Fuyo General Lease : Consolidated financial statements 2025

Estimate of residual value of real estate under operating lease transactions

Description of Key Audit Matter

Auditor's Response

Fuyo General Lease Co., Ltd. and its consolidated subsidiaries (the Group) are engaged in leasing, installment sales, commercial loan origination, and other financial services. The Group recorded assets for lease of ¥1,038,525 million in property, plant and equipment, at cost less accumulated depreciation, on the consolidated balance sheet as of March 31, 2025. Real estate lease assets with a carrying amount of

¥547,897 million were recognized as described in Note XX. "Real estate leasing business," to the consolidated financial statements. These assets account for 15% of consolidated total assets.

As described in "4. Summary of significant accounting policies," "(2) Depreciation and amortization" under Note I. "Basis of presentation," in the notes to consolidated financial statements, assets leased under operating lease transactions are depreciated to their residual value using the straight-line method over the lease term and depreciation expense is recorded in cost of sales. The residual value at the end of the lease term is estimated at the inception of the lease and is revised, as deemed necessary, during the lease term. If a loss on disposal of the leased assets is expected, the corresponding amount is recorded under cost of sales.

As described in Note II. "Significant accounting estimates," the Group estimates the residual value using future cash flows and discount rates, and the significant assumption for estimating the residual value is future cash flows. The future cash flows of real estate lease transactions are estimated based on considerations such as terms of contracts, rents, and occupancy rates. However, these transactions are highly individual in nature and the estimation of the residual value requires complex judgment, and specialized knowledge and experience. In addition, since the value of each property in real estate lease transactions is significant and operating lease transactions are not full payout, an inaccurate estimation of the residual value can have a considerable impact on profit or loss calculations.

Based on the above, we have determined the estimation of the residual value of real estate under operating lease transactions to be a key audit matter.

We performed the following audit procedures, among others, to evaluate the key assumptions such as future cash flows and other inputs required to estimate the residual value of real estate under operating lease transactions by selecting a sample of transactions based on quantitative materiality, the remaining number of years, and the type of lease payments:

1. Audit procedures performed for selected assets acquired in the current year

   • In order to evaluate the inputs, such as rents and the occupancy rates of the properties, which form the basis for calculating future cash flows used by the Group in estimating the residual value, we inspected external evidence, including real estate valuation reports, by involving

     the real estate valuation experts from our network firm.

   • We evaluated the inputs such as rents and the occupancy rates of the properties, which form the basis for calculating future cash flows, by comparing such inputs with past results and available external data.

   • We recalculated the residual value to evaluate the Group's estimation process.

2. Audit procedures performed for selected assets acquired in previous years

   In order to evaluate the Group's estimate of the residual value, we compared the estimates of future cash flows with actual results.

3. Audit procedures performed for selected assets sold during the current year

In order to evaluate the effectiveness of the Group's estimation process, we reconciled actual sale prices with the sale agreements and compared these prices with the estimated residual values.

Valuation of goodwill

Description of Key Audit Matter

Auditor's Response

The Group pursues corporate acquisitions with the aim of further expanding and growing its business and recorded goodwill of ¥46,304 million on the consolidated balance sheet as of March 31, 2025. This goodwill is primarily attributable to the acquisition of Wako Pallet Co., Ltd., INVOICE Inc., LN Holdings, Co., Ltd., Pacific Rim Capital, Inc. and Accretive Co., Ltd.

As described in "4. Summary of significant accounting policies," "(9) Amortization method and period of goodwill," under Note

I. "Basis of presentation," in the notes to consolidated financial statements, the Group systematically amortizes goodwill arising from business combinations over its effective period. However, it is necessary to recognize an impairment loss if the Group has determined that there are indications of impairment for businesses that include goodwill, as the expected revenues at the time of their acquisition may no longer be achievable due to changes in its operating environment and the total undiscounted future cash flows expected from these businesses fall below their book values.

The Group determines whether there are indications of impairment by comparing the initial business plans at the time of acquiring each subsidiary and actual results, analyzing the factors behind any discrepancies, and considering future earnings forecasts based on these analyses. This process involves management's judgment regarding the current and future operating environments.

In considering the determinations by the Group related to indications of impairment for goodwill arising from business combinations, we performed the following audit procedures for businesses that include goodwill, among others:

• In order to assess judgments on whether there has been a significant deterioration in the operating environment, we compared

  the initial business plans at the time of acquiring each subsidiary to the actual results until the end of the fiscal year ended March 31, 2025, and conducted a factor analysis of the differences between the planned and actual figures.

• To assess judgments regarding the likelihood of significant deterioration in future operating environments, we made

  inquiries with the responsible departments about the basis for the projected sales growth rates of each subsidiary, performed trend analysis, and compared the projections to external data, such as growth rates of the industries to which each subsidiary belongs.

• To assess judgments regarding the occurrence or expected occurrence of changes resulting in a significant reduction

in recoverable amounts, we made inquiries of management and inspected relevant documentation. We examined the consistency between the initial business plans of each subsidiary and the overall management policy and medium-term management plan of the Group for the fiscal year ended March 31, 2025, and later.

Furthermore, as described in Note XVIII. "Business combinations, etc.," in the notes to consolidated financial statements, the Group acquired shares of Wako Pallet Co., Ltd. for

¥31,217 million, with March 31, 2025 set as the deemed acquisition date, resulting in the Group recording goodwill of ¥22,824 million. At the end of the fiscal year ended March 31, 2025, the allocation of the acquisition cost to the identifiable assets acquired and liabilities assumed has not been completed. As a consequence, provisional accounting treatment is being applied based on reasonable information available at that time. The Group has engaged external specialists in the acquisition of the shares, to evaluate the share value based on its future business plans and to determine the acquisition cost.

The business combination involving Wako Pallet Co., Ltd. is a transaction that is quantitatively material, and assessing the value of shares, which forms the basis for determining the acquisition cost, requires specialized knowledge. In addition, these underlying business plans involve management's judgment regarding the current and future operating environments and other considerations.

Based on the above, we have determined the valuation of goodwill to be a key audit matter.

We mainly performed the following procedures in considering the valuation of goodwill arising from the acquisition of shares of Wako Pallet Co., Ltd.:

• We made inquiries of management regarding the purpose of the share acquisition and inspected relevant minutes of meetings of

  the board of directors and key contracts.

• We inspected contracts and supporting documentation for cash disbursements related to the acquisition of shares, and considered the accuracy of the acquisition

  cost.

• We evaluated the competence, capabilities, and objectivity of the external specialists engaged by the Group to perform share

  valuations.

• We made inquiries with the responsible departments regarding the business plans that serve as the basis for the valuation of shares, conducted trend analysis, and

  examined the consistency of the plans with the overall management policy of the Group.

• We assessed the valuation methods, underlying data, and assumptions used in the valuation of shares by involving valuation

specialists from our network firm.