Annual Report 2007 - Komatsu

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service revenues from repair and maintenance and from transportation
are recognized at the completion of service delivery.
Revenues from long-term fixed price maintenance contracts are
recognized ratably over the contract period.
Certain of consolidated subsidiaries rent construction equipments
to customers. Rent revenue is recognized on a straight-line
basis over the rental period.
Revenues are recorded net of discounts.
(9) Income Taxes
In accordance with SFAS No. 109, “Accounting for Income
Taxes,” 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 years in which those temporary
differences and carryforwards are expected to be realized or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
Komatsu uses a specific identification method to release the
residual tax effects associated with components of accumulated
other comprehensive income (loss) resulting from a change in
tax law or rate.
(10) Product Warranties
Komatsu establishes a liability for estimated product warranty
cost after sales. Estimates for accrued product warranty cost
are primarily based on historical experience and are classified as
other current liabilities.
(11) Pension and Retirement Benefits
The defined benefit plans are accounted for in accordance with
SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS
No. 158, ”Employer’s Accounting for Defined Benefit Pension
and Other Postretirement Plans-an amendment of SFAS No. 87,
88, 106 and 132(R)” except for certain subsidiaries’ pension
plans which in the aggregate are not significant. Certain domestic
subsidiaries also have local severance payment plans under
which accrued severance liabilities are stated on a vested benefit
obligation basis, which is the amount required to be paid if all
eligible employees voluntarily terminated their employment as of
the balance-sheet date.
Amortization of actuarial net gain or loss is included as a
component of the Company’s net periodic pension cost for a
year if, as of the beginning of the year, that unrecognized net
gain or loss exceeds 10 percent of the greater of (1) the projected
benefit obligation or (2) the fair value of that plan’s assets.
In such case, the amount of amortization recognized is the
resulting excess divided by average remaining service period of
active employees expected to receive benefits under the plan.
The expected return on plan assets is determined based on the
historical long-term rate of return on plan assets. The discount
rate is determined based on the rates of return of high-quality
fixed income investments currently available and expected to be
available during the period to maturity of the pension benefits.
(12) Stock-Based Compensation
Effective April 1, 2006, Komatsu adopted SFAS No. 123 (revised
2004), “Share-Based Payment” (“SFAS No. 123R”) for
the year ended March 31, 2007 using the modified prospective
method. In accordance with SFAS No. 123R, Komatsu recognizes
compensation expense using the fair value method.
Compensation expense is measured at grant-date fair value of
the stock option and charged to expense over the vesting period.
For the years ended March 31, 2006 and 2005, Komatsu
had applied the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock
Issued to Employees”. No compensation expense was recognized
as the exercise price was at least equal to the market
price on the date of grant.
The following table summarizes pro forma net income of
Komatsu if compensation expense for stock options granted
under the plan had been determined in accordance with the
fair value based method prescribed by SFAS No. 123R for the
years ended March 31, 2006 and 2005:
Millions of yen
2006 2005
Net income, as reported ¥114,290 ¥59,010
Compensation expense 699 256
Pro forma net income 113,591 58,754
Yen
Net income per share, basic and diluted: 2006 2005
Basic earnings per share As reported ¥ 115.13 ¥ 59.51
Pro forma 114.42 59.25
Diluted earnings per share As reported 114.93 59.47
Pro forma 114.23 59.21
57 Annual Report 2007