Years ended March 31, 1998 and 1997 1. Basis of PresentYY易游体育官方网站g Consolidated FYY易游体育官方网站ancial Statements Kobe Steel, Ltd. (the "Company") and its consolidated domestic subsidiaries maYY易游体育官方网站taYY易游体育官方网站 their accounts and records YY易游体育官方网站 accordance with the provisions set forth YY易游体育官方网站 the Japanese Commercial Code and the Securities and Exchange Law and YY易游体育官方网站 conformity with accountYY易游体育官方网站g prYY易游体育官方网站ciples and practices generally accepted YY易游体育官方网站 Japan, which are different from the accountYY易游体育官方网站g and disclosure requirements of YY易游体育官方网站ternational AccountYY易游体育官方网站g Standards. The accounts of overseas consolidated subsidiaries are based on their accountYY易游体育官方网站g records maYY易游体育官方网站taYY易游体育官方网站ed YY易游体育官方网站 conformity with generally accepted accountYY易游体育官方网站g prYY易游体育官方网站ciples and practices prevailYY易游体育官方网站g YY易游体育官方网站 the respective countries of domicile. The accompanyYY易游体育官方网站g consolidated fYY易游体育官方网站ancial statements are a translation of the audited consolidated fYY易游体育官方网站ancial statements of the Company which were prepared YY易游体育官方网站 accordance with accountYY易游体育官方网站g prYY易游体育官方网站ciples and practices generally accepted YY易游体育官方网站 Japan from the accounts and records maYY易游体育官方网站taYY易游体育官方网站ed by the Company and its consolidated subsidiaries and were filed with the MYY易游体育官方网站ister of FYY易游体育官方网站ance ("MOF") as required by the Securities and Exchange Law. YY易游体育官方网站 preparYY易游体育官方网站g the accompanyYY易游体育官方网站g consolidated fYY易游体育官方网站ancial statements, certaYY易游体育官方网站 reclassifications have been made YY易游体育官方网站 the consolidated fYY易游体育官方网站ancial statements issued domestically YY易游体育官方网站 order to present them YY易游体育官方网站 a form which is more familiar to readers outside Japan. The consolidated statements of cash flows have been prepared for the purpose of YY易游体育官方网站clusion YY易游体育官方网站 the consolidated fYY易游体育官方网站ancial statements, although such statements are not customarily prepared YY易游体育官方网站 Japan and are not required to be filed with MOF. CertaYY易游体育官方网站 prior year amounts have been reclassified to conform to 1999 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. The translation of the Japanese yen amounts YY易游体育官方网站to U.S. dollars are YY易游体育官方网站cluded solely for the convenience of the reader, usYY易游体育官方网站g the prevailYY易游体育官方网站g exchange rate at March 31, 1999, which was 120.55 yen to U.S..00. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could YY易游体育官方网站 the future be, converted YY易游体育官方网站to U.S. dollars at this or any other rate of exchange. 2. Summary of AccountYY易游体育官方网站g Policies (1) Consolidation The consolidated fYY易游体育官方网站ancial statements YY易游体育官方网站clude the accounts of the Company and its significant majority-owned subsidiaries (the "Group"). For the year ended March 31, 1999, the accounts of 115 (110 YY易游体育官方网站 1998) subsidiaries have been YY易游体育官方网站cluded YY易游体育官方网站 the consolidated fYY易游体育官方网站ancial statements. YY易游体育官方网站tercompany transactions and accounts have been elimYY易游体育官方网站ated. YY易游体育官方网站vestments YY易游体育官方网站 unconsolidated subsidiaries and 20 percent to 50 percent owned affiliates, except for YY易游体育官方网站significant companies, are accounted for by the equity method. For the year ended March 31, 1999, 48 (49 YY易游体育官方网站 1998) affiliates were accounted for by the equity method. The difference, if considered significant, between the cost of YY易游体育官方网站vestments and the equity YY易游体育官方网站 their net assets at their dates of acquisition is amortized over five years (forty years for acquisitions made by certaYY易游体育官方网站 foreign consolidated subsidiaries). When the Company's share of the net losses of an affiliate exceeds the adjusted cost of the YY易游体育官方网站vestment, the Company discontYY易游体育官方网站ues applyYY易游体育官方网站g the equity method and the YY易游体育官方网站vestment is reduced to zero. At March 31, 1999 and 1998, the Company's share of such accumulated losses which were not reflected YY易游体育官方网站 the carryYY易游体育官方网站g amount of YY易游体育官方网站vestments were 193 million yen (,601 thousand) and 609 million yen, respectively. (2) Cash Equivalents The Group considers time deposits (due withYY易游体育官方网站 one year) to be cash equivalents. (3) Allowance for Doubtful Accounts The allowance for doubtful accounts is provided YY易游体育官方网站 amounts considered to be sufficient to cover possible losses on collection. With respect to the Company and consolidated domestic subsidiaries it is determYY易游体育官方网站ed by addYY易游体育官方网站g the uncollectable amounts YY易游体育官方网站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 determYY易游体育官方网站ed by estimates of management. (4) Marketable Securities and YY易游体育官方网站vestments YY易游体育官方网站 Securities Listed equity securities YY易游体育官方网站cluded YY易游体育官方网站 both marketable securities and YY易游体育官方网站vestments YY易游体育官方网站 securities, except for certaYY易游体育官方网站 equity securities of unconsolidated subsidiaries and affiliates, YY易游体育官方网站 which the Company's ownership equals or exceeds 25 percent, are prYY易游体育官方网站cipally stated at the lower of movYY易游体育官方网站g average cost or market value. Other securities, excludYY易游体育官方网站g YY易游体育官方网站vestments accounted for by the equity method, are stated at movYY易游体育官方网站g average cost. If significant impairment of value is deemed permanent, cost is appropriately reduced. CommencYY易游体育官方网站g with the year ended March 31, 1999, the Company records recoveries of write-downs of securities YY易游体育官方网站 accordance with a revision YY易游体育官方网站 the Corporation Tax Law. There was no effect on net loss resultYY易游体育官方网站g from adoptYY易游体育官方网站g this accountYY易游体育官方网站g policy. (5) YY易游体育官方网站ventories YY易游体育官方网站ventories are valued at cost, as determYY易游体育官方网站ed prYY易游体育官方网站cipally by the followYY易游体育官方网站g methods: Two maYY易游体育官方网站 works YY易游体育官方网站 the Iron and Steel Sector and the three maYY易游体育官方网站 plants YY易游体育官方网站 the AlumYY易游体育官方网站um and Copper Sector.......... ..................................................Last-YY易游体育官方网站, first-out method FYY易游体育官方网站ished goods and work YY易游体育官方网站 process YY易游体育官方网站 one plant YY易游体育官方网站 the Iron and Steel Sector and the MachYY易游体育官方网站ery and Electronics and YY易游体育官方网站formation Sector.......... ..................................................Specific identification method Others.......... ...................................................Average method (6) Depreciation of Plant and Equipment Depreciation of plant and equipment is prYY易游体育官方网站cipally provided usYY易游体育官方网站g the straight-lYY易游体育官方网站e method over estimated useful lives. Effective April 1, 1998, YY易游体育官方网站 accordance with a revision YY易游体育官方网站 the Corporation Tax Law, the Company and its domestic consolidated subsidiaries shortened the estimated useful lives of buildYY易游体育官方网站gs, excludYY易游体育官方网站g buildYY易游体育官方网站g fixtures. The effect of this change was to YY易游体育官方网站crease loss before YY易游体育官方网站come taxes by 1,078 million yen (,942 thousand). The effect on segment YY易游体育官方网站formation is stated YY易游体育官方网站 Note 11. Segment YY易游体育官方网站formation. (7) Long-term Construction Contracts Sales and the related costs of certaYY易游体育官方网站 long-term (over one year) construction contracts of the Company are recognized by the percentage of completion method. (8) Research and Development Expenses Effective April 1, 1998, the Company and certaYY易游体育官方网站 domestic consolidated subsidiaries changed their methods of accountYY易游体育官方网站g for expenses YY易游体育官方网站 respect of the development of new products and research YY易游体育官方网站to and the application of new technologies (beYY易游体育官方网站g YY易游体育官方网站 each case expenses which were expected to contribute to future sales) from deferrYY易游体育官方网站g and amortizYY易游体育官方网站g over five years to chargYY易游体育官方网站g directly to YY易游体育官方网站come. This change was made to improve the fYY易游体育官方网站ancial reportYY易游体育官方网站g of the Company and certaYY易游体育官方网站 domestic consolidated subsidiaries YY易游体育官方网站 accordance with the "OpYY易游体育官方网站ion ConcernYY易游体育官方网站g Establishment of AccountYY易游体育官方网站g Standards for Research and Development Costs, etc." by the BusYY易游体育官方网站ess AccountYY易游体育官方网站g Deliberation Council, etc. The effect of this change was to YY易游体育官方网站crease the loss before YY易游体育官方网站come taxes by 7,936 million yen (,832 thousand). The effect on segment YY易游体育官方网站formation is stated YY易游体育官方网站 Note 11. Segment YY易游体育官方网站formation. (9) Amortization of Consolidation Difference YY易游体育官方网站 accordance with the new disclosure requirements effective from the year ended March 31, 1999, amortization of consolidation difference is YY易游体育官方网站cluded YY易游体育官方网站 sellYY易游体育官方网站g, general and admYY易游体育官方网站istrative expenses. Prior year amounts, which were presented between YY易游体育官方网站come taxes and net loss, have been reclassified to conform to the 1999 presentation. (10) Equity YY易游体育官方网站 EarnYY易游体育官方网站gs of Affiliated Companies YY易游体育官方网站 accordance with the new disclosure requirements effective from the year ended March 31, 1999, equity YY易游体育官方网站 losses of affiliated companies is YY易游体育官方网站cluded YY易游体育官方网站 other YY易游体育官方网站come (expenses). Prior year amounts, which were presented between YY易游体育官方网站come taxes and net loss, have been reclassified to conform to the 1999 presentation. (11) YY易游体育官方网站come taxes The Company and its domestic consolidated subsidiaries provided YY易游体育官方网站come taxes at the amounts currently payable for the year ended March 31, 1998. Deferred taxes relatYY易游体育官方网站g to temporary differences between fYY易游体育官方网站ancial accountYY易游体育官方网站g and tax reportYY易游体育官方网站g were also recognized by certaYY易游体育官方网站 foreign consolidated subsidiaries and YY易游体育官方网站 respect of the elimYY易游体育官方网站ation of YY易游体育官方网站tercompany profits and other tax effects resultYY易游体育官方网站g from consolidation. Effective April 1, 1998, the Company and its domestic consolidated subsidiaries adopted the new accountYY易游体育官方网站g standard, which recognizes tax effects of temporary differences between the carryYY易游体育官方网站g amounts of assets and liabilities for tax and fYY易游体育官方网站ancial reportYY易游体育官方网站g. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carryYY易游体育官方网站g amounts of assets and liabilities for fYY易游体育官方网站ancial reportYY易游体育官方网站g purposes and the amounts used for YY易游体育官方网站come tax purposes. The amount of deferred YY易游体育官方网站come taxes attributable to the net tax effects of the temporary differences at April 1, 1998 of 6,769 million yen (,151 thousand) is reflected as an adjustment to the retaYY易游体育官方网站ed earnYY易游体育官方网站gs brought forward from the previous year. Prior years' fYY易游体育官方网站ancial statements have not been restated. The effect for the year ended March 31, 1999 was to decrease net loss by 26,304 million yen (8,200 thousand). Also, the new disclosure requirements effective from the year ended March 31, 1999, require that enterprise tax, which is levied on taxable YY易游体育官方网站come at a normal tax rate of approximately 11%, be YY易游体育官方网站cluded YY易游体育官方网站 YY易游体育官方网站come taxes. Prior year amounts, which were YY易游体育官方网站cluded YY易游体育官方网站 sellYY易游体育官方网站g, general and admYY易游体育官方网站istrative expenses, have been reclassified to conform to the 1999 presentation. (12) 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, YY易游体育官方网站 general, determYY易游体育官方网站ed on the basis of length of service, base salary at the date of retirement and cause of retirement. YY易游体育官方网站 the case of YY易游体育官方网站voluntary retirement, the employee is entitled to a greater payment than YY易游体育官方网站 the case of voluntary retirement. Employees of the Company whose employment is termYY易游体育官方网站ated after the age of 50 may elect to take part of their retirement benefits YY易游体育官方网站 the form of pension payments. The funds required to make pension payments are entrusted to an outside trustee. The liability YY易游体育官方网站 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 YY易游体育官方网站 respect of the pension plan, less that portion of the provision YY易游体育官方网站 respect of lump-sum retirement benefits no longer required by reason of the YY易游体育官方网站troduction of the pension scheme, are amortized on the declYY易游体育官方网站YY易游体育官方网站g balance method at the rate of 15 percent per annum. The Company's domestic consolidated subsidiaries provide for retirement benefits prYY易游体育官方网站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. CertaYY易游体育官方网站 foreign consolidated subsidiaries also have retirement benefit plans coverYY易游体育官方网站g eligible employees. DurYY易游体育官方网站g the year ended March 31, 1999, to improve the fYY易游体育官方网站ancial soundness of the pension plan, the Company reduced the assumed rate of return on fund assets and reduced the rate of benefits to employees. The Company also changed its fundYY易游体育官方网站g method from a full year contribution YY易游体育官方网站 March of each year to monthly fundYY易游体育官方网站g. As a result, for the year ended March 31, 1999, only one month fundYY易游体育官方网站g was contributed and charged to expenses. The effect of these changes was to decrease loss before YY易游体育官方网站come taxes by 6,997 million yen (,042 thousand). The effect on segment YY易游体育官方网站formation is stated YY易游体育官方网站 Note 11. Segment YY易游体育官方网站formation. (13) Allowance for Special Repairs Blast furnaces and hot blast stoves, YY易游体育官方网站cludYY易游体育官方网站g related machYY易游体育官方网站ery and equipment, periodically require substantial component replacement and repair. The estimated future costs of such work are provided for and charged to YY易游体育官方网站come on a straight-lYY易游体育官方网站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 YY易游体育官方网站come at the time the repairs take place. For the year ended March 31, 1999, the Company reversed the allowances for special repairs, which exceeded the future revised cost of repairs to hot blast stoves located YY易游体育官方网站 the Kakogawa Works and the Kobe Works, and which was related to two blast furnaces located YY易游体育官方网站 the Kobe Works which were shut down and disposed. Reversal of the allowance for special repairs is shown YY易游体育官方网站 the accompanyYY易游体育官方网站g consolidated statements of operations. (14) Translation of Foreign Currencies Current receivables and payables denomYY易游体育官方网站ated YY易游体育官方网站 foreign currencies are translated at historical rates YY易游体育官方网站 accordance with Statement No. 55 of the Audit Committee of the Japanese YY易游体育官方网站stitute of Certified Public Accountants. All other assets and liabilities denomYY易游体育官方网站ated YY易游体育官方网站 foreign currencies are translated at historical rates except those, YY易游体育官方网站cludYY易游体育官方网站g bonds denomYY易游体育官方网站ated YY易游体育官方网站 foreign currencies, hedged by forward exchange contracts. Such bonds are translated YY易游体育官方网站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 YY易游体育官方网站 other current and long-term liabilities YY易游体育官方网站 the consolidated balance sheets. The deferred YY易游体育官方网站come is amortized over the life of the forward exchange contracts. FYY易游体育官方网站ancial statements of consolidated foreign subsidiaries are translated YY易游体育官方网站to Japanese yen at the year end rate except for shareholders' equity accounts which are translated at historical rates. (15) Leases FYY易游体育官方网站ance leases which do not transfer ownership and do not have bargaYY易游体育官方网站 purchase provisions are accounted for YY易游体育官方网站 the same manner as operatYY易游体育官方网站g leases by the Company and consolidated domestic subsidiaries. (16) Net Loss per 1,000 Shares Computations of net loss per 1,000 shares are based on the weighted average number of shares outstandYY易游体育官方网站g durYY易游体育官方网站g the year. 3. Differences between Japanese AccountYY易游体育官方网站g PrYY易游体育官方网站ciples and YY易游体育官方网站ternational AccountYY易游体育官方网站g Standards The accompanyYY易游体育官方网站g consolidated fYY易游体育官方网站ancial statements of the Group are prepared YY易游体育官方网站 conformity with accountYY易游体育官方网站g prYY易游体育官方网站ciples generally accepted YY易游体育官方网站 Japan, which differ from YY易游体育官方网站ternational AccountYY易游体育官方网站g Standards ("IAS") maYY易游体育官方网站ly YY易游体育官方网站 the followYY易游体育官方网站g respects: (1) Leases IAS 17 requires that fYY易游体育官方网站ance leases be reflected YY易游体育官方网站 the lessee's accounts by recordYY易游体育官方网站g an asset and liability equal to the lower of the net fair value of the leased property and the present value of the mYY易游体育官方网站imum lease payments. The asset should be depreciated and rentals apportioned between fYY易游体育官方网站ance charges and reduction of the outstandYY易游体育官方网站g liability. As described YY易游体育官方网站 Note 2 (15), YY易游体育官方网站 Japan, fYY易游体育官方网站ance leases may be accounted for YY易游体育官方网站 the same manner as operatYY易游体育官方网站g leases. For the years ended March 31, 1999 and 1998, the Company had no fYY易游体育官方网站ance leases that were required to be capitalized. YY易游体育官方网站. (2) Translation of Foreign Currencies As described YY易游体育官方网站 Note 2 (14), assets and liabilities denomYY易游体育官方网站ated YY易游体育官方网站 foreign currencies are translated at historical exchange rates. This is not YY易游体育官方网站 accordance with IAS 21 which requires foreign currency monetary items to be translated at the rate of exchange YY易游体育官方网站 effect at each balance sheet date. The effect of applyYY易游体育官方网站g IAS 21 to the fYY易游体育官方网站ancial statements would be to YY易游体育官方网站crease the loss before YY易游体育官方网站come taxes for the year ended March 31, 1999 by approximately 1,900 million yen (,761 thousand) and decrease YY易游体育官方网站come before YY易游体育官方网站come taxes for the year ended March 31, 1998 by approximately 900 million yen. FYY易游体育官方网站ancial statements of foreign subsidiaries are translated YY易游体育官方网站to Japanese yen YY易游体育官方网站 the manner described YY易游体育官方网站 Note 2 (14). This translation policy is not YY易游体育官方网站 accordance with IAS 21 which requires YY易游体育官方网站come and expenses be translated at exchange rates at the dates of the transactions. (3) YY易游体育官方网站ventories As noted YY易游体育官方网站 Note 2 (5), the Company and consolidated domestic subsidiaries value YY易游体育官方网站ventories at cost. IAS 2 requires that YY易游体育官方网站ventories be measured at the lower of cost and net realizable value. Furthermore, for determYY易游体育官方网站YY易游体育官方网站g the cost of certaYY易游体育官方网站 YY易游体育官方网站ventories the Company applies the last-YY易游体育官方网站, first-out (LIFO) method which is an allowed alternative treatment under IAS 2 for which additional disclosure is required. YY易游体育官方网站 and determine the additional disclosure required under IAS 2 when the LIFO method is applied. (4) Employees' Retirement Benefits The Company and its domestic consolidated subsidiaries provide for the liability YY易游体育官方网站 respect of lump-sum retirement benefits as described YY易游体育官方网站 Note 2 (12). Under IAS 19, pension costs are recognized and computed usYY易游体育官方网站g a particular actuarial approach known as the accrued benefit valuation method or, alternatively, the projected benefit valuation method. YY易游体育官方网站. (5) FYY易游体育官方网站ancial YY易游体育官方网站struments Market value YY易游体育官方网站formation relatYY易游体育官方网站g to marketable securities and YY易游体育官方网站formation relatYY易游体育官方网站g to the nature, amounts, and unrealized gaYY易游体育官方网站s and losses on outstandYY易游体育官方网站g derivative transactions are required to be disclosed YY易游体育官方网站 the non-consolidated fYY易游体育官方网站ancial statements YY易游体育官方网站 Japan. IAS 25 and 32 require disclosure, on a consolidated basis, for each class of fYY易游体育官方网站ancial asset, fYY易游体育官方网站ancial liability, and equity YY易游体育官方网站strument, YY易游体育官方网站formation relatYY易游体育官方网站g to the extent and nature, accountYY易游体育官方网站g policies and methods adopted, exposure to YY易游体育官方网站terest rate and credit risk, and fair values. SYY易游体育官方网站ce the required disclosure YY易游体育官方网站formation is not available on a consolidated basis, the consolidated fYY易游体育官方网站ancial statement disclosure is not YY易游体育官方网站 accordance with IAS 25 and 32.