Annual Report 2006 - Komatsu

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
portation 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.
The Company 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
The companies establish a liability for estimated product warranty
cost after sales. Estimates for accrued product warranty
cost are primarily based on historical experience.
(11) Pension and Retirement Benefits
The defined benefit plans are accounted for in accordance with
SFAS No. 87, “Employers’ Accounting for Pensions,” 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 unrecognized 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 by the
Company 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
The Company applies Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to Employees” as permitted
by SFAS No. 123, “Accounting for Stock-Based Compensation.”
SFAS No. 123 gives entities a choice of measuring related compensation
expense by using the fair value method or the intrinsic
value approach under APB Opinion No. 25. Under the intrinsic
value method, stock compensation is measured by the difference
between the exercise price of the stock options and the fair
value of the Company’s common stock on the date of grant and
charged to expense over the vesting period.
The following table summarizes pro forma net income of the
Company if compensation cost for stock options granted under the
plan had been determined in accordance with the fair value based
method prescribed by SFAS No. 123:
Thousands of
Millions of yen
U.S. dollars
2006 2005 2004 2006
Net income, as reported ¥114,290 ¥59,010 ¥26,963 $976,838
Total stock-based compensation expenses determined using the fair value based method 699 256 229 5,974
Pro forma net income 113,591 58,754 26,734 970,864
Yen
U.S. cents
Net income per share, basic and diluted: 2006 2005 2004 2006
Basic earnings per share As reported ¥ 115.13 ¥ 59.51 ¥ 27.17 98.40¢
Pro forma 114.42 59.25 26.94 97.79
Diluted earnings per share As reported 114.93 59.47 27.16 98.23
Pro forma 114.23 59.21 26.93 97.63
57 Annual Report 2006