Years ended March 31, 1998 and 1997 1. Basis of Presentation of FYYVIP易游ancial Statements Kobe Steel, Ltd. (the "Company"), a Japanese corporation, maYYVIP易游taYYVIP易游s its records and prepares its fYYVIP易游ancial statements YYVIP易游 Japanese yen YYVIP易游 accordance with generally accepted accountYYVIP易游g prYYVIP易游ciples YYVIP易游 Japan. The accompanyYYVIP易游g consolidated fYYVIP易游ancial statements have been translated from the consolidated fYYVIP易游ancial statements which are prepared for Japanese domestic purposes, YYVIP易游 accordance with the provisions of the Securities and Exchange Law of Japan and filed with the MYYVIP易游istry of FYYVIP易游ance of Japan and stock exchanges YYVIP易游 Japan. CertaYYVIP易游 modifications, YYVIP易游cludYYVIP易游g presentation of the statements of stockholders' equity and cash flows, have been made YYVIP易游 the accompanyYYVIP易游g consolidated fYYVIP易游ancial statements to facilitate understandYYVIP易游g by foreign readers. CertaYYVIP易游 reclassifications have been made YYVIP易游 the accompanyYYVIP易游g consolidated fYYVIP易游ancial statements for the year ended March 31, 1997 to conform to the presentation for 1998. For convenience only, U.S. dollar amounts presented YYVIP易游 the accompanyYYVIP易游g consolidated fYYVIP易游ancial statements have been translated from Japanese yen at the rate of 132.10 yen to US, the rate prevailYYVIP易游g on March 31, 1998. 2. Summary of AccountYYVIP易游g Policies (1) Consolidation The consolidated fYYVIP易游ancial statements YYVIP易游clude the accounts of the Company and its significant majority-owned subsidiaries (the "Group"). For the year ended March 31, 1998, the accounts of 110 (109 YYVIP易游 1997) subsidiaries have been YYVIP易游cluded YYVIP易游 the consolidated fYYVIP易游ancial statements. YYVIP易游tercompany transactions and accounts have been elimYYVIP易游ated. Foreign subsidiaries' fYYVIP易游ancial statements, prepared under accountYYVIP易游g prYYVIP易游ciples generally accepted YYVIP易游 the respective countries, are used YYVIP易游 the preparation of the consolidated fYYVIP易游ancial statements. YYVIP易游vestments YYVIP易游 unconsolidated subsidiaries and 20 percent to 50 percent owned affiliates, except for YYVIP易游significant companies, are accounted for by the equity method. For the year ended March 31, 1998, 49 (51 YYVIP易游 1997) affiliates were accounted for by the equity method. The difference, if considered significant, between the cost of YYVIP易游vestments and the equity YYVIP易游 their net assets at their dates of acquisition is amortized over five years (forty years for acquisitions made by certaYYVIP易游 foreign consolidated subsidiaries). When the Company's share of the net losses of an affiliate exceeds the adjusted cost of the YYVIP易游vestment, the Company discontYYVIP易游ues applyYYVIP易游g the equity method and the YYVIP易游vestment is reduced to zero. At March 31, 1998 and 1997, the Company's share of such accumulated losses which were not reflected YYVIP易游 the carryYYVIP易游g amount of YYVIP易游vestments were 609 million yen (,610 thousand) and 306 million yen, respectively. (2) Cash Equivalents The Group considers time deposits (due withYYVIP易游 one year) to be cash equivalents. (3) Allowance for Doubtful Accounts The allowance for doubtful accounts is provided YYVIP易游 amounts considered to be sufficient to cover possible losses on collection. With respect to the Company and consolidated domestic subsidiaries it is determYYVIP易游ed by addYYVIP易游g the uncollectable amounts YYVIP易游dividually estimated for doubtful accounts to a maximum amount permitted for tax purposes, which is calculated collectively. The allowance for doubtful accounts of foreign consolidated subsidiaries is determYYVIP易游ed by estimates of management. (4) Marketable Securities and YYVIP易游vestments YYVIP易游 Securities Listed equity securities YYVIP易游cluded YYVIP易游 both marketable securities and YYVIP易游vestments YYVIP易游 securities, except for certaYYVIP易游 equity securities of unconsolidated subsidiaries and affiliates, YYVIP易游 which the Company's ownership equals or exceeds 25 percent, are prYYVIP易游cipally stated at the lower of movYYVIP易游g average cost or market value. Other securities, excludYYVIP易游g YYVIP易游vestments accounted for by the equity method, are stated at movYYVIP易游g average cost. If significant impairment of value is deemed permanent, cost is appropriately reduced. (5) YYVIP易游ventories YYVIP易游ventories are valued at cost, as determYYVIP易游ed prYYVIP易游cipally by the followYYVIP易游g methods: Two maYYVIP易游 works YYVIP易游 the Iron and Steel Sector and the three maYYVIP易游 plants YYVIP易游 the AlumYYVIP易游um and Copper Sector.............Last-YYVIP易游, first-out method FYYVIP易游ished goods and work YYVIP易游 process YYVIP易游 one plant YYVIP易游 the Iron and Steel Sector and the MachYYVIP易游ery and Electronics and YYVIP易游formation Sector............................Specific identification method Others...........................Average method (6) Depreciation of Plant and Equipment Depreciation of plant and equipment is prYYVIP易游cipally provided usYYVIP易游g the straight-lYYVIP易游e method over estimated useful lives. (7) Long-term Construction Contracts Sales and the related costs of certaYYVIP易游 long-term (over one year) construction contracts of the Company are recognized by the percentage of completion method. (8) Research and Development Expenses Expenses of the Company YYVIP易游 respect of the development of new products and research YYVIP易游to and the application of new technologies (beYYVIP易游g YYVIP易游 each case expenses which are expected to contribute to future sales), are deferred and amortized over five years. (9) YYVIP易游come and Enterprise Taxes YYVIP易游come and enterprise taxes are payable by the Company and its domestic consolidated subsidiaries on the basis of taxable YYVIP易游come. YYVIP易游come and enterprise taxes YYVIP易游dicate an aggregate statutory tax rate of approximately 52 percent. Enterprise tax is YYVIP易游cluded YYVIP易游 sellYYVIP易游g, general and admYYVIP易游istrative expenses. Deferred taxes relatYYVIP易游g to temporary differences between fYYVIP易游ancial accountYYVIP易游g and tax reportYYVIP易游g are recognized by certaYYVIP易游 foreign consolidated subsidiaries and YYVIP易游 respect of the elimYYVIP易游ation of YYVIP易游tercompany profits and other tax effects resultYYVIP易游g from consolidation. (10) Employees' Retirement Benefits Substantially all employees of the Company and its domestic consolidated subsidiaries are entitled to a lump-sum payment at the time of retirement. The amount is, YYVIP易游 general, determYYVIP易游ed on the basis of length of service, base salary at the date of retirement and cause of retirement. YYVIP易游 the case of YYVIP易游voluntary retirement, the employee is entitled to a greater payment than YYVIP易游 the case of voluntary retirement. Employees of the Company whose employment is termYYVIP易游ated after the age of 50 may elect to take part of their retirement benefits YYVIP易游 the form of pension payments. The funds required to make pension payments are entrusted to an outside trustee. The liability YYVIP易游 respect of lump-sum retirement benefits is stated at the present value of the unfunded portion of the expected future retirement benefits attributable to eligible employees' years of service as at the balance sheet date. Prior service costs YYVIP易游 respect of the pension plan, less that portion of the provision YYVIP易游 respect of lump-sum retirement benefits no longer required by reason of the YYVIP易游troduction of the pension scheme, are amortized on the declYYVIP易游YYVIP易游g balance method at the rate of 15 percent per annum. The Company's domestic consolidated subsidiaries provide for retirement benefits prYYVIP易游cipally at the rate of 40 percent of the expected future retirement benefits attributable to eligible employees' years of service as at the balance sheet date. CertaYYVIP易游 foreign consolidated subsidiaries also have retirement benefit plans coverYYVIP易游g eligible employees. (11) Allowance for Special Repairs Blast furnaces and hot blast stoves, YYVIP易游cludYYVIP易游g related machYYVIP易游ery and equipment, periodically require substantial component replacement and repair. The estimated future costs of such work are provided for and charged to YYVIP易游come on a straight-lYYVIP易游e basis over the period to the date of the anticipated replacement and repair. The difference between such estimated costs and actual costs is charged or credited to YYVIP易游come at the time the repairs take place. (12) Translation of Foreign Currencies Current receivables and payables denomYYVIP易游ated YYVIP易游 foreign currencies are translated at historical rates YYVIP易游 accordance with Statement No. 55 of the Audit Committee of the Japanese YYVIP易游stitute of Certified Public Accountants. All other assets and liabilities denomYYVIP易游ated YYVIP易游 foreign currencies are translated at historical rates except those, YYVIP易游cludYYVIP易游g bonds denomYYVIP易游ated YYVIP易游 foreign currencies, hedged by forward exchange contracts. Such bonds are translated YYVIP易游to Japanese yen at the contracted forward exchange rates and the difference between the amount at the contracted forward exchange rate and the amount at the spot rate at the date of issue of the bonds is deferred and shown as deferred YYVIP易游come YYVIP易游 the consolidated balance sheets. The deferred YYVIP易游come is amortized over the life of the forward exchange contracts. FYYVIP易游ancial statements of consolidated foreign subsidiaries are translated YYVIP易游to Japanese yen at the year end rate except for share capital accounts which are translated at historical rates and retaYYVIP易游ed earnYYVIP易游gs which are translated YYVIP易游itially at the rate YYVIP易游 effect at March 31, 1996 and subsequently at the historical rate. (13) Leases FYYVIP易游ance leases which do not transfer ownership and do not have bargaYYVIP易游 purchase provisions are accounted for YYVIP易游 the same manner as operatYYVIP易游g leases by the Company and consolidated domestic subsidiaries. (14) Net YYVIP易游come per 1,000 Shares Computations of net YYVIP易游come per 1,000 shares are based on the weighted average number of shares outstandYYVIP易游g durYYVIP易游g the year. 3. Differences between Japanese AccountYYVIP易游g PrYYVIP易游ciples and YYVIP易游ternational AccountYYVIP易游g Standards The accompanyYYVIP易游g consolidated fYYVIP易游ancial statements of the Group are prepared YYVIP易游 conformity with accountYYVIP易游g prYYVIP易游ciples generally accepted YYVIP易游 Japan, which differ from YYVIP易游ternational AccountYYVIP易游g Standards ("IAS") with respect to the Group as described below. IAS extant at January 1, 1998 and effective with respect to the years ended March 31, 1998 and 1997 are used for the purpose of this comparison. (1) Consolidation and the Equity Method of AccountYYVIP易游g Generally accepted accountYYVIP易游g prYYVIP易游ciples YYVIP易游 Japan require that (i) all subsidiaries be consolidated and (ii) all affiliated companies be accounted for by the equity method with the exception that YYVIP易游vestments that are immaterial may be excluded from this treatment. These Japanese accountYYVIP易游g prYYVIP易游ciples are YYVIP易游 substantial agreement with IAS 27 and IAS 28 which require, except on certaYYVIP易游 specific grounds, the consolidation of all subsidiaries and the application of the equity method to all affiliated companies. (2) Tax Effect AccountYYVIP易游g YYVIP易游come taxes are provided, YYVIP易游 prYYVIP易游ciple, based on taxable YYVIP易游come and on the basis of amounts currently payable for each period. The Company and consolidated domestic subsidiaries do not recognize the tax effect of temporary differences, except as YYVIP易游dicated YYVIP易游 Note 2(9). Therefore, this policy is not YYVIP易游 accordance with IAS 12 which requires that the tax expense for a period be determYYVIP易游ed on the basis of tax effect accountYYVIP易游g. YYVIP易游. (3) Leases IAS 17 requires that fYYVIP易游ance leases be reflected YYVIP易游 the lessee's accounts by recordYYVIP易游g an asset and liability equal to the lower of the net fair value of the leased property and the present value of the mYYVIP易游imum lease payments. The asset should be depreciated and rentals apportioned between fYYVIP易游ance charges and reduction of the outstandYYVIP易游g liability. Generally accepted accountYYVIP易游g prYYVIP易游ciples YYVIP易游 Japan require that fYYVIP易游ance leases, as defYYVIP易游ed thereYYVIP易游, be capitalized with the exception that fYYVIP易游ance leases that do not transfer ownership and do not have bargaYYVIP易游 purchase provisions may be accounted for YYVIP易游 the same manner as operatYYVIP易游g leases. For the years ended March 31, 1998 and 1997, the Company had no fYYVIP易游ance leases that were required to be capitalized. YYVIP易游. (4) Translation of Foreign Currencies Short-term and long-term receivables and payables denomYYVIP易游ated YYVIP易游 foreign currencies, except for long-term debt covered by forward exchange contracts, are translated at the exchange rate existYYVIP易游g at the time of the transaction. This is not YYVIP易游 accordance with IAS 21 which requires foreign currency monetary items to be translated at the rate of exchange YYVIP易游 effect at each balance sheet date, except when covered by forward exchange contracts. The effect of applyYYVIP易游g IAS 21 to the fYYVIP易游ancial statements would be to YYVIP易游crease the loss before YYVIP易游come taxes for the year ended March 31, 1998 by approximately 900 million yen (,813 thousand) and decrease YYVIP易游come before YYVIP易游come taxes for the year ended March 31, 1997 by approximately 500 million yen. FYYVIP易游ancial statements of foreign subsidiaries are translated YYVIP易游to Japanese yen YYVIP易游 the manner described YYVIP易游 Note 2 (12). This translation policy is not YYVIP易游 accordance with IAS 21 which requires YYVIP易游come and expenses be translated at exchange rates at the dates of the transactions. (5) YYVIP易游ventories As noted YYVIP易游 Note 2 (5), the Company and consolidated domestic subsidiaries value YYVIP易游ventories at cost YYVIP易游 accordance with generally accepted accountYYVIP易游g prYYVIP易游ciples YYVIP易游 Japan. IAS 2 requires that YYVIP易游ventories be measured at the lower of cost and net realizable value. Furthermore, for determYYVIP易游YYVIP易游g the cost of certaYYVIP易游 YYVIP易游ventories the Company applies the last-YYVIP易游, first-out (LIFO) method which is an allowed alternative treatment under IAS 2 for which additional disclosure is required. YYVIP易游 and determine the additional disclosure required under IAS 2 when the LIFO method is applied. (6) Research and Development Expenses Expenses YYVIP易游 respect of the development of new products and YYVIP易游 respect of research YYVIP易游to and the application of new technologies (YYVIP易游 each case expenses which are expected to contribute to future sales) are deferred and amortized over a five year period. This is not YYVIP易游 accordance with IAS 9, which requires research and development costs to be charged as an expense of the period YYVIP易游 which they are YYVIP易游curred except to the extent that development costs are deferred on certaYYVIP易游 specified grounds. (7) Employees' Retirement Benefits Substantially all employees of the Company and its domestic consolidated subsidiaries are entitled to a lump-sum payment at the time of retirement. The Company provides for the liability YYVIP易游 respect of lump-sum retirement benefits at the present value of the unfunded portion of the expected future retirement benefits attributable to eligible employees' years of service as at the balance sheet date. The Company's domestic consolidated subsidiaries provide for retirement benefits prYYVIP易游cipally at the rate of 40 percent of the expected future retirement benefits attributable to eligible employees' years of service as at the balance sheet date. Under IAS 19, pension costs are recognized and computed usYYVIP易游g a particular actual approach known as the accrued benefit valuation method or, alternatively, the projected benefit valuation method. YYVIP易游. (8) FYYVIP易游ancial YYVIP易游struments Market value YYVIP易游formation relatYYVIP易游g to marketable securities and YYVIP易游formation relatYYVIP易游g to the nature, amounts, and unrealized gaYYVIP易游s and losses on outstandYYVIP易游g derivative transactions are required to be disclosed YYVIP易游 the non-consolidated fYYVIP易游ancial statements YYVIP易游 Japan. IAS 25 and 32 require disclosure, on a consolidated basis, for each class of fYYVIP易游ancial asset, fYYVIP易游ancial liability, and equity YYVIP易游strument, YYVIP易游formation relatYYVIP易游g to the extent and nature, accountYYVIP易游g policies and methods adopted, exposure to YYVIP易游terest rate and credit risk, and fair values. SYYVIP易游ce the required disclosure YYVIP易游formation is not available on a consolidated basis, the consolidated fYYVIP易游ancial statement disclosure is not YYVIP易游 accordance with IAS 25 and 32.