JAL Investor Relations - Notes to Consolidated Financial Statements (Annual Report 2005)

Notes to Consolidated Financial Statements

Japan Airlines Corporation and Consolidated Subsidiaries
Japan Airlines System Corporation, the holding company of the JAL group, was renamed Japan Airlines Corporation on June 26, 2004.

1. Summary of Significant Accounting Policies

a. Basis of presentation

Japan Airlines Corporation (the “Company,” formerly Japan Airlines System Corporation) and its consolidated domestic subsidiaries maintain their accounting records and prepare their financial statements in accordance with accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards, and its consolidated foreign subsidiaries, in conformity with those of their countries of domicile. The accompanying consolidated financial statements have been compiled from the consolidated financial statements filed with the Financial Services Agency as required by the Securities and Exchange Law of Japan and include certain additional financial information for the convenience of readers outside Japan.
As permitted by the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. As a result, the totals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sum of the individual amounts.

b. Principles of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates

The consolidated financial statements include the accounts of the Company and all significant companies controlled directly or indirectly by the Company. Companies over which the Company exercises significant influence in terms of their operating and financial policies have been included in the consolidated financial statements on an equity basis.
  The balance sheet date of 27 of the consolidated subsidiaries is December 31, for 2005 (26 for 2004), and for 1 consolidated subsidiary, it is the end of February. Any significant differences in intercompany accounts and transactions arising from intervening intercompany transactions during the period from January 1 through March 31 and the period from March 1 through March 31 have been adjusted, if necessary.
  The differences between the cost and the fair value of the net assets at the dates of acquisition of the consolidated subsidiaries and companies accounted for by the equity method are amortized by the straight-line method over a period of 5 years.
  All significant intercompany accounts and transactions and unrealized gain or loss on intercompany accounts and transactions have been eliminated.
  In accounting for business combinations, both the pooling-of-interest method and the purchase method are permitted under accounting practices generally accepted in Japan. On October 2, 2002, the Company was established as a holding company by Japan Airlines International Co., Ltd. (“JALI,” formerly Japan Airlines Company, Ltd.) and Japan Airlines Domestic Co., Ltd. (“JALJ,” formerly Japan Air System Co., Ltd.) by means of a transfer of shares in accordance with the Commercial Code of Japan. The business combination of JALI and JALJ was accounted for by the pooling-of-interest method. The operating results of the consolidated subsidiaries were included in the consolidated financial statements of operations and cash flows from April 1, 2002, regardless of the date of establishment of the Company. In addition, the beginning balances in the consolidated statement of stockholders’ equity for 2003 were presented assuming that the Company had existed as of April 1, 2002.

c. Securities

Securities, except for investments in unconsolidated subsidiaries and affiliates, are classified as trading securities, held-to-maturity securities or other securities. Trading securities are carried at fair value. Held-to-maturity securities are carried at amortized cost. Marketable securities classified as other securities are carried at fair value with any unrealized gain or loss reported as a separate component of stockholders’ equity, net of taxes. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold is determined principally by the moving average method.

d. Derivatives

Derivatives positions are stated at fair value.
Gain or loss on derivatives designated as hedging instruments is deferred until the loss or gain on the underlying hedged items is recognized. Foreign receivables and payables are translated at the applicable forward foreign exchange rates if certain conditions are met. In addition, the related interest differential paid or received under interest-rate swaps used as hedging instruments is recognized over the terms of the swap agreements as an adjustment to the interest expense of the underlying hedged items if certain conditions are met.

e. Property and equipment

Property and equipment is stated at cost except as indicated in the following paragraph.
Under Japanese tax legislation, it is permitted to defer certain capital gains, principally those arising from insurance claims, by crediting them to the cost of certain properties. Deferred capital gains at March 31, 2005 and 2004 amounted to ¥23,153 million ($216,383 thousand) and ¥15,236 million, respectively.

Depreciation of property and equipment is computed as follows:
Flight equipment:
Aircraft and spare engines:
Boeing 747 (with the exception of Boeing 747-400)	−	principally the declining-balance method based on their estimated useful lives
Boeing 747-400	−	the straight-line method based on their estimated useful lives
Boeing 767	−	principally the straight-line method based on their estimated useful lives
Boeing 777	−	the straight-line method based on their estimated useful lives
Boeing 737	−	the straight-line method based on their estimated useful lives
Douglas DC-10	−	principally the declining-balance method based on their estimated useful lives
Douglas MD-11	−	the straight-line method based on their estimated useful lives
Douglas MD 90	−	the straight-line method based on their estimated useful lives
Douglas MD 87	−	the straight-line method based on their estimated useful lives
Douglas MD 81	−	the straight-line method based on their estimated useful lives
Airbus A300	−	the straight-line method based on their estimated useful lives
Airbus A300-600	−	the straight-line method based on their estimated useful lives
Spare parts contained in flight equipment:
	−	principally the declining-balance method based on each aircraft’s or engine’s estimated useful life
Ground property and equipment:
	−	principally the straight-line method based on the estimated useful lives of the respective assets
The estimated useful lives are as follows:
Flight equipment		from 8 to 27 years
Ground property and equipment		from 2 to 65 years

f. Software

Computer software intended for internal use is amortized by the straight-line method based on its estimated useful life which ranges principally from 5 to 7 years.

g. Bond issuance expenses

Bond issuance expenses are capitalized and are amortized over a period of 3 years.

h. Accrued pension and severance costs

To provide for employees’ severance indemnities, net periodic pension cost is accounted for based on the projected benefit obligation and the plan assets.
  The unrecognized obligation at transition is being amortized by the straight-line method principally over a period of 15 years.
  The adjustment for actuarial assumptions is being amortized by the straight-line method over a period ranging from 5 to 15 years, which is principally less than the average remaining years of service of the active participants in the plans. Amortization is computed from the fiscal year subsequent to the year in which the adjustment was recorded.
  Past service cost is principally charged to income as incurred. However, at certain consolidated subsidiaries, past service cost is being amortized by the straight-line method over a period which is less than the average remaining years of service of the active participants in the plans.

i. Foreign currency accounts

Foreign currency receivables and payables are translated into yen at the applicable year-end exchange rates and any gain or loss on translation is included in current earnings.
Translation adjustments arising from the translation of assets, liabilities, revenues and expenses of the consolidated subsidiaries and affiliates accounted for by the equity method into yen at the applicable year-end exchange rates are presented as minority interests and as a separate component of stockholders’ equity.

j. Revenue recognition

Passenger and cargo revenues are recognized when the transportation services are rendered.

k. Leases

As lessee

The Company and certain consolidated subsidiaries lease certain equipment under noncancelable lease agreements referred to as capital leases. Capital leases, defined as leases which do not transfer the ownership of the leased property to the lessee, are principally accounted for as operating leases.

As lessor

Certain consolidated subsidiaries lease certain equipment under noncancelable lease agreements referred to as direct financing leases. Direct financing leases, defined as leases which do not transfer the ownership of the leased property to the lessee, are principally accounted for as operating leases.

l. Appropriation of retained earnings and disposition of accumulated deficit

Under the Commercial Code of Japan, the appropriation of retained earnings and disposition of accumulated deficit with respect to a financial period is made by resolution of the stockholders at a general meeting held subsequent to the close of the financial period and the accounts for that period do not, therefore, reflect such appropriations and disposition.

m. Cash equivalents

Cash equivalents are defined as highly liquid, short-term investments with an original maturity of 3 months or less.

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