ＳＭＣ（6273） – Internet Disclosure on the Notice of Convocation Annual General Meeting 2022

To Our Shareholders Internet Disclosure on the Notice of Convocation of the 63rd Annual General Meeting of Shareholders June 2022 SMC Corporation 1. Consolidated Statement of Changes in Equity 2. Notes to Consolidated Financial Statements Page 1 Page 2 3. Non-consolidated Statement of Changes in Equity Page 13 4. Notes to Non-consolidated Financial Statements Page 15 The above materials are deemed to have been provided to our shareholders by publishing on the Company’s website (https://www.smcworld.com/ir/en/) based on the Regulation on Corporate Accounting and the Articles of Incorporation of the Company. Contents Consolidated Statement of Changes in Equity (April 1, 2021 to March 31, 2022) Share capital Capital surplus Treasury shares Shareholders’ equity Retained earnings (Millions of yen) Total shareholders’ equity Net assets at beginning of period 61,005 73,335 1,277,198 (59,139) 1,352,399 Restated balance 61,005 73,335 1,276,940 (59,139) 1,352,142 Cumulative effects of changes in accounting policies Changes during period Dividends of surplus Profit attributable to owners of parent Purchase of treasury shares Disposal of treasury shares Net changes in items other than shareholders’ equity (257) (257) (39,646) 192,991 (39,646) 192,991 (50,020) (50,020) 23 23 Total changes during period – – 153,344 (49,997) 103,347 Net assets at end of period 61,005 73,335 1,430,285 (109,136) 1,455,489 Accumulated other comprehensive income Valuation difference on available-for-sale securities Foreign currency translation adjustment Remeasurements of defined benefit plans Total accumulated other comprehensive income Non-controlling interests Total net assets 11,404 12,056 842 24,304 3,283 1,379,987 Restated balance 11,404 12,056 842 24,304 3,283 1,379,730 Net assets at beginning of period Cumulative effects of changes in accounting policies Changes during period Dividends of surplus Profit attributable to owners of parent Purchase of treasury shares Disposal of treasury shares Net changes in items other than shareholders’ equity 75,836 87,893 －1－ (257) (39,646) 192,991 (50,020) 23 76,196 179,543 Total changes during period (169) (169) 75,836 167 167 75,834 75,834 361 361 Net assets at end of period 11,235 1,010 100,139 3,645 1,559,274 Notes to Consolidated Financial Statements [Notes on significant matters constituting the basis for preparing the Consolidated Financial Statements] 1. The scope of consolidation (1) Number of consolidated subsidiaries and names of major consolidated subsidiaries Number of consolidated subsidiaries: 44 Names of major consolidated subsidiaries: Nihon Kizai Co., Ltd. SMC Automation China Co., Ltd. SMC Corporation of America SMC (China) Co., Ltd. SMC Deutschland GmbH SMC Korea Co., Ltd. SMC (Beijing) Manufacturing Co., Ltd. (2) Names of major non-consolidated subsidiaries: SC SMC Romania S.r.l., SMC Corporation (Chile) S.A. (Reasons for exclusion from the scope of consolidation) The 30 non-consolidated subsidiaries are excluded from the scope of consolidation since they are all small in size and their aggregate total assets, net sales, net income (amount corresponding to equity) and retained earnings (amount corresponding to equity) do not significantly impact the consolidated financial statements. 2. The scope of application of the equity method Non-consolidated subsidiaries (SC SMC Romania S.r.l. and 29 other subsidiaries) and 1 affiliate that are not accounted for using the equity method are excluded from the equity method scope since their effect on the consolidated financial statements is considered to be minimal and insignificant in whole in terms of net income or loss (amount corresponding to equity) and retained earnings (amount corresponding to equity). －2－ 3. Matters pertaining to the fiscal year of consolidated subsidiaries The consolidated financial statements were prepared based on the preliminary financial statements as of March 31, 2022 for the following 10 subsidiaries whose fiscal year-end date is December 31. SMC Investment Management China Co., Ltd. SMC Automation China Co., Ltd. SMC (China) Co., Ltd. SMC (Beijing) Manufacturing Co., Ltd. SMC (Tianjin) Manufacturing Co., Ltd. SMC Automation (Guangzhou) Ltd. Nihon Kizai (Shanghai) Co., Ltd. SMC Corporation (Mexico), S.A. de C.V. SMC Automação do Brasil Ltda. SMC Pneumatik LLC 4. Accounting policies (i) Securities (1) Valuation standards and methods for significant assets Securities held to maturity: valued at amortized cost method. Available-for-sale securities a. Stocks other than those for which a market price is not available: stated at fair value method. (All unrealized holding gains and losses are included in net assets and cost of sales is principally calculated with the moving average method.) b. Stocks for which a market price is not available: stated at cost using the moving average (ii) Inventories: principally stated at cost using the gross average method (with book value written down on the balance sheet based on decreased profitability of assets). method. (2) Depreciation methods for significant depreciable assets (i) Property, plant and equipment (excluding leased assets) Depreciation of property, plant and equipment of the Company and its domestic consolidated subsidiaries is calculated principally under the declining balance method. However, buildings acquired on and after April 1, 1998 (excluding facilities attached to buildings) and facilities attached to buildings and structures acquired on and after April 1, 2016 are calculated with the straight-line method. And that of foreign consolidated subsidiaries is determined in accordance with the straight-line method pursuant to the accounting standards of the corresponding nation. Primary useful periods are as described below. Buildings and structures: 3-50 years Machinery, equipment and vehicles: 2-17 years Tools, furniture and fixtures: 2-20 years (ii) Intangible assets (excluding leased assets) Amortization of intangible assets of the Company and its domestic consolidated subsidiaries is calculated in accordance with the straight-line method and that of foreign consolidated subsidiaries is determined in accordance with the straight-line method pursuant to the accounting standards of the corresponding nation. －3－ Internal-use software is amortized on a straight-line basis over the useful life period (mainly 5 years) specified by the Company. (3) Basis for significant allowances and provisions (i) Allowance for doubtful accounts The Company and its consolidated domestic subsidiaries provide an allowance for possible loan losses upon assessing the amount deemed uncollectible by applying the historical bad-debt ratio for general claims and by individually estimating such amount for specific doubtful claims. Foreign consolidated subsidiaries provide an allowance for possible loan losses in the amount deemed uncollectible based on an individual assessment of each claim. (ii) Provision for bonuses Some of the Company’s consolidated subsidiaries provide a reserve of the estimated amount to prepare for bonus payment to employees. (iii) Provision for retirement benefits for directors Some of the Company’s consolidated subsidiaries provide a reserve for retirement benefits for directors to prepare for the necessary payment amount as of the end of the current fiscal year in accordance with the internal rules. (iv) Provision for share awards for directors For the purpose of preparing for share benefits as remuneration to Directors, projected amount of share benefits at the end of the current fiscal year is recorded. (4) Basis for translating significant foreign currency denominated assets and liabilities into Japanese yen Foreign currency denominated assets and liabilities are translated into Japanese yen at exchange rates prevailing at the balance sheet date and the difference resulting from the translation is recognized as gains or losses. Meanwhile, assets and liabilities held by foreign consolidated subsidiaries are translated into Japanese yen at exchange rates prevailing at the balance sheet date, while revenues and expenses are translated into Japanese yen at average rates of exchange during the current consolidated fiscal year and the difference resulting from the translation is charged to foreign currency translation adjustments and non-controlling interests under net assets. (5) Basis for significant revenues and expenses (i) Contents of main performance obligations in major businesses The Group is engaged in the manufacturing and sale of automatic control equipment, including pneumatic instruments, that is essential for automated, labor-saving operations in various industry sectors, and is under the obligation to deliver products to customers in (ii) At the usual point at which the Company fulfills its performance obligation (at the usual accordance with sales agreements, etc. point at which it recognizes revenue) The Group sells automatic control equipment, including pneumatic instruments, to customers. We deem control over these products to be transferred to the customer at the －4－ revenue. point at which the product is shipped or delivered, at which point we recognize the (6) Other significant matters constituting the basis for preparing the Consolidated Financial Statements Basis for net defined retirement benefit liabilities and net defined retirement benefit assets For the purpose of preparing employees’ retirement benefit payments, retirement benefit liabilities and retirement benefit assets are recorded based on the projected amounts for pension assets and retirement benefit obligations at the end of the fiscal year at the consolidated level. For the calculation of consolidated retirement benefit obligations, the retirement benefit formula is used to attribute expected retirement benefits for the period until the end of the current fiscal year. Prior service cost is amortized on a straight-line basis over certain years (10 years) within the average remaining service periods at the time of recognition. Actuarial net gain or loss is recognized on a straight-line basis over certain years (10 years) within the average remaining service period at the time of recognition of each fiscal year, starting from the succeeding period. Unrecognized actuarial net gains or losses and unrecognized prior service costs are included, after adjusting for tax effects, in the re-measurements of defined benefit plans under accumulated other comprehensive income in the net asset section. Some of the Company’s consolidated subsidiaries adopt the simplified accounting method for the calculation of their net defined benefit assets, net defined benefit liabilities and retirement benefit expenses. Within, the amount payable to employees retiring due to personal reasons at year end is recognized as the amount of retirement benefit obligations. [Notes on changes in accounting policy] 1. Application of the Accounting Standard for Revenue Recognition The Group began applying the “Accounting Standard for Revenue Recognition” (ASBJ Statement No. 29, March 31, 2020; hereinafter “the Accounting Standard for Revenue Recognition”) at the consolidated level at the beginning of the fiscal year under review, such that at the point at which control of the promised good or service is transferred to the customer, the Company recognizes revenue equivalent to the amount it expects to receive in return for said good or service. The amount of revenue recorded consists of the consideration promised in the agreement with the customer, from which returns, discounts, rebates and other items have been deducted. The revenue recognition standard has been applied in accordance with the transitional measures set forth in the proviso to paragraph 84 of the revenue recognition standard, under which the cumulative effect of the retrospective application, assuming that the new accounting policy had been applied at the consolidated level to periods prior to the beginning of the fiscal year under review, was added to or deducted from the opening balance of retained earnings at the －5－ beginning of the fiscal year, and thus the new accounting policy was applied from this opening balance. However, due to the application of the methods provided for in paragraph 86 of the Accounting Standard for Revenue Recognition, the new accounting policy was not retrospectively applied at the consolidated level to contracts for which nearly all the revenue amounts had been recognized according to the previous treatment in periods prior to the beginning of the fiscal year under review. In addition, some of the sales promotion expenses that were previously recorded in selling, general and administrative expenses, and sales discounts that were previously recorded in non-operating expenses, are now deducted from net sales. As a result, the impact on the consolidated financial statements of the application of the Accounting Standard for Revenue Recognition was negligible. 2. Application of the Accounting Standard for Fair Value Measurement, etc. The Company began applying the “Accounting Standard for Fair Value Measurement” (ASBJ Statement No. 30, July 4, 2019; hereinafter “the Accounting Standard for Fair Value Measurement”) and relevant ASBJ regulations at the consolidated level at the beginning of the current fiscal year. Furthermore, in accordance with the transitional treatment set forth in paragraph 19 of the Accounting Standard for Fair Value Measurement and paragraph 44-2 of the “Accounting Standard for Financial Instruments” (ASBJ Statement No. 10, July 4, 2019), the Company will prospectively apply the new accounting policy prescribed by the Accounting Standard for Fair Value Measurement and relevant ASBJ regulations. This had no impact on the consolidated financial statements. Furthermore, in the Notes on Financial Instruments, the Company has opted to provide notes on matters related to the breakdown, etc. for each level of fair value for financial instruments. －6－ [Notes on revenue recognition] 1. Information on disaggregated revenue arising from contracts with customers Net sales by region Fiscal year 2021 (Millions of yen) Japan China United States Europe Other Asia (excluding China) Total net sales 173,232 82,648 188,522 130,668 122,282 30,042 727,397 Note: There is no revenue other than from the automatic control equipment business. 2. Basic information for understanding revenue (1) Information on calculating transaction prices The amount of revenue recorded consists of the consideration promised in the agreement with the customer, from which returns, discounts, rebates and other items have been deducted. For returns and discounts, predictions of the amounts that could occur are based on past experience, and rebates are calculated by assuming a fixed percentage will be rebated, based on the contract. (2) Information on the point at which performance obligations are fulfilled The Group sells automatic control equipment, including pneumatic instruments, to customers. Since these products do not require time for delivery inspection by the customer, control of the products is deemed to be transferred to the customer at the point at which the product is shipped or delivered, at which point revenue is recognized. [Notes on accounting estimates] Of the accounting estimates made in preparing the consolidated financial statements for the current fiscal year, those with a risk of having a material impact on the consolidated financial statements for the following fiscal year have not been identified, and are therefore omitted from this report. [Notes on Consolidated Balance Sheet] 1. Accumulated depreciation of property, plant and equipment 2. For non-consolidated subsidiaries and affiliates Investment securities (stocks) (Millions of yen) 258,340 14,863 －7－ [Notes on Consolidated Statements of Income] 1. Principal items under selling, general and administrative expenses Salaries and allowances Bonuses Retirement benefit expenses Provision of allowance for doubtful accounts 2. Research and development expenses included under general and administrative expenses as well as manufacturing costs [Notes on Consolidated Statement of Changes in Equity] 1. Type and number of outstanding shares and treasury shares (Millions of yen) 47,149 12,053 1,432 384 23,457 (Shares) At the end of current fiscal year Type Increase Decrease At the beginning of current fiscal year Outstanding shares Common share 67,369,359 – – 67,369,359 Treasury shares Common share 1,294,348 735,065 400 2,029,013 Note: Of the increase in treasury shares of 735,065 shares, 734,700 shares were purchased following a resolution by the Board of Directors for the purchase of treasury shares, and 365 shares were the result of purchasing shares from trading lots of less than one unit. The 400 share decrease in treasury shares was a result of shares being granted by the Board Benefit Trust for officers as part of the stock compensation plan for directors. －8－ 2. Dividends (1) Dividend amount Resolved at Type Record date Effective date Total dividend amount Dividend per share Annual General Meeting of Shareholders held on June 29, 2021 Common share ¥19,823 million ¥300 March 31, 2021 June 30, 2021 Board of Directors’ Meeting held on November 12, 2021 Common share ¥19,823 million ¥300 September 30, 2021 December 1, 2021 Note: The “Total dividend amount” includes a dividend of ¥0 million for the Company’s shares held by the “Board Benefit Trust”. (2) Dividends whose record date is within the term and effective date in the succeeding term The following is to be proposed at the Annual General Meeting of Shareholders scheduled to be held on June 29, 2022. Type Source Record date Effective date Total dividend amount Dividend per share Common share Retained earnings ¥29,404 million ¥450 March 31, 2022 June 30, 2022 Note: The “Total dividend amount” includes a dividend of ¥1 million for the Company’s shares held by the “Board Benefit Trust”. [Notes on financial instruments] 1. Status of financial instruments (1) Policy on financial instruments The Group procures fund through self-financing and external sources mainly in the form of loans from financial institutions including banks. The Company invests temporary surplus funds in financial instruments with high levels of safety while its consolidated subsidiaries are prohibited from investing such funds in securities in principle and instead, are limited to invest in short-term bank deposits, etc. We limit the derivative transactions within the range of actual demand and do not make speculative transactions, based on internal rules. (2) Contents and risk of financial instruments Notes and accounts receivable-trade, which are trade receivables, are subject to the credit risk of customers. Foreign currency denominated notes and accounts receivable-trade are also subject to the risk of exchange rate fluctuations. Securities and investment securities, which consist mainly of stocks of companies that have business relationships with the Company, government bonds, and securities investment trusts, are subject to market price volatility risk and other risks. Notes and accounts payable-trade, which are trade payables, have a due date of one year or less. Foreign currency denominated notes and trade payables drawn for imports of raw －9－ materials, etc. are subject to the risk of exchange rate fluctuations. Short-term borrowings are mainly fund procurement for general purpose working capital. Long-term borrowings are used mainly to fund capital investments. (3) Risk management system for financial instruments (i) Credit risk management (risk relating to contract default by customers) Regarding credit risk management for trade receivables, we manage the due date and balance of receivables by customer, and have established a system in which we collect customers’ credit status information on a daily basis. As part of this system, we perform risk assessment regularly to ensure receivables are protected. Furthermore, the Company receives guarantee deposits from its principal distribution agents. (ii) Market risk management (risk of fluctuations in exchange rates and interest rates) For foreign currency denominated trade receivables and trade payables, the Company and some of its consolidated subsidiaries may engage in foreign exchange forward contract transactions when required. The balance of foreign currency denominated trade payables is constantly within the balance of foreign currency denominated trade receivables. We regularly keep track of the fair values and financial conditions of the issuers of securities and investment securities. (iii) Liquidity risk management relating to financing (risk of inability to repay on the due date) We manage liquidity risk by methods such as creating a cash flow plan. (4) Supplementary explanation on matters relating to fair value of financial instruments and others Methods of calculating fair values of financial instruments include market price based values and deemed market price values that are reasonably assessed when there are no market prices. Since certain assumptions and others are adopted for calculating such values, they may differ when adopting different assumptions and others. －10－ 2. Fair value of financial instruments and others The following are the consolidated balance sheet amounts, fair values and their differences. Consolidated balance sheet amount (Millions of yen) Fair value Difference Securities and investment securities (i) Securities held to maturity (ii) Available-for-sale securities Total assets 950 55,078 56,028 898 55,078 55,977 (51) – (51) (*1) Notes on cash are omitted. Presentation of deposits, notes and accounts receivable-trade, notes and accounts payable-trade, and short-term borrowings has been omitted because they are settled in a short period of time and their fair value approximates their book value. (*2) Stocks, etc. for which a market prices not available are not included in “Securities and investment securities”. The following are the consolidated balance sheet amounts for these financial instruments. Category Consolidated balance sheet amount Shares of subsidiaries and affiliates Unlisted stocks ¥14,863 million ¥78 million 3. Breakdown etc. for each level of fair value for financial instruments Fair value for financial instruments is categorized into one of the following three levels, depending on the observability and significance of inputs used in the calculation of fair value. Level 1 fair value: Fair value calculations with observable inputs, in which fair value is calculated using quoted prices formed in an active market for the assets or liabilities that are the subject of the fair Level 2 fair value: Fair value calculations with observable inputs, in which fair value is calculated using inputs other than those used as inputs in value calculation. Level 1. Level 3 fair value: Fair values calculated using unobservable inputs. In cases where multiple inputs with a significant impact on the calculation of fair value are used, the fair value is categorized to the level, among those to which the various inputs belong, that has the lowest priority in the fair value calculation. －11－ (1) Financial instruments recorded on the consolidated balance sheet at fair value Fair value Level 1 Level 2 Level 3 Total (Millions of yen) Category Securities and investment securities Available-for-sale securities Stocks Bonds Other Total assets sheet at fair value Category Securities and investment securities Securities held to maturity Corporate bonds Total assets 14,565 30,521 9,991 55,078 – – – – – – 898 898 (2) Financial instruments other than financial instruments recorded on the consolidated balance Fair value Level 1 Level 2 Level 3 Total (Millions of yen) – – – – – – 14,565 30,521 9,991 55,078 898 898 Note: Explanation of valuation techniques and inputs used for fair value calculations. Securities and investment securities Listed stocks, government bonds and corporate bonds are valued using quoted market prices. Since listed stocks and government bonds are traded in active markets, their fair values are classified as at Level 1. However, corporate bonds held by consolidated subsidiaries are classified at Level 2 because their trade frequency in the market is low and their fair value is not considered to be their quoted market price in an active market. [Notes on per share information] 1. Net assets per share: 2. Net income per share: 23,808.08 yen 2,923.76 yen Note: In the Consolidated Statement of Changes in Equity and the Notes to Consolidated Financial Statements, amounts are rounded down to match the unit in which they are presented. －12－ Non-consolidated Statement of Changes in Equity (April 1, 2021 to March 31, 2022) Shareholders’ equity Capital surplus Retained earnings (Millions of yen) Share capital Legal capital surplus Other capital surplus Total capital surplus Legal retained earnings Other retained earnings Reserve for special depreciation Reserve for tax purpose reduction entry of assets General reserve 61,005 72,576 694 73,271 15,251 159 263 150,250 Restated balance 61,005 72,576 694 73,271 15,251 159 263 150,250 Net assets at beginning of period Cumulative effects of changes in accounting policies Changes during period Provision of reserve for special depreciation Reversal of reserve for special depreciation Reversal of reserve for tax purpose reduction entry of assets Dividends of surplus Profit Purchase of treasury shares Disposal of treasury shares Net changes in items other than shareholders’ equity 29 (25) (12) Total changes during period – – – – – 3 (12) – Net assets at end of period 61,005 72,576 694 73,271 15,251 162 251 150,250 －13－ Shareholders’ equity Valuation and translation adjustments (Millions of yen) Treasury shares Total shareholders’ equity Valuation difference on available-for-sale securities Total valuation and translation adjustments Total net assets Retained earnings Other retained earnings Retained earnings brought forward Total retained earnings 724,608 890,533 (59,139) 965,670 10,976 10,976 976,647 (50) (50) (50) (50) Restated balance 724,557 890,482 (59,139) 965,619 10,976 10,976 976,596 Net assets at beginning of period Cumulative effects of changes in accounting policies Changes during period Provision of reserve for special depreciation Reversal of reserve for special depreciation Reversal of reserve for tax purpose reduction entry of assets Disposal of treasury shares Net changes in items other than shareholders’ equity (29) 25 12 – – – 23 – – – 23 Dividends of surplus (39,646) (39,646) (39,646) Profit 130,658 130,658 130,658 Purchase of treasury shares (50,020) (50,020) – – – (39,646) 130,658 (50,020) 23 Total changes during period 91,020 91,011 (49,997) 41,014 (259) (259) 40,755 Net assets at end of period 815,578 981,494 (109,136) 1,006,634 10,717 10,717 1,017,351 (259) (259) (259) －14－ Notes to Non-consolidated Financial Statements [Notes on significant matters pertaining to accounting policies] 1. Standards and methods for valuation of securities (1) Shares of subsidiaries and affiliates: Stated at cost using the moving average method. (2) Available-for-sale securities (i) Stocks other than those for which a market price is not available: stated at fair value method. (All unrealized holding gains and losses are included in net assets and cost of sales is principally calculated with the moving average method). (ii) Stocks for which a market price is not available: stated at cost using the moving average 2. Valuation standards and methods for inventories method. Principally stated at cost using the gross average method (with book value written down on the However, buildings acquired on and after April 1, 1998 (excluding facilities attached to buildings) and facilities attached to buildings and structures acquired on and after April 1, balance sheet based on decreased profitability of assets). 3. Depreciation methods of non-current assets (1) Property, plant and equipment (excluding leased assets) In accordance with the declining balance method. 2016 are in accordance with the straight-line method. Primary useful periods are as described below. Buildings and structures: 3-50 years Machinery, equipment and vehicles: 2-17 years Tools, furniture and fixtures: 2-20 years (2) Intangible assets (excluding leased assets) In accordance with the straight-line method. years) specified by the Company. 4. Basis for allowances and provisions (1) Allowance for doubtful accounts Internal-use software is amortized on a straight-line basis over the useful life period (5 An allowance is provided for possible loan losses upon assessing the amount deemed irrecoverable by applying the historical bad-debt ratio for general claims and by individually estimating such amount for specific doubtful claims. (2) Provision for retirement benefits A reserve is provided for employee retirement benefits based on the projected amount of retirement benefit obligations and pension plan assets in the fiscal year. For the calculation －15－ of retirement benefit obligations, the retirement benefit formula is used to attribute expected retirement benefits to the period until the current fiscal year. Prior service cost is amortized on a straight-line basis over certain years (10 years) within the average remaining service periods at the time of recognition. Actuarial net gain or loss is recognized on a straight-line basis over certain years (10 years) within the average remaining service periods at the time of recognition of each fiscal year, starting from the succeeding period. (3) Provision for share awards for directors For the purpose of preparing for share benefits as remuneration to Directors, projected amount of share benefits at the end of the current business year is recorded. 5. Accounting policy for recognition of significant revenues and expenses (1) Contents of main performance obligations in major businesses The Company is engaged in the manufacturing and sale of automatic control equipment, including pneumatic instruments, that is essential for automated, labor-saving operations in various industry sectors, and is under the obligation to deliver products to customers in (2) At the usual point at which the Company fulfills its performance obligation (at the usual accordance with sales agreements, etc. point at which it recognizes revenue) The Company sells automatic control equipment, including pneumatic instruments, to customers. We deem control over these products to be transferred to the customer at the point at which the product is shipped or delivered, at which point we recognize the revenue. 6. Other significant matters constituting the basis for preparing the Financial Statements Accounting procedures for retirement benefits The accounting procedures for unrecognized actuarial net gains or losses and unrecognized prior service costs related to retirement benefits are different from those adopted to prepare the consolidated financial statements. [Notes on changes in accounting policy] 1. Application of the Accounting Standard for Revenue Recognition The Group began applying the “Accounting Standard for Revenue Recognition” (ASBJ Statement No. 29, March 31, 2020; hereinafter “the Accounting Standard for Revenue Recognition”) at the beginning of the fiscal year under review, such that at the point at which control of the promised good or service is transferred to the customer, the Company recognizes revenue equivalent to the amount it expects to receive in return for said good or service. The amount of revenue recorded consists of the consideration promised in the agreement －16－ with the customer, from which returns, discounts, rebates and other items have been deducted. The revenue recognition standard has been applied in accordance with the transitional measures set forth in the proviso to paragraph 84 of the revenue recognition standard, under which the cumulative effect of the retrospective application, assuming that the new accounting policy had been applied to periods prior to the beginning of the fiscal year under review, was added to or deducted from the opening balance of retained earnings brought forward at the beginning of the fiscal year, and thus the new accounting policy was applied from this opening balance. However, due to the application of the methods provided for in paragraph 86 of the Accounting Standard for Revenue Recognition, the new accounting policy was not retrospectively applied to contracts for which nearly all the revenue amounts had been recognized according to the previous treatment in periods prior to the beginning of the fiscal year under review. In addition, some of the sales promotion expenses that were previously recorded in selling, general and administrative expenses, and sales discounts that were previously recorded in non-operating expenses, are now deducted from net sales. As a result, the impact on the non-consolidated financial statements of the application of the Accounting Standard for Revenue Recognition was negligible. 2. Application of the Accounting Standard for Fair Value Measurement, etc. The Company began applying the “Accounting Standard for Fair Value Measurement” (ASBJ Statement No. 30, July 4, 2019; hereinafter “the Accounting Standard for Fair Value Measurement”) and relevant ASBJ regulations at the beginning of the current fiscal year. Furthermore, in accordance with the transitional treatment set forth in paragraph 19 of the Accounting Standard for Fair Value Measurement and paragraph 44-2 of the “Accounting Standard for Financial Instruments” (ASBJ Statement No. 10, July 4, 2019), the Company will prospectively apply the new accounting policy prescribed by the Accounting Standard for Fair Value Measurement and relevant ASBJ regulations. This had no impact on the non-consolidated financial statements. [Notes on revenue recognition] Basic information for understanding revenue Notes on revenue recognition have been omitted because the same information is presented in “Notes on revenue recognition” for the consolidated financial statements. [Notes on accounting estimates] Of the accounting estimates made in preparing the financial statements for the current fiscal year, those with a risk of having a material impact on the financial statements for the following fiscal year have not been identified, and are therefore omitted from this report. －17－ 1. Accumulated depreciation of property, plant and equipment 2. Receivables and payables in relation to subsidiaries and affiliates [Notes on Balance Sheet] Short-term receivables Short-term payables [Notes on Statements of Income] Transactions with subsidiaries and affiliates Net sales Purchase amount Selling, general and administrative expenses Non-operating transaction amount (Millions of yen) 128,403 (Millions of yen) 103,749 20,672 336,761 81,173 2,546 15,194 [Notes on Non-consolidated Statement of Changes in Equity] Type and number of treasury shares Type Treasury shares Common share At the end of previous fiscal year Increase Decrease (Shares) At the end of current fiscal year 1,294,348 735,065 400 2,029,013 Note: Of the increase in treasury shares of 735,065 shares, 734,700 shares were purchased following a resolution by the Board of Directors for the purchase of treasury shares, and 365 shares were the result of purchasing shares from trading lots of less than one unit. The 400 share decrease in treasury shares was a result of shares being granted by the Board Benefit Trust for officers as part of the stock compensation plan for directors. －18－ [Notes on tax effect accounting] Significant components of deferred tax assets and deferred tax liabilities (Millions of yen) The 63rd fiscal year (As of March 31, 2022) Deferred tax assets Loss on valuation of investment securities Loss on valuation of inventories One-time depreciable assets Loss on valuation of shares of subsidiaries and affiliates Allowance for doubtful accounts Accounts payable other Accrued enterprise taxes, accrued business office taxes Accrued expenses Provision for retirement benefits Provision for share awards for directors Asset retirement obligations Valuation difference on available-for-sale securities Other Total deferred tax assets Deferred tax liabilities Asset retirement obligations Prepaid pension costs Reserve for special depreciation Reserve for tax purpose reduction entry of assets Valuation difference on available-for-sale securities Other Total deferred tax liabilities Net deferred tax assets 580 6,322 102 390 71 142 1,761 2,848 1,293 19 61 6 200 13,801 (1) (1,446) (71) (111) (4,736) (1) (6,368) 7,433 －19－ [Notes on transactions with related parties] 1. Subsidiaries and affiliates (Millions of yen) Account title Balance at end of period Type Name Relationship Transaction Amount Percentage of voting rights Subsidiary SMC (China) Co., Ltd. (Indirect) 100.0% Subsidiary SMC Corporation of America (Direct) 100.0% Distributor of the Company’s products and supplier Distributor of the Company’s products and supplier Sales of the Company’s product (*1) Sales of the Company’s product (*1) 100,054 25,099 49,487 12,345 Accounts receivable-trade Accounts receivable-trade Transaction conditions and policies on determining such conditions (*1) The sales price of the Company’s products is determined in consideration of the prevailing market price. 2. Director and individual major shareholders, etc. Type Name Relationship Transaction Amount Percentage of voting rights (Millions of yen) Account title Balance at end of period Accounts payable-trade Machinery, equipment and vehicles, other Investments and other asset, other (leasehold and guarantee deposits) – – 73 0 70 Purchase of raw materials (*1) 1,491 Loan of machinery and equipment (*1) Rental of warehouses (*1) Companies, etc. in which the majority of voting rights are owned by a Director or his/her close relatives SMAC Corporation (Note) None Supplier of raw materials Note: Samuel Neff, Director and Executive Officer of the Company, and his close relatives own 99.7% of the total voting rights. Transaction conditions and policies on determining such conditions (*1) The Company outsources the production of raw materials (tubes) to SMAC Corporation (“SMAC”). The purchase price of tubes is determined through negotiations, and machinery and equipment are lent to free of charge. The rent fee for the warehouse that the Company rents from SMAC for storage of tubes is negotiated and set according to the amount of purchase, and is included in the purchase price of tubes. Furthermore, purchase transactions with SMAC were terminated on March 31, 2022. －20－ [Notes on per share information] 1. Net assets per share: 2. Net income per share: 15,570.04 yen 1,979.43 yen Note: In the Non-consolidated Statement of Changes in Equity and the Notes to Non-consolidated Financial Statements, amounts are rounded down to match the unit in which they are presented. －21－