             

Available-for-sale securities

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

Corporate debt securities

    5        0        0        0        0        0        0        0        5        0   

Specified bonds issued by SPEs in Japan

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

CMBS and RMBS in the Americas

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

Other asset-backed securities and debt securities

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

Other securities

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

Investment funds

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

Derivative assets and liabilities (net)

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

Options held/written and other

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

Other asset

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

Reinsurance recoverables *6

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

Accounts payable

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

Contingent consideration

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

Policy Liabilities and Policy Account Balances

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

Variable annuity and variable life insurance contracts *7

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

 

*1

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

*2

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

*3

An increase resulting from insurance contracts ceded to reinsurance companies is 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. A decrease resulting from the elapse of the computation period of the contingent consideration is included.

*5

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

*6

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

*7

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

There were no transfers in or out of Level 3 in the three months ended December 31, 2014 and 2015.

 

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Table of Contents

The following table presents recorded amounts of assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2015. These assets are measured at fair value on a nonrecurring basis mainly to recognize impairment:

March 31, 2015

 

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

 

 

Assets:

           

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

   ¥ 21,537       ¥ 0       ¥ 0       ¥ 21,537   

Investment in operating leases and property under facility operations

     67,500         0         0         67,500   

Land and buildings undeveloped or under construction

     8,084         0         0         8,084   

Certain investment in affiliates

     1,220         0         0         1,220   

Goodwill

     2,435         0         0         2,435   
  

 

 

    

 

 

    

 

 

    

 

 

 
   ¥ 100,776       ¥ 0       ¥ 0       ¥ 100,776   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

 

           
     Millions of yen  
     Total
carrying
value in
consolidated
balance sheets
     Quoted prices
in active
markets for
identical assets
(Level 1)
     Significant
other
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)

 

 

Assets:

           

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

   ¥ 13,399       ¥ 0       ¥ 0       ¥ 13,399   

Investment in operating leases and property under facility operations

     5,763         0         0         5,763   
  

 

 

    

 

 

    

 

 

    

 

 

 
   ¥ 19,162       ¥ 0       ¥ 0       ¥ 19,162   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

Valuation process

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

Loans held for sale

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

Real estate collateral-dependent loans

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

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

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

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

 

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

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

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

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

Investment funds

Certain subsidiaries elected the fair value option for investments in some funds. These investment funds for which the fair value option is elected are classified as Level 3, because the subsidiaries measure their fair value using discounting to net asset value based on inputs that are unobservable in the market.

 

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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.

Contingent consideration

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

Variable annuity and variable life insurance contracts

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

Goodwill

The Company and its subsidiaries mainly use discounted cash flow methodologies and the business enterprise value multiples methodologies to measure the fair value of goodwill. The fair value of goodwill is classified as Level 3 because unobservable inputs are used in the methodologies.

 

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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, 2015 and December 31, 2015.

 

     March 31, 2015
     Millions of yen     

Valuation technique(s)

  

Significant

unobservable inputs

   Range
(Weighted average)
     Fair value           

Assets:

           

Available-for-sale securities

           

Specified bonds issued by SPEs in Japan

   ¥ 2,543       Discounted cash flows    Discount rate    0.9% – 3.6%

(2.2%)

     4,737       Appraisals/Broker quotes    —      —  

CMBS and RMBS in the Americas

     22,658       Discounted cash flows    Discount rate    13.6% – 32.4%

(18.2%)

         Probability of default    0.0% – 22.0%

(7.2%)

Other asset-backed securities and debt securities

     7,583       Discounted cash flows    Discount rate    1.2% – 32.4%

(13.2%)

         Probability of default    0.8% – 1.3%

(1.0%)

     58,669       Appraisals/Broker quotes    —      —  

Equity securities

     861       Discounted cash flows    Discount rate    6.2%

(6.2%)

Other securities

           

Investment funds

     8,723       Internal cash flows    Discount rate    12.0% – 28.0%

(15.8%)

Derivative assets

           

Options held/written and other

     7,982       Discounted cash flows    Discount rate    10.0% – 15.0%

(11.8%)

     3,888       Appraisals/Broker quotes    —      —  

Other assets

           

Reinsurance recoverables

     36,038       Discounted cash flows    Discount rate    (0.1)% – 0.8%

(0.2%)

         Mortality rate    0.0% – 100.0%

(1.3%)

         Lapse rate    1.5% – 54.0%

(20.8%)

        

Annuitization rate

(guaranteed minimum annuity benefit)

   0.0% – 100.0%

(100.0%)

  

 

 

          

Total

   ¥ 153,682            
  

 

 

          

Liabilities:

           

Accounts payable

           

Contingent consideration

   ¥ 5,533       Monte Carlo simulation    Discount rate    13.9%

(13.9%)

Policy liabilities and Policy Account Balances

           

Valuable annuity and variable life insurance contracts

     1,254,483       Discounted cash flows    Discount rate    (0.1)% – 0.8%

(0.2%)

         Mortality rate    0.0% – 100.0%

(1.3%)

         Lapse rate    1.5% – 54.0%

(20.8%)

        

Annuitization rate

(guaranteed minimum annuity benefit)

   0.0% – 100.0%

(100.0%)

  

 

 

          

Total

   ¥ 1,260,016            
  

 

 

          

 

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Table of Contents
     December 31, 2015
     Millions of yen     

Valuation technique(s)

  

Significant

unobservable inputs

   Range
(Weighted average)
     Fair value           

Assets:

           

Available-for-sale securities

           

Corporate debt securities

   ¥ 5       Appraisals/Broker quotes    —      —  

Specified bonds issued by SPEs in Japan

     1,262       Discounted cash flows    Discount rate    0.9%

(0.9%)

     4,579       Appraisals/Broker quotes    —      —  

CMBS and RMBS in the Americas

     36,743       Discounted cash flows    Discount rate    13.6% – 32.4%

(18.2%)

         Probability of default    0.0% – 31.1%

(8.2%)

Other asset-backed securities and debt securities

     10,053       Discounted cash flows    Discount rate    1.1% – 32.4%

(13.5%)

         Probability of default    0.7% – 1.2%

(1.0%)

     52,360       Appraisals/Broker quotes    —      —  

Other securities

           

Investment funds

     9,844       Internal cash flows    Discount rate    10.0% – 40.0%

(13.7%)

Derivative assets

           

Options held/written and other

     2,066       Discounted cash flows    Discount rate    10.0% – 15.0%

(11.5%)

     2,536       Appraisals/Broker quotes    —      —  

Other assets

           

Reinsurance recoverables

     32,334       Discounted cash flows    Discount rate    (0.1)% – 0.5%

(0.1%)

         Mortality rate    0.0% –100.0%

(0.9%)

         Lapse rate    1.5% – 54.0%

(20.4%)

        

Annuitization rate

(guaranteed minimum annuity benefit)

   0.0% – 100.0%

(99.4%)

  

 

 

          

Total

   ¥ 151,782            
  

 

 

          

Liabilities:

           

Policy liabilities and Policy Account Balances

           

Valuable annuity and variable life insurance contracts

   ¥ 867,632       Discounted cash flows    Discount rate    (0.1)% – 0.5%

(0.1%)

         Mortality rate    0.0% – 100.0%

(1.0%)

         Lapse rate    1.5% – 54.0%

(19.1%)

        

Annuitization rate

(guaranteed minimum annuity benefit)

   0.0% – 100.0%

(84.9%)

  

 

 

          

Total

   ¥    867,632            
  

 

 

          

 

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The following tables provide information about the valuation techniques and significant unobservable inputs used in the valuation of Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2015.

 

     March 31, 2015
     Millions of yen     

Valuation technique(s)

  

Significant

unobservable inputs

   Range
(Weighted average)
     Fair value           

Assets:

           

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

   ¥ 21,537       Discounted cash flows    Discount rate    5.8% – 12.0%

(9.5%)

      Direct capitalization    Capitalization rate    5.5% – 16.5%

(10.4%)

Investment in operating leases and property under facility operations

     25,732       Discounted cash flows    Discount rate    4.1% – 15.0%

(5.1%)

     41,768       Appraisals    —      —  

Land and buildings undeveloped or under construction

     8,084       Discounted cash flows    Discount rate      5.3% –
 10.1%

(9.2%)

Certain investment in affiliates

     1,220       Discounted cash flows    Discount rate    9.8%

(9.8%)

Goodwill

     2,435       Discounted cash flows    —      —  
  

 

 

     Business enterprise value multiples    —      —  
   ¥    100,776            
  

 

 

          
     December 31, 2015
     Millions of yen     

Valuation technique(s)

  

Significant

unobservable inputs

   Range
(Weighted average)
     Fair value           

Assets:

           

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

   ¥ 13,399       Discounted cash flows    Discount rate    4.3% –10.9%

(8.1%)

      Direct capitalization    Capitalization rate    5.9% – 17.0%

(9.9%)

Investment in operating leases and property under facility operations

     3,019       Discounted cash flows    Discount rate    5.3% – 10.0%

(5.9%)

     2,744       Appraisals    —      —  
  

 

 

          
   ¥ 19,162            
  

 

 

          

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

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

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

 

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4.

Acquisitions and divestitures

(1) Robeco Groep N.V. acquisition

On July 1, 2013, the Company acquired approximately 90.01% of the total voting equity interests of Robeco Groep N.V. (Head office: Rotterdam, the Netherlands, hereinafter, “Robeco”) from Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Head office: Utrecht, the Netherlands). As a result, Robeco became a consolidated subsidiary of the Company. Robeco, a mid-size global asset manager, offers a mix of investment solutions in a broad range of strategies to institutional and private investors worldwide.

The Company is required to pay contingent consideration depending on the future performance of a certain section of asset management business for each of Robeco’s fiscal years until the fiscal year ending in December 2015. The estimated fair value of such contingent consideration was ¥5,176 million, which was included in the total consideration transferred. The estimated fair value of the contingent consideration was ¥5,533 million as of March 31, 2015. Due to the elapse of the computation period of the contingent consideration during the three months ended December 31, 2015, unsettled payment of ¥2,474 million was included in trade notes, accounts and other payable in the Company’s consolidated balance sheets as of December, 31, 2015. The changes in its fair value during the nine months ended December 31, 2014 and 2015 were increased by ¥11,408 million and decreased by ¥3,059 million, respectively. The decrease of ¥47 million during the nine months ended December 31, 2014 was due to a settlement. The changes in its fair value during the three months ended December 31, 2014 and 2015 were an increase of ¥8,282 million and a decrease of ¥1,265 million, respectively. The changes in the fair value are included in other (income) and expense, net in the Company’s consolidated statements of income.

(2) Hartford Life Insurance K.K. acquisition

On July 1, 2014, the Company’s wholly owned subsidiary, ORIX Life Insurance Corporation (hereinafter, “ORIX Life Insurance”), acquired the entire outstanding shares of Hartford Life Insurance K.K. (Head office: Minato-ku, Tokyo, Japan, Business description: Life insurance business and reinsurance business, hereinafter, “HLIKK”), a subsidiary of The Hartford Financial Services Group, Inc. in accordance with the share purchase agreement executed between the Company and Hartford Life, Inc. (Head office: Simsbury, Connecticut, U.S.A.), a subsidiary of The Hartford Financial Services Group, Inc. as of April 28, 2014 in order to enhance its capital strength and improve the soundness of its management, in view of accelerating its growth. As a result, HLIKK became a consolidated subsidiary of the Company. HLIKK has discontinued selling insurance products since June 2009.

In addition, on July 1, 2015, HLIKK was merged into ORIX Life Insurance.

The total amount of acquisition consideration was ¥98,355 million, of which amount ¥97,676 million was paid in cash on July 1, 2014. An additional consideration of ¥679 million was paid in cash on December 3, 2014, as a result of the acquisition price adjustment calculated based on HLIKK’s net assets as of June 30, 2014 pursuant to the share purchase agreement.

Transaction costs of ¥1,441 million were included in selling, general and administrative expenses in the Company’s consolidated statements of income for prior periods.

The Company allocated the acquisition consideration to HLIKK’s respective assets acquired and liabilities assumed, and recorded the identified assets and liabilities based on their fair values at the acquisition date by the acquisition method of accounting in accordance with ASC 805 (“Business Combinations”).

The Company finalized the purchase price allocation during the three months ended June 30, 2015. As a result, the following table provides fair value amounts allocated to assets acquired and liabilities assumed of HLIKK.

In connection with this acquisition, the Company recognized the identifiable assets acquired and the liabilities assumed at their fair value, and recognized an excess of the fair value of the net assets acquired over the fair value of the consideration transferred as a bargain purchase gain of ¥36,082 million for the previous fiscal year, which is separately reported in the consolidated statements of income during the three months ended September 30, 2014.

 

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Table of Contents
     Millions of yen  
     Fair value amounts of assets and
liabilities
 

Cash and Cash Equivalents

   ¥ 69,244   

Installment Loans

     282   

Investment in Securities

     1,847,536   

Trade Notes, Accounts and Other Receivable

     66,340   

Office Facilities

     351   

Other Assets

     319,244   
  

 

 

 

Total Assets

     2,302,997   
  

 

 

 

Short-Term Debt

     25,000   

Trade Notes, Accounts and Other Payable

     3,979   

Policy Liabilities and Policy Account Balances

     2,125,257   

Current and Deferred Income Taxes

     8,413   

Other Liabilities

     5,911   
  

 

 

 

Total Liabilities

     2,168,560   
  

 

 

 

Net

     134,437   
  

 

 

 

Fair values of consideration transferred

     98,355   
  

 

 

 

Bargain purchase gain

   ¥ 36,082   
  

 

 

 

The following unaudited supplemental pro forma financial information presents the combined results of operations of the Company and its subsidiaries as though the acquisition had occurred as of April 1, 2013, the beginning of the year ended March 31, 2014:

 

     Millions of yen  
     Nine months ended
December 31, 2014
 

Total revenues

   ¥ 1,618,561   

Income from Continuing Operations

     199,122   

Total revenues and income from continuing operations of HLIKK included in the Company’s consolidated statements of income for the nine months ended December 31, 2014 were ¥167,808 million and ¥2,257 million, respectively.

The unaudited supplemental pro forma financial information is based on estimates and assumptions that the Company believes are reasonable and should not be taken as indicative of what the Company’s consolidated financial results would have been had the acquisition been completed on that date. The Company elected the fair value option to account for variable annuity and variable life insurance contracts at the acquisition date; however, it cannot reasonably calculate their fair values prior to the acquisition date as if the fair value option were retrospectively applied. Thus, the unaudited supplemental pro forma financial information is prepared in accordance with ASC 944 (“Financial Services—Insurance”) without applying the fair value option accounting.

(3) Other acquisitions

During fiscal 2015, the Company and its subsidiaries acquired entities other than HLIKK which were individually immaterial business combinations but were considered collectively material. The total amount of the acquisitions consideration was ¥102,621 million, which was paid mainly in cash.

The Company allocated the acquisition consideration to the entities’ respective assets acquired and liabilities assumed and recorded the identified assets, liabilities and noncontrolling interest based on their fair values at the acquisition date by the acquisition method of accounting in accordance with ASC 805 (“Business Combinations”). The fair value of noncontrolling interest is estimated based on the acquisition consideration taking into account an appraisal value using a binominal option pricing model.

The following table provides preliminary fair value amounts allocated to assets acquired and liabilities assumed of the acquired entities. The amount of goodwill and intangible assets other than goodwill could possibly be adjusted because certain of the acquisitions were made near the fiscal year-end and the purchase price allocations have not been completed yet. However, the final purchase price allocations are not expected to differ materially from the current valuation.

 

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Table of Contents
     Millions of yen  
     Provisional fair value amounts of
assets, liabilities and noncontrolling
interests
 

Cash and Cash Equivalents

   ¥ 32,234   

Property under Facility Operations

     9,289   

Trade Notes, Accounts and Other Receivable

     37,359   

Inventories

     21,249   

Office Facilities

     3,250   

Other Assets

     158,370   

Other

     1,359   
  

 

 

 

Total Assets

     263,110   
  

 

 

 

Short-Term Debt

     4,140   

Trade Notes, Accounts and Other Payable

     33,963   

Current and Deferred Income Taxes

     24,457   

Long-Term Debt

     45,739   

Other Liabilities

     26,165   
  

 

 

 

Total Liabilities

     134,464   
  

 

 

 

Noncontrolling interests

     26,025   
  

 

 

 

Aggregate fair value of considerations transferred

   ¥ 102,621   
  

 

 

 

Goodwill with a preliminary value of ¥79,872 million and other intangible assets of ¥60,839 million that were identified in connection with the acquisitions are included in other assets in the Company’s consolidated balance sheets as of December, 31, 2015. Goodwill is calculated as the excess of considerations transferred and the fair value of noncontrolling interest over the net assets recognized at fair value. Goodwill represents the future growth of the ORIX Group from new revenue streams arising from the consolidation of the entities and synergies with the Company’s existing assets and businesses. Goodwill is not deductible for tax purposes. Goodwill and other intangible assets recorded in connection with the acquisitions are included in the Corporate Financial Services segment, the Investment and Operation segment and the Overseas Business segment.

The following unaudited supplemental pro forma financial information presents the combined results of operations of the Company and its subsidiaries as though the acquisitions had occurred as of April 1, 2014, the beginning of the year ended March, 31 2015:

 

     Millions of yen  
     Nine months ended
December 31, 2014
 

Total revenues

   ¥ 1,729,684   

Income from Continuing Operations

     200,279   

Total revenues and income from continuing operations of newly consolidated subsidiaries included in the Company’s consolidated statements of income for the nine months ended December 31, 2014 were ¥135,232 million and ¥3,119 million, respectively

The unaudited supplemental pro forma financial information is based on estimates and assumptions that the Company believes are reasonable and should not be taken as indicative of what the Company’s consolidated financial results would have been had the acquisition been completed on that date.

There were no material acquisitions during the nine months ended December 31, 2015.

(4) Divestitures

Gains on sales of subsidiaries and affiliates and liquidation losses, net for the nine months ended December 31, 2014 and 2015 amounted to ¥20,226 million and ¥57,012 million, respectively. Gains on sales of subsidiaries and affiliates and liquidation losses, net for the nine months ended December 31, 2014 mainly consisted of ¥18,092 million in the Overseas Business segment. Gains on sales of subsidiaries and affiliates and liquidation losses, net for the nine months ended December 31, 2015 mainly consisted of ¥47,095 million in the Overseas Business segment and ¥9,189 million in the Investment and Operating segment.

 

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Table of Contents

Gains on sales of subsidiaries and affiliates and liquidation losses, net for the three months ended December 31, 2014 and 2015 amounted to ¥369 million and ¥603 million, respectively.

The Company sold 71.9% of the common shares of a consolidated subsidiary, STX Energy Co., Ltd. (presently GS E&R Corp., hereinafter, “STX Energy”) to a third-party during the three months ended June 30, 2014. The Company retains a 25% interest in STX Energy, which became an equity method affiliate from the three months ended June 30, 2014. The sale of the controlling interest resulted in a gain of ¥14,883 million, and the remeasurement of the retained interest to its fair value resulted in a gain of ¥1,329 million, both of which were included in earnings as gains on sales of subsidiaries and affiliates and liquidation losses, net during the three months ended June 30, 2014. The fair value of the retained interest was remeasured based on the sale proceed adjusted for a control premium.

The Company and its subsidiaries sold to third parties all of the shares of certain consolidated subsidiaries during the three months ended June 30, 2015. As a result of the sales, the Company and its subsidiaries recognized a gain of ¥8,739 million in gains on sales of subsidiaries and affiliates and liquidation losses, net in the consolidated statement of income for the nine months ended December 31, 2015.

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

 

5.

Credit Quality of Financing Receivables and the Allowance for Credit Losses

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

Allowance for credit losses—by portfolio segment

Credit quality of financing receivables—by class

 

   

Impaired loans

 

   

Credit quality indicators

 

   

Non-accrual and past-due financing receivables

Information about troubled debt restructurings—by class

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

 

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Table of Contents

The following table provides information about the allowance for credit losses as of March 31, 2015, for the nine and three months ended December 31, 2014 and 2015:

 

     Nine months ended December 31, 2014  
     Millions of yen  
     Loans     Direct
financing
leases

 

    Total

 

 
           Corporate     Purchased
loans *1

 

     
     Consumer

 

    Non-recourse
loans
    Other

 

       

Allowance for Credit Losses :

            

Beginning Balance

   ¥ 13,473      ¥ 9,047      ¥ 32,744      ¥ 14,148      ¥ 15,384      ¥ 84,796   

Provision (Reversal)

     4,086        (686     1,823        (900     1,941        6,264   

Charge-offs

     (5,025     (327     (4,312     (2,989     (2,168     (14,821

Recoveries

     833        0        628        372        42        1,875   

Other *2

     72        186        1,068        204        642        2,172   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   ¥ 13,439      ¥ 8,220      ¥ 31,951      ¥ 10,835      ¥ 15,841      ¥ 80,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually Evaluated for Impairment

     2,845        7,717        21,510        8,843        0        40,915   

Not Individually Evaluated for Impairment

     10,594        503        10,441        1,992        15,841        39,371   

Financing receivables :

            

Ending Balance

   ¥ 1,300,233      ¥ 134,240      ¥ 956,655      ¥ 43,272      ¥ 1,189,905      ¥ 3,624,305   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually Evaluated for Impairment

     11,931        21,957        53,843        16,246        0        103,977   

Not Individually Evaluated for Impairment

     1,288,302        112,283        902,812        27,026        1,189,905        3,520,328   

 

     Three months ended December 31, 2014  
     Millions of yen  
     Loans     Direct
financing
leases

 

    Total

 

 
     Consumer

 

    Corporate     Purchased
loans *1

 

     
       Non-recourse
loans
    Other

 

       

Allowance for credit losses :

            

Beginning balance

   ¥ 13,298      ¥ 7,433      ¥ 29,467      ¥ 12,106      ¥ 15,489      ¥ 77,793   

Provision (Reversal)

     1,321        272        2,409        (284     569        4,287   

Charge-offs

     (1,390     (259     (973     (1,155     (576     (4,353

Recoveries

     206        0        224        61        15        506   

Other *2

     4        774        824        107        344        2,053   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   ¥ 13,439      ¥ 8,220      ¥ 31,951      ¥ 10,835      ¥ 15,841      ¥ 80,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     As of March 31, 2015  
     Millions of yen  
     Loans     Direct
financing
leases

 

    Total

 

 
     Consumer

 

    Corporate     Purchased
loans *1

 

     
       Non-recourse
loans
    Other

 

       

Allowance for credit losses :

            

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     2,606        7,751        15,541        8,481        0        34,379   

Not Individually Evaluated for Impairment

     9,979        397        10,131        2,236        15,204        37,947   

Financing receivables :

            

Ending balance

   ¥ 1,330,353      ¥ 124,768      ¥ 965,028      ¥ 42,292      ¥ 1,216,454      ¥ 3,678,895   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

     11,993        22,032        51,793        15,216        0        101,034   

Not individually evaluated for impairment

     1,318,360        102,736        913,235        27,076        1,216,454        3,577,861   

 

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Table of Contents
     Nine months ended December 31, 2015  
     Millions of yen  
     Loans     Direct
financing
leases

 

    Total

 

 
     Consumer

 

    Corporate     Purchased
loans *1

 

     
       Non-recourse
loans
    Other

 

       

Allowance for credit losses :

            

Beginning balance

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

Provision (Reversal)

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

Charge-offs

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

Recoveries

     308        0        372        196        13        889   

Other *3

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

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

Not individually evaluated for impairment

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

Financing receivables :

            

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

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

Not individually evaluated for impairment

     1,427,220        72,028        967,392        17,973        1,207,133        3,691,746   
     Three months ended December 31, 2015  
     Millions of yen  
     Loans     Direct
financing
leases

 

    Total

 

 
     Consumer

 

    Corporate     Purchased
loans *1

 

     
       Non-recourse
loans
    Other

 

       

Allowance for credit losses :

            

Beginning Balance

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

Provision (Reversal)

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

Charge-offs

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

Recoveries

     (550     0        97        (47     0        (500

Other *3

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*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 in accordance with ASC 310-30 (“Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality”).

*2

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

*3

Other mainly includes foreign currency translation adjustments and decrease in allowance related to newly consolidated subsidiaries. Additionally, other in non-recourse loans includes a decrease of ¥5,221 million due to the sale of controlling class interests of a certain VIE, which was formerly consolidated, to a third party and resulting in deconsolidation of that VIE.

*4

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

 

– 63 –


Table of Contents

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

 

   

business characteristics and financial conditions of obligors;

 

   

current economic conditions and trends;

 

   

prior charge-off experience;

 

   

current delinquencies and delinquency trends; and

 

   

value of underlying collateral and guarantees.

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

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

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

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

 

– 64 –


Table of Contents

The following table provides information about the impaired loans as of March 31, 2015 and December 31, 2015:

 

    

March 31, 2015

 
          Millions of yen  

Portfolio segment

 

  

Class

 

   Loans
Individually
Evaluated for
Impairment
     Unpaid
Principal
Balance

 

     Related
Allowance

 

 

With no related allowance recorded *1 :

      ¥ 18,404       ¥ 18,359       ¥ 0   

Consumer borrowers

        450         407         0   
   Housing loans      450         407         0   
   Card loans      0         0         0   
   Other      0         0         0   

Corporate borrowers

        17,954         17,952         0   

Non-recourse loans

   Japan      4,975         4,975         0   
  

The Americas

     0         0         0   

Other

   Real estate companies      5,167         5,167         0   
  

Entertainment companies

     892         892         0   
  

Other

     6,920         6,918         0   

Purchased loans

        0         0         0   

With an allowance recorded *2 :

        82,630         79,418         34,379   

Consumer borrowers

        11,543         9,737         2,606   
  

Housing loans

     4,907         3,118         1,689   
  

Card loans

     3,741         3,731         566   
  

Other

     2,895         2,888         351   

Corporate borrowers

        55,871         54,465         23,292   

Non-recourse loans

   Japan      310         310         64   
  

The Americas

     16,747         16,747         7,687   

Other

   Real estate companies      15,940         15,708         5,099   
  

Entertainment companies

     3,580         3,548         1,429   
  

Other

     19,294         18,152         9,013   

Purchased loans

        15,216         15,216         8,481   
     

 

 

    

 

 

    

 

 

 

Total :

      ¥ 101,034       ¥ 97,777       ¥ 34,379   
     

 

 

    

 

 

    

 

 

 

Consumer borrowers

        11,993         10,144         2,606   
     

 

 

    

 

 

    

 

 

 
  

Housing loans

     5,357         3,525         1,689   
     

 

 

    

 

 

    

 

 

 
  

Card loans

     3,741         3,731         566   
     

 

 

    

 

 

    

 

 

 
  

Other

     2,895         2,888         351   
     

 

 

    

 

 

    

 

 

 

Corporate borrowers

        73,825         72,417         23,292   
     

 

 

    

 

 

    

 

 

 

Non-recourse loans

   Japan      5,285         5,285         64   
     

 

 

    

 

 

    

 

 

 
  

The Americas

     16,747         16,747         7,687   
     

 

 

    

 

 

    

 

 

 

Other

   Real estate companies      21,107         20,875         5,099   
     

 

 

    

 

 

    

 

 

 
  

Entertainment companies

     4,472         4,440         1,429   
     

 

 

    

 

 

    

 

 

 
  

Other

     26,214         25,070         9,013   
     

 

 

    

 

 

    

 

 

 

Purchased loans

        15,216         15,216         8,481   
     

 

 

    

 

 

    

 

 

 

 

– 65 –


Table of Contents
    

December 31, 2015

 
          Millions of yen  

Portfolio segment

 

  

Class

 

   Loans
individually
evaluated for
impairment
     Unpaid
principal
balance

 

     Related
allowance

 

 

With no related allowance recorded *1 :

      ¥       10,224       ¥ 10,176       ¥ 0   

Consumer borrowers

        1,007         963         0   
   Housing loans      1,007         963         0   
   Card loans      0         0         0   
   Other      0         0         0   

Corporate borrowers

        9,217         9,213         0   

Non-recourse loans

   Japan      4,776         4,776         0   
   The Americas      0         0         0   

Other

   Real estate companies      0         0         0   
   Entertainment companies      316         316         0   
   Other      4,125         4,121         0   

Purchased loans

        0         0         0   

With an allowance recorded *2 :

        60,194         58,621         21,790   

Consumer borrowers

        13,686         12,880         2,745   
   Housing loans      4,280         3,494         1,501   
   Card loans      4,072         4,061         623   
   Other      5,334         5,325         621   

Corporate borrowers

        34,636         33,869         12,790   

Non-recourse loans

   Japan      297         297         73   
   The Americas      6,282         6,282         1,339   

Other

   Real estate companies      8,478         8,354         2,163   
   Entertainment companies      2,689         2,680         1,074   
   Other      16,890         16,256         8,141   

Purchased loans

        11,872         11,872         6,255   
     

 

 

    

 

 

    

 

 

 

Total :

      ¥ 70,418       ¥ 68,797       ¥  21,790   
     

 

 

    

 

 

    

 

 

 

Consumer borrowers

        14,693         13,843         2,745   
     

 

 

    

 

 

    

 

 

 
   Housing loans      5,287         4,457         1,501   
     

 

 

    

 

 

    

 

 

 
   Card loans      4,072         4,061         623   
     

 

 

    

 

 

    

 

 

 
   Other      5,334         5,325         621   
     

 

 

    

 

 

    

 

 

 

Corporate borrowers

        43,853         43,082         12,790   
     

 

 

    

 

 

    

 

 

 

Non-recourse loans

   Japan      5,073         5,073         73   
     

 

 

    

 

 

    

 

 

 
   The Americas      6,282         6,282         1,339   
     

 

 

    

 

 

    

 

 

 

Other

   Real estate companies      8,478         8,354         2,163   
     

 

 

    

 

 

    

 

 

 
   Entertainment companies      3,005         2,996         1,074   
     

 

 

    

 

 

    

 

 

 
   Other      21,015         20,377         8,141   
     

 

 

    

 

 

    

 

 

 

Purchased loans

        11,872         11,872         6,255   
     

 

 

    

 

 

    

 

 

 

 

*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.

The following table provides information about the average recorded investments in impaired loans and interest income on impaired loans for the nine and three months ended December 31, 2014 and 2015:

 

Nine months ended December 31, 2014

 
          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

      ¥ 11,780       ¥ 218       ¥ 160   
  

Housing loans

     6,518         138         93   
  

Card loans

     3,275         45         37   
  

Other

     1,987         35         30   

Corporate borrowers

        85,278         1,647         1,304   

Non-recourse loans

   Japan      6,148         0         0   
   The Americas      15,385         384         384   

Other

   Real estate companies      22,235         353         292   
   Entertainment companies      6,321         169         116   
   Other      35,189         741         512   

Purchased loans

        19,616         0         0   
     

 

 

    

 

 

    

 

 

 

Total

      ¥ 116,674       ¥ 1,865       ¥ 1,464   
     

 

 

    

 

 

    

 

 

 

 

– 67 –


Table of Contents

Nine months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

 

  

Class

 

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

 

     Interest on
Impaired Loans
Collected in Cash
 

Consumer borrowers

      ¥ 12,838       ¥ 248       ¥ 214   
  

Housing loans

     5,226         140         124   
  

Card loans

     3,898         55         45   
  

Other

     3,714         53         45   

Corporate borrowers

        61,924         785         774   

Non-recourse loans

   Japan      5,147         9         9   
  

The Americas

     13,442         242         242   

Other

   Real estate companies      15,853         166         165   
  

Entertainment companies

     3,856         75         75   
  

Other

     23,626         293         283   

Purchased loans

        13,685         0         0   
     

 

 

    

 

 

    

 

 

 

Total

      ¥ 88,447       ¥ 1,033       ¥ 988   
     

 

 

    

 

 

    

 

 

 

Three months ended December 31, 2014

 
          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

      ¥ 11,834       ¥ 76       ¥ 55   
  

Housing loans

     6,017         49         29   
  

Card loans

     3,502         15         14   
  

Other

     2,315         12         12   

Corporate borrowers

        74,539         404         360   

Non-recourse loans

   Japan      5,082         0         0   
  

The Americas

     14,374         124         124   

Other

   Real estate companies      18,007         78         78   
  

Entertainment companies

     5,093         34         34   
  

Other

     31,983         168         124   

Purchased loans

        17,285         0         0   
     

 

 

    

 

 

    

 

 

 

Total

      ¥ 103,658       ¥ 480       ¥ 415   
     

 

 

    

 

 

    

 

 

 

Three months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

 

  

Class

 

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

 

     Interest on
Impaired Loans
Collected in Cash
 

Consumer borrowers

      ¥ 13,870       ¥ 118       ¥ 110   
  

Housing loans

     5,269         83         77   
  

Card loans

     4,046         17         16   
  

Other

     4,555         18         17   

Corporate borrowers

        52,251         241         238   

Non-recourse loans

   Japan      5,075         4         4   
  

The Americas

     10,417         48         48   

Other

   Real estate companies      11,524         53         52   
  

Entertainment companies

     3,355         17         17   
  

Other

     21,880         119         117   

Purchased loans

        12,125         0         0   
     

 

 

    

 

 

    

 

 

 

Total

      ¥ 78,246       ¥ 359       ¥ 348   
     

 

 

    

 

 

    

 

 

 

 

*

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

 

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Table of Contents

The following table provides information about the credit quality indicators as of March 31, 2015 and December 31, 2015:

 

    

March 31, 2015

 
          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

      ¥ 1,311,725       ¥ 11,993       ¥ 6,635       ¥ 18,628       ¥ 1,330,353   
  

Housing loans

     1,050,531         5,357         3,898         9,255         1,059,786   
  

Card loans

     238,660         3,741         824         4,565         243,225   
  

Other

     22,534         2,895         1,913         4,808         27,342   

Corporate borrowers

        1,015,971         73,825         0         73,825         1,089,796   

Non-recourse loans

   Japan      36,250         5,285         0         5,285         41,535   
  

The Americas

     66,486         16,747         0         16,747         83,233   

Other

   Real estate companies      235,493         21,107         0         21,107         256,600   
  

Entertainment companies

     101,701         4,472         0         4,472         106,173   
  

Other

     576,041         26,214         0         26,214         602,255   

Purchased loans

        27,076         15,216         0         15,216         42,292   

Direct financing leases

        1,201,081         0         15,373         15,373         1,216,454   
  

Japan

     819,592         0         10,293         10,293         829,885   
  

Overseas

     381,489         0         5,080         5,080         386,569   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥ 3,555,853       ¥ 101,034       ¥ 22,008       ¥ 123,042       ¥ 3,678,895   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

December 31, 2015

 
          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

      ¥ 1,419,593       ¥ 14,693       ¥ 7,627       ¥ 22,320       ¥ 1,441,913   
  

Housing loans

     1,114,638         5,287         2,424         7,711         1,122,349   
  

Card loans

     251,243         4,072         735         4,807         256,050   
  

Other

     53,712         5,334         4,468         9,802         63,514   

Corporate borrowers

        1,039,420         43,853         0         43,853         1,083,273   

Non-recourse loans

   Japan      15,257         5,073         0         5,073         20,330   
  

The Americas

     56,771         6,282         0         6,282         63,053   

Other

   Real estate companies      251,115         8,478         0         8,478         259,593   
  

Entertainment companies

     102,062         3,005         0         3,005         105,067   
  

Other

     614,215         21,015         0         21,015         635,230   

Purchased loans

        17,973         11,872         0         11,872         29,845   

Direct financing leases

        1,194,130         0         13,003         13,003         1,207,133   
  

Japan

     835,028         0         7,990         7,990         843,018   
  

Overseas

     359,102         0         5,013         5,013         364,115   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥ 3,671,116       ¥ 70,418       ¥ 20,630       ¥ 91,048       ¥ 3,762,164   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The following table provides information about the non-accrual and past-due financing receivables as of March 31, 2015 and December 31, 2015:

 

     March 31, 2015  
          Millions of yen  
     Class

 

   Past-due financing receivables      Total
financing
receivables
     Non-accrual

 

 

Portfolio segment

 

      30-89 days
past-due

 

     90 days
or more
past-due
     Total
past-due

 

       

Consumer borrowers

      ¥ 3,229       ¥ 9,825       ¥ 13,054       ¥ 1,330,353       ¥ 9,825   
   Housing loans      1,672         6,503         8,175         1,059,786         6,503   
   Card loans      704         1,202         1,906         243,225         1,202   
   Other      853         2,120         2,973         27,342         2,120   

Corporate borrowers

        7,991         33,694         41,685         1,089,796         43,697   

Non-recourse loans

   Japan      0         4,975         4,975         41,535         4,975   
   The Americas      6,639         9,846         16,485         83,233         14,716   

Other

   Real estate companies      37         8,366         8,403         256,600         8,730   
   Entertainment companies      0         571         571         106,173         571   
   Other      1,315         9,936         11,251         602,255         14,705   

Direct financing leases

        6,142         15,373         21,515         1,216,454         15,373   
   Japan      1,877         10,293         12,170         829,885         10,293   
   Overseas      4,265         5,080         9,345         386,569         5,080   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥ 17,362       ¥ 58,892       ¥ 76,254       ¥ 3,636,603       ¥ 68,895   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2015  
          Millions of yen  
     Class

 

   Past-due financing receivables      Total
financing
receivables
     Non-accrual

 

 

Portfolio segment

 

      30-89 days
past-due

 

     90 days
or more
past-due
     Total
past-due

 

       

Consumer borrowers

      ¥ 5,165       ¥ 11,299       ¥ 16,464       ¥ 1,441,913       ¥ 11,299   
   Housing loans      1,888         4,650         6,538         1,122,349         4,650   
   Card loans      1,112         1,179         2,291         256,050         1,179   
   Other      2,165         5,470         7,635         63,514         5,470   

Corporate borrowers

        3,804         18,229         22,033         1,083,273         26,079   

Non-recourse loans

   Japan      0         4,776         4,776         20,330         4,776   
   The Americas      1,448         428         1,876         63,053         6,840   

Other

   Real estate companies      37         2,817         2,854         259,593         2,817   
   Entertainment companies      42         142         184         105,067         142   
   Other      2,277         10,066         12,343         635,230         11,504   

Direct financing leases

        6,734         13,003         19,737         1,207,133         13,003   
   Japan      999         7,990         8,989         843,018         7,990   
   Overseas      5,735         5,013         10,748         364,115         5,013   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      ¥ 15,703       ¥ 42,531       ¥ 58,234       ¥ 3,732,319       ¥ 50,381   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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Table of Contents

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

The following table provides information about troubled debt restructurings of financing receivables that occurred during the nine and three months ended December 31, 2014 and 2015:

 

Nine months ended December 31, 2014

 
          Millions of yen  

Portfolio segment

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

Consumer borrowers

      ¥ 3,990       ¥ 2,907   
   Housing loans      357         179   
   Card loans      1,920         1,489   
   Other      1,713         1,239   

Corporate borrowers

        806         787   

Non-recourse loans

   The Americas      145         145   

Other

   Other      661         642   
     

 

 

    

 

 

 

Total

      ¥ 4,796       ¥ 3,694   
     

 

 

    

 

 

 

Nine months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

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

Consumer borrowers

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

Corporate borrowers

        156         154   

Non-recourse loans

   The Americas      147         147   

Other

   Other      9         7   
     

 

 

    

 

 

 

Total

      ¥ 4,765       ¥ 3,572   
     

 

 

    

 

 

 

 

– 71 –


Table of Contents

Three months ended December 31, 2014

 
          Millions of yen  

Portfolio segment

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

Consumer borrowers

      ¥ 1,352       ¥ 1,016   
   Housing loans      84         36   
   Card loans      625         510   
   Other      643         470   

Corporate borrowers

        276         273   

Other

   Other      276         273   
     

 

 

    

 

 

 

Total

      ¥ 1,628       ¥ 1,289   
     

 

 

    

 

 

 

Three months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

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

Consumer borrowers

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

 

 

    

 

 

 

Total

      ¥ 1,630       ¥ 1,265   
     

 

 

    

 

 

 

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.

 

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Table of Contents

The following table provides information about financing receivables modified as troubled debt restructurings within the previous 12 months from December 31, 2014 and for which there was a payment default during the nine and three months ended December 31, 2014:

Nine months ended December 31, 2014

 
          Millions of yen  

Portfolio segment

  

Class

   Recorded Investment  

Consumer borrowers

      ¥ 113   
   Housing loans      8   
   Card loans      75   
   Other      30   

Corporate borrowers

        497   

Other

   Other      497   
     

 

 

 

Total

      ¥ 610   
     

 

 

 

Three months ended December 31, 2014

 
          Millions of yen  

Portfolio segment

  

Class

   Recorded Investment  

Consumer borrowers

      ¥ 50   
   Card loans      32   
   Other      18   

Corporate borrowers

        134   

Other

   Other      134   
     

 

 

 

Total

      ¥ 184   
     

 

 

 

 

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

Nine months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

  

Class

   Recorded Investment  

Consumer borrowers

      ¥ 90   
   Card loans      59   
   Other      31   
     

 

 

 

Total

      ¥ 90   
     

 

 

 

Three months ended December 31, 2015

 
          Millions of yen  

Portfolio segment

  

Class

   Recorded Investment  

Consumer borrowers

      ¥ 46   
   Card loans      26   
   Other      20   
     

 

 

 

Total

      ¥ 46   
     

 

 

 

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.

 

– 73 –


Table of Contents

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.

In January 2014, Accounting Standards Update 2014-04 (“Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure”—ASC 310-40 (“Receivables—Troubled Debt Restructurings by Creditors”)) was issued. This Update clarifies when a creditor is considered to have received physical possession resulting from an in substance repossession or foreclosure or residential real estate property collateralizing a consumer mortgage loan. Additionally, this Update requires an entity to disclose the amount of foreclosed residential real estate property and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The Company and its subsidiaries adopted this Update on April 1, 2015.

As of December 31, 2015, there was no amount of foreclosed residential real estate property based on this Update. The carrying amounts of installment loans in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure is ¥661 million as of December 31, 2015.

 

6.

Investment in Securities

Investment in securities as of March 31, 2015 and December 31, 2015 consists of the following:

 

     Millions of yen  
     March 31, 2015      December 31, 2015  

Trading securities*

   ¥ 1,190,131       ¥ 803,155   

Available-for-sale securities

     1,356,840         1,367,020   

Held-to-maturity securities

     115,599         115,297   

Other securities

     183,687         158,002   
  

 

 

    

 

 

 

Total

   ¥ 2,846,257       ¥ 2,443,474   
  

 

 

    

 

 

 

 

*

The amount of assets under management of variable annuity and variable life insurance contracts included in trading securities were ¥1,165,347 million and ¥791,899 million as of March 31, 2015 and December 31, 2015, respectively.

Other securities consist mainly of non-marketable equity securities, preferred capital shares carried at cost and investment funds carried at an amount that reflects equity income and loss based on the investor’s share. The aggregate carrying amount of other securities accounted for under the cost method totaled ¥43,718 million and ¥26,273 million as of March 31, 2015 and December 31, 2015, respectively. Investments with an aggregate cost of ¥42,838 million and ¥26,102 million, respectively, were not evaluated for impairment because the Company and its subsidiaries did not identify any events or changes in circumstances that might have had a significant adverse effect on the fair value of those investments and it was not practicable to estimate the fair value of the investments.

A certain subsidiary elected the fair value option under ASC 825 (“Financial Instruments”) for certain investments in equity securities included in available-for-sale securities, which as of March 31, 2015 and December 31, 2015, were fair valued at ¥8,168 million and ¥13,212 million, respectively.

Certain subsidiaries elected the fair value option under ASC 825 (“Financial Instruments”) for certain investments in a trust and investment funds included in other securities whose net asset values do not represent the fair value of investments due to the illiquid nature of these investments. The subsidiaries manage these investments on a fair value basis and the election of the fair value option enables the subsidiaries to reflect more appropriate assumptions to measure the fair value of these investments. As of March 31, 2015 and December 31, 2015, the fair values of these investments were ¥8,723 million and ¥9,844 million, respectively.

 

– 74 –


Table of Contents

The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale securities and held-to-maturity securities in each major security type as of March 31, 2015 and December 31, 2015 are as follows:

March 31, 2015

 

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

Available-for-sale:

          

Japanese and foreign government bond securities

   ¥ 517,500       ¥ 10,127       ¥ (35   ¥ 527,592   

Japanese prefectural and foreign municipal bond securities

     155,943         5,644         (110     161,477   

Corporate debt securities

     283,859         3,891         (137     287,613   

Specified bonds issued by SPEs in Japan

     7,257         54         (31     7,280   

CMBS and RMBS in the Americas

     67,049         3,073         (146     69,976   

Other asset-backed securities and debt securities

     147,308         1,286         (624     147,970   

Equity securities

     104,096         52,568         (1,732     154,932   
  

 

 

    

 

 

    

 

 

   

 

 

 
     1,283,012         76,643         (2,815     1,356,840   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

          

Japanese government bond securities and other

     115,599         14,490         (112     129,977   
  

 

 

    

 

 

    

 

 

   

 

 

 
   ¥ 1,398,611       ¥ 91,133       ¥ (2,927   ¥ 1,486,817   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2015

 

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

Available-for-sale:

          

Japanese and foreign government bond securities

   ¥ 486,636       ¥ 12,413       ¥ (256   ¥ 498,793   

Japanese prefectural and foreign municipal bond securities

     171,873         3,709         (81     175,501   

Corporate debt securities

     404,638         3,189         (656     407,171   

Specified bonds issued by SPEs in Japan

     5,803         38         0        5,841   

CMBS and RMBS in the Americas

     87,583         1,610         (818     88,375   

Other asset-backed securities and debt securities

     67,053         1,123         (5,048     63,128   

Equity securities

     93,421         37,002         (2,212     128,211   
  

 

 

    

 

 

    

 

 

   

 

 

 
     1,317,007         59,084         (9,071     1,367,020   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

          

Japanese government bond securities and other

     115,297         17,199         (138     132,358   
  

 

 

    

 

 

    

 

 

   

 

 

 
   ¥ 1,432,304       ¥ 76,283       ¥ (9,209   ¥ 1,499,378   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The following tables provide information about available-for-sale securities and held-to-maturity securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss portion as of March 31, 2015 and December 31, 2015, respectively:

March 31, 2015

 

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

Available-for-sale:

               

Japanese and foreign government bond securities

   ¥ 5,407       ¥ (35   ¥ 0       ¥ 0      ¥ 5,407       ¥ (35

Japanese prefectural and foreign municipal bond securities

     44,782         (110     0         0        44,782         (110

Corporate debt securities

     81,108         (58     6,363         (79     87,471         (137

Specified bonds issued by SPEs in Japan

     0         0        1,269         (31     1,269         (31

CMBS and RMBS in the Americas

     9,754         (31     506         (115     10,260         (146

Other asset-backed securities and debt securities

     10,950         (304     8,127         (320     19,077         (624

Equity securities

     6,640         (1,723     585         (9     7,225         (1,732
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     158,641         (2,261     16,850         (554     175,491         (2,815
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity:

               

Japanese government bond securities and other

     4,889         (112     0         0        4,889         (112
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   ¥ 163,530       ¥ (2,373   ¥ 16,850       ¥ (554   ¥ 180,380       ¥ (2,927
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

December 31, 2015

 

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

Available-for-sale:

               

Japanese and foreign government bond securities

   ¥ 21,253       ¥ (256   ¥ 0       ¥ 0      ¥ 21,253       ¥ (256

Japanese prefectural and foreign municipal bond securities

     27,892         (48     867         (33     28,759         (81

Corporate debt securities

     154,078         (656     0         0        154,078         (656

CMBS and RMBS in the Americas

     47,756         (661     4,042         (157     51,798         (818

Other asset-backed securities and debt securities

     12,966         (1,537     20,109         (3,511     33,075         (5,048

Equity securities

     26,171         (1,706     2,543         (506     28,714         (2,212
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     290,116         (4,864     27,561         (4,207     317,677         (9,071
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity:

               

Japanese government bond securities and other

     4,919         (138     0         0        4,919         (138
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   ¥ 295,035       ¥ (5,002   ¥ 27,561       ¥ (4,207   ¥ 322,596       ¥ (9,209
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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The number of investment securities that were in an unrealized loss position as of March 31, 2015 and December 31, 2015 were 197 and 321 respectively. The gross unrealized losses on these securities are attributable to a number of factors including changes in interest rates, credit spreads and market trends.

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 corporate debt securities in Japan and overseas countries, CMBS and RMBS in the Americas, and other asset-backed securities.

The unrealized loss associated with corporate debt securities is primarily due to changes in the market interest rate 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 as of December 31, 2015.

The unrealized loss associated with CMBS and RMBS in the Americas and other asset-backed securities is primarily caused by changes in credit spreads and interest rates. In order to determine whether a credit loss exists, the Company and its subsidiaries estimate the present value of anticipated cash flows, discounted at the current yield to accrete the security. The cash flows are estimated based on a number of assumptions such as default rate and prepayment speed, as well as seniority of the security. Then, a credit loss is assessed by comparing the present value of the expected cash flows to the security’s amortized cost basis. Based on that assessment, the Company and its subsidiaries expect to recover the entire amortized cost basis and no credit impairment was identified. Because the Company and its subsidiaries do not intend to sell the investments and it is not more likely than not that the Company and its subsidiaries will be required to sell the investments before recovery of their amortized cost basis, the Company and its subsidiaries do not consider these investments to be other-than-temporarily impaired as of December 31, 2015.

For equity securities with unrealized losses, the Company and its subsidiaries consider various factors to determine whether the decline is other-than-temporary, including the length of time and the extent to which the fair value has been less than the carrying value and the issuer’s specific economic conditions as well as the ability and intent to hold these securities for a period of time sufficient to recover the securities’ carrying amounts. Based on our ongoing monitoring process, the Company and its subsidiaries do not consider these investments to be other-than-temporarily impaired as of December 31, 2015.

The total other-than-temporary impairment with an offset for the amount of the total other-than-temporary impairment recognized in other comprehensive income (loss) for the nine months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
      Nine months ended 
 December 31, 2014 
     Nine months ended 
 December 31, 2015 
 

Total other-than-temporary impairment losses

   ¥                         6,384      ¥                         3,954   

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

     (68     (2
  

 

 

   

 

 

 

Net impairment losses recognized in earnings

   ¥ 6,316      ¥ 3,952   
  

 

 

   

 

 

 

 

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The total other-than-temporary impairment with an offset for the amount of the total other-than-temporary impairment recognized in other comprehensive income (loss) for the three months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Total other-than-temporary impairment losses

   ¥                         4,562      ¥                            470   

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

     0        0   
  

 

 

   

 

 

 

Net impairment losses recognized in earnings

   ¥ 4,562       ¥ 470   
  

 

 

   

 

 

 

Total other-than-temporary impairment losses for the nine and three months ended December 31, 2014 related to equity securities, debt securities and other securities. Total other-than-temporary impairment losses for the nine and three months ended December 31, 2015 related to equity securities, debt securities and other securities.

Other-than-temporary impairment losses related to debt securities recognized during the nine months ended December 31, 2014 and 2015 were mainly due to credit losses arising from the decline in the value of the underlying assets. Because the Company and its subsidiaries do not intend to sell the investments and it is not more likely than not that the Company and its subsidiaries will be required to sell the investments before recovery of their amortized cost basis, the credit loss component is recognized in earnings, and the non-credit loss component is recognized in other comprehensive income (loss), net of applicable income taxes. The credit loss assessment is made by comparing the securities’ amortized cost basis with the portion of the estimated fair value of the underlying assets available to repay the specified bonds, or with the present value of the expected cash flows from the mortgage-backed securities, that were estimated based on a number of assumptions such as seniority of the security.

Roll-forwards of the amount related to credit losses on other-than-temporarily impaired debt securities recognized in earnings according to ASC 320-10-35-34 (“Investments—Debt and Equity Securities—Recognition of Other-Than-Temporary Impairments”) for the nine months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
      Nine months ended 
 December 31, 2014 
     Nine months ended 
 December 31, 2015 
 

Beginning

   ¥                         1,991      ¥                         2,633   

Addition during the period:

    

Credit loss for which an other-than-temporary impairment was not previously recognized

     456        0   

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

     234        49   

Reduction during the period:

    

For securities sold

     (3     (604

Due to change in intent to sell or requirement to sell

     (22     (661
  

 

 

   

 

 

 

Ending

   ¥ 2,656      ¥ 1,417   
  

 

 

   

 

 

 

 

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Roll-forwards of the amount related to credit losses on other-than-temporarily impaired debt securities recognized in earnings according to ASC 320-10-35-34 (“Investments—Debt and Equity Securities—Recognition of Other-Than-Temporary Impairments”) for the three months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Beginning

   ¥                         2,444      ¥                         2,421   

Addition during the period:

    

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

     234        0   

Reduction during the period:

    

For securities sold

     0        (343

Due to change in intent to sell or requirement to sell

     (22     (661
  

 

 

   

 

 

 

Ending

   ¥ 2,656      ¥ 1,417   
  

 

 

   

 

 

 

The Company and its subsidiaries recorded other-than-temporary impairments related to the non-credit losses arising from foregoing debt securities for CMBS and RMBS in the Americas. These impairments included the amount of unrealized gains or losses for the changes in fair value of the debt securities after recognition of other-than-temporary impairments in earnings. As of March 31, 2015, an unrealized gain of ¥234 million and an unrealized loss of ¥58 million, before taxes, were included and an unrealized gain of ¥149 million and an unrealized loss of ¥37 million, net of taxes, were included in unrealized gains or losses of accumulated other comprehensive income. As of December 31, 2015, an unrealized gain of ¥69 million and an unrealized loss of ¥21 million, before taxes, were included and an unrealized gain of ¥44 million and an unrealized loss of ¥14 million, net of taxes, were included in unrealized gains or losses of accumulated other comprehensive income.

 

7.

Securitization Transactions

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

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

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

In accordance with ASC 860 (“Transfers and Servicing”) and ASC 810 (“Consolidation”), trusts or SPEs used in securitization transactions have been consolidated if the Company and its subsidiaries are the primary beneficiary of the trusts or SPEs.

During the nine months ended December 31, 2014 and 2015, there was no securitization transaction accounted for as a sale.

 

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Quantitative information about delinquencies, impaired loans and components of financial assets sold on securitization and other assets managed together as of March 31, 2015 and December 31, 2015, and quantitative information about net credit loss for the nine and three months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
     Total principal
amount of
receivables

 

     Principal amount of
receivables that are
90 days or more
past-due and
impaired loans
 
     March 31, 2015      December 31, 2015      March 31, 2015      December 31, 2015  

Direct financing leases

   ¥ 1,216,454       ¥ 1,207,133       ¥ 15,373       ¥ 13,003   

Installment loans

     2,478,054         2,567,316         107,669         78,045   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets recorded on the balance sheet

     3,694,508         3,774,449         123,042         91,048   

Direct financing leases sold on securitization

     894         739         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets managed together or sold on securitization

   ¥ 3,695,402       ¥ 3,775,188       ¥ 123,042       ¥ 91,048   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Millions of yen  
     Credit loss  
     Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
     Three months ended
December 31, 2014
     Three months ended
December 31, 2015
 

Direct financing leases

   ¥ 2,126       ¥ 2,277       ¥ 561       ¥ 495   

Installment loans

     10,815         10,112         3,286         4,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets recorded on the balance sheet

     12,941         12,389         3,847         4,595   

Direct financing leases sold on securitization

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets managed together or sold on securitization

   ¥ 12,941       ¥ 12,389       ¥ 3,847       ¥ 4,595   
  

 

 

    

 

 

    

 

 

    

 

 

 

A certain subsidiary originates and sells loans into the secondary market while retaining the obligation to service those loans. In addition, it undertakes obligations to service loans originated by others. The servicing assets related to those servicing activities are included in other assets and the balances of these servicing assets as of March 31, 2015 and December 31, 2015 were ¥18,376 million and ¥18,544 million, respectively. During the nine months ended December 31, 2014 and 2015, the servicing assets were increased by ¥2,527 million and ¥3,508 million, respectively, mainly from loans sold with servicing retained and decreased by ¥3,186 million and ¥3,407 million, respectively, mainly from amortization and increased by ¥2,822 million and ¥67 million, respectively, from the effects of changes in foreign exchange rates. During the three months ended December 31, 2014 and 2015, the servicing assets were increased by ¥881 million and ¥1,230 million, respectively, mainly from loans sold with servicing retained and decreased by ¥1,229 million and ¥941 million, respectively, mainly from amortization and increased by ¥1,771 million and ¥97 million, respectively, from the effects of changes in foreign exchange rates. The fair value of the servicing assets as of March 31, 2015 and December 31, 2015 were ¥27,676 million and ¥26,430 million, respectively.

 

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Table of Contents
8.

Variable Interest Entities

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

These SPEs are not always controlled by voting rights, and there are cases where voting rights do not exist for those SPEs. ASC 810 (“Consolidation”) addresses consolidation by business enterprises of SPEs within the scope of ASC 810. Generally these SPEs are entities where (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. Entities within the scope of ASC 810 are called VIEs.

According to ASC 810, the Company and its subsidiaries are required to 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 shall consolidate a VIE:

 

   

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

 

   

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

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

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

 

   

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

 

   

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

 

   

Involvement of other variable interest holders

 

   

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

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

 

   

Designing the structuring of a transaction

 

   

Providing an equity investment and debt financing

 

   

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

 

   

Providing liquidity and other financial support

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

 

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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, 2015

 

     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

     1,036         123         0         0   

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

     223,069         65,017         135,723         7,000   

(d) VIEs for corporate rehabilitation support business

     4,366         34         0         0   

(e) VIEs for investment in securities

     21,027         8,064         12,928         23,974   

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

     393,502         250,402         325,236         0   

(g) VIEs for securitization of commercial mortgage loans originated by third parties

     36,452         43,280         36,452         0   

(h) VIEs for power generation projects

     84,242         31,236         30,227         173,560   

(i) Other VIEs

     202,708         99,545         187,065         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 966,402       ¥ 497,701       ¥ 727,631       ¥ 204,534   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

  
     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

     986         0         0         0   

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

     177,815         57,290         114,855         7,000   

(d) VIEs for corporate rehabilitation support business

     2,692         16         0         0   

(e) VIEs for investment in securities

     19,707         8,384         12,467         0   

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

     459,878         284,586         379,367         0   

(g) VIEs for securitization of commercial mortgage loans originated by third parties

     21,572         22,640         21,572         0   

(h) VIEs for power generation projects

     136,966         53,258         46,524         139,281   

(i) Other VIEs

     242,456         113,969         227,320         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥     1,062,072       ¥        540,143       ¥        802,105       ¥        146,281   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

*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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Table of Contents
2.

Non-consolidated VIEs

March 31, 2015

 

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

Types of VIEs

 

   Total assets

 

     Specified bonds
and

non-recourse
loans
     Investments

 

     Maximum
exposure to loss
*
 

(a) VIEs for liquidating customer assets

   ¥ 32,421       ¥ 0       ¥ 2,091       ¥ 9,551   

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

     325,429         14,084         26,283         50,017   

(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

     3,038,819         0         28,584         55,940   

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

     0         0         0         0   

(g) VIEs for securitization of commercial mortgage loans originated by third parties

     1,100,830         0         8,064         8,139   

(h) VIEs for power generation projects

     0         0         0         0   

(i) Other VIEs

     26,894         14         3,038         3,052   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 4,524,393       ¥ 14,098       ¥ 68,060       ¥ 126,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

 

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

Types of VIEs

 

   Total assets

 

     Specified bonds
and

non-recourse
loans
     Investments

 

     Maximum
exposure to loss
*
 

(a) VIEs for liquidating customer assets

   ¥ 33,419       ¥ 0       ¥ 2,091       ¥ 9,551   

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

     222,892         4,776         15,919         27,968   

(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

     3,090,997         0         29,303         52,095   

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

     0         0         0         0   

(g) VIEs for securitization of commercial mortgage loans originated by third parties

     342,052         0         7,136         7,193   

(h) VIEs for power generation projects

     0         0         0         0   

(i) Other VIEs

     83,448         0         5,606         5,606   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥     3,772,808       ¥             4,776       ¥           60,055       ¥        102,413   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

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 and its subsidiaries have, are mainly included in other assets in the Company’s condensed consolidated balance sheets. The Company has a commitment agreement by which the Company may be required to make additional investment in certain such non-consolidated VIEs.

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

Customers and the Company and its subsidiaries are involved with VIEs formed to acquire real estate and/or develop real estate projects. In each case, a customer establishes and makes an equity investment in a VIE that is designed to be bankruptcy remote from the customer. The VIEs acquire real estate and/or develop real estate projects.

The Company and its subsidiaries provide non-recourse loans to such VIEs and hold specified bonds issued by them and/or make investments in them. The Company and its subsidiaries have consolidated certain VIEs because the Company or its subsidiary effectively controls the VIEs by acting as the asset manager of the VIEs.

In the Company’s condensed consolidated balance sheets, assets of consolidated VIEs are mainly included in investment in affiliates.

With respect to the variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, specified bonds are included in investment in securities, non-recourse loans are included in installment loans, and investments are mainly included in investment in securities, investment in affiliates and other assets in the Company’s condensed consolidated balance sheets. The Company and its subsidiaries have commitment agreements by which the Company and its subsidiaries may be required to provide additional investment in certain non-consolidated VIEs as long as the agreed-upon terms are met. Under these agreements, the Company and its subsidiaries are committed to invest in these VIEs with the other investors based on their respective ownership percentages. The Company and its subsidiaries concluded that the VIEs are not consolidated because the power to direct these VIEs is held by unrelated parties. In some cases, the Company and its subsidiaries concluded that the VIEs are not consolidated because the power to direct these VIEs is shared among multiple unrelated parties.

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

The Company and its subsidiaries establish VIEs and acquire real estate to borrow non-recourse loans from financial institutions and simplify the administration activities necessary for the real estate. The Company and its subsidiaries consolidate such VIEs even though the Company and its subsidiaries may not have voting rights if substantially all of such VIEs’ subordinated interests are issued to the Company and its subsidiaries, and therefore the VIEs are controlled by and for the benefit of the Company and its subsidiaries.

The Company and its subsidiaries contributed additional funding to certain consolidated VIEs, since those VIEs had difficulty repaying debt and accounts payable. The amount of the additional funding for fiscal 2015 was ¥5,628 million. There was no additional funding or acquisition of subordinated interests during the nine months ended December 31, 2015.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in cash and cash equivalents, restricted cash, investment in operating leases, property under facility operations and other assets, and liabilities of those consolidated VIEs are mainly included in long-term debt. The Company has a commitment agreement by which the Company may be required to make additional investment in certain such consolidated VIEs.

(d) VIEs for corporate rehabilitation support business

Financial institutions, the Company and its subsidiary are involved with VIEs established for the corporate rehabilitation support business. VIEs receive the funds from investors including the financial institutions, the Company and the subsidiary, and purchase loan receivables due from borrowers which have financial problems, but are deemed to have the potential to recover in the future. The servicing operations for the VIEs are conducted by the subsidiary.

 

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The Company and its subsidiary consolidated such VIEs since the Company and the subsidiary have the majority of the investment share of such VIEs, and have the power to direct the activities of the VIEs that most significantly impact the entities’ economic performance through the servicing operations.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in installment loans, and liabilities of those consolidated VIEs are mainly included in other liabilities.

(e) VIEs for investment in securities

The Company and its subsidiaries have interests in VIEs that are investment funds and mainly invest in equity and debt securities. Such VIEs are managed by a certain subsidiary or fund management companies that are independent of the Company and its subsidiaries.

The Company consolidated certain such VIEs since the Company has the majority of the investment share of them, and has the power to direct the activities of those VIEs that most significantly impact the entities’ economic performance through involvement with the design of the VIEs or other means.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in investment in securities and investment in affiliates, and liabilities of those consolidated VIEs are mainly included in long-term debt. A subsidiary has a commitment agreement by which the subsidiary may be required to make additional investment in certain such consolidated VIEs.

Variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, are included in investment in securities in the Company’s condensed consolidated balance sheets. The Company and its subsidiaries have a commitment agreement by which the Company and its subsidiaries may be required to make additional investment in certain such non-consolidated VIEs.

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

The Company and its subsidiaries use VIEs to securitize financial assets such as direct financing leases receivables and loans receivables. In the securitization process, these financial assets are transferred to SPEs, and the SPEs issue beneficial interests or securities backed by the transferred financial assets to investors. After the securitization, the Company and its subsidiaries continue to hold a subordinated part of the securities and act as a servicer.

The Company and its subsidiaries consolidated such VIEs since the Company and its subsidiaries have the power to direct the activities that most significantly impact the entity’s economic performance by designing the securitization scheme and conducting servicing activities, and have a responsibility to absorb losses of the VIEs that could potentially be significant to the entities by retaining the subordinated part of the securities.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in restricted cash, investment in direct financing leases and installment loans, and liabilities of those consolidated VIEs are mainly included in long-term debt.

(g) VIEs for securitization of commercial mortgage loans originated by third parties

The Company and its subsidiaries invest in CMBS and RMBS originated by third parties. In some cases of such securitization, certain subsidiaries hold the subordinated portion and the subsidiaries act as a special-servicer of the securitization transaction. As the special servicer, the subsidiaries have rights to dispose of real estate collateral related to the securitized commercial mortgage loans.

The subsidiaries consolidate certain of these VIEs when the subsidiaries have the power to direct the activities of the VIEs that most significantly impact the entities’ economic performance through its role as special-servicer, including the right to dispose of the collateral, and have a responsibility to absorb losses of the VIEs that could potentially be significant to the entities by holding the subordinated part of the securities.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in installment loans, and liabilities of those consolidated VIEs are mainly included in long-term debt.

 

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Variable interests of non-consolidated VIEs, which the Company and its subsidiaries have, are included in investment in securities in the Company’s condensed consolidated balance sheets. The Company has a commitment agreement by which the Company may be required to make additional investment in certain such non-consolidated VIEs.

(h) VIEs for power generation projects

The Company and its subsidiaries may use VIEs in power generation projects. VIEs receive the funds from the Company and its subsidiaries, install solar panels on acquired or leased lands, and sell the generated power to electric power companies. The Company and its subsidiaries have consolidated certain VIEs because the Company and its subsidiaries have the majority of the investment shares of such VIEs and effectively control the VIEs by acting as the asset manager of the VIEs.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in property under facility operations and other assets, and liabilities of those consolidated VIEs are mainly included in long-term debt. The Company has commitment agreements by which the Company may be required to make additional investment or execute loans in certain such consolidated VIEs.

(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 to finance. The Company transfers its own held assets to SPEs, which borrow non-recourse loan from financial institutions and effectively pledge such assets as collateral. The Company continually holds subordinated interests in the SPEs and perform administrative work of such assets. The Company consolidates such SPEs because the Company has a right to direct the activities of them that most significantly impact their economic performance by setting up the scheme and performing administrative work of the assets and has the obligation to absorb expected losses of them by holding the subordinated interests.

In the Company’s condensed consolidated balance sheets, assets of the consolidated VIEs are mainly included in investment in operating leases, investment in affiliates and office facilities, and liabilities of those consolidated VIEs are mainly included in long-term debt.

Variable interests in non-consolidated VIEs, which the Company and its subsidiaries hold, are mainly included in installment loans in the Company’s condensed consolidated balance sheets.

 

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9.

Investment in Affiliates

Investment in affiliates at March 31 and December 31, 2015 consists of the following:

 

     Millions of yen  
     March 31, 2015     December 31, 2015  

Shares

   ¥ 368,989      ¥ 460,400   

Loans

     9,098        20,391   
  

 

 

   

 

 

 
   ¥                378,087      ¥                480,791   
  

 

 

   

 

 

 

Combined and condensed information relating to the affiliates as of and for the nine months ended December 31, 2014 and 2015 are as follows (some operation data for entities reflect only the period since the Company and its subsidiaries made the investment):

 

     Millions of yen  
     As of and for the nine
months ended
December 31, 2014
    As of and for the nine
months ended
December 31, 2015
 

Operations:

    

Total revenues

   ¥ 685,098      ¥ 981,300   

Income before income taxes

     69,032        116,354   

Net income

     53,680        85,806   

Financial position:

    

Total assets

   ¥             6,303,650      ¥             7,953,241   

Total liabilities

     5,026,985        6,007,691   

Total equity

     1,276,665        1,945,550   

 

10.

Redeemable Noncontrolling Interests

Changes in redeemable noncontrolling interests for the nine months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Beginning balance

   ¥ 53,177      ¥ 66,901   

Adjustment of redeemable noncontrolling interests to redemption value

     279        (1,811

Transaction with noncontrolling interests

     1,545        1,004   

Comprehensive income

    

Net income

     3,344        810   

Other comprehensive income

    

Net change of foreign currency translation adjustments

     9,381        1,264   

Total other comprehensive income

     9,381        1,264   

Comprehensive income

     12,725        2,074   

Cash dividends

     (1,622     (11,274

Property dividends

     0        (3,774

Partial sale of the parent’s ownership interest in subsidiaries that results in the loss of control

     0        (34,961
  

 

 

   

 

 

 

Ending balance

   ¥                  66,104      ¥                  18,159   
  

 

 

   

 

 

 

 

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11.

Accumulated Other Comprehensive Income (Loss)

Changes in each component of accumulated other comprehensive income (loss) for the nine months ended December 31, 2014 and 2015, are as follows:

 

     Nine months ended December 31, 2014  
     Millions of yen  
     Net unrealized
gains (losses) on
investment in
securities
    Defined benefit
pension plans

 

    Foreign
currency
translation
adjustments
    Net unrealized
gains (losses) on
derivative
instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at March 31, 2014

   ¥ 38,651      ¥ (6,230   ¥ (31,949   ¥ (434   ¥ 38   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on investment in securities, net of tax of ¥(9,804) million

     20,175              20,175   

Reclassification adjustment included in net income, net of tax of ¥7,393 million

     (13,569           (13,569

Defined benefit pension plans, net of tax of ¥4,347 million

       (13,109         (13,109

Reclassification adjustment included in net income, net of tax of ¥89 million

       (166         (166

Foreign currency translation adjustments, net of tax of ¥(5,224) million

         55,790          55,790   

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

         21          21   

Net unrealized gains on derivative instruments, net of tax of ¥976 million

           (2,661     (2,661

Reclassification adjustment included in net income, net of tax of ¥(508) million

           1,771        1,771   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     6,606        (13,275     55,811        (890     48,252   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transaction with noncontrolling interests

     0        0        96        0        96   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (loss) Attributable to the Noncontrolling Interest

     978        (1,197     5,006        (63     4,724   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0        0        9,381        0        9,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   ¥ 44,279      ¥ (18,308   ¥ 9,571      ¥ (1,261   ¥ 34,281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Nine months ended December 31, 2015  
     Millions of yen  
     Net unrealized
gains (losses) on
investment in
securities
    Defined benefit
pension plans

 

    Foreign
currency
translation
adjustments
    Net unrealized
gains (losses) on
derivative
instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at March 31, 2015

   ¥ 50,330      ¥ (19,448   ¥ 431      ¥ (940   ¥ 30,373   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on investment in securities, net of tax of ¥(704) million

     3,265              3,265   

Reclassification adjustment included in net income, net of tax of ¥10,069 million

     (17,480           (17,480

Defined benefit pension plans, net of tax of ¥105 million

       (358         (358

Reclassification adjustment included in net income, net of tax of ¥(15) million

       245            245   

Foreign currency translation adjustments, net of tax of ¥2,253 million

         (5,683       (5,683

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

         975          975   

Net unrealized losses on derivative instruments, net of tax of ¥850 million

           (1,943     (1,943

Reclassification adjustment included in net income, net of tax of ¥(527) million

           1,320        1,320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (14,215     (113     (4,708     (623     (19,659
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (loss) Attributable to the Noncontrolling Interest

     28        45        (168     (32     (127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0        0        1,264        0        1,264   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   ¥ 36,087      ¥ (19,606   ¥ (5,373   ¥ (1,531   ¥ 9,577   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

– 89 –


Table of Contents

Changes in each component of accumulated other comprehensive income (loss) for the three months ended December 31, 2014 and 2015, are as follows:

 

     Three months ended December 31, 2014  
     Millions of yen  
     Net unrealized
gains (losses) on
investment in
securities
    Defined benefit
pension plans

 

    Foreign
currency
translation
adjustments
    Net unrealized
gains (losses) on
derivative
instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at September 30, 2014

   ¥ 35,309      ¥ (6,128   ¥ (20,060   ¥ (454   ¥ 8,667   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on investment in securities, net of tax of ¥(5,885) million

     11,986              11,986   

Reclassification adjustment included in net income, net of tax of ¥1,458 million

     (2,610           (2,610

Defined benefit pension plans, net of tax of ¥4,282 million

       (13,454         (13,454

Reclassification adjustment included in net income, net of tax of ¥29 million

       (55         (55

Foreign currency translation adjustments, net of tax of ¥(3,679) million

         40,566          40,566   

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

         21          21   

Net unrealized gains on derivative instruments, net of tax of ¥585 million

           (1,522     (1,522

Reclassification adjustment included in net income, net of tax of ¥(213) million

           694        694   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     9,376        (13,509     40,587        (828     35,626   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transaction with noncontrolling interests

     0        0        96        0        96   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (loss) Attributable to the Noncontrolling Interest

     406        (1,329     5,095        (21     4,151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0        0        5,957        0        5,957   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   ¥ 44,279      ¥ (18,308   ¥ 9,571      ¥ (1,261   ¥ 34,281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Three months ended December 31, 2015  
     Millions of yen  
     Net unrealized
gains (losses) on
investment in
securities
    Defined benefit
pension plans

 

    Foreign
currency
translation
adjustments
    Net unrealized
gains (losses) on
derivative
instruments
    Accumulated
other
comprehensive
income (loss)
 

Balance at September 30, 2015

   ¥ 36,530      ¥ (19,904   ¥ (4,924   ¥ (930   ¥ 10,772   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on investment in securities, net of tax of ¥(501) million

     1,458              1,458   

Reclassification adjustment included in net income, net of tax of ¥1,232 million

     (1,859           (1,859

Defined benefit pension plans, net of tax of ¥(113) million

       270            270   

Reclassification adjustment included in net income, net of tax of ¥(4) million

       78            78   

Foreign currency translation adjustments, net of tax of ¥1,171 million

         (1,794       (1,794

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

         226          226   

Net unrealized losses on derivative instruments, net of tax of ¥235 million

           (588     (588

Reclassification adjustment included in net income, net of tax of ¥38 million

           (47     (47
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (401     348        (1,568     (635     (2,256
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (loss) Attributable to the Noncontrolling Interest

     42        50        (1,225     (34     (1,167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income Attributable to the Redeemable Noncontrolling Interests

     0        0        106        0        106   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   ¥ 36,087      ¥ (19,606   ¥ (5,373   ¥ (1,531   ¥ 9,577   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Amounts reclassified to net income from accumulated other comprehensive income (loss) in the nine months ended December 31, 2014 and 2015 are as follows:

 

     Nine months ended December 31, 2014

Details about accumulated other comprehensive

income components

   Reclassification
adjustment included in
net income
   

Consolidated statements of

income caption

 

   Millions of yen    

Net unrealized gains (losses) on investment in securities

    

Sales of investment securities

   ¥ 21,129      Gains on investment securities and dividends

Sales of investment securities

     3,733      Life insurance premiums and related investment income

Amortization of investment securities

     183      Finance revenues

Amortization of investment securities

     (1,489   Life insurance premiums and related investment income

Others

     (2,594   Write-downs of securities and other
  

 

 

   
     20,962      Total before tax
     (7,393   Tax expenses or benefits
  

 

 

   
   ¥ 13,569      Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 720      See Note 14 “Pension Plans”

Amortization of net actuarial loss

     (423   See Note 14 “Pension Plans”

Amortization of transition obligation

     (42   See Note 14 “Pension Plans”
  

 

 

   
     255      Total before tax
     (89   Tax expenses or benefits
  

 

 

   
   ¥ 166      Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Sales or liquidation

   ¥ (21   Gains on sales of subsidiaries and affiliates and liquidation losses, net
  

 

 

   
     (21   Total before tax
     0      Tax expenses or benefits
  

 

 

   
   ¥ (21   Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 25      Finance revenues/Interest expense

Foreign exchange contracts

     878      Other (income) and expense, net

Foreign currency swap agreements

     (3,182   Finance revenues/Interest expense/ Other (income) and expense, net
  

 

 

   
     (2,279   Total before tax
     508      Tax expenses or benefits
  

 

 

   
   ¥ (1,771   Net of tax
  

 

 

   

 

– 92 –


Table of Contents
     Nine months ended December 31, 2015

Details about accumulated other comprehensive

income components

   Reclassification
adjustment included in
net income
   

Consolidated statements of
income caption

 

   Millions of yen    

Net unrealized gains (losses) on investment in securities

    

Sales of investment securities

   ¥ 25,010      Gains on investment securities and dividends

Sales of investment securities

     6,515      Life insurance premiums and related investment income

Amortization of investment securities

     (158   Finance revenues

Amortization of investment securities

     (1,165   Life insurance premiums and related investment income

Others

     (2,653   Write-downs of securities and other
  

 

 

   
     27,549      Total before tax
     (10,069   Tax expenses or benefits
  

 

 

   
   ¥ 17,480      Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 776      See Note 14 “Pension Plans”

Amortization of net actuarial loss

     (997   See Note 14 “Pension Plans”

Amortization of transition obligation

     (39   See Note 14 “Pension Plans”
  

 

 

   
     (260   Total before tax
     15      Tax expenses or benefits
  

 

 

   
   ¥ (245   Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Sales or liquidation

   ¥ (975   Gains on sales of subsidiaries and affiliates and liquidation losses, net
  

 

 

   
     (975   Total before tax
     0      Tax expenses or benefits
  

 

 

   
   ¥ (975   Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 7      Finance revenues/Interest expense

Foreign exchange contracts

     2,618      Other (income) and expense, net

Foreign currency swap agreements

     (4,472   Finance revenues/Interest expense/Other (income) and expense, net
  

 

 

   
     (1,847   Total before tax
     527      Tax expenses or benefits
  

 

 

   
   ¥ (1,320   Net of tax
  

 

 

   

 

– 93 –


Table of Contents

Amounts reclassified to net income from accumulated other comprehensive income (loss) in the three months ended December 31, 2014 and 2015 are as follows:

 

     Three months ended December 31, 2014

Details about accumulated other comprehensive

income components

 

   Reclassification
adjustment included in
net income
   

Consolidated statements of

income caption

 

   Millions of yen    

Net unrealized gains (losses) on investment in securities

    

Sales of investment securities

   ¥ 3,012      Gains on investment securities and dividends

Sales of investment securities

     2,793      Life insurance premiums and related investment income

Amortization of investment securities

     692      Finance revenues

Amortization of investment securities

     (1,167   Life insurance premiums and related investment income

Others

     (1,262   Write-downs of securities and other
  

 

 

   
     4,068      Total before tax
     (1,458   Tax expenses or benefits
  

 

 

   
   ¥ 2,610      Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 241      See Note 14 “Pension Plans”

Amortization of net actuarial loss

     (143   See Note 14 “Pension Plans”

Amortization of transition obligation

     (14   See Note 14 “Pension Plans”
  

 

 

   
     84      Total before tax
     (29   Tax expenses or benefits
  

 

 

   
   ¥ 55      Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Sales or liquidation

   ¥ (21   Gains on sales of subsidiaries and affiliates and liquidation losses, net
  

 

 

   
     (21   Total before tax
     0      Tax expenses or benefits
  

 

 

   
   ¥ (21   Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 13      Finance revenues/Interest expense

Foreign exchange contracts

     855      Other (income) and expense, net

Foreign currency swap agreements

     (1,775   Finance revenues/Interest expense/ Other (income) and expense, net
  

 

 

   
     (907   Total before tax
     213      Tax expenses or benefits
  

 

 

   
   ¥ (694   Net of tax
  

 

 

   

 

– 94 –


Table of Contents
     Three months ended December 31, 2015

Details about accumulated other comprehensive

income components

   Reclassification
adjustment included in
net income
   

Consolidated statements of

income caption

 

   Millions of yen    

Net unrealized gains (losses) on investment in securities

    

Sales of investment securities

   ¥ 3,973      Gains on investment securities and dividends

Sales of investment securities

     27      Life insurance premiums and related investment income

Amortization of investment securities

     (56   Finance revenues

Amortization of investment securities

     (430   Life insurance premiums and related investment income

Others

     (423   Write-downs of securities and other
  

 

 

   
     3,091      Total before tax
     (1,232   Tax expenses or benefits
  

 

 

   
   ¥ 1,859      Net of tax
  

 

 

   

Defined benefit pension plans

    

Amortization of prior service credit

   ¥ 259      See Note 14 “Pension Plans”

Amortization of net actuarial loss

     (328   See Note 14 “Pension Plans”

Amortization of transition obligation

     (13   See Note 14 “Pension Plans”
  

 

 

   
     (82   Total before tax
     4      Tax expenses or benefits
  

 

 

   
   ¥ (78   Net of tax
  

 

 

   

Foreign currency translation adjustments

    

Sales or liquidation

   ¥ (226   Gains on sales of subsidiaries and affiliates and liquidation losses, net
  

 

 

   
     (226   Total before tax
     0      Tax expenses or benefits
  

 

 

   
   ¥ (226   Net of tax
  

 

 

   

Net unrealized gains (losses) on derivative instruments

    

Interest rate swap agreements

   ¥ 5      Finance revenues/Interest expense

Foreign exchange contracts

     21      Other (income) and expense, net

Foreign currency swap agreements

     59      Finance revenues/Interest expense/ Other (income) and expense, net
  

 

 

   
     85      Total before tax
     (38   Tax expenses or benefits
  

 

 

   
   ¥ 47      Net of tax
  

 

 

   

 

– 95 –


Table of Contents
12.

ORIX Corporation Shareholders’ Equity

Information about ORIX Corporation Shareholders’ Equity for the nine months ended December 31, 2014 and 2015 are as follows:

 

(1)

Dividend payments

 

    

Nine months ended December 31, 2014

   Nine months ended December 31, 2015

Resolution

   The board of directors on May 22, 2014    The board of directors on May 20, 2015

Type of shares

   Common stock    Common stock

Total dividends paid

   ¥30,117 million    ¥47,188 million

Dividend per share

   ¥23.00    ¥36.00

Date of record for dividend

   March 31, 2014    March 31, 2015

Effective date for dividend

   June 3, 2014    June 3, 2015

Dividend resource

   Retained earnings    Retained earnings

Resolution

      The board of directors on October 29, 2015

Type of shares

      Common stock

Total dividends paid

      ¥28,846 million

Dividend per share

      ¥22.00

Date of record for dividend

      September 30, 2015

Effective date for dividend

      December 2, 2015

Dividend resource

      Retained earnings

Total dividends paid by resolution of the board of directors on May 20, 2015 and October 29, 2015 include ¥77 million and ¥42 million of dividends paid to the Board Incentive Plan Trust, respectively.

 

(2)

There were no applicable dividends for which the date of record was in the nine months ended December 31, 2014 and 2015, respectively, and for which the effective date was after December 31, 2014 and 2015, respectively.

 

13.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Personnel expenses

   ¥               193,310      ¥               189,281   

Selling expenses

     43,806        49,391   

Administrative expenses

     66,486        74,559   

Depreciation of office facilities

     3,281        3,722   
  

 

 

   

 

 

 

Total

   ¥ 306,883      ¥ 316,953   
  

 

 

   

 

 

 

Selling, general and administrative expenses for the three months ended December 31, 2014 and 2015 are as follows:

 

                                                             
     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Personnel expenses

   ¥ 69,087      ¥ 57,608   

Selling expenses

     16,136        16,796   

Administrative expenses

     23,433        24,965   

Depreciation of office facilities

     1,153        1,240   
  

 

 

   

 

 

 

Total

   ¥               109,809      ¥               100,609   
  

 

 

   

 

 

 

 

– 96 –


Table of Contents
14.

Pension Plans

The Company and certain subsidiaries have contributory and non-contributory pension plans covering substantially all of their employees. Those contributory funded pension plans include defined benefit pension plans and defined contribution pension plans. Under the plans, employees are entitled to lump-sum payments at the time of termination of their employment or pension payments. Defined benefit pension plans consist of a plan of which the amounts of such payments are determined on the basis of length of service and remuneration at the time of termination and a cash balance plan.

The Company and its subsidiaries’ funding policy is to contribute annually the amounts actuarially determined. Assets of the plans are invested primarily in interest-bearing securities and marketable equity securities.

Net pension cost of the plans for the nine months ended December 31, 2014 and 2015 consists of the following:

 

                                                                   
     Millions of yen  
   Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Japanese plans:

    

Service cost

   ¥                   3,298      ¥                   3,288   

Interest cost

     871        739   

Expected return on plan assets

     (1,765     (1,933

Amortization of prior service credit

     (695     (696

Amortization of net actuarial loss (gain)

     376        (13

Amortization of transition obligation

     40        37   
  

 

 

   

 

 

 

Net periodic pension cost

   ¥ 2,125      ¥ 1,422   
  

 

 

   

 

 

 
     Millions of yen  
   Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Overseas plans:

    

Service cost

   ¥ 1,690      ¥ 2,820   

Interest cost

     1,736        1,273   

Expected return on plan assets

     (2,810     (3,429

Amortization of prior service credit

     (25     (80

Amortization of net actuarial loss

     47        1,010   

Amortization of transition obligation

     2        2   
  

 

 

   

 

 

 

Net periodic pension cost

   ¥ 640      ¥ 1,596   
  

 

 

   

 

 

 

Net pension cost of the plans for the three months ended December 31, 2014 and 2015 consists of the following:

 

                                                                   
     Millions of yen  
   Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Japanese plans:

    

Service cost

   ¥                   1,094      ¥                   1,081   

Interest cost

     291        256   

Expected return on plan assets

     (590     (642

Amortization of prior service credit

     (232     (232

Amortization of net actuarial loss (gain)

     126        (4

Amortization of transition obligation

     13        13   
  

 

 

   

 

 

 

Net periodic pension cost

   ¥ 702      ¥ 472   
  

 

 

   

 

 

 

 

– 97 –


Table of Contents
     Millions of yen  
   Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Overseas plans:

    

Service cost

   ¥ 590      ¥ 873   

Interest cost

     593        390   

Expected return on plan assets

     (959     (1,102

Amortization of prior service credit

     (9     (27

Amortization of net actuarial loss

     17        332   

Amortization of transition obligation

     1        0   
  

 

 

   

 

 

 

Net periodic pension cost

   ¥                      233      ¥                      466   
  

 

 

   

 

 

 

 

15.

Life Insurance Operations

Life insurance premiums and related investment income for the nine and three months ended December 31, 2014 and 2015 consist of the following:

 

     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Life insurance premiums

   ¥ 134,530      ¥ 152,326   

Life insurance related investment income

     141,582        8,409   
  

 

 

   

 

 

 
   ¥               276,112      ¥               160,735   
  

 

 

   

 

 

 
     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Life insurance premiums

   ¥ 47,630      ¥ 51,480   

Life insurance related investment income

     90,543        38,763   
  

 

 

   

 

 

 
   ¥ 138,173      ¥ 90,243   
  

 

 

   

 

 

 

Life insurance premiums include reinsurance benefits, net of reinsurance premiums. For the nine and three months ended December 31, 2014 and 2015, reinsurance benefits and reinsurance premiums included in life insurance premiums are as follows:

 

     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Reinsurance benefits

   ¥                   1,603      ¥                   1,302   

Reinsurance premiums

     (7,959     (8,839
     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Reinsurance benefits

   ¥ 719      ¥ 511   

Reinsurance premiums

     (3,808     (2,798

The benefits and expenses of life insurance operations included in life insurance costs in the consolidated statements of income are recognized so as to associate with earned premiums over the life of contracts. This association is accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs (principally commissions and certain other expenses relating to policy issuance and underwriting). Amortization charged to income for the nine months ended December 31, 2014 and 2015 amounted to ¥8,524 million and ¥9,153 million, respectively. Also, amortization charged to income for the three months ended December 31, 2014 and 2015 amounted to ¥2,887 million and ¥3,067 million, respectively.

 

– 98 –


Table of Contents

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 above mentioned gains or losses relating to variable annuity and variable life insurance contracts for the nine and three months ended December 31, 2014 and 2015 are as follows:

 

     Millions of yen  
     Nine months ended
December 31, 2014
    Nine months ended
December 31, 2015
 

Life insurance premiums and related investment income :

    

Net realized and unrealized gains or losses from investment assets

   ¥               151,633      ¥ 558   

Net gains or losses from derivative contracts :

     (23,394     (2,575

Futures

     (6,031     (1,604

Foreign exchange contracts

     (2,259     (194

Options held

     (15,104     (777

Life insurance costs :

    

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

   ¥ (326,098   ¥ (386,851

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

                   428,522                      366,198   

Changes in the fair value of the reinsurance contracts

     24,332        3,704   
     Millions of yen  
     Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Life insurance premiums and related investment income :

    

Net realized and unrealized gains or losses from investment assets

   ¥ 93,170      ¥                 40,253   

Net gains or losses from derivative contracts :

     (10,538     (4,381

Futures

     (3,646     (3,525

Foreign exchange contracts

     (1,374     31   

Options held

     (5,518     (887

Life insurance costs :

    

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

   ¥ (135,985   ¥ (67,277

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

     206,663        86,206   

Changes in the fair value of the reinsurance contracts

     16,516        10,491   

 

– 99 –


Table of Contents
16.

Write-Downs of Long-Lived Assets

In accordance with ASC 360 (“Property, Plant, and Equipment”), the Company and its subsidiaries perform tests for recoverability on assets 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. The Company and its subsidiaries determine the fair value using appraisals prepared by independent third party appraisers or our own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flows methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate.

For the nine months ended December 31, 2014 and 2015, the Company and its subsidiaries recognized impairment losses for the difference between carrying amounts and fair values in the amount of ¥15,512 million and ¥4,547 million, respectively, which are reflected as write-downs of long-lived assets.

Losses of ¥14,435 million in the Real Estate segment, ¥653 million in the Corporate Financial Services segment, ¥325 million in the Overseas Business segment, and ¥99 million in the Investment and Operation segment were recorded for the nine months ended December 31, 2014. Losses of ¥4,411 million in the Real Estate segment, ¥124 million in the Investment and Operation segment, and ¥12 million in the Overseas Business segment were recorded for the nine months ended December 31, 2015.

For the three months ended December 31, 2014 and 2015, the Company and its subsidiaries recognized impairment losses for the difference between carrying amounts and fair values in the amount of ¥8,630 million and ¥3,601 million, respectively, which are reflected as write-downs of long-lived assets.

Losses of ¥8,630 million in the Real Estate segment were recorded for the three months ended December 31, 2014. Losses of ¥3,499 million in the Real Estate segment and ¥102 million in the Investment and Operation segment were recorded for the three months ended December 31, 2015.

The details of significant write-downs are as follows.

Office Buildings—For the nine months ended December 31, 2014, write-downs of ¥2,143 million were recorded for two office buildings due to declines in estimated future cash flows. For the nine months ended December 31, 2015, write-downs of ¥597 million were recorded for three office buildings held for sale, and write-downs of ¥3,026 million were recorded for three office buildings due to declines in estimated future cash flows. For the three months ended December 31, 2014, write-downs of ¥348 million were recorded for one office building due to declines in estimated future cash flows. For the three months ended December 31, 2015, write-downs of ¥550 million were recorded for two office buildings held for sale and write-downs of ¥2,890 million were recorded for one office building due to declines in estimated future cash flows.

Commercial Facilities other than Offices— For the nine months ended December 31, 2014, write-downs of ¥1,777 million were recorded for two commercial facilities due to declines in estimated future cash flows. For the nine months ended December 31, 2015, write-downs of ¥59 million were recorded for one commercial facility held for sale and write-downs of ¥741 million were recorded for two commercial facilities due to declines in estimated future cash flows. For the three months ended December 31, 2014, write-downs of ¥1,066 million were recorded for one commercial facility due to declines in estimated future cash flows. For the three months ended December 31, 2015, write-downs of ¥59 million were recorded for one commercial facility held for sale.

Condominiums—For the nine months ended December 31, 2014, write-downs of ¥621 million were recorded for one condominium due to a change in use. There was no impairment for condominiums for the nine months ended December 31, 2015. There was no impairment for the three months ended December 31, 2014 and 2015.

Land undeveloped or under construction—For the nine months ended December 31, 2014, write-downs of ¥351 million were recorded for land undeveloped or under construction held for sale and write-downs of ¥2,678 million were recorded in relation to land undeveloped or under construction due to declines in estimated future cash flows of each unit. For the nine months ended December 31, 2015, write-downs of ¥22 million were recorded for land undeveloped or under construction held for sale. For the three months ended December 31, 2014, write-downs of ¥252 million were recorded for land undeveloped or under construction held for sale. There was no impairment for the three months ended December 31, 2015.

 

– 100 –


Table of Contents

Others—For the nine months ended December 31, 2014 and 2015, write-downs of ¥7,942 million and ¥102 million were recorded, respectively, for long-lived assets other than the above, mainly because the carrying amounts exceeded the estimated undiscounted future cash flows, which decreased due to deterioration in operating performance. For the three months ended December 31, 2014 and 2015, write-downs of ¥6,964 million and ¥102 million were recorded, respectively, for long-lived assets other than the above, because the carrying amounts exceeded the estimated undiscounted future cash flows, which decreased due to deterioration in operating performance. In addition, write-downs of long-lived assets for the nine months and the three months ended December 31, 2014 include write-downs of ¥6,964 million of golf courses.

 

17.

Discontinued Operations

In April 2014, Accounting Standards Update 2014-08 (“Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”—ASC 205 (“Presentation of Financial Statements”) and ASC 360 (“Property, Plant, and Equipment”)) was issued. This Update requires an entity to report a disposal or a classification as held for sale of a component of an entity or a group of components of an entity in discontinued operations if it represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The Company and its subsidiaries early adopted this Update on April 1, 2014. In accordance with this Update, the Company and its subsidiaries report a disposal of a component or a group of components of the Company and its subsidiaries in discontinued operations if the disposal represents a strategic shift which has (or will have) a major effect on the Company and its subsidiaries’ operations and financial results when the component or group of components is disposed by sale or classified as held for sale on or after April 1, 2014.

During the nine months ended December 31, 2014 and 2015, there was no disposal or classification as held for sale of a component or a group of components which represents a strategic shift which has (or will have) a major effect on the Company and its subsidiaries’ operations and financial results.

Accounting Standards Update 2014-08 does not apply retrospectively to a disposal or a classification as held for sale of a component or a group of components of the Company and its subsidiaries which have previously been reported in the financial statements. Accordingly, during the nine months ended December 31, 2014, the Company and its subsidiaries continue to report gains on sales and the results of operations of subsidiaries and business units, which were classified as held for sale at March 31, 2014, as income from discontinued operations in the accompanying condensed consolidated statements of income in accordance with ASC 205-20 prior to the early adoption of the update.

During fiscal 2014, the Company has determined to sell the food business unit of a subsidiary, which is composed of the food service business unit and the food business unit. During the nine months ended December 31, 2014, the operating income from the food business unit and the gain were ¥463 million. The Company has completed the sale of the food business unit of a subsidiary during fiscal 2015 and there are no amounts of assets or liabilities included in the accompanying consolidated balance sheets as of March 31, 2015 and December 31, 2015.

With respect to the real estate properties classified as held for sale at March 31, 2015 included in the accompanying condensed consolidated balance sheets are investment in operating leases of ¥24,619 million and property under facility operations of ¥2,873 million and other assets of ¥689 million. With respect to the real estate properties and transportation equipment classified as held for sale at December 31, 2015, included in the accompanying condensed consolidated balance sheets are investment in operating leases of ¥34,965 million and other assets of ¥9,045 million.

Discontinued operations for the nine months ended December 31, 2014 consist of the following. For the nine months ended December 31, 2015 and the three months ended December 31, 2014 and 2015, there was no income from discontinued operations, net.

 

    Millions of yen  
    Nine months ended
December 31, 2014
 

Revenues

  ¥ 2,214   
 

 

 

 

Income from discontinued operations, net*

    463   

Provision for income taxes

    (166
 

 

 

 

Discontinued operations, net of applicable tax effect

  ¥ 297   
 

 

 

 

 

*

For the nine months ended December 31, 2014, income from discontinued operations, net included a gain of ¥362 million on a sale of business unit.

 

– 101 –


Table of Contents
18.

Per Share Data

Reconciliation of the differences between basic and diluted earnings per share (EPS) in the nine months ended December 31, 2014 and 2015 and the three months ended December 31, 2014 and 2015 is as follows:

During the nine months ended December 31, 2014 and 2015, the diluted EPS calculation excludes stock option for 6,530 thousand shares and 4,403 thousand shares, as they were antidilutive.

During the three months ended December 31, 2014 and 2015, the diluted EPS calculation excludes stock options for 6,442 thousand shares and 2,249 thousand shares, as they were antidilutive.

 

     Millions of yen  
   Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
 

Income attributable to ORIX Corporation from continuing operations

   ¥ 185,108       ¥ 215,364   
  

 

 

    

 

 

 
     Millions of yen  
   Three months ended
December 31, 2014
     Three months ended
December 31, 2015
 

Income attributable to ORIX Corporation from continuing operations

   ¥ 44,106       ¥ 54,066   
  

 

 

    

 

 

 
     Thousands of Shares  
   Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
 

Weighted-average shares

     1,309,295         1,309,022   

Effect of dilutive securities—

     

Exercise of stock options

     1,918         1,363   
  

 

 

    

 

 

 

Weighted-average shares for diluted EPS computation

     1,311,213         1,310,385   
  

 

 

    

 

 

 
     Thousands of Shares  
   Three months ended
December 31, 2014
     Three months ended
December 31, 2015
 

Weighted-average shares

     1,308,259         1,309,259   

Effect of dilutive securities—

     

Exercise of stock options

     1,554         1,338   
  

 

 

    

 

 

 

Weighted-average shares for diluted EPS computation

     1,309,813         1,310,597   
  

 

 

    

 

 

 
     Yen  
   Nine months ended
December 31, 2014
     Nine months ended
December 31, 2015
 

Earnings per share for income attributable to ORIX Corporation from continuing operations:

     

Basic

   ¥ 141.38       ¥ 164.52   

Diluted

     141.17         164.35   
     Yen  
   Three months ended
December 31, 2014
     Three months ended
December 31, 2015
 

Earnings per share for income attributable to ORIX Corporation from continuing operations:

     

Basic

   ¥ 33.71       ¥ 41.30   

Diluted

     33.67         41.25   

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. (861,520 and 2,071,000 shares for the nine months ended December 31, 2014 and 2015, 2,153,800 and 1,946,800 shares for the three months ended December 31, 2014 and 2015)

 

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Table of Contents
19.

Derivative Financial Instruments and Hedging

Risk management policy

The Company and its subsidiaries manage interest rate risk through asset and liability management systems. The Company and its subsidiaries use derivative financial instruments to hedge interest rate risk and avoid changes in interest rates that could have a significant adverse effect on the Company’s results of operations. As a result of interest rate changes, the fair value and/or cash flow of interest sensitive assets and liabilities will fluctuate. However, such fluctuation will generally be offset by using derivative financial instruments as hedging instruments. Derivative financial instruments that the Company and its subsidiaries use as part of the interest risk management include interest rate swaps.

The Company and its subsidiaries utilize foreign currency borrowings, foreign exchange contracts and foreign currency swap agreements to hedge exchange rate risk that are associated with certain transactions and investments denominated in foreign currencies. Similarly, overseas subsidiaries generally structure their liabilities to match the currency-denomination of assets in each region. A certain subsidiary holds option agreements, futures and foreign exchange contracts for the purpose of economic hedges against minimum guarantee risk of variable annuity and variable life insurance contracts.

By using derivative instruments, the Company and its subsidiaries are exposed to credit risk in the event of nonperformance by counterparties. The Company and its subsidiaries attempt to manage the credit risk by carefully evaluating the content of transactions and the quality of counterparties in advance and regularly monitoring the amount of notional principal, fair value, type of transaction and other factors pertaining to each counterparty.

(a) Cash flow hedges

The Company and its subsidiaries designate interest rate swap agreements, foreign currency swap agreements and foreign exchange contracts as cash flow hedges for variability of cash flows originating from floating rate borrowings and forecasted transactions and for exchange fluctuations.

(b) Fair value hedges

The Company and its subsidiaries use financial instruments designated as fair value hedges to hedge their exposure to interest rate risk and foreign currency exchange risk. The Company and its subsidiaries designate foreign currency swap agreements and foreign exchange contracts to minimize foreign currency exposures on lease receivables, loan receivables and borrowings and others denominated in foreign currency. The Company and its subsidiaries designate interest rate swap to hedge interest rate exposure of the fair values of loan receivables. The Company and certain overseas subsidiaries, which issued medium-term notes or bonds with fixed interest rates, use interest rate swap agreements to hedge interest rate exposure of the fair values of these medium-term notes or bonds. In cases where the medium-term notes were denominated in other than the subsidiaries’ local currencies, foreign currency swap agreements are used to hedge foreign exchange rate exposure. A certain overseas subsidiary uses foreign currency long-term-debt to hedge foreign exchange rate exposure from unrecognized firm commitment.

(c) Hedges of net investment in foreign operations

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

(d) Trading derivatives or derivatives not designated as hedging instruments

Certain subsidiaries engage in trading activities involving various future contracts. Therefore the Company and its subsidiaries are at various risks such as share price fluctuation risk, interest rate risk and foreign currency exchange risk. The Company and its subsidiaries check that these risks are below a certain level by using internal indicators and determine whether such contracts should be continued or not. The Company and the subsidiaries entered into interest rate swap agreements, foreign currency swap agreements and foreign exchange contracts for risk management purposes which are not qualified for hedge accounting under ASC 815 (“Derivatives and Hedging”). 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.

ASC 815-10-50 (“Derivatives and Hedging—Disclosures”) requires companies to disclose the fair value of derivative instruments and their gains (losses) in tabular format, as well as information about credit-risk-related contingent features in derivative agreements.

 

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Table of Contents

The effect of derivative instruments on the consolidated statements of income, pre-tax, for the nine months ended December 31, 2014 is as follows.

(1) Cash flow hedges

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
(effective
portion)
    Gains (losses) reclassified from accumulated other
comprehensive income (loss) into income
(effective portion)
    Gains (losses) recognized in
income on derivative
(ineffective portion and amount
excluded from effectiveness testing)
 
     Millions
of yen
    Consolidated statements
of income location
  Millions
of yen
    Consolidated statements
of income location
   Millions
of yen
 

Interest rate swap agreements

   ¥ (559  

Finance revenues/Interest expense

  ¥ 25      —      ¥ 0   

Foreign exchange contracts

     (1,914  

Other (income) and expense, net

    878      —        0   

Foreign currency swap agreements

     (1,164  

Finance revenues/Interest expense/
Other (income) and expense, net

    (3,182  

Other (income) and expense, net

     321   

(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

   ¥ (1,398   Finance revenues/Interest expense    ¥ 1,418      Finance revenues/Interest expense

Foreign exchange contracts

     (27,954   Other (income) and expense, net      27,954      Other (income) and expense, net

Foreign currency swap agreements

     (3,547   Other (income) and expense, net      3,547      Other (income) and expense, net

Foreign currency long-term debt

     176      Other (income) and expense, net      (176   Other (income) and expense, net

(3) Hedges of net investment in foreign operations

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
and others
(effective
portion)
    Gains (losses) reclassified from accumulated other
comprehensive income (loss) into income
(effective portion)
    Gains (losses) recognized in
income on derivative and others

(ineffective portion and amount
excluded from effectiveness testing)
 
     Millions
of yen
    Consolidated statements
of income location
   Millions
of yen
    Consolidated statements
of income location
   Millions
of yen
 

Foreign exchange contracts

   ¥ (31,278   Gains on Sales of Subsidiaries and
Affiliates and Liquidation Losses, net
   ¥ (21   —      ¥ 0   

Borrowings and bonds in local currency

     (21,952   —        0      —            0   

(4) Trading derivatives or 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

   ¥ (141   Other (income) and expense, net

Futures

     (6,243  

Gains on investment securities and dividends

Life insurance premiums and related investment income*

Foreign exchange contracts

     (2,141  

Gains on investment securities and dividends

Life insurance premiums and related investment income*

Credit derivatives held

     (27   Other (income) and expense, net

Options held/written and other

     (15,246  

Other (income) and expense, net

Life insurance premiums and related investment income*

 

*

Futures, foreign exchange contracts and options held/written and other in the above table include gains or losses arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for the nine months ended December 31, 2014 (see Note 15 “Life Insurance Operations”).

 

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Table of Contents

The effect of derivative instruments on the consolidated statements of income, pre-tax, for the nine months ended December 31, 2015 is as follows.

(1) Cash flow hedges

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
(effective
portion)
    Gains (losses) reclassified from accumulated other
comprehensive income (loss) into income
(effective portion)
    Gains (losses) recognized in
income on derivative
(ineffective portion and amount
excluded from effectiveness testing)
 
     Millions
of yen
    Consolidated statements
of income location
  Millions
of yen
    Consolidated statements
of income location
   Millions
of yen
 

Interest rate swap agreements

   ¥ (1,467  

Finance revenues/Interest expense

  ¥ 7      —      ¥ 0   

Foreign exchange contracts

     255     

Other (income) and expense, net

    2,618      —        0   

Foreign currency swap agreements

     (1,581  

Finance revenues/Interest expense/
Other (income) and expense, net

    (4,472  

Other (income) and expense, net

     444   

(2) Fair value hedges

 

     Gains (losses) recognized in income
on derivative and other
   Gains (losses) recognized in income
on hedged item
     Millions
of yen
   

Consolidated statements
of income location

   Millions
of yen
   

Consolidated statements
of income location

Interest rate swap agreements

   ¥ (604   Finance revenues/Interest expense    ¥ 604      Finance revenues/Interest expense

Foreign exchange contracts

     3,139      Other (income) and expense, net      (3,139   Other (income) and expense, net

Foreign currency swap agreements

     2,227      Other (income) and expense, net      (2,226   Other (income) and expense, net

Foreign currency long-term debt

     (282   Other (income) and expense, net      282      Other (income) and expense, net

(3) Hedges of net investment in foreign operations

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
and others
(effective
portion)
    Gains (losses) reclassified from accumulated other
comprehensive income (loss) into income
(effective portion)
    Gains (losses) recognized in
income on derivative and others
(ineffective portion and amount
excluded from effectiveness testing)
 
     Millions
of yen
    Consolidated statements
of income location
   Millions
of yen
    Consolidated statements
of income location
   Millions
of yen
 

Foreign exchange contracts

   ¥ (813   Gains on Sales of Subsidiaries and
Affiliates and Liquidation Losses, net
   ¥ (226   —      ¥ 0   

Borrowings and bonds in local currency

     166      —        0      —            0   

(4) Trading derivatives or derivatives not designated as hedging instruments

 

     Gains (losses) recognized in income on derivative
     Millions
of yen
   

Consolidated statements of income location

Interest rate swap agreements

   ¥ (38   Other (income) and expense, net

Futures

     (1,615  

Gains on investment securities and dividends

Life insurance premiums and related investment income*

Foreign exchange contracts

     (231  

Gains on investment securities and dividends

Life insurance premiums and related investment income*

Credit derivatives held

     230      Other (income) and expense, net

Options held/written and other

     (949  

Other (income) and expense, net

Life insurance premiums and related investment income*

 

*

Futures, foreign exchange contracts and options held/written and other in the above table include gains or losses arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for the nine months ended December 31, 2015 (see Note 15 “Life Insurance Operations”).

 

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The effect of derivative instruments on the consolidated statements of income, pre-tax, for the three months ended December 31, 2014 is as follows.

(1) Cash flow hedges

 

    Gains (losses)
recognized
in other
comprehensive
income on
derivative
(effective
portion)
    Gains (losses) reclassified from accumulated other
comprehensive income (loss) into income
(effective portion)
    Gains (losses) recognized in
income on derivative
(ineffective portion and amount
excluded from effectiveness testing)
 
    Millions
of yen
    Consolidated statements
of income location
  Millions
of yen
    Consolidated statements
of income location
  Millions  
of yen
 

Interest rate swap agreements

  ¥ (452   Finance revenues/Interest expense   ¥ 13      —     ¥ 0   

Foreign exchange contracts

      (1,048   Other (income) and expense, net     855      —       0   

Foreign currency swap agreements

    (607   Finance revenues/Interest expense /Other
(income) and expense, net
    (1,775   Other (income) and expense, net     266   

(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

   ¥ (306   Finance revenues/Interest expense    ¥ 306       Finance revenues/Interest expense

Foreign exchange contracts

     (17,072   Other (income) and expense, net      17,072       Other (income) and expense, net

Foreign currency swap agreements

     (1,481   Other (income) and expense, net      1,481       Other (income) and expense, net

(3) Hedges of net investment in foreign operations

 

    Gains (losses)
recognized
in other
comprehensive
income on
derivative
and others
(effective
portion)
    Gains (losses) reclassified from accumulated other
comprehensive income (loss) into income
(effective portion)
    Gains (losses) recognized in
income on derivative and others
(ineffective portion and amount
excluded from effectiveness testing)
 
    Millions
of yen
    Consolidated statements
of income location
  Millions
of yen
    Consolidated statements
of income location
  Millions  
of yen
 

Foreign exchange contracts

  ¥ (22,639   Gains on Sales of Subsidiaries and
Affiliates and Liquidation Losses, net
  ¥ (21   —     ¥ 0   

Borrowings and bonds in local currency

    (18,432   —              0      —           0   

(4) Trading derivatives or 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

   ¥ (25   Other (income) and expense, net

Futures

     (3,872   Gains on investment securities and dividends Life insurance premiums and related investment income*

Foreign exchange contracts

     (2,133   Gains on investment securities and dividends Life insurance premiums and related investment income*

Credit derivatives held

     (2   Other (income) and expense, net

Options held/written and other

     (5,292   Other (income) and expense, net Life insurance premiums and related investment income*

 

*

Futures, foreign exchange contracts and options held/written and other in the above table include gains or losses arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for the three months ended December 31, 2014 (see Note 15 “Life Insurance Operations”).

 

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Table of Contents

The effect of derivative instruments on the consolidated statements of income, pre-tax, for the three months ended December 31, 2015 is as follows.

(1) Cash flow hedges

 

    Gains (losses)
recognized
in other
comprehensive
income on
derivative
(effective
portion)
    Gains (losses) reclassified from accumulated other
comprehensive income (loss) into income

(effective portion)
    Gains (losses) recognized in
income on derivative
(ineffective portion and amount
excluded from effectiveness testing)
 
    Millions
of yen
    Consolidated statements
of income location
   Millions
of yen
    Consolidated statements
of income location
  Millions
of yen
 

Interest rate swap agreements

  ¥ 831      Finance revenues/Interest expense    ¥ 5      —     ¥ 0   

Foreign exchange contracts

    284      Other (income) and expense, net      21      —       0   

Foreign currency swap agreements

    (1,938   Finance revenues/Interest expense/ Other
(income) and expense, net
     59      Other (income) and expense, net     (86

(2) Fair value hedges

 

     Gains (losses) recognized in income
on derivative and other
  Gains (losses) recognized in income
on hedged item
     Millions
of yen
    Consolidated statements
of income location
  Millions
of yen
    Consolidated statements
of income location

Interest rate swap agreements

   ¥ (207   Finance revenues/Interest expense   ¥ 207      Finance revenues/Interest expense

Foreign exchange contracts

     (527   Other (income) and expense, net     527      Other (income) and expense, net

Foreign currency swap agreements

     (523   Other (income) and expense, net     524      Other (income) and expense, net

Foreign currency long-term debt

     146      Other (income) and expense, net     (146   Other (income) and expense, net

(3) Hedges of net investment in foreign operations

 

     Gains (losses)
recognized
in other
comprehensive
income on
derivative
and others
(effective
portion)
     Gains (losses) reclassified from accumulated other
comprehensive income (loss) into income

(effective portion)
    Gains (losses) recognized in
income on derivative and others
(ineffective portion  and amount
excluded from effectiveness testing)
 
     Millions
of yen
     Consolidated statements
of income location
   Millions
of yen
    Consolidated statements
of income location
   Millions
of yen
 

Foreign exchange contracts

   ¥ 1,913       Gains on Sales of Subsidiaries and
Affiliates and Liquidation Losses, net
   ¥ (226   —      ¥ 0   

Borrowings and bonds in local currency

     2,226       —        0      —        0   

(4) Trading derivatives or derivatives not designated as hedging instruments

 

     Gains (losses) recognized in income on derivative
     Millions
of yen
   

Consolidated statements of income location

Interest rate swap agreements

   ¥ (26   Other (income) and expense, net

Futures

     (3,751  

Gains on investment securities and dividends

Life insurance premiums and related investment income*

Foreign exchange contracts

     367     

Gains on investment securities and dividends

Life insurance premiums and related investment income*

Credit derivatives held

     67      Other (income) and expense, net

Options held/written and other

     (1,411  

Other (income) and expense, net

Life insurance premiums and related investment income*

 

*

Futures, foreign exchange contracts and options held/written and other in the above table include gains or losses arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for the three months ended December 31, 2015 (see Note 15 “Life Insurance Operations”).

 

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Table of Contents

Notional amounts of derivative instruments and other, fair values of derivative instruments and other before offsetting at March 31, 2015 and December 31, 2015 are as follows.

March 31, 2015

 

           Asset derivatives    Liability derivatives
     Notional
amount
    Fair value

 

    

Consolidated balance   
sheets location

   Fair value

 

    

Consolidated balance
sheets location

     Millions
of yen
    Millions
of yen
          Millions
of yen
      

Derivatives designated as hedging instruments and other:

  

        

Interest rate swap agreements

   ¥ 296,464      ¥ 890       Other Assets    ¥ 1,094       Other Liabilities

Futures, foreign exchange contracts

     581,510        5,281       Other Assets      11,016       Other Liabilities

Foreign currency swap agreements

      104,058        6,411       Other Assets      9,788       Other Liabilities

Foreign currency long-term debt

     258,313        0       —        0       —  

Trading derivatives or derivatives not designated as hedging instruments:

Interest rate swap agreements

   ¥ 3,000      ¥ 0       —      ¥ 127       Other Liabilities

Options held/written and other*

     441,586        12,103       Other Assets      6,177       Other Liabilities

Futures, foreign exchange contracts*

     111,309        438       Other Assets      1,252       Other Liabilities

Credit derivatives held

     9,013        0       —        165       Other Liabilities

 

*

The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥265,094 million, futures contracts of ¥34,586 million and foreign exchange contracts of ¥13,415 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2015, respectively. Asset derivatives in the above table includes fair value of the options held and foreign exchange contracts before offsetting of ¥3,888 million and ¥92 million and liability derivatives includes fair value of the futures and foreign exchange contracts before offsetting of ¥690 million and ¥60 million at March 31, 2015, respectively.

December 31, 2015

 

            Asset derivatives    Liability derivatives
     Notional
amount
     Fair value

 

    

Consolidated balance
sheets location

   Fair value

 

    

Consolidated balance
sheets location

     Millions
of yen
     Millions
of yen
          Millions
of yen
      

Derivatives designated as hedging instruments and other:

  

        

Interest rate swap agreements

   ¥ 268,026       ¥ 164       Other Assets    ¥ 2,533       Other Liabilities

Futures, foreign exchange contracts

     907,999         8,512       Other Assets        2,981       Other Liabilities

Foreign currency swap agreements

     85,753         9,421       Other Assets      4,925       Other Liabilities

Foreign currency long-term debt

     222,670         0       —        0       —  

Trading derivatives or derivatives not designated as hedging instruments:

  

  

Interest rate swap agreements

   ¥ 3,730       ¥ 0       —      ¥ 165       Other Liabilities

Options held/written and other*

     240,547           5,784       Other Assets      1,373       Other Liabilities

Futures, foreign exchange contracts*

     1,420,510         594       Other Assets      622       Other Liabilities

Credit derivatives held

     9,046         99       Other Assets      34       Other Liabilities

 

*

The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥84,614 million, futures contracts of ¥40,397 million and foreign exchange contracts of ¥16,412 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at December 31, 2015, respectively. Asset derivatives in the above table includes fair value of the options held, futures and foreign exchange contracts before offsetting of ¥2,536 million, ¥373 million and ¥115 million and liability derivatives includes fair value of the futures and foreign exchange contracts before offsetting of ¥179 million and ¥82 million at December 31, 2015, respectively.

 

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Table of Contents

Certain of the Company’s derivative instruments contain provisions that require the Company to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company’s credit rating were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment on derivative instruments that are in net liability positions. There are no derivative instruments with credit-risk-related contingent features that are in a liability position on March 31, 2015 and December 31, 2015.

 

20.

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, 2015 and December 31, 2015 are as follows.

March 31, 2015

 

     Millions of yen  
     Gross amounts
recognized

 

     Gross amounts
offset in the
consolidated
balance sheets
    Net amounts
presented in
the consolidated
balance sheets
     Gross amounts not offset in
the consolidated balance sheets*1
    Net amount

 

 
             Financial
instruments
     Collateral
received/pledged
   

Derivative assets

   ¥ 25,123       ¥ (2,858   ¥ 22,265       ¥ 0       ¥ (3,888   ¥ 18,377   
Reverse repurchase, securities borrowing, and similar arrangements*2      9,915         (9,915     0         0         0        0   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   ¥ 35,038       ¥ (12,773   ¥ 22,265       ¥ 0       ¥ (3,888   ¥ 18,377   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities

   ¥ 29,619       ¥ (2,858   ¥ 26,761       ¥ 0       ¥ (277   ¥ 26,484   
Repurchase, securities lending, and similar arrangements*2      10,590         (9,915     675         0         0        675   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   ¥ 40,209       ¥ (12,773   ¥ 27,436       ¥ 0       ¥ (277   ¥ 27,159   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2015

               
     Millions of yen  
     Gross amounts
recognized

 

     Gross amounts
offset in the
consolidated
balance sheets
    Net amounts
presented in
the consolidated
balance sheets
     Gross amounts not offset in
the consolidated balance sheets*1
    Net amount

 

 
             Financial
instruments
     Collateral
received/pledged
   

Derivative assets

   ¥ 24,574       ¥ (3,445   ¥ 21,129       ¥ 0       ¥ (2,536   ¥ 18,593   
Reverse repurchase, securities borrowing, and similar arrangements*2      3,289         (3,273     16         0         0        16   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   ¥ 27,863       ¥ (6,718   ¥ 21,145       ¥ 0       ¥ (2,536   ¥ 18,609   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities

   ¥ 12,633       ¥ (3,445   ¥ 9,188       ¥ 0       ¥ (187   ¥ 9,001   
Repurchase, securities lending, and similar arrangements*2      3,273         (3,273     0         0         0        0   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   ¥ 15,906       ¥ (6,718   ¥ 9,188       ¥ 0       ¥ (187   ¥ 9,001   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

 

*1

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

*2

Reverse repurchase agreements and securities borrowing, and similar transactions are reported within other assets in the consolidated balance sheets. Repurchase agreements and securities lending, and similar transactions are reported within other liabilities in the consolidated balance sheets.

 

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21. 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 accompanying consolidated financial statements and the related market or fair value. For derivative financial instruments, see Note 3 “Fair Value Measurements.”

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

March 31, 2015

 

    Millions of yen  
    Carrying
amount
    Estimated
fair value
   

 

Level 1

 

   

 

Level 2

 

   

 

Level 3

 

 

Assets:

         

Trading securities

  ¥ 1,190,131      ¥ 1,190,131      ¥ 50,902      ¥ 1,139,229      ¥ 0   

Cash and cash equivalents

    827,518        827,518        827,518        0        0   

Restricted cash

    85,561        85,561        85,561        0        0   

Installment loans (net of allowance for probable loan losses)

    2,420,932        2,439,904        0        231,565        2,208,339   

Investment in securities:

         

Practicable to estimate fair value

    1,481,162        1,495,540        130,519        1,239,124        125,897   

Not practicable to estimate fair value*1

    174,964        174,964        0        0        0   

Other Assets:

         

Time deposits

    13,761        13,761        0        13,761        0   

Derivative assets*2

    22,265        22,265        0        0        0   

Reinsurance recoverables Investment contracts

    115,116        116,229        0        0        116,229   

Liabilities:

         

Short-term debt

  ¥ 284,785      ¥ 284,785      ¥ 0      ¥ 284,785      ¥ 0   

Deposits

    1,287,380        1,288,419        0        1,288,419        0   

Policy liabilities and Policy account balances Investment contracts

    298,132        303,359        0        0        303,359   

Long-term debt

    4,132,945        4,117,259        0        1,417,687        2,699,572   

Other Liabilities:

         

Derivative liabilities*2

    26,761        26,761        0        0        0   

 

*1

The fair value of investment securities of ¥174,964 million was not estimated, as it was not practical.

*2

It represents the amount after offset under counterparty netting of derivative assets and liabilities. For the information of input level before netting, see Note 3 “Fair Value Measurements.”

 

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December 31, 2015

 

    Millions of yen  
    Carrying
amount
    Estimated
fair value
    Level 1

 

    Level 2

 

    Level 3

 

 

Assets:

         

Trading securities

  ¥ 803,155      ¥ 803,155      ¥ 44,258      ¥ 758,897      ¥ 0   

Cash and cash equivalents

    809,600        809,600        809,600        0        0   

Restricted cash

    83,402        83,402        83,402        0        0   

Installment loans (net of allowance for probable loan losses)

    2,520,811        2,494,948        0        256,325        2,238,623   

Investment in securities:

         

Practicable to estimate fair value

    1,492,161        1,509,222        114,162        1,260,000        135,060   

Not practicable to estimate fair value*1

    148,158        148,158        0        0        0   

Other Assets:

         

Time deposits

    6,854        6,854        0        6,854        0   

Derivative assets*2

    21,129        21,129        0        0        0   

Reinsurance recoverables

Investment contracts

    94,310        94,701        0        0        94,701   

Liabilities:

         

Short-term debt

  ¥ 277,267      ¥ 277,267      ¥ 0      ¥ 277,267      ¥ 0   

Deposits

    1,385,662        1,385,842        0        1,385,842        0   

Policy liabilities and Policy account balances Investment contracts

    306,738        309,171        0        0        309,171   

Long-term debt

    4,065,500        4,067,585        0        1,248,110        2,819,475   

Other Liabilities:

         

Derivative liabilities*2

    9,188        9,188        0        0        0   

 

*1

The fair value of investment securities of ¥148,158 million was not estimated, as it was not practical.

*2

It represents the amount after offset under counterparty netting of derivative assets and liabilities. For the information of input level before netting, see Note 3 “Fair Value Measurements.”

 

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Input level of fair value measurement

If active market prices are available, fair value measurement is based on quoted active market prices and classified as Level 1. If active market prices are not available, fair value measurement is based on observable inputs other than quoted prices included within Level 1 such as quoted market prices of similar assets and classified as Level 2. If market prices are not available and there are no observable inputs, then fair value is estimated by using valuation models including discounted cash flow methodologies, commonly used option-pricing models and broker quotes and classified as Level 3, as the valuation models and broker quotes are based on inputs that are unobservable in the market.

Estimation of fair value

The following methods and significant assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate a value:

Cash and cash equivalents, restricted cash, time deposits and short-term debt—The carrying amounts recognized in the balance sheets were determined to be reasonable estimates of their fair values due to their short maturity.

Installment loans—The carrying amounts of floating-rate installment loans with no significant changes in credit risk and which could be repriced within a short-term period were determined to be reasonable estimates of their fair values. The carrying amounts of purchased loans were determined to be reasonable estimates of their fair values because the carrying amounts (net of allowance) are considered to properly reflect the recoverability and value of these loans. For certain homogeneous categories of medium- and long-term fixed-rate loans, such as housing loans, the estimated fair values were calculated by discounting the future cash flows using the current interest rates charged by the Company and its subsidiaries for new loans made to borrowers with similar credit ratings and remaining maturities. Concerning above, if available, estimated fair values were based on quoted market prices or quotations provided by dealers.

Investment in securities—For trading securities and available-for-sale securities other than specified bonds issued by SPEs and certain other mortgage-backed and asset-backed securities, the estimated fair values, which are also the carrying amounts recorded in the balance sheets, were generally based on quoted market prices or quotations provided by dealers. As for the specified bonds issued by the SPEs and certain other mortgage-backed and asset-backed securities included in available-for-sale securities, the Company and its subsidiaries estimated the fair value by using valuation models including discounted cash flow methodologies and broker quotes (see Note 3 “Fair Value Measurements”). For held-to-maturity securities, the estimated fair values were mainly based on quoted market prices. For certain investment funds included in other securities, the fair values were estimated based on net asset value per share or discounted cash flow methodologies. With regard to other securities other than the investment funds described above, the Company and its subsidiaries have not estimated the fair value, as it is not practicable to do so. Those other securities mainly consist of non-marketable equity securities and preferred capital shares. Because there were no quoted market prices for such other securities and each security has a different nature and characteristics, reasonable estimates of fair values could not be made without incurring excessive costs.

Deposits—The carrying amounts of demand deposits recognized in the consolidated balance sheets were determined to be reasonable estimates of their fair values. The estimated fair values of time deposits were calculated by discounting the future cash flows. The current interest rates offered for the deposits with similar terms and remaining average maturities were used as the discount rates.

Long-term debt—The carrying amounts of long-term debt with floating rates which could be repriced within short-term periods were determined to be reasonable estimates of their fair values. For medium-and long-term fixed-rate debt, the estimated fair values were calculated by discounting the future cash flows. The borrowing interest rates that were currently available to the Company and its subsidiaries offered by financial institutions for debt with similar terms and remaining average maturities were used as the discount rates. Concerning above, if available, estimated fair values were based on quoted market prices or quotations provided by dealers.

Derivatives—For exchange-traded derivatives, fair value is based on quoted market prices. Fair value estimates for other derivatives generally reflect the estimated amounts that the Company and its subsidiaries would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. In estimating the fair value of most of the Company’s and its subsidiaries’ derivatives, estimated future cash flows are discounted using the current interest rate.

Reinsurance recoverables and Policy liabilities and Policy account balances—A certain subsidiary has fixed annuity contracts, variable annuity and variable life insurance contracts, and reinsurance contracts which are classified as investment contracts because they do not expose the subsidiary to mortality or morbidity risks. In estimating the fair value of those contracts, estimated future cash flows are discounted using the current interest rate.

 

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22.

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 ¥22,500 million and ¥21,131 million as of March 31, 2015 and December 31, 2015, respectively.

The minimum future rentals on non-cancelable operating leases are as follows:

 

     Millions of yen  
     March 31, 2015      December 31, 2015  

Within one year

   ¥ 18,774       ¥ 8,387   

More than one year

     67,134         58,812   
  

 

 

    

 

 

 

Total

   ¥ 85,908       ¥ 67,199   
  

 

 

    

 

 

 

The Company and certain subsidiaries lease office space under operating lease agreements, which are primarily cancelable, and made rental payments totaling ¥11,293 million and ¥10,785 million for the nine months ended December 31, 2014 and 2015, respectively, and ¥4,046 million and ¥3,288 million for the three months ended December 31, 2014 and 2015, respectively.

Certain computer systems of the Company and certain subsidiaries have been operated and maintained under non-cancelable contracts with third-party service providers. For such services, the Company and certain subsidiaries made payments totaling ¥3,054 million and ¥3,461 million for the nine months ended December 31, 2014 and 2015, respectively, and ¥1,034 million and ¥1,222 million for the three months ended December 31, 2014 and 2015, respectively. As of March 31, 2015 and December 31, 2015, the amounts due are as follows:

 

     Millions of yen  
     March 31, 2015      December 31, 2015  

Within one year

   ¥ 3,933       ¥ 3,573   

More than one year

     6,570         6,699   
  

 

 

    

 

 

 

Total

   ¥ 10,503       ¥ 10,272   
  

 

 

    

 

 

 

The Company and certain subsidiaries have commitments to fund estimated construction costs to complete ongoing real estate development projects and other commitments, totaling ¥89,500 million and ¥108,484 million as of March 31, 2015 and December 31, 2015, 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 is ¥370,378 million and ¥353,478 million as of March 31, 2015 and December 31, 2015, respectively.

Guarantees—The Company and its subsidiaries apply ASC 460 (“Guarantees”), and at the inception of a guarantee, recognize a liability in the consolidated balance sheets at fair value for the guarantee within the scope of ASC 460. 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, 2015 and December 31, 2015:

 

     March 31, 2015      December 31, 2015  
     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

   ¥ 439,253       ¥ 4,959         2022       ¥ 398,601       ¥ 5,648         2023   

Transferred loans

     213,099         2,357         2045         192,696         1,862         2046   

Consumer loans

     117,153         11,773         2018         161,299         16,464         2018   

Housing loans

     59,743         6,422         2051         22,561         5,941         2051   

Other

     2,963         28         2024         634         28         2041   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 832,211       ¥ 25,539         —         ¥ 775,791       ¥ 29,943         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2015 and December 31, 2015, total notional amount of the loans subject to such guarantees are ¥1,204,000 million and ¥1,280,000 million respectively, and book value of guarantee liabilities are ¥1,016 million and ¥1,171 million, respectively. The potential future payment amounts for these guarantees are limited to a certain range of the guarantee commissions, which are less than the total notional amounts of the loans subject to these guarantees. The potential future payment amounts for the contract period are calculated from the guarantee limit which is arranged by financial institutions in advance as to contracts that the amounts of performance guarantee are unlimited to a certain range of guarantee commissions. For this reason, the potential future payment amounts for these guarantees include the amount of the guarantee which may occur in the future, which is larger than the balance of guarantee executed as of the end of fiscal year or the end of interim period. The executed guarantee balance includes defrayment by financial institutions which we bear temporarily at the time of execution, and credit risk for financial institutions until liquidation of this guarantee. Our substantial amounts of performance guarantee except credit risk for financial institutions are limited to our defrayment which is arranged by financial institutions in advance.

Payment or performance risk of the guarantees is considered based on the historical experience of credit events.

There were no significant changes in the payment or performance risk of the guarantees for the nine months ended December 31, 2015.

Guarantee of transferred loans: A subsidiary in the United States is authorized to underwrite, originate, fund, and service multi-family and seniors housing loans without prior approval from Fannie Mae under Fannie Mae’s Delegated Underwriting and Servicing program. As part of this program, Fannie Mae provides a commitment to purchase the loans.

In return for the delegated authority, the subsidiary guarantees the performance of certain housing loans transferred to Fannie Mae and has the payment or performance risk of the guarantees to absorb some of the losses when losses arise from the transferred loans.

There were no significant changes in the payment or performance risk of these guarantees for the nine months ended December 31, 2015.

Guarantee of consumer loans: A certain subsidiary guarantees consumer loans, typically card loans, issued by Japanese financial institutions. The subsidiary is obliged to pay the outstanding obligations when these loans become delinquent generally a month or more.

Payment or performance risk of the guarantees is considered based on the historical experience of credit events.

There were no significant changes in the payment or performance risk of the guarantees for the nine months ended December 31, 2015.

Guarantee of housing loans: The Company and certain subsidiaries guarantee the 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 more than three months. The housing loans are usually secured by the real properties. Once the Company and the subsidiaries assume the guaranteed parties’ obligation, the Company and the subsidiaries obtain a right to claim the collateral assets.

Payment or performance risk of the guarantees is considered based on the historical experience of credit events.

There were no significant changes in the payment or performance risk of the guarantees for the nine months ended December 31, 2015.

 

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Other guarantees: Other guarantees include the guarantees to financial institutions and the guarantees derived from collection agency agreements. Pursuant to the contracts of the guarantees to financial institutions, a certain subsidiary pays to the financial institutions when customers of the financial institutions become debtors and default on the debts. Pursuant to the agreements of the guarantees derived from collection agency agreements, the Company and certain subsidiaries collect third parties’ debt and pay the uncovered amounts.

Litigation—The Company and certain subsidiaries are involved in legal proceedings and claims in the ordinary course of business. In the opinion of management, none of such proceedings and claims will have a significant impact on the Company’s financial position or results of operations.

Collateral—Other than the assets of the consolidated VIEs pledged as collateral for financing described in Note 8 “Variable Interest Entities”, the Company and certain subsidiaries provide the following assets as collateral for the short-term and long-term debt payables to financial institutions as of March 31, 2015 and December 31, 2015:

 

     Millions of yen  
     March 31, 2015      December 31, 2015  

Minimum lease payments, loans and investment in operating leases

   ¥ 95,883       ¥ 158,676   

Investment in securities

     162,239         185,937   

Property under Facility Operations

     19,308         9,240   

Other assets

     39,118         22,479   
  

 

 

    

 

 

 

Total

   ¥ 316,548       ¥ 376,332   
  

 

 

    

 

 

 

As of March 31, 2015 and December 31, 2015, investment in securities of ¥24,698 million and ¥26,806 million, respectively, were pledged for primarily collateral deposits.

Under loan agreements relating to short-term and long-term debt from commercial banks and certain insurance companies, the Company and certain subsidiaries are required to provide collateral against these debts at anytime if requested by the lenders. The Company and the subsidiaries did not receive any such requests from the lenders as of December 31, 2015.

 

23.

Segment Information

Financial information about the operating segments reported below is that which is available by segment and evaluated regularly by the management in deciding how to allocate resources and in assessing performance.

The segment information has been restated giving effect to these changes to conform to DAIKYO’s current fiscal year end of March 31, 2015 as described in Note 2 “Significant Accounting and Reporting Policies (ah) Elimination of a lag period.”

An overview of operations for each of the six segments follows below.

 

Corporate Financial Services

     :     

Lending, leasing and fee business.

Maintenance Leasing

     :     

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

Real Estate

     :     

Real estate development, rental and financing, facility operation, REIT asset management, and real estate investment and advisory services

Investment and Operation

     :     

Environment and energy-related business, principal investment and loan servicing (asset recovery)

Retail

     :     

Life insurance, banking and card loan business

Overseas Business

     :     

Leasing, lending, investment in bonds, investment banking, asset management and ship- and aircraft-related operations

 

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Financial information of the segments for the nine months ended December 31, 2014 is as follows:

 

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing

 

     Real Estate

 

     Investment
and
Operation
     Retail

 

     Overseas
Business

 

     Total

 

 

Segment revenues

   ¥      61,069       ¥ 198,246       ¥   147,208       ¥   429,687       ¥      335,252       ¥      406,545       ¥      1,578,007   

Segment profits

       18,661           31,578           22,481           23,007           96,570           84,786         277,083   

 

Financial information of the segments for the nine months ended December 31, 2015 is as follows:

 

  

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing

 

     Real Estate

 

     Investment
and
Operation
     Retail

 

     Overseas
Business

 

     Total

 

 

Segment revenues

   ¥      81,475       ¥   204,743       ¥   154,691       ¥   751,084       ¥      208,751       ¥     399,856       ¥      1,800,600   

Segment profits

       33,841           33,691           44,374           46,672           48,835           116,001         323,414   

 

Financial information of the segments for the three months ended December 31, 2014 is as follows:

 

  

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing

 

     Real Estate

 

     Investment
and
Operation
     Retail

 

     Overseas
Business

 

     Total

 

 

Segment revenues

   ¥      20,247       ¥   66,575       ¥     52,827       ¥     172,019       ¥     153,202       ¥     153,291       ¥      618,161   

Segment profits

       6,015           10,069           6,730             8,504           19,525           23,253           74,096   

 

Financial information of the segments for the three months ended December 31, 2015 is as follows:

 

  

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing

 

     Real Estate

 

     Investment
and
Operation
     Retail

 

     Overseas
Business

 

     Total

 

 

Segment revenues

   ¥      28,763       ¥   68,819       ¥     45,644       ¥     257,559       ¥     106,350       ¥      122,013       ¥      629,148   

Segment profits

       12,277           10,574         10,657             10,222           16,773           18,120           78,623   

 

Segment assets information as of March 31, 2015 and December 31, 2015 is as follows:

 

  

     Millions of yen  
     Corporate
Financial
Services
     Maintenance
Leasing

 

     Real Estate

 

     Investment
and
Operation
     Retail

 

     Overseas
Business

 

     Total

 

 

March 31, 2015

   ¥   1,132,468       ¥      662,851       ¥      835,386       ¥      660,014       ¥   3,700,635       ¥   2,178,895       ¥   9,170,249   

December 31, 2015

     1,058,719         717,811         744,869         628,939         3,511,492         2,279,558         8,941,388   

Segment figures reported in these tables include operations classified as discontinued operations in the accompanying consolidated statements of income.

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, income from discontinued operations and the consolidation of certain VIEs. Income taxes are not included in segment profits or losses because the management evaluates segments’ performance on a pre-tax basis. Also, net income attributable to noncontrolling interests and redeemable noncontrolling interests are not included in segment profits or losses because the management evaluates segments’ performance based on profits or losses (per-tax) attributable to ORIX Corporation Shareholders. On the other hand, income from discontinued operations is included in segment profits or losses because the management considers such disposal activities as part of the ordinary course of business. Since the Company and its subsidiaries evaluate performance for the segments based on profit or loss before income taxes, tax expenses are not included in segment profits or losses. Net income attributable to the noncontrolling interests, net income attributable to the redeemable noncontrolling interests and discontinued operations, which are recognized net of tax in the accompanying consolidated statements of income, are adjusted to profit or loss before income tax, when calculating segment profits or losses. Most of selling, general and administrative expenses, including compensation costs that are directly related to the revenue generating activities of each segment, have been accumulated by and charged to each segment. Gains and losses that management does not consider for evaluating the performance of the segments,

 

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such as write-downs of certain securities, write-downs of certain long-lived assets and certain foreign exchange gains or losses(included in other (income) and expense, net) are excluded from the segment profits or losses, and are regarded as corporate items.

Assets attributed to each segment are investment in direct financing leases, installment loans, investment in operating leases, investment in securities, property under facility operations, investment in affiliates, inventories, advances for investment in operating leases (included in other assets), advances for investment in property under facility operations (included in other assets) and goodwill and other intangible assets recognized as a result of business combination (included in other assets). This has resulted in the depreciation of office facilities being included in each segment’s profit or loss while the carrying amounts of corresponding assets are not allocated to each segment’s assets. However, the effect resulting from this allocation is not significant.

For those VIEs that are used for securitization and are consolidated in accordance with ASC 810 (“Consolidations”), for which the VIE’s assets can be used only to settle related obligations of those VIEs and the creditors (or beneficial interest holders) do not have recourse to other assets of the Company or its subsidiaries, segment assets are measured based on the amount of the Company and its subsidiaries’ net investments in the VIEs, which is different from the amount of total assets of the VIEs, and accordingly, segment revenues are also measured at a net amount representing the revenues earned on the net investments in the VIEs.

Certain gains or losses related to assets and liabilities of consolidated VIEs, which are not ultimately attributable to the Company and its subsidiaries, are excluded from segment profits.

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

 

    Millions of yen  
     Nine months ended 
 December 31, 2014 
     Nine months ended 
 December 31, 2015 
 

Segment revenues:

   

Total revenues for segments

  ¥   1,578,007      ¥   1,800,600   

Revenues related to corporate assets

    5,949        8,488   

Revenues related to assets of certain VIEs

    5,638        4,259   

Revenues from inter-segment transactions

    (15,340     (16,267

Revenues from discontinued operations

    (2,214     0   
 

 

 

   

 

 

 

Total consolidated revenues

  ¥ 1,572,040      ¥ 1,797,080   
 

 

 

   

 

 

 

Segment profits:

   

Total profits for segments

  ¥ 277,083      ¥ 323,414   

Corporate losses

    (10,761     (2,233

Gains related to assets or liabilities of certain VIEs

    3,532        5,672   

Discontinued operations, pre-tax

    (463     0   

Net income attributable to the noncontrolling interests and net income attributable to the redeemable noncontrolling interests, net of applicable tax effect

    8,886        7,819   
 

 

 

   

 

 

 

Total consolidated income before income taxes and discontinued operations

  ¥ 278,277      ¥ 334,672   
 

 

 

   

 

 

 

 

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Table of Contents
    Millions of yen  
    Three months ended
December 31, 2014
    Three months ended
December 31, 2015
 

Segment revenues:

   

Total revenues for segments

  ¥ 618,161      ¥ 629,148   

Revenues related to corporate assets

    1,378        1,453   

Revenues related to assets of certain VIEs

    1,617        1,354   

Revenues from inter-segment transactions

    (4,751     (5,069

Revenues from discontinued operations

    0        0   
 

 

 

   

 

 

 

Total consolidated revenues

  ¥ 616,405      ¥ 626,886   
 

 

 

   

 

 

 

Segment profits:

   

Total profits for segments

  ¥ 74,096      ¥ 78,623   

Corporate losses

    (629     (1,152

Gains related to assets or liabilities of certain VIEs

    (92     5,448   

Discontinued operations, pre-tax

    0        0   

Net income attributable to the noncontrolling interests and net income attributable to the redeemable noncontrolling interests, net of applicable tax effect

    3,769        1,008   
 

 

 

   

 

 

 

Total consolidated income before income taxes and discontinued operations

  ¥ 77,144      ¥ 83,927   
 

 

 

   

 

 

 
    Millions of yen  
    March 31, 2015     December 31, 2015  

Segment assets:

   

Total assets for segments

  ¥ 9,170,249      ¥ 8,941,388   

Cash and cash equivalents, restricted cash

    913,079        893,002   

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

    (72,326     (60,172

Trade notes, accounts and other receivable

    348,404        272,115   

Other corporate assets

    789,636        715,815   

Assets of certain VIEs

    294,586        302,471   
 

 

 

   

 

 

 

Total consolidated assets

  ¥ 11,443,628      ¥ 11,064,619   
 

 

 

   

 

 

 

The following information represents geographical revenues and income before income taxes, which are attributed to geographic areas, based on the country location of the Company and its subsidiaries.

For the nine months ended December 31, 2014

 

    Millions of yen  
    Japan

 

    The Americas *2

 

    Other *3 *4

 

    Difference between
Geographic Total and
Consolidated Amounts
    Total

 

 

Total Revenues

  ¥ 1,161,655      ¥ 148,719      ¥ 263,880      ¥ (2,214   ¥ 1,572,040   

Income before Income Taxes*1

    190,561        24,393        63,786        (463     278,277   

For the nine months ended December 31, 2015

         
    Millions of yen  
    Japan

 

    The Americas *2

 

    Other *3*4

 

    Difference between
Geographic Total and
Consolidated Amounts
    Total

 

 

Total Revenues

  ¥ 1,384,265      ¥ 143,227      ¥ 269,588      ¥ 0      ¥ 1,797,080   

Income before Income Taxes*1

    212,559        61,372        60,741        0        334,672   

 

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Table of Contents

For the three months ended December 31 2014

 

    Millions of yen  
    Japan

 

    The Americas *2 

 

    Other *3*4

 

    Difference between
Geographic Total and
Consolidated Amounts
    Total

 

 

Total Revenues

  ¥    461,424      ¥   59,587      ¥   95,394      ¥ 0      ¥    616,405   

Income before Income Taxes*1

    53,795        7,690        15,659        0        77,144   

For the three months ended December 31, 2015

         
    Millions of yen  
    Japan

 

    The Americas *2

 

    Other *3*4

 

    Difference between
Geographic Total and
Consolidated Amounts
    Total

 

 

Total Revenues

  ¥    498,982      ¥ 40,351      ¥   87,553      ¥ 0      ¥    626,886   

Income before Income Taxes*1

    59,005        10,062        14,860        0        83,927   

 

  *1  

Results of discontinued operations, pre-tax are included in each amount attributed to each geographic area.

  *2  

Mainly the United States

  *3  

Mainly Asia, Europe, Australasia and Middle East

  *4  

Robeco, one of the Company’s subsidiaries domiciled in the Netherlands, conducts principally an asset management business. Due to the integrated nature of such business with its customer base spread across the world, “Other” locations include the total revenues and the income before income taxes of Robeco, respectively, for the nine and three months ended December 31, 2014 and 2015. The revenues of Robeco aggregated on a legal entity basis were ¥73,418 million in the Americas and ¥72,361 million in Other for the nine months ended December 31, 2014, and ¥84,410 million in the Americas and ¥58,748 million in Other for the nine months ended December 31, 2015, and ¥27,613 million in the Americas and ¥33,361 million in Other for the three months ended December 31, 2014, and ¥27,483 million in the Americas and ¥19,755 million in Other for the three months ended December 31, 2015.

ASC 280 (“Segment Reporting”) requires disclosure of revenues from external customers for each product and service as enterprise-wide information. The consolidated statements of income in which the revenues are categorized based on the nature of types of business conducted include the required information.

No single customer accounted for 10% or more of the total revenues for the nine and three months ended December 31, 2014 and 2015.

 

24.

Subsequent Events

There are no material subsequent events.

 

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