セコム（9735） – Internet Disclosure Accompanying the Notice of the Convocation of The 61st Ordinary General Meeting of Shareholders

Internet Disclosure Accompanying the Notice of the Convocation of The 61st Ordinary General Meeting of Shareholders Notes to Consolidated Financial Statements Notes to Non-Consolidated Financial Statements 1 27 Pursuant to the relevant law and ordinance, and Article 16 of the Articles of Incorporation of SECOM CO., LTD., “Notes to Consolidated Financial Statements” and “Notes to Non-Consolidated Financial Statements” are made available on the Company’s web site (https://www.secom.co.jp/english/ir/). The Company provides this translation for your reference and convenience only and without any warranty as to its accuracy or otherwise. Notes to Consolidated Financial Statements Notes to Significant Items for Preparation of Consolidated Financial Statements 1. Scope of Consolidation (1) Number of Consolidated Subsidiaries: 161 Names of major consolidated subsidiaries: Secom Joshinetsu Co., Ltd., Asahi Security Co., Ltd., Nohmi Bosai Ltd., Nittan Co., Ltd., Secom Medical System Co., Ltd., Secom General Insurance Co., Ltd., Pasco Corporation, Secom Trust Systems Co., Ltd., At Tokyo Corporation, TMJ, Inc., The Westec Security Group, Inc., Secom Plc (2) Descriptions of Non-Consolidated Subsidiaries: Eishin Denshi Co., Ltd., Kyoudou Setubi Ltd. and 5 other companies (The reason for exclusion from scope of consolidation) All of these 7 non-consolidated subsidiaries are of a small size, so that the aggregate amounts of total assets, revenue, net income/loss (an amount prorated to ownership) and retained earnings (an amount prorated to ownership) and others do not have a significant effect on the consolidated financial statements. (3) Names of Other Companies Owing Majority of Voting Rights not Regarded as Subsidiaries: Katzkin Holdings, LLC, United Tactical Systems Holdings, LLC, CLP Legal Services, LLC, CLP Landscape Services, LLC, PF Holdco, LLC, Austin Fitness Holdings, LLC, Handel’s Holdco, LLC, CLP ICS Holdings, LLC. (The reason for not regarded as subsidiaries) These companies were acquired by subsidiaries of The Westec Security Group, Inc. through normal course of business with the objective of investment, not with the objective of control. 2. Equity Method (1) Number of equity method affiliates: 16 Names of major affiliates accounted for under the equity method: S1 Corporation, Toyo Tec Co., Ltd., Taiwan Secom Co., Ltd. (2) Number of non-equity method affiliates: 8 (The reason for not applying the equity method) These 8 companies are not accounted for under the equity method because their effect on net income/loss (an amount prorated to ownership) and retained earnings (an amount prorated to ownership) is insignificant and immaterial as a whole. [English Translation] 1 3. Changes in Scope of Consolidation and Companies Accounted for under the Equity Method Consolidation Newly consolidated subsidiaries: 1 Scan Alarms and Security Systems (Ireland) Ltd. (Establishment investment) Excluded from consolidation: 5 Zao Urbane Properties Co., Ltd. and 2 other companies (Merger) PASCO DO BRASIL CONSULTORIA TECNICA LTDA. (Divesture) D’Garde Security Pte. Ltd. (Liquidation) Equity Method: None 4. Closing Dates of Consolidated Subsidiaries and Equity Method Affiliates With respect to overseas consolidated subsidiaries, 6 U.S. subsidiaries such as The Westec Security Group Inc., 8 Australia and New Zealand subsidiaries such as Secom Australia Pty., Ltd., , 5 U.K. subsidiaries such as Secom Plc, 16 Chinese subsidiaries such as Secom (China) Co., Ltd., 6 Vietnam subsidiaries such as Secom Vietnam Security Service JSC, Secom (Singapore) Pte. Ltd., Secom Medical System (Singapore) Pte. Ltd., Takshasila Hospitals Operating Pvt. Ltd., Takshasila Healthcare and Research Service Pvt. Ltd., PT. Nusantara Secom Infotech, PT. Secom Indonesia, PT. Secom Bhayangkara, PT. Secom Realty Indonesia, Pasco Thailand Co., Ltd., Thai Secom Security Co., Ltd., Pasco Philippines Corp., Nohmi Taiwan Ltd., TMJP BPO SERVICES, INC., Secom Aktif Güvenlik Yatirim A.S., Secom Aktif Elektronik Güvenlik Çözümleri A.S., and Scan Alarms and Security Systems (Ireland) Ltd. close their book as of December 31 each year, and the financial statements as of this date are used for preparation of the consolidated financial statements. Also, while Secom Smart (Malaysia) Sdn. Bhd., Secom Smart (Singapore) Pte. Ltd. and ADT Alarm Monitoring Hong Kong Limited closes its book as of September 30, the financial statements prepared pursuant to the provisional closing of books conducted as of December 31 are used. With respect to equity method affiliates, 6 companies such as S1 Corporation and Taiwan Secom Co., Ltd. close their book as of December 31 each year, and the financial statements as of this date are used for preparation of the consolidated financial statements. While Koatsu Co., Ltd. closes its book as of September 30 each year, the financial statements prepared pursuant to the provisional closing of books conducted as of March 31 are used for preparation of the consolidated financial statements. The necessary adjustments related to the consolidation are made for any major transactions which arise between the consolidated closing dates. The closing dates of other consolidated subsidiaries and equity method affiliates are the same as the consolidated closing date. 5. Significant Accounting Policies (1) Valuation Policies and Methods for Significant Assets 1) Securities a. Held-to-maturity debt securities are carried at amortized cost. b. Available-for-sale Securities other than shares that do not have a market value [English Translation] 2 (2) Depreciation and Amortization of Depreciable and Amortizable Fixed Assets At fair value Net unrealized gains and losses of securities are primarily reported directly in net assets. The cost of securities sold is primarily calculated by the moving average method. Shares that do not have a market value At cost, principally based on the moving average method 2) Derivatives 3) Inventories Derivatives are stated at fair value. Inventories are principally stated at cost based on the moving average method (or at the net realizable value (NRV) calculated by writing down the book value to reflect a decrease in the NRV). 4) Real estate for sale Stated at cost by the specific cost method (or at the NRV calculated by writing down the book value to reflect a decrease in the NRV). 1) Tangible Assets (except for leased assets) a. Security equipment and control stations Security equipment and control stations are depreciated over their average estimated useful the declining-balance method. lives (5-8 years) by b. Other tangible fixed assets Other tangible fixed assets are depreciated by the straight-line method. Their main useful lives are as follows: Buildings and improvements: 33-50 years Tools and equipment: 2-20 years 2) Intangible Assets (except for leased assets) Intangible fixed assets are amortized by the straight-line method. The software used in the Company is amortized by the straight-line method based on the useful lives within the Company (5 years). 3) Leased Assets a. Leased assets related to ownership-transfer finance lease transactions Depreciated, using the same depreciation method applied to fixed assets in possession. b. Leased assets related to non-ownership-transfer finance lease transactions Depreciated, using the straight-line method over a useful life equal to the lease period with a residual value of zero. In addition, non-ownership-transfer finance leases entered into on or before March 31, 2008 are treated using the method applicable to operating lease transactions. 4) Long-term Prepaid Expenses [English Translation] 3 Long-term prepaid expenses are amortized by the straight-line method. (3) Basis for Significant Allowances 1) Allowance for Doubtful Accounts To prepare for losses from bad debts such as losses on trade receivables and loans, the allowance for doubtful accounts provides an estimated amount of uncollectables. It is determined based on the historical loss rate with respect to ordinary accounts, and an estimate of uncollectable amounts respectively determined by reference to specific doubtful accounts from customers who are experiencing financial difficulties. 2) Accrued Bonuses The accrued bonuses are provided for the bonus payments to employees, at an amount incurred during the current fiscal year. 3) Provision for Loss on Construction Contracts To prepare for future losses on construction contracts etc., an accrual is provided based on the estimated losses on construction contracts etc. that are undelivered at the end of the current fiscal year. 4) Accrued Retirement Benefits for Directors and Audit & Supervisory Board Members To prepare for payment for retirement benefits of Directors and Audit & Supervisory Board Members of domestic consolidated subsidiaries, a necessary amount at the end of the current fiscal year is accrued based on the rules of the Directors and Audit & Supervisory Board Members’ retirement benefits. (4) Recognition Policies for Significant Revenue and Cost 1) Recognition Policies for Revenue and Cost from Contracts with the Company Customers In the major businesses of the Company and its consolidated subsidiaries related to revenue from contracts with customers, the details of major performance obligations, as well as the normal point in time when such performance obligations are satisfied (i.e., the normal point in time when revenue is recognized) are as follows: a. Revenues from Security Services are mainly from centralized systems for businesses and homes, static guard services, and armored car services, and the performance obligation to provide services based on the security contract with the customer. Such security contracts represent transactions in which the performance obligation is satisfied over a certain period, and the Company recognizes revenue in line with the fulfilment of the contract. Equipment installation work fees received in a lump sum at the start of services for centralized systems and other points in time are allocated on a straight-line basis over the same period as the period in which the service is provided and revenue is recognized in the amount corresponding to the current fiscal year, if the customer is thought to receive the benefits as the performance obligations in the security contract is satisfied. identifies [English Translation] 4 It should be noted that equipment installation work expenses are allocated on a straight line over the same period as the period in which the service is provided and recognized as expenses in the amount corresponding to the current fiscal year. Additionally, consideration for these performance obligations is generally collected within one year from the performance obligations are satisfied, unless they are received as contract liabilities prior to the satisfaction of the performance obligations, and the amount of consideration contains no significant financing components. time the b. Revenues from construction related to the Fire Protection Services are mainly from construction contracts for fire protection equipment, and the Company recognizes revenue over time by measuring the progress towards complete satisfaction of the performance obligation, as it has been determined that the performance obligation is satisfied over a certain period. The measurement of the progress towards complete satisfaction of the performance obligation is based on the percentage of the cost of construction incurred by the end of each reporting period to the estimated total cost of construction. It should be noted that in cases where the expenses incurred are expected to be recovered despite not being able to reasonably estimate the degree of completion of the satisfaction of performance obligations, revenue is recognized using the cost recovery method. Additionally, consideration for performance obligations of construction contracts is generally collected within one year from the time the performance obligations are satisfied, unless they are received as contract liabilities prior to the satisfaction the amount of of consideration contains no significant financing components. the performance obligations, and 2) Recognition Policies for Revenue and Cost of Finance Leases Revenue and cost are recognized upon receipt of lease payments. (5) Other Significant Items for Preparation of Consolidated Financial Statements 1) Accounting for Major Hedge a. Hedge Accounting Policy The Company principally applies deferred hedging accounting. The interest rate swaps that fulfill requirements for exceptional treatments permitted for interest rate swaps are accounted for using exceptional treatments. b. Hedging Instruments and Hedged Items Hedging instruments: Interest rate swap Loans payable Hedged items: c. Hedging Policy The risks for forward interest rate fluctuations are to be hedged principally pursuant to the risk management policy of the Company. d. Assessment of Hedge Effectiveness [English Translation] 5 Hedge effectiveness is assessed by comparing the cumulative totals of price fluctuations of the hedged items and hedging instruments from the beginning of hedging to the effective point of assessment, taking the changes of both the hedged items and hedging instruments into account. However, when an item is judged to fulfill requirements for exceptional treatments, the assessment of hedge effectiveness is omitted. 2) Accounting for Retirement Benefit To prepare for the retirement benefits of employees, the Company and its domestic consolidated subsidiaries recognize a net defined benefit asset and a net defined benefit liability for the amount calculated by deducting plan assets from retirement benefit obligations, based on the estimated amount of these items at the end of the current fiscal year. Prior service cost is recognized as profit or loss in the year of occurrence. Actuarial gains and losses are amortized from the following fiscal year of occurrence, using the straight-line method over certain years within the average remaining service period (mainly 10 years). Unrecognized actuarial gains and losses are included in the line item “Remeasurements of defined benefit plans, net of taxes” of accumulated other comprehensive income in the net assets section. 3) Amortization of Goodwill and Negative Goodwill Goodwill is amortized by the straight-line method over 5-20 years. 6. Notes on Changes in Accounting Policies (Application of Accounting Standard for Revenue Recognition, etc.) From the beginning of the fiscal year ended March 31, 2022, we have applied “Accounting Standard for Revenue Recognition” (ASBJ Statement No.29, March 31, 2020; hereinafter, “Accounting Standard for Revenue Recognition”), etc. Accordingly, we recognize revenue to describe the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The major changes due to the application of Accounting Standard for Revenue Recognition etc. are as follows: (1) Initial lump sum revenue related to service contracts, etc. With respect to the initial lump-sum revenue from some service contracts, etc., the Company previously recognized revenue at the time of acceptance, but has changed to recognize the revenue over a certain period when the customer receives the benefits as performance obligations are satisfied. (2) Revenue recognition related to construction contracts For construction contracts, the percentage-of-completion method when the outcome of the construction activity is deemed certain. However, when control over goods or services is to be transferred to the customer over a certain period of time, the Company has changed the method to one in which revenue is recognized over a certain period of time as the performance obligation to transfer the goods or services to the customer is satisfied. The Company measures the degree of progress the Company previously applied [English Translation] 6 toward satisfaction of performance obligations based on the percentage of construction costs incurred by the end of each reporting period to the total construction costs expected to be incurred. In addition, when the degree of progress toward satisfying the performance obligation cannot be reasonably estimated in the early stages of a contract but the costs to be incurred are expected to be recovered, the Company recognizes revenue under the cost recovery method. The application of the Accounting Standard for the Revenue Recognition, etc. is subject to the transitional treatment provided for in the proviso of Paragraph 84 of the Accounting Standard for Revenue Recognition. The cumulative effect of the retrospective application, assuming the new accounting policy had been applied to periods prior to the beginning of the current fiscal year, was added to or subtracted from the beginning balance of retained earnings of the current fiscal year, and thus the new accounting policy has been applied from the beginning balance. In addition, the Company has applied the method prescribed in proviso (1) of Paragraph 86 of the Accounting Standard for Revenue Recognition. The cumulative effect, after accounting procedures for contract changes made prior to the beginning of the current fiscal year based on the contract terms after reflecting all contract changes, was added to or subtracted from the beginning balance of retained earnings of the current fiscal year. In addition, “Notes and accounts receivable, trade,” which was a part of “Current assets” in the consolidated balance sheet for the previous fiscal year, is included in “Notes and accounts receivable – trade and contract assets” from the current fiscal year and a part of “Guarantee deposits received,” which was included in “Long-term liabilities,” is included in “Long-term deferred revenue” from the current fiscal year. As a result, for the Consolidated Statements of Income for the current fiscal year, revenue decreased by 3,301 million yen, cost of revenue decreased by 2,497 million yen, operating profit decreased by 803 million yen, non-operating expenses decreased by 470 million yen, ordinary profit and income before income taxes decreased by 332 million yen, respectively, compared to those before Accounting Standard for Revenue Recognition, etc. being applied. Retained earnings of the Consolidated Statements of Changes in Net Assets at the beginning of current period decreased by 10,717 million yen as the cumulative effect of applying the policy to all prior periods was reflected to net assets at the beginning of the current fiscal year, compared to those before Accounting Standard for Revenue Recognition, etc. being applied. These effects on the per-share information are stated in the relevant section. (Application of Accounting Standard for Fair Value Measurement, etc.) From the beginning of the current fiscal year, we have applied “Accounting Standard for Fair Value Measurement” (ASBJ Statement No.30, July 4, 2019; hereinafter, “Fair Value Accounting Standards”), etc. In accordance with the transitional treatment set forth in Paragraph 19 of Fair Value Accounting Standards and Paragraph 44-2 of “Accounting Standard for Financial Instruments” (ASBJ Statement No. 10, July 4, 2019), we have applied prospectively new accounting policies prescribed by Fair Value Accounting Standards, etc. Consequently, from the current fiscal year, we have adopted the valuation method based on the market price on the closing date of stocks and beneficiary securities with market value that are among other securities, from the previous method that was based on the average market price over a one-month period prior to the closing date. [English Translation] 7 In addition, notes including matters related to the breakdown of the financial instruments by level are made in “Notes to Financial Instruments” of “Notes to Consolidated Financial Statements.” 7. Notes on Accounting Estimates (1) Allowance for Doubtful Accounts 1) Amounts stated in the consolidated financial statements The Company has recognized short-term loans receivable of YEN 2,563 million, long-term loans receivable of YEN 29,494 million, an allowance for doubtful accounts of YEN 2,031 million for current assets, and an allowance for doubtful accounts of YEN 12,195 million for fixed assets in the consolidated balance sheet for the current fiscal year. 2) Other information to facilitate the understanding of accounting estimates As stated in the above 5. (3) 1) Allowance for Doubtful Accounts, to provide for doubtful accounts such as trade accounts receivable and loans receivable, provisions are recognized as allowance for doubtful accounts. The amount of such an allowance for general receivables is determined based on historical default rates and the amount for specific receivables such as delinquent claims is determined as the expected non-recoverable amount based on recoverability assessment on an individual basis. In identifying specific loans that are required to be assessed for recoverability on an individual basis, the Company takes into consideration the status of delinquency in repaying debts as well as the financial condition, past operating results, and future business plans of the debtors. Among these factors, business plans are subject to uncertainty as they are affected by unforeseeable changes in business assumptions. The non-recoverable amount of specific is estimated based on the debtors’ financial condition and future business plans and the management on whether the plans for future revenue and expenses developed as part of the business plans are feasible, including whether in business impact of unforeseeable changes assumptions is properly considered in these plans. involves significant judgment of identified loans the (2) Goodwill and Other Intangible Assets 1) Amounts stated in the consolidated financial statements The Company has recognized goodwill of YEN 59,996 million and other intangible assets of YEN 33,684 million in the consolidated balance sheet for the current fiscal year. 2) Other information to facilitate the understanding of accounting estimates Goodwill and other intangible fixed assets are amortized in a regular manner. However, if there is an indication of impairment for the asset group containing these intangible assets, they need to be tested to determine whether an impairment loss needs to be recognized by comparing the total amount of undiscounted future cash flows arising from the asset group with their carrying amount. If it is determined that an impairment loss needs to be recognized as a result of such a test, the Company writes down the carrying [English Translation] 8 amount to the recoverable amount and recognizes the amount of write-down as an impairment loss. An indication of impairment is considered to exist, for example, when operating activities continue to make losses or when there has been or there is expected to be a significant deterioration in the business environment. The carrying amounts of goodwill and other intangible fixed assets reflect the consolidated subsidiaries’ excess earnings power, value of their customer base, etc., based on the expectations for the future growth of their business as at the time of the acquisition of each consolidated subsidiary. For this reason, in such cases where the business growth expected at the time of acquisition of each consolidated subsidiary is not achieved or where there has been or there is expected to be a significant deterioration in the business environment on which the business plan was based, an indication of impairment is considered to exist and goodwill and other intangible assets may need to be tested for the recognition of an impairment loss, even if its operating activities in which the asset group containing these intangible fixed assets is used are not making continuous losses. Additional Information (Accounting estimates of the impact of the COVID-19 pandemic) The Company has developed accounting estimates in such areas as impairment accounting for fixed assets and allowance for doubtful accounts based on the assumption that the effect of the COVID-19 pandemic will last at least for some time, and has determined that it does not have a significant impact on its consolidated financial statements at this point. However, as the impact of COVID-19 is subject to a number of uncertain elements, the Group’s financial condition and operating results from the next year onward may be significantly affected. Notes to Consolidated Balance Sheet 1. Cash on Hand and in Banks, and “Other” in Investments and others Under certain provisions on sales agreements for investment securities that apply to certain consolidated subsidiaries, restrictions are imposed on the use of part of cash on hand and in banks (YEN 61 million) and other (YEN 18 million) in investments and others. 2. Cash Deposits for Armored Car Services and Short-term Bank Loans, and Deposits Received for Armored Car Services For financial institutions, the Company and some of the domestic consolidated subsidiaries provide cash collection from and cash filling to cash dispensers located outside of financial institution facilities, and cash collection and delivery. The balance of cash deposits for armored car services includes cash on hand and cash in banks representing a total of YEN 17,253 million connected with cash filling services, which is restricted in use by the Group. The short-term bank loan balance includes YEN 817 million financed for the cash filling services. The balance of cash deposits for armored car services includes YEN 19,174 million connected with cash collection administration services, which is also restricted in use by the Group. Also, the short-term bank loan balance includes YEN 16,650 million financed for the cash collection administration services. The balance of cash deposits for armored car services includes cash on hand and cash in banks representing a total of YEN 100,049 million connected with cash collection and delivery services, which is restricted in use by the [English Translation] 9 Group and also the balance of deposits received for armored car services includes deposits received representing a total of YEN 100,031 million connected with cash collection and delivery services. 3. Assets Pledged as Collateral and Collateral-related Liabilities: (1) Assets Pledged as Collateral (Millions of Yen) Cash on hand and in banks (time deposit) Short-term loans receivables Other – current assets (receivable – other) Buildings and improvements Land Other – intangible assets (leasehold) Investment securities Long-term loans receivable Total (2) Collateral-related Liabilities Bank loans Current portion of straight bonds Straight bonds Long-term loans Total 1,619 17 689 20,758 25,606 818 1,590 576 51,676 1,635 398 3,480 8,362 13,876 (Millions of Yen) 6. In addition to the above liabilities, short-term loans receivable, investment securities and long-term loans receivable are pledged as collateral for the debts of affiliates and other debts. 4. Receivables from Contracts with Customers and Contract Assets and Contract Liabilities (1) The amounts of receivables from contracts with customers and contract assets included in notes and accounts receivable-trade and contract assets, due from subscribers, and other of current assets are as follows. Notes receivable Accounts receivable Due from subscribers Other Contract assets (Millions of Yen) 11,449 114,776 32,902 894 23,434 (2) The amount of contract liabilities included in deferred revenue, other of current liabilities, and long-term deferred revenue is as follows. Contract liabilities YEN 56,158 million (Note) The amounts of contract liabilities included in deferred revenue, other of current liabilities, and long-term deferred revenue are YEN 37,762 million, YEN 1,851 million, and YEN 16,545 million, respectively. 5. Accumulated Depreciation of Tangible Assets YEN 563,581 million Investment in Non-Consolidated Subsidiaries and Affiliates: (Fixed assets) Investment securities (stocks) YEN 62,484 million [English Translation] 10 7. Contingent Liabilities: Guarantees of liabilities of entities and individuals YEN 404 million Notes to Consolidated Statement of Income 1. Revenue from Contracts with Customers Revenue stated in the Consolidated Statements of Income has not been classified into revenue from contracts with customers and other revenue. The amount of revenue from contracts with customers has been stated in “1. Information on the breakdown of revenue from contracts with customers” of “Notes on Revenue Recognition” of “Notes to Consolidated Financial Statements.” 2. Amortization of Goodwill in Extraordinary Losses Part of Goodwill was amortized pursuant to Paragraph 32 of the “Practical Guidelines for Capital Consolidation Procedures in Consolidated Financial Statements” (Japanese Institute of Certified Public Accountants (JICPA), last revised February 16, 2018, Accounting System Committee Report No. 7) Notes to Consolidated Statement of Changes in Net Assets 1. Items Related to Issued Shares and Treasury Stocks Number of shares at the beginning of the fiscal year Increase in the number of shares in the fiscal year Decrease in the number of shares in the fiscal year Issued shares Treasury stocks Common stocks 233,295,926 15,034,565 (Outline of reasons for change) Common stocks 2,123 1,319,647 – 1,138,994 (Unit：1 share) Number of shares at the end of the fiscal year 233,298,049 15,215,218 The increase of 2,123 in the number of common stocks of issued shares is due to the issuance of restricted shares. The increase of 1,319,647 in the number of common stocks of treasury stocks is due to the repurchase of 1,318,500 own shares resolved by the Board of Directors and the purchase of 1,147 shares constituting less than one unit. The decrease of 1,138,994 in the number of common stocks of treasury stocks is due to the share exchange of 1,138,992 own shares and requests to sell 2 shares constituting less than one unit. Classes of Shares Total amount of cash dividend (Millions of Yen) Cash dividend per share(Yen) Record date Effective date Common stock 18,552 March 31, 2021 June 28, 2021 Common stock 19,643 September 30, 2021 December 8, 2021 85 90 Items Related to Dividends 2. (1) Amount of Dividends Paid Resolution Ordinary General Meeting of Shareholders on June 25, 2021 Board of Directors Meeting on November 10, 2021 [English Translation] 11 (2) Of the dividends whose record date belongs to the current fiscal year, the following are those dividends whose effective date belongs to the next fiscal year. The matters planned to be resolved on the general meeting of shareholders are as follows: Resolution Classes of Shares Source of dividend Total amount of cash dividend (Millions of Yen) Cash dividend per share (Yen) Record date Effective date Common stock Retained earnings 19,627 90 March 31, 2022 June 29, 2022 Ordinary General Meeting of Shareholders on June 28, 2022 Notes to Financial Instruments 1. Items Related to Status of Financial Instruments The Group (excluding its insurance services segment) raises necessary funds, with the aim of establishing “Social System Industry,” by means of procuring funds from markets and borrowing money from financial institutions. The Group also holds financial instruments for promoting its business and investment. Derivatives are primarily used for averting market risks associated with loans, etc., and it is the Group’s policy not to perform speculative transactions. The Group’s insurance services segment manages funds using financial instruments for the purpose of safely and carefully holding and managing insurance premiums received from policyholders for underwriting insurance policies as a source of funds for paying for future insurance claims. As the financial instruments in which the Group’s insurance services segment invests are exposed to market risks including interest rate fluctuation risks, the Group’s asset-liability management (ALM) to prevent any adverse impact of such risks from arising. segment performs insurance services [English Translation] 12 Items Related to Fair Values of Financial Instruments etc. The amounts recognized on the consolidated balance sheet, fair values and corresponding differences as of March 31, 2022 are listed below. 2. (Millions of Yen) Fair value Difference Amount recognized on the consolidated balance sheet (1)Short-term investments and investment Investment securities in affiliates securities (i) Held-to-maturity debt securities (ii) (iii) Available-for-sale securities (2)Lease receivables and investment in leased assets (3)Long-term loans receivable Allowance for doubtful accounts (*3) (4)Lease deposits Total assets (1)Straight bonds (2)Long-term loans (3)Guarantee deposits received Total liabilities Derivative transactions (*4) (i) Hedge accounting not applied (ii) Hedge accounting applied Total derivative transactions 11,823 52,008 214,127 37,518 29,494 (11,491) 18,002 17,335 350,815 3,899 11,650 23,669 39,218 – – – 12,728 132,508 214,127 37,511 18,038 17,265 432,179 3,899 11,647 23,668 39,214 – <0> <0> 905 80,499 – (7) 36 (69) 81,364 (0) (3) (0) (4) – (0) (0) *1 “Cash on hand and in banks,” “Cash deposits for armored car services,” “Notes and accounts receivable-trade and contract assets,” “Due from subscribers,” “Short-term loans receivable,” “Notes and accounts payable, trade,” “Bank loans,” “Payables – other,” “Accrued income taxes, ” and “Deposits received for armored car services” are not included, as they fall under cash or they are settled in a short period of time and their fair values approximate their book values. *2 Shares that do not have a market value are not included in “(1) Short-term investments and investment securities”. The amounts of these financial instruments recognized on the Consolidated Balance Sheet are as follows Item Unlisted stock Unlisted stock of affiliates (Millions of Yen) Amount recognized on the consolidated balance sheet 5,533 10,476 *3 Allowance for doubtful accounts for long-term loans receivable is deducted. *4 Net claims and obligations arising from derivative transactions are shown as net values. Items for which the total is a net obligation are shown in parentheses < >. *5 The Company’s shares in Investments in partnerships and similar entities, which are recognized in net amounts in the Consolidated Balance Sheet are not included. The amount of such investments recognized in the Consolidated Balance Sheet is YEN 9,283 million. [English Translation] 13 3. Matters Related to the Breakdown of the Fair Value of Financial Instruments by Level The fair value hierarchy of financial instruments is categorized into the following three levels according to the degree of observability and importance of the inputs used in the calculation of fair value. Level 1 fair value: The fair value calculated based on quoted market prices of assets and liabilities for fair values in active markets among the observable inputs for calculating fair value Level 2 fair value: The fair value calculated using inputs other than those included in Level 1 inputs, among the observable inputs for calculating fair value Level 3 fair value: The fair value calculated using unobservable inputs If multiple inputs with significant impact are used for the fair value measurement of a financial instrument, the financial instrument is classified into the lowest priority level of fair value measurement to which each input belongs. (1) Financial instruments at fair value on the Consolidated Balance Sheet Item Short-term investments and investment securities (Millions of Yen) Fair value Level1 Level2 Level3 Total Available-for-sale securities Stocks Government bonds and Municipal bonds Straight bonds Other 52,630 39,125 64,903 43,790 200,449 <0> <0> *1 Net claims and obligations arising from derivative transactions are shown as net values. 52,630 12,291 – 27,625 92,547 – – – 26,834 64,903 1,052 92,789 <0> <0> – – – 15,112 15,112 – – Total derivative transactions Total assets Derivative transactions (*1) Interest rates related Items for which the total is a net debt are shown in parentheses < >. *2 The fair values of investment trust funds are not included. The amount of investment trust funds recognized in the Consolidated Balance Sheet is YEN 13,677 million. [English Translation] 14 (2) Financial instruments which other than stated at fair value on the Consolidated Balance Sheet Item Short-term investments and investment securities Held-to-maturity debt securities Government bonds and Municipal bonds Straight bonds Other Investment securities in affiliates Lease receivables and investment in leased assets Long-term loans receivable Lease deposits Total assets Straight bonds Long-term loans Guarantee deposits received Total liabilities (Millions of Yen) Fair value Level1 Level2 Level3 Total 11,722 – – 132,508 – – 144,230 – – – – – – 432 – 8,566 17,265 63,775 3,899 11,647 23,668 39,214 – 573 – – 9,472 – 10,046 – – – – 11,722 573 432 132,508 18,038 17,265 218,052 3,899 11,647 23,668 39,214 – 37,511 – 37,511 (Note 1) Description of the valuation techniques and inputs used to measure fair value Assets: Short-term investments and investment securities The fair value of stocks is based on the price quoted on the exchange whereas the fair value of straight bonds etc. is based on the price quoted on the exchange or the price presented by the corresponding financial institution. As listed stock and government bonds are traded on active markets, they are classified into Level 1 fair value. Other bonds, etc. are less frequently traded on the market and their prices are not deemed to be quoted prices on an active market, and their fair values are, therefore, classified into Level 2 fair value. If their values are calculated using techniques such as the present value technique based on significant unobservable inputs, they are classified into Level 3 fair value. Lease receivables and investment in leased assets These items are stated at present value calculated by discounting the sum of the principal and interest at the interest rate assumed when a new similar lease transaction is performed, and classified into Level 2 fair value. Long-term loans Long-term loans are stated at present value calculated by discounting the sum of the principal and interest at the interest rate assumed when a new similar loan transaction is performed with respect to each category based on type, internal rating and period of the loans receivable, and are therefore classified into Level 2 fair value. The fair value of doubtful accounts is approximately the same as the value on the balance sheet as of the fiscal year-end less the current estimated losses from the loan, as the estimated losses from the loan are calculated based on the discounted present value of the estimated cash flow or upon separately considering the expected recoverable amount; therefore, the said value is stated as fair value, and their fair values are, therefore, classified into Level 3 fair value. Certain consolidated subsidiaries calculate the present value of future cash flow by discounting the future cash [English Translation] 15 flow at an interest rate equal to an appropriate index such as the yield of government bonds plus the credit spread according to the residual period, and their fair values are, therefore, classified into Level 2 fair value. Lease deposits are stated at present value calculated by discounting the future cash flow at risk-free interest rate and classified into Level 2 fair value. Lease deposits Liabilities: Straight bonds These items are stated at present value calculated by discounting the sum of the principal and interest at the interest rate assumed when new similar straight bonds are issued, according to the residual period of the straight bonds, and classified into Level 2 fair value. Long-term loans These items are stated at present value calculated by discounting the sum of the principal and interest at the interest rate assumed when a new similar debt is taken on, and classified into Level 2 fair value. Guarantee deposits received Guarantee deposits received are stated at present value calculated by discounting the future cash flow at risk-free interest rate, and classified into Level 2 fair value. Derivative transactions Interest Rate Swap are stated at the price presented by the financial institution with which the Group has concluded an agreement, and classified into Level 2 fair value. (Note 2) Information about financial assets and liabilities measured and stated on the consolidated balance sheet at fair value and classified into Level 3 (1) Quantitative information on significant unobservable inputs Item Valuation Technique Significant Unobservable Inputs Scope of Input Short-term investment securities investments and Available-for-sale securities Other Present value Technique Discount rate Year of disposal EBITDA multiples (2) Description of the fair value valuation process 15% – 30% 2022 – 2025 0 – 9.9x The Group has established policies and procedures for measuring the fair value approved by an appropriate person of authority. In the measurement of fair value, the validity of the valuation technique and inputs used in the measurement of fair value, and the appropriateness of the classification of the fair value level are verified. The verification results are reported in an appropriate manner to the person of authority, thereby ensuring the appropriateness of the policies and procedures for measuring fair value. In the measurement of fair value, a valuation model that most suitably reflects the nature, characteristics and risks of the individual assets is used. In addition, when using the quoted market prices obtained from a third party as fair value, the validity of the prices is verified by appropriate methods such [English Translation] 16 as confirmation of the valuation technique and inputs used and comparison with the fair value of similar financial instruments. (3) Description of the impact on fair values where significant unobservable inputs are varied Significant unobservable inputs include the discount rate, the time of disposal, and EBITDA multiples. Generally, fair values decrease when the discount rate is raised, the time of disposal is extended, and the EBITDA multiples are lowered. Fair values increase when the discount rate is lowered, the time of disposal is shortened, and the EBITDA multiples are raised. Notes to Rental Property and Other Real Estate The Company and some of its consolidated subsidiaries own rental office buildings and medical facilities such as hospitals, in addition to rental housing etc. mainly in Tokyo and other major cities across the country. The amount recognized on the consolidated balance sheet, the amount of increase/decrease during the current fiscal year and the fair value of such rental properties are as follows: Amount recognized on the consolidated balance sheet Balance at the Increase/decrease Balance at the end of the fiscal during the fiscal beginning of the year year fiscal year (Millions of Yen) Fair value at the end of the fiscal year Office buildings 3,092 47,113 86,130 44,020 52,737 12,738 (1,572) 51,164 63,900 (2,950) 9,787 11,717 109,495 (1,430) 108,065 161,749 (Note 1) The amount recognized on the consolidated balance sheet equals the acquisition cost less accumulated depreciation and accumulated impairment loss. (Note 2) The fair value at the end of the current fiscal year is, in the case of major properties, the amount based on real-estate appraisal by an external real-estate appraiser, and in the case of other properties, the amount calculated in-house based on the Real Estate Appraisal Standard. However, if no significant fluctuations have occurred in a certain valuation or an index that is deemed to properly reflect the market price since the acquisition of the property from a third party or the most recent external valuation, the fair value is based on such valuation or the amount adjusted by using the index. Medical facilities Other Total [English Translation] 17 Profit or loss on rental properties and other real estate for the fiscal year ended March 31, 2022 is as follows: (Millions of Yen) Other (gains/losses on sale etc.) Rental income Rental expenses Difference Office buildings Medical facilities Other Total 4,191 7,037 565 11,794 2,103 3,272 304 5,679 2,088 3,765 261 6,114 (85) – 183 97 (Note 1) The rental expenses include depreciation, repair costs, insurance premium, taxes and public imposts, etc. (Note 2) Other includes gain on tangible assets recognized as extraordinary profit, etc. Notes on Revenue Recognition 1. Information on the Breakdown of Revenue from Contracts with Customers Reportable segments Security services Fire protection services Medical services Insurance services (Millions of Yen) Geospatial information services 475,476 – 73,786 148,803 67,161 549,262 148,803 67,161 8,830 558,093 148,803 7,413 74,575 – – – 634 634 52,056 52,691 56,371 56,371 – – 56,371 Reportable segments BPO and ICT services Subtotal Other services Total – 475,476 – 475,476 115,683 462,441 26,957 489,399 115,683 937,918 26,957 964,875 – 68,301 16,682 84,983 115,683 1,006,219 43,640 1,049,859 (Note) “Other services” is an operating segment not designated as a reportable segment, and comprises real estate leasing, construction and installation services, etc. [English Translation] 18 Revenue from security contracts Other Revenue from contracts with customers Other revenue Revenue from customers Revenue from security contracts Other Revenue from contracts with customers Other revenue Revenue from customers 2. Basic Information for Understanding Revenue from Contracts with Customers Please refer to “5. (4) Recognition Policies for Significant Revenue and Cost” of “Notes to Significant Items for Preparation of Consolidated Financial Statements” of “Notes to Consolidated Financial Statements.” 3. Information for Understanding the Amounts of Revenue in and after the Fiscal Year Ended March 31, 2022 (1) Balance, etc. of contract assets and contract liabilities (Millions of Yen) Fiscal year ended March 31, 2022 150,904 160,023 20,388 23,434 57,105 Claims arising from contracts with customers (beginning balance of the year) Claims arising from contracts with customers (ending balance of the year) Contract assets (beginning balance of the year) Contract assets (ending balance of the year) Contract liabilities (beginning balance of the year) 56,158 Contract liabilities (ending balance of the year) Contract assets comprise rights to claim consideration on construction contracts, etc., by the Company and its consolidated subsidiaries that have been completed by the fiscal year-end but remain unclaimed. Contract assets are transferred to receivables from contracts with customers at the point in time when the rights to claim consideration by the Company and its consolidated subsidiaries become unconditional. Contract liabilities mainly comprise deferred revenue received from customers concerning service contracts, etc., and are reversed upon the recognition of revenue. For the fiscal year ended March 31, 2022, most of the YEN 39,161 million of the beginning balance of contract liabilities of one year or less has been recognized as revenue in the current fiscal year. (2) Transaction price allocated to remaining performance obligations In the notes to the transaction price allocated to remaining performance obligations, the Company and its consolidated subsidiaries apply the practical expedient, and contracts with terms initially expected to be one year or less are not included in the notes. The total transaction price allocated to remaining performance obligations and the expected time of revenue recognition are as follows. One year or less More than one year Total (Millions of Yen) Fiscal year ended March 31, 2022 146,867 196,270 343,138 [English Translation] 19 Notes to Deferred Income Tax Accounting 1. The Significant Components of Deferred Income Tax Assets and Deferred Income Tax Liabilities: Deferred income tax assets: (Millions of Yen) Investment deposits by policyholders, unearned premiums and other insurance liabilities Net defined benefit liability Accrued bonuses Eliminations of unrealized gain Write-down on fixed assets Adjustment of book value of fixed assets of subsidiaries at fair value at the date of consolidation (land and buildings) Allowance for doubtful accounts Impairment loss Effect from the application of Accounting Standard for Revenue Recognition (deferred revenue) Operating loss carryforwards Effect from the application of Accounting Standard for Revenue Recognition (prepaid expenses) Other Gross deferred income tax assets Valuation allowance Total deferred income tax assets Deferred income tax liabilities: Net defined benefit asset Unrealized gains on securities Adjustment of book value of fixed assets of subsidiaries at fair value at the date of consolidation (intangible assets) Adjustment of book value of fixed assets of subsidiaries at fair value at the date of consolidation (land and buildings) Effect from the application of Accounting Standard for Revenue Recognition (prepaid expenses) Adjustment of book value of fixed assets of subsidiaries at fair value at the date of consolidation (other fixed assets) Other Total deferred income tax liabilities Net deferred income tax assets 16,118 6,516 5,535 5,524 4,981 4,710 4,587 4,530 3,221 2,360 2,206 13,296 73,590 (15,000) 58,589 (14,522) (7,895) (6,663) (4,680) (2,328) (941) (1,007) (38,040) 20,548 2. Summary of the Reconciliation between the Statutory Tax Rate and the Effective Tax Rate after the Application of Deferred Income Tax Accounting In the current fiscal year, difference between the statutory tax rate and the effective tax rate after the application of deferred income tax accounting accounted for less than 5% to the statutory tax rate. Accordingly the note is omitted. [English Translation] 20 Notes to Retirement Benefits 1. Outline of the Retirement Benefit Plan Adopted: Employees of the Company and its consolidated domestic subsidiaries whose services are terminated are, under most circumstances, eligible for lump-sum severance indemnities and/or eligible for pension benefits. The Company and its domestic consolidated subsidiaries with the same retirement benefit plan have adopted a severance indemnity plan and a defined contribution pension plan, and have also implemented a matching contribution plan since July 2012. The method of calculating the severance indemnity under the severance indemnity plan is to pay out to the employees an amount equal to a certain percentage of their annual income over their period of service, plus interest which is calculated as the 3-year average yield of applicants for 10-year government bonds. The defined contribution pension plan was established in April 2003, a portion equivalent to 20 % of the severance indemnity plan so far accumulated was transferred to the new plan, and a specified percentage of annual income is contributed thereto. The Company transferred an additional portion of the severance indemnity plan funds to the defined contribution pension plan in April 2005, and accordingly, the ratio of the accumulated amount in the severance indemnity plan and the amount of contributions to the defined contribution pension plan, including the past reserve, changed to 70 % and 30 %, respectively. The majority of the consolidated overseas subsidiaries have adopted a variety of pension plans that essentially cover all employees. Most of these plans are defined contribution pension plans. In defined benefit pension plans and lump-sum severance indemnity plans for some consolidated subsidiaries, net defined benefit liabilities and retirement benefit expenses are calculated using the simplified method. 2. Defined Benefit Plans (1) Reconciliation of beginning and ending balances of retirement benefit obligations (excluding those pertaining to plans to which the simplified method is applied) Beginning balance of retirement benefit obligations Service cost Interest cost Actuarial gains and losses incurred Retirement benefits paid Ending balance of retirement benefit obligations (2) Reconciliation of beginning and ending balances of plan assets (excluding those pertaining to plans to which the simplified method is applied) (Millions of Yen) 104,227 5,955 411 (322) (5,578) 104,693 (Millions of Yen) 124,762 3,520 4,680 5,198 (4,559) 133,603 Beginning balance of plan assets Expected rate of return Actuarial gains and losses incurred Contributions from the employer Retirement benefits paid Ending balance of plan assets [English Translation] 21 (3) Reconciliation of beginning and ending balances of net defined benefit liability pertaining to plans to which the simplified method is applied Beginning balance of net defined benefit liability Retirement benefit expenses Retirement benefits paid Contributions to the plan Ending balance of net defined benefit liability (4) Reconciliation of ending balances of retirement benefit obligations and plan assets with net defined benefit liability and net defined benefit asset recognized in the consolidated balance sheet Retirement benefit obligations of funded plans Plan assets Retirement benefit obligations of non-funded plans Net amount of assets and liabilities recognized in the consolidated balance sheet Net defined benefit liability Net defined benefit asset Net amount of assets and liabilities recognized in the consolidated balance sheet (Note) Including plans to which the simplified method is applied. (5) Retirement benefit expenses and their breakdown Service cost Interest cost Expected rate of return Amortization of actuarial gains and losses Retirement benefit expenses calculated using simplified method Retirement benefit expenses pertaining benefit plans the to defined (Millions of Yen) 3,102 523 (529) (141) 2,955 (Millions of Yen) 89,769 (136,289) (46,519) 20,564 (25,955) (Millions of Yen) 21,896 (47,852) (25,955) (Millions of Yen) 5,955 411 (3,520) (1,408) 523 1,960 (Millions of Yen) (10,284) (10,284) (6) Remeasurements of defined benefit plans The breakdown of the amount recognized in remeasurements of defined benefit plans (before the tax effect) is as follows: Unrecognized actuarial gains and losses Total (7) Matters concerning actuarial assumptions Major actuarial assumptions applied at the end of the current fiscal year Discount rate Long-term expected rate of return Mainly 0.5% Mainly 3.0% 3. Defined Contribution Plans The amount of contribution required for the Company and its consolidated subsidiaries is YEN 2,225 million in total. [English Translation] 22 Notes to Asset Retirement Obligation 1. Asset Retirement Obligations Recognized in Consolidated Balance Sheet Footnote information of asset retirement obligations recognized in the consolidated balance sheet is omitted as they are immaterial. 2. Asset Retirement Obligations not Recognized in Consolidated Balance Sheet A certain building of a consolidated subsidiary must be restored to its original state under the building lease agreement upon returning the building at the expiry of the lease. However, the Company does not plan to relocate from the building in its business strategies and it is assumed to be used until the building is demolished through the renewal of the agreement. In cases where the building is demolished, it is not expected to execute the contractual obligation to restore the building to its original state. For this reason, though the Company tried to establish best estimates, considering evidence available as at the closing date, asset retirement obligations have not been recognized with respect to such obligations, since it is impracticable to forecast the probability regarding the scope and the amount of asset retirement obligations. Notes to Business Combination Transactions under Common Control, etc. (Acquisition of additional shares of the consolidated subsidiary) 1. The Outline of Transactions (1) The Name of the Combined Company and its Business The name of the combined company: The consolidated subsidiary of Business description : Security business centering on the Company, Secom Joshinetsu Co., Ltd. on-line security system and other business (2) Date of Business Combination July 15, 2021 (3) Legal Form of Business Combination Acquisition of shares from non-controlling shareholders (4) Name of Company after Business Combination Not changed (5) Other Matters Relating to the Transactions The Company resolved in the meeting of the Board of Directors on May 28, 2021 to acquire shares of Secom Joshinetsu through the tender offer and make Secom Joshinetsu a wholly owned subsidiary of the Company, in order to achieve quick and highly flexible decision-making through integration of the Company and Secom Joshinetsu and concentrate necessary management resources on the security service business along with strong coordination with Secom Joshinetsu, leading to the achievement of the sustainable development and pursuing the further enhancement of both companies’ corporate values. The Company implemented the tender offer from May 31, 2021 to July 9, 2021. As a result, the Company’s ownership ratio of the total number of issued shares of Secom Joshinetsu (excluding the number of treasury shares owned by Secom Joshinetsu) increased from 54.03% (as of May 28, [English Translation] 23 2021) to 88.03%. On November 1, 2021, the share exchange was implemented in which the Company became a wholly owning parent company in share exchange and Secom Joshinetsu became a wholly owned subsidiary in share exchange, and Secom Joshinetsu became a wholly owned subsidiary of the Company. 2. Summary of Accounting Treatment Based on the “Accounting Standards for Business Combinations” (ASBJ Statement No.21, January 16, 2019) and “Implementation Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestures” (ASBJ Statement No.10, January 16, 2019), the Share Exchange was accounted for as a transaction under common control, etc. Subsidiary 3. Matters Related to the Additional Acquisition of Shares of the Consolidated Acquisition Cost and Breakdown Thereof Consideration for the Acquisition Cash on hand and in banks Acquisition Cost 27,442 million yen 27,442 million yen 4. Matters Related to Changes in Shares of the Company Arising from (2) Amount of Capital Surplus decreased by Transactions with Transactions with Non-controlling Shareholders (1) Major Factors in Changes in Capital Surplus Acquisition of additional shares of a subsidiary Non-controllin