Purpose of Consolidated Financial Statements The purpose of preparing consolidated financial statements is to report financial condition and operating result of a consolidated business group, which is assumed as one entity comprised of more than one companies (including entities other than "companies") under a common control. General Principles Consolidated financial statements should provide true and fair view of financial condition and operating result of the business group. Consolidated financial statements should be prepared based on legal-entity based financial statements of the parent and subsidiaries that belong to the business group, which are prepared in accordance with the generally accepted accounting principles. Consolidated financial statements should display clearly financial information necessary for interest parties not to mislead their judgments about the condition of the business group. Policies and procedures used for preparing consolidated financial statements should be applied continuously and not be changed without reason. General Standards Scope of Consolidation 1. In principle, the parent should consolidate all subsidiaries. 2. A parent is a company that controls effectively other companies, and the other companies are subsidiaries. - If a company is a reorganized, liquidated, bankrupt or other similar company and there is no unity of organization because of no effective control, the company is not a subsidiary. - An effective control is a control over the decision-making body of a company. A company that shows one of the following indications is assumed as a subsidiary, unless any counter evidence supports that no effective control exists over the decision making body: a. A company holds effectively the majority of the voting interests in the other company. If voting shares or interest is owned in a company's account, whomever the ownership is titled to, such as executives of the company, the shares or interest is supposed to be owned in substance by the company. b. A company holds less than 50 percent but significant minority of the voting interests in the other company, and there is certain facts that support the existence of control over the decision making body of the other company. 3. If a parent and its subsidiaries or the subsidiaries control effectively other companies, the other companies are assumed as subsidiaries as well. 4. A subsidiary that meets one of the following conditions should not be consolidated: a. The control over the subsidiary is temporal. b. Even if the subsidiary does not meet the condition (a), consolidation of the subsidiary would mislead significantly the judgments of the interest parties. If a subsidiary is immaterial in assets, sales, and other elements, so that non-consolidation of the subsidiary would not affect rational judgments about financial conditions and operating result of the business group, the subsidiary may not be consolidated.