Japan Bank for International Cooperation 18-K Annual report (foreign governments)

Exhibit 7*

Audited consolidated financial statements of Japan Bank for International Cooperation and its subsidiaries (the “JBIC Group”) as of and for the fiscal years ended March 31, 2018 and 2017 prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”).*

* Audited consolidated financial statements of the JBIC Group as of and for the fiscal years ended March 31, 2018 and 2017 prepared in accordance with IFRS are being disclosed for reference purposes in order to improve comparability with other issuers outside of Japan. The registrant’s financial statements for reporting purposes are prepared in accordance with Japanese GAAP (see Exhibit 2).

Independent auditor’s report

The Board of Directors

Japan Bank for International Cooperation

Report on the audit of the consolidated financial statements

Opinion

We have audited the consolidated financial statements of Japan Bank for International Cooperation and its subsidiaries (the Group), which comprise the consolidated statements of financial position as at March 31, 2018 and 2017, and the consolidated income statements, the consolidated statements of comprehensive income, the consolidated statements of changes in equity and the consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at March 31, 2018 and 2017 and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB).

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in Japan, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended March 31, 2018. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.

Key audit matter	How our audit addressed the key audit matter
Impairment assessment of loans and other receivables
The Group’s loan portfolio is characterized by a significant portion of long-term loans and loans that entail sovereign and country risks. The Group conducts credit risk management, which takes into account mechanisms for securing assets under an international supporting framework, such as the Paris Club, which is a unique framework of debt management by official creditors.	We evaluated the design and tested the operating effectiveness of internal controls for the following processes: - Self-assessment of asset quality; and - Calculation and book entry of loans assessed individually and collectively for impairment
The assessment of the impairment of loans and other receivables involves significant judgment by management. This includes, but is not limited to, management’s self-assessment of the quality of loans, including assumptions used in the discounted cash flow method for impairment of loans assessed individually. The impairment losses on loans assessed collectively are estimated through the use of unobservable inputs, such as probability of default and the collateral coverage ratio. As of March 31, 2018, the Group reported gross loans and other receivables of ¥13,634 billion and recorded an allowance for loan losses of ¥182 billion. We considered the assessment of impairment of loans and other receivables as a key audit matter, due to the significance of its potential impact on the Group’s consolidated financial statements and the uncertainty in the estimates. Management discloses information about credit risk in Note 37 “Financial Risk Management” as well as the details of the allowance for loan losses in Note 11 “Loans and Other Receivables” and impairment losses in Note 29 “Impairment Losses (Reversals) on Financial Assets”, respectively.	In addition, we performed the following substantive procedures: - For the self-assessment of asset quality, we reviewed the Group’s self-assessment files, analyzed debtors’ financial information and examined the consistency with the external information to assess whether management identifies the occurrence of loss events and recognizes the impairment losses in a timely manner. When selecting samples, we considered the macroeconomic factors and industry trends, and increased the number of samples tested of sectors currently experiencing difficult economic and market conditions. We also made inquiries to the relevant Finance Groups and Country Credit Department and reviewed related information to assess the financial condition of the debtors. In addition, we compared internal ratings on sovereign loans with external credit ratings. We discussed the credit quality of certain debtors with the Country Credit Department.
	- For the impairment of loans assessed individually, we tested the mathematical accuracy of the models through recalculation. We evaluated the models and in particular assessed the estimates of future cash flows as well as the inputs used in the discounted cash flow method. We also performed back testing procedures on the estimates made in the prior year.
	- For the impairment of loans assessed collectively, we evaluated key inputs to the models, such as probability of default and the collateral coverage ratio, we evaluated the models, and we tested the mathematical accuracy of the models through recalculation.

Other information included in the Group’s 2018 Annual Report on Form 18-K

Management is responsible for the other information. The other information comprises the information included in the Annual Report, other than Exhibits 3, 6, 7, 8 and the auditor’s report. Figures in Exhibit 1 and Exhibit 2 are prepared on a basis consistent with accounting principles generally accepted in Japan (Japanese GAAP). Exhibit 9 is a reconciliation between Japanese GAAP and IFRSs.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether it is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

u Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

u Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

u Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

u Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

u Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

u Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The partner in charge of the audit resulting in this independent auditor’s report is Noboru Miura.

/s/ Ernst & Young ShinNihon LLC

Tokyo, Japan

August 21, 2018

Consolidated Statement of Financial Position

			(Millions of yen)
	Notes		March 31, 2018		March 31, 2017
Assets
Cash and due from banks		7		1,751,287		1,526,209
Derivative financial instrument assets		8		149,506		167,277
Financial assets designated as fair value through profit or loss		9		9,204		—
Securities		10		208,385		190,155
Loans and other receivables		11		13,452,950		14,352,720
Equity method investments		13		137,078		114,204
Property and equipment		15		28,401		27,613
Other assets		16		255,046		194,762
Total assets				15,991,860		16,572,942
Liabilities
Derivative financial instrument liabilities		8		287,429		498,928
Borrowings		17		8,370,758		9,908,705
Bonds payable		18		4,388,754		3,299,498
Financial guarantee contracts		19		72,285		84,912
Other liabilities		20, 21		227,980		98,486
Total liabilities				13,347,209		13,890,532
Equity
Capital stock		22		1,765,200		1,683,000
Retained earnings				856,640		969,264
Other reserves		22		22,582		30,145
Non-controlling interests				227		—
Total equity				2,644,651		2,682,409
Total liabilities and equity				15,991,860		16,572,942

See Notes to the Consolidated Financial Statements.

1

Consolidated Income Statement

			(Millions of yen)
	Notes		March 31, 2018			March 31, 2017
Interest income		24		344,801			261,372
Interest expense		24		206,624			150,223
Net interest income		24		138,177			111,148
Fee and commission income		25		15,018			15,542
Fee and commission expense		25		2,043			1,919
Net expense from derivative financial instruments		26		138,389			149,316
Net loss from financial assets designated as fair value through profit or loss		27		146			—
Net investment income		28		88			—
Other income		30		3,552			223
Expense other than interest income				121,921			135,470
Total operating income (loss) *1				16,256			(24,322	)
Impairment losses (reversals) on financial assets		29		109,978			(108,639	)
Net operating income (loss) *2				(93,722	)		84,317
Operating expenses		31		19,545			17,017
Other expenses		30		822			1,508
Total operating expenses				20,367			18,525
Profits of equity method investments		13		22,480			8,151
Profit (loss) before income tax				(91,609	)		73,944
Income tax expense		32		0			—
Net profit (loss)				(91,609	)		73,944
Attributable to:
Shareholder of JBIC				(91,592	)		73,944
Non-controlling interests				(17	)		—

*¹  Aggregate of “Net interest income” and “Expense other than interest income”

*²  “Total operating income (loss)” less “Impairment losses (reversals) on financial assets”

See Notes to the Consolidated Financial Statements.

2

Consolidated Statement of Comprehensive Income

	(Millions of yen)
	March 31, 2018			March 31, 2017
Net profit (loss)		(91,609	)		73,944
Other comprehensive income (loss)
Items that will not be reclassified to profit or loss:
Remeasurement of defined benefit plans:
Remeasurement arising during the year		(184	)		173
Total of items that will not be reclassified to profit or loss		(184	)		173
Items that may be reclassified to profit or loss:
Available-for-sale financial assets:
Net gains arising during the year		4,759			1,070
Reclassification adjustments		(171	)		(553	)
Deferred gains (losses) on hedges:
Reclassification adjustments		(2,342	)		(2,842	)
Exchange differences on translation of foreign operations:
Net losses arising during the year		(8,052	)		(1,645	)
Reclassification adjustments		(1,754	)		—
Total of items that may be reclassified to profit or loss		(7,562	)		(3,971	)
Other comprehensive loss		(7,747	)		(3,797	)
Total comprehensive income (loss)		(99,356	)		70,146
Attributable to:
Shareholder of JBIC		(99,339	)		70,146
Non-controlling interests		(17	)		—

3

Consolidated Statement of Changes in Equity

			(Millions of yen)
			Attributable to shareholder of Japan Bank for International Cooperation
									Other reserves
	Notes		Capital stock			Retained earnings			Remeasurement of defined benefit plans			Available- for-sale financial assets		Deferred gains (losses) on hedges			Exchange differences on translation of foreign operations			Other reserves, Total			Sub Total
April 1, 2016				1,391,000			1,066,533			—			2,787		9,210			22,117			34,116			2,491,649
Net profit				—			73,944			—			—		—			—			—			73,944
Other comprehensive income (loss)				—			—			173			516		(2,842	)		(1,645	)		(3,797	)		(3,797	)
Total comprehensive income (loss)				—			73,944			173			516		(2,842	)		(1,645	)		(3,797	)		70,146
Transfer to capital stock based on Article 3 (3) of the Supplementary Provisions of the Act for Partial Revision of the Japan Bank for International Cooperation Act		22		150,000			(150,000	)		—			—		—			—			—			—
Issuance of new shares		22		142,000			—			—			—		—			—			—			142,000
Payment to national treasury		23		—			(21,386	)		—			—		—			—			—			(21,386	)
Other		22		—			173			(173	)		—		—			—			(173	)		—
March 31, 2017				1,683,000			969,264			—			3,304		6,368			20,471			30,145			2,682,409
Net loss				—			(91,592	)		—			—		—			—			—			(91,592	)
Other comprehensive income (loss)				—			—			(184	)		4,587		(2,342	)		(9,807	)		(7,747	)		(7,747	)
Total comprehensive income (loss)				—			(91,592	)		(184	)		4,587		(2,342	)		(9,807	)		(7,747	)		(99,339	)
Issuance of new shares		22		82,200			—			—			—		—			—			—			82,200
Payment to national treasury		23		—			(20,846	)		—			—		—			—			—			(20,846	)
Proceeds from non-controlling shareholders with a consolidated subsidiary establishment				—			—			—			—		—			—			—			—
Other		22		—			(184	)		184			—		—			—			184			—
March 31, 2018				1,765,200			856,640			—			7,892		4,025			10,664			22,582			2,644,423
	Notes		Non- controlling interests			Total equity
April 1, 2016				—			2,491,649
Net profit				—			73,944
Other comprehensive income (loss)				—			(3,797	)
Total comprehensive income (loss)				—			70,146
Transfer to capital stock based on Article 3 (3) of the Supplementary Provisions of the Act for Partial Revision of the Japan Bank for International Cooperation Act		22		—			—
Issuance of new shares		22		—			142,000
Payment to national treasury		23		—			(21,386	)
Other		22		—			—
March 31, 2017				—			2,682,409
Net loss				(17	)		(91,609	)
Other comprehensive income (loss)				—			(7,747	)
Total comprehensive income (loss)				(17	)		(99,356	)
Issuance of new shares		22		—			82,200
Payment to national treasury		23		—			(20,846	)
Proceeds from non-controlling shareholders with a consolidated subsidiary establishment				245			245
Other		22		—			—
March 31, 2018				227			2,644,651

See Notes to the Consolidated Financial Statements.

4

Consolidated Statement of Cash Flows

			(Millions of yen)
	Notes		March 31, 2018			March 31, 2017
Cash flows from operating activities
Profit (loss) before income tax				(91,609	)		73,944
Depreciation and amortization				1,460			1,209
Increase (decrease) in liability for retirement benefits				53			(188	)
Net loss from financial assets designated as fair value through profit or loss				146			—
Profits from equity method investments				(22,480	)		(8,151	)
Net decrease (increase) in loans and other receivables				899,770			(892,373	)
Net increase (decrease) in borrowings				(1,537,947	)		470,255
Net decrease (increase) in deposits (excluding demand deposits)				191,404			(336,276	)
Net change in derivative financial instrument assets and liabilities				(193,728	)		(1,319	)
Net increase (decrease) in financial guarantee contracts				(12,627	)		8,201
Net increase (decrease) in bonds payable				1,089,256			630,625
Other				71,413			(48,695	)
Net cash provided by (used in) operating activities				395,112			(102,768	)
Cash flows from investing activities
Purchase of financial assets designated as fair value through profit or loss				(9,717	)		—
Purchase of securities				(41,155	)		(41,726	)
Proceeds from sales or redemption of securities				29,126			4,975
Purchase of equity method investments				(18,151	)		(2,101	)
Proceeds from return of equity method investments				9,640			1,210
Other				(3,005	)		(917	)
Net cash provided by (used in) investing activities				(33,263	)		(38,559	)
Cash flows from financing activities
Proceeds from issuance of new shares		22		82,200			142,000
Payment to national treasury		23		(20,846	)		(21,386	)
Proceeds from non-controlling shareholders with a consolidated subsidiary establishment				245			—
Other				(6	)		(12	)
Net cash provided by (used in) financing activities				61,591			120,601
Exchange difference on cash and cash equivalents				(6,957	)		(9,528	)
Net increase (decrease) in cash and cash equivalents				416,482			(30,254	)
Cash and cash equivalents at the beginning of the year		7		1,082,325			1,112,579
Cash and cash equivalents at the end of the year		7		1,498,807			1,082,325
Net cash provided by (used in) operating activities includes the following:
Interest received				322,349			240,874
Interest paid				(193,214	)		(137,157	)

See Notes to Consolidated Financial Statements.

5

Notes to Consolidated Financial Statements

1. Corporate Information

On April 1, 2012, the JBIC Operations and the Financial Operations for Facilitating Realignment of United States Forces in Japan were transferred out of Japan Finance Corporation to establish Japan Bank for International Cooperation (“JBIC”), a policy-based financial institution, wholly owned by the Japanese government according to the Japan Bank for International Cooperation Act (2011 Act No. 39, or “JBIC Act”). JBIC is a joint-stock corporation incorporated and domiciled in Japan with its headquarters registered at 4-1, Ohtemachi 1-chome Chiyoda-ku, Tokyo 100-8144, Japan.

The consolidated financial statements for the year ended March 31, 2018 were authorized for issue by the board of directors on August 21, 2018.

The objective of JBIC and its subsidiaries (the “JBIC Group”) is to contribute to the sound development of Japan and the international economy and society by conducting financial operations in the following four fields, while supplementing the financial transactions of private sector financial institutions:

• promoting the overseas development and securement of resources which are important for Japan;

• maintaining and improving the international competitiveness of Japanese industries;

• promoting the overseas business having the purpose of preserving the global environment, such as preventing global warming; and

• preventing disruptions to international financial order or taking appropriate measures with respect to damage caused by such disruptions.

See Note 6 “Segment Information” for the JBIC Group’s major operations.

2. Basis of Preparation

The consolidated financial statements of the JBIC Group are prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

The consolidated financial statements are prepared on a historical cost basis, except for certain financial instruments measured at fair value. The consolidated financial statements are presented in yen, the functional currency of JBIC. Unless otherwise stated, all amounts are rounded down and stated in millions of yen.

3. Significant Accounting Policies

A. Basis of consolidation

i. Subsidiaries

A subsidiary is an entity (including a structured entity) controlled by the JBIC Group. The JBIC Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Currently exercisable potential voting rights are taken into account in considering whether the JBIC Group has power over an entity. Even if the JBIC Group does not have voting rights in an investee, the JBIC Group determines that the investee is its subsidiary if, as a result of considering the scope of its decision-making rights over the investee, the rights held by other parties and other factors, the JBIC Group determines that another entity with decision-making rights is acting as an agent for the JBIC Group.

Inter-company transactions entered into with consolidated companies, the inter-company balance of receivables and payables and, if any, unrealized gains included in assets acquired as a result of transactions executed with consolidated companies are eliminated in consolidation. The JBIC Group consolidates a subsidiary from the date it obtains control over the subsidiary until the date JBIC ceases to control the subsidiary. If the JBIC Group ceases to control a consolidated subsidiary, it recognizes any investment retained in the former subsidiary at its fair value.

JBIC had no subsidiaries before the fiscal year ended March 31, 2018. Because JBIC IG Partners and Russia-Japan Investment Fund, L.P. were established and became consolidated subsidiaries of JBIC during the fiscal year ended March 31, 2018, the JBIC Group prepares consolidated financial statements from the fiscal year ended March 31, 2018.

6

ii. Associates and joint arrangements

An associate is an entity over which the JBIC Group has significant influence in respect of managerial decisions related to the financial and operating policies of the entity but does not have control or joint control of the entity. Indications, such as ownership interest or participation in decision-making bodies, are considered in determining the existence of significant influence.

Joint control is an arrangement that constitutes contractually-agreed sharing of control, which exists only when decisions about the activities that significantly affect the variable returns of the arrangement require the unanimous consent of the parties sharing control. The classification of a joint arrangement investment as a joint operation or a joint venture depends upon the rights and obligations of each investor to the arrangement. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. JBIC does not have joint operation investments.

The JBIC Group’s investments in associates and joint ventures are accounted for using the equity method. Under the equity method, the investments in the associates and joint ventures are carried at cost in the consolidated statement of financial position, and are adjusted for changes in the JBIC Group’s share of the net assets of the investees since their respective acquisition dates. The consolidated income statement reflects the JBIC Group’s share of the results of operations of the investees. Where there has been a change in the other comprehensive income of the associates and joint ventures, the JBIC Group recognizes its share of the change in other comprehensive income. The profits of equity method investments are shown on the face of the consolidated income statement and represent the profits attributable to the investors of the associates and the joint ventures.

The consolidated financial statements of the JBIC Group include investments in associates and joint ventures of which the reporting date is different from that of JBIC because it is impracticable to change the reporting date of those associates and joint ventures to coincide with that of the JBIC Group in conjunction with other shareholders or for other reasons. The reporting date of certain associates and joint ventures included in the JBIC Group’s consolidated financial statements is December 31, and therefore adjustments are made for the effects of significant transactions or events which occurred during the period between the reporting dates.

The JBIC Group determines whether it is necessary to recognize impairment losses on its investments in associates and joint ventures. At each reporting date, the JBIC Group determines whether there is objective evidence that its investments in associates and joint ventures are impaired. If there is such evidence, the JBIC Group recognizes impairment losses for the differences between the recoverable amounts of investments in associates or joint ventures and their carrying values.

Upon loss of significant influence or joint control over the associates and the joint ventures, the JBIC Group measures and recognizes any retained investments at their fair values. Any differences between the carrying amounts of its investments in associates or joint ventures upon the loss of significant influence or joint control, and total of the fair values of the retained investments and proceeds from disposal are recognized in profit or loss.

B. Foreign currency translation

The consolidated financial statements of the JBIC Group are presented in yen, which is the functional currency of JBIC.

Transactions in foreign currencies are initially recorded in the functional currency using the exchange rate at the transaction date.

Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Any gains or losses arising from the foreign currency translation are recognized in profit or loss.

Non-monetary items measured at historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value is determined, and any translation differences are recognized in other comprehensive income.

The assets and liabilities of foreign operations are translated into yen using the exchange rate at the reporting date. Income and expenses are translated into yen at the exchange rate (or the rate that approximates the exchange rate) at the transaction date. The exchange differences arising on translation are recognized in other comprehensive income.

C. Financial assets

The JBIC Group classifies its financial assets into the following four categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification of financial instruments at initial recognition depends on their purpose and characteristics.

7

The JBIC Group recognizes a financial asset in its consolidated statement of financial position when, and only when, the JBIC Group becomes a party to the contractual provisions of the financial instrument. The JBIC Group derecognizes a financial asset when contractual rights to cash flows from the financial asset expire, or it transfers substantially all the risks and rewards of ownership of the financial asset. In transactions in which substantially all the risks and rewards of ownership of a financial asset are neither retained nor transferred, the JBIC Group derecognizes a financial asset if control over that asset is not retained. If the terms of the financial asset are significantly modified, the existing financial asset is derecognized and a new asset is recognized, and difference in the respective carrying amounts is recognized in profit or loss.

Regular way purchases or sales of financial assets at fair value through profit or loss, held-to-maturity investments, and available-for-sale financial assets are recognized and derecognized using trade date accounting. Trade date accounting refers to the recognition of an asset to be received and the liability to pay for it on the trade date, derecognition of an asset that is sold, and recognition of a receivable from the buyer for payment on the trade date.

i. Financial assets at fair value through profit or loss

Financial assets that the JBIC Group classifies as held for trading or designates as fair value through profit or loss are classified as financial assets at fair value through profit or loss.

a. Financial assets classified as held for trading

In the JBIC Group, financial assets classified as held for trading only include derivatives and are included in “Derivative financial instrument assets” in the consolidated statement of financial position. The JBIC Group does not apply hedge accounting under IFRS. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative, and subsequently measured at fair value at each reporting date. Gains and losses arising from changes in the fair values of derivatives are included in “Net income (expense) from derivative financial instruments” or “Other income (expenses)” in the consolidated income statement. For hedges that qualify for hedge accounting under Japanese GAAP but that do not meet the conditions for hedge accounting under International Accounting Standard (“IAS”) 39 Financial Instruments: Recognition and Measurement, JBIC discontinued hedge accounting for the opening statement of financial position as of April 1, 2012, the date of transition to IFRS.

The derivative component of a hybrid instrument containing both a derivative and non-derivative element (“host contract”) is defined as an embedded derivative. Under certain conditions, such as when the economic characteristics and risks are not closely related to those of the host contract and the hybrid instrument is not measured at fair value through profit or loss, the embedded derivative is separated from the host contract and accounted for as a derivative, and subsequently measured at fair value.

b. Financial assets designated as fair value through profit or loss

Financial assets can be designated as financial assets at fair value through profit or loss upon initial recognition, if they meet either of the following criteria:

(i) a measurement or recognition inconsistency is eliminated or significantly reduced by the designation; or

(ii) a group of financial assets is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

When the JBIC Group is required to separate an embedded derivative from its host contract, but is unable to measure the embedded derivative separately either at acquisition or at a subsequent reporting date, the JBIC Group designates the entire hybrid contract as fair value through profit or loss. Financial assets designated as fair value through profit or loss are initially and subsequently measured at fair value. Transaction costs are recognized in profit or loss.

The JBIC Group classifies certain financial assets held by its consolidated subsidiary, Russia-Japan Investment Fund, L.P., as financial assets designated as fair value through profit or loss. These financial assets are managed and their performance is evaluated on a fair value basis in accordance with the JBIC Group’s documented risk management or investment strategy. There were no financial assets that had been designated as fair value through profit or loss before the fiscal year ended March 31, 2018.

ii. Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than:

a. those that the JBIC Group intends to sell immediately or in the near term and those that the JBIC Group designates as fair value through profit or loss at initial recognition;

b. those that the JBIC Group designates as available-for-sale at initial recognition; or

c. those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

Upon initial recognition, loans and receivables are measured at fair value plus directly attributable transaction costs, and measured at amortized cost using the effective interest method less impairment losses, if any. Financial assets classified as loans and receivables are mainly included in “Loans and other receivables” in the consolidated statement of financial position.

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iii. Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the JBIC Group has the positive intent and ability to hold to maturity other than:

a. those that the JBIC Group designates as fair value through profit or loss at initial recognition;

b. those that the JBIC Group designates as available-for-sale at initial recognition; and

c. those that meet the definition of loans and receivables.

Upon initial recognition, held-to-maturity investments are measured at fair value plus directly attributable transaction costs, and subsequently measured at amortized cost using the effective interest method less impairment losses, if any. As of March 31, 2018 and 2017, there were no held-to-maturity investments.

iv. Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or not classified as any of the categories discussed above, and they include unlisted equity securities and unlisted debt securities. Upon initial recognition, available-for-sale financial assets are measured at fair value plus directly attributable transaction costs, and subsequently measured at fair value. Equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are subsequently measured at cost.

A gain or loss on an available-for-sale financial asset, except for interest calculated using the effective interest method, impairment losses, and foreign exchange gains and losses on monetary assets, is recognized in other comprehensive income until such a financial asset is derecognized. At that time, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. Dividends on an available-for-sale equity instrument are recognized in profit or loss when a right to receive payment is established.

D. Financial liabilities

Financial liabilities are measured at fair value less directly attributable transaction costs at initial recognition and subsequently measured at amortized cost using the effective interest method, except for financial liabilities at fair value through profit or loss and financial guarantee contracts. Amortization using the effective interest method and any gains or losses arising from the derecognition of a financial liability are recognized in profit or loss.

i. Financial liabilities at fair value through profit or loss

Financial liabilities that the JBIC Group classifies as held for trading or designates as fair value through profit or loss are classified as financial liabilities at fair value through profit or loss.

a. Financial liabilities classified as held for trading

In the JBIC Group, financial liabilities classified as held for trading only include derivatives and are included in “Derivative financial instrument liabilities” in the consolidated statement of financial position. The hedge accounting and accounting treatment for derivatives are disclosed in more detail in “C. Financial assets” and “G. Hedge accounting.”

b. Financial liabilities designated as fair value through profit or loss

Financial liabilities can be designated as financial liabilities at fair value through profit or loss upon initial recognition, if they meet either of the following criteria:

(i) a measurement or recognition inconsistency is eliminated or significantly reduced by the designation; or

(ii) a group of financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

When the JBIC Group is required to separate an embedded derivative from its host contract, but is unable to measure the embedded derivative separately either at acquisition or at a subsequent reporting date, the JBIC Group designates the entire hybrid contract as fair value through profit or loss.

Financial liabilities designated as fair value through profit or loss are initially and subsequently measured at fair value. Transaction costs are recognized in profit or loss.

As of March 31, 2018 and 2017, there were no financial liabilities that had been designated as fair value through profit or loss.

ii. Financial guarantee contracts

A financial guarantee contract requires its issuer to reimburse the contract holder for a loss caused by a specific debtor’s failure to make payment on the due date pursuant to the original or modified terms of a debt instrument. Upon initial recognition, financial liabilities associated with financial guarantee contracts are measured at fair value. They are subsequently measured at the higher of (a) the amount initially recognized less cumulative amortization recognized in accordance with IAS 18 Revenue and (b) the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

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E. Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position when, and only when, there is a currently enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

F. Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair values of financial instruments traded in active markets are based on their quoted market prices. A financial instrument is regarded as quoted in an active market if transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis, for example, quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, or pricing service. If an active market for a financial instrument is not available, the JBIC Group determines the fair value using valuation techniques, such as using recent arm’s-length market transactions between independent parties, discounted cash flow analyses, and other valuation techniques commonly used by market participants.

See a detailed discussion at Note 35 “Fair Value of Financial Assets and Liabilities” and Note 36 “Fair Value Hierarchy.”

G. Hedge accounting

The JBIC Group does not apply hedge accounting under IAS 39.

H. Impairment of financial assets

i. Loans and receivables

The JBIC Group assesses, at each reporting date, whether there is any objective evidence that a financial asset or group of financial assets classified as loans and receivables is impaired. Impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated cash flows of the financial asset or a group of financial assets that can be reliably estimated.

Objective evidence that a financial asset or group of assets is impaired includes the following events:

a. significant financial difficulty of the issuer or obligor;

b. a breach of contract, such as a default or delinquency in interest or principal payments;

c. the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

d. it becoming probable that the borrower will enter into bankruptcy or other financial reorganization; or

e. observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

The JBIC Group first assesses whether objective evidence of impairment exists individually for financial assets.

If the JBIC Group determines that no objective evidence of impairment exists for an individually assessed financial asset, the JBIC Group includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.

An impairment loss in respect of a financial asset that is individually assessed for impairment is determined using the discounted cash flow method (“DCF method”). Under the DCF method, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial instrument’s original effective interest rate. For variable interest rate assets, the discount rate used for measuring any impairment loss is the reasonably estimated current effective interest rate(s) at the reporting date determined in accordance with the contract. Future cash flows are separately estimated on the basis of historical loss experience for assets, the reasonableness and the execution status of the borrower’s business plan, the level of funds acquired from financial institutions, and the net realizable value of collateral.

A collective assessment of impairment for financial assets is categorized into one of the following two types:

a. impairment loss to be recognized for the incurred but not reported losses in the period between the time the loss is incurred and the time it is recognized; and

b. impairment loss for individual financial assets that have not been identified as impaired, when economic conditions or other circumstances of an entity’s country of residence indicate objective evidence that the asset is impaired subsequent to the initial recognition.

Impairment losses in respect of a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience data include the probability of default and the collateral coverage ratio over a specific period of time in the past.

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The carrying amount of the asset is reduced by the impairment loss through an allowance for loan losses account and the loss is recognized in profit or loss. Changes in the impairment loss are recognized in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be objectively attributed to an event occurring after the impairment loss was recognized, the previously recognized impairment loss is reversed through profit or loss. If a financial asset is determined to be uncollectible, it is written off against the related allowance account.

ii. Available-for-sale financial assets

The JBIC Group assesses at each reporting date whether there is objective evidence that financial assets classified as available-for-sale financial assets are impaired. For equity instruments, a significant or prolonged decline in the fair value of an asset below its cost is also considered in determining whether the asset is impaired or not. In the case of debt instruments, in principle, impairment is assessed in the same manner as for loans and receivables. If any objective evidence of impairment exists, the cumulative loss on equity instruments previously recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. Impairment losses on equity instruments recognized in profit or loss are not reversed through profit or loss.

For debt instruments, if, in a subsequent period, the fair value increases and it can be objectively attributed to an event occurring after the impairment loss was recognized, the previously recognized impairment loss is reversed through profit or loss.

I. Property and equipment

Property and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses. The cost of an item of property and equipment includes costs directly attributable to the acquisition of the item.

Depreciation is generally calculated on a straight-line basis over the estimated useful lives of the assets as follows:

• Buildings (including leasehold improvements): 3 to 50 years

• Other: 2 to 35 years

An item of property and equipment and any significant part thereof initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset, which is calculated as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in profit or loss when the asset is derecognized.

The residual values, useful lives, and methods of depreciation of property and equipment are reviewed at each reporting date and adjusted prospectively, if appropriate.

J. Impairment of non-financial assets

The JBIC Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, an impairment test is performed. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is written down to its recoverable amount and an impairment loss is recognized.

K. Post-employment benefits

JBIC has defined benefit plans and defined contribution plans to secure funds to pay employees’ retirement benefits.

i. Defined benefit plans

JBIC determines the present value of its defined benefit obligations and the related current and past service costs for each plan using the projected unit credit method. Remeasurements of defined benefit plans are recognized in full in other comprehensive income in the year incurred, and immediately transferred to retained earnings. Past service costs are recognized in full in the year incurred.

The liability for retirement benefits is the present value of the defined benefit obligation less the fair value of the plan assets (the present value is determined using a discount rate based on market yields on high-quality corporate bonds. See the detailed discussion in Note 21 “Employee Benefits”). The plan assets comprise assets held by a long-term employee benefit fund and qualifying insurance policies. The plan assets are not used to repay JBIC’s creditors and are not returned to JBIC, except under certain circumstances. The fair value of the plan assets is based on market price information. The recognition of the net defined benefit asset is limited to the total amount of the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

ii. Defined contribution plans

JBIC recognizes contributions to the defined contribution plans as expenses in the periods in which employees render the related services.

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L. Taxes

JBIC is a nontaxable entity according to Paragraph 2, Item 5 of the Corporate Tax Act of Japan (Act No. 34, 1965) and has no obligation to pay corporate taxes. JBIC IG Partners is a taxable entity and has an obligation to pay corporate taxes as applicable under relevant laws. Russia-Japan Investment Fund, L.P. is a tax-exempt limited partnership established under Cayman Islands laws and has no obligation to pay corporate taxes.

M. Interest income and interest expense

Interest income and expense for all financial instruments, except for financial assets and financial liabilities at fair value through profit or loss, is recognized in “Interest income” and “Interest expense” using the effective interest rate method.

The effective interest rate method is a method of calculating the amortized cost of a financial asset or a financial liability (or a group of financial assets or financial liabilities) and allocating the interest income or interest expense over the relevant period.

N. Fee and commission income

Fee and commission income primarily comprises guarantee income arising from financial guarantee contracts. Guarantee income is recognized over the time period stipulated in the relevant contract.

O. Fee and commission expense

Fee and commission expense primarily comprises outsourcing expenses. Outsourcing expenses are recognized as the services are rendered on an accrual basis in accordance with the terms of the relevant agreement.

P. Net income (expense) from derivative financial instruments

Net income (expense) from derivative financial instruments comprises gains and losses arising from changes in the fair values of derivatives and interests on these derivatives, except for gains or losses arising from the foreign currency translation of notional amounts of the currency swap contracts by using the exchange rate at the reporting date.

Q. Net gain (loss) from financial assets designated as fair value through profit or loss

Net gain (loss) from financial assets designated as fair value through profit or loss includes all gains and losses arising from changes in the fair value of these financial assets and sales of such assets, as well as interest and dividend income on these financial assets.

R. Net investment income

Net investment income comprises gains or losses on the sale or redemption of available-for-sale financial assets and dividends from equity instruments classified as available-for-sale financial assets.

S. Cash and cash equivalents

Cash and cash equivalents as stated in the consolidated statement of cash flows consist of cash on hand and demand deposits included in “Cash and due from banks” in the consolidated statement of financial position.

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4. Significant Accounting Judgments, Estimates, and Assumptions

The preparation of the consolidated financial statements requires the JBIC Group to make judgments, estimates, and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities, and the disclosure of contingent liabilities, at the reporting date.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The JBIC Group based its key assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the JBIC Group. Such changes are reflected in the assumptions when they occur.

Fair value of financial instruments

Where the fair value of financial assets and financial liabilities cannot be measured based on quoted prices in active markets, their fair value is determined using valuation techniques including discounted cash flow models. The JBIC Group uses its judgment in selecting valuation techniques and the inputs to these models are derived from observable markets, where possible. However, inputs that are not derived from observable markets are used for the estimation of the fair value for some financial instruments based on the JBIC Group’s estimates and judgments.

The JBIC Group’s estimates and judgments are continually evaluated and updated in line with market conditions, and these changes could directly affect the fair values of these financial instruments.

See a detailed discussion in Note 35 “Fair Value of Financial Assets and Liabilities” and Note 36 “Fair Value Hierarchy.”

Impairment of loans and other receivables

Impairment of loans and other receivables represents the JBIC Group’s estimates of incurred losses on loans and other receivables at the reporting date. The JBIC Group is required to exercise judgment in making assumptions and estimates when individually or collectively assessing loans and other receivables.

For individual financial assets exhibiting objective evidence of impairment, an impairment loss is based on estimated future cash flows, taking into account historical loss experience, the borrower’s business plan, the level of funds acquired from financial institutions, and the net realizable value of collateral. Impairment losses of a group of loans and other receivables that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group.

The JBIC Group’s estimates and judgments are continually evaluated and updated in response to changes in the economic environment and in the light of new information. These changes could lead to a revision of the amount of impairment losses on loans and other receivables, and could directly affect the amount of impairment losses.

The impairment of loans and other receivables is disclosed in more detail in Note 11 “Loans and Other Receivables” and Note 29 “Impairment Losses (Reversals) on Financial Assets.” The credit risk is described in more detail in Note 38 “Maximum Exposure to Credit Risk” and the subsequent notes.

Impairment of available-for-sale financial assets

In respect of available-for-sale financial assets, if a loss event (or events) has occurred, the JBIC Group determines whether there is any objective evidence of impairment based on its estimates and judgments. In addition, for equity instruments classified as available-for-sale financial assets, a significant or prolonged decline in fair value is considered to be objective evidence in assessing impairment.

The JBIC Group’s estimates and judgments are continually evaluated and updated when future events occur or fail to occur, and such revisions could directly affect the amount of impairment losses of the financial assets.

The impairment of available-for-sale financial assets is disclosed in more detail in Note 29 “Impairment Losses (Reversals) on Financial Assets.”

Post-employment benefits

The present value of defined benefit obligations and related costs are determined using actuarial valuations. An actuarial valuation involves making various assumptions, which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates, and future pension increases. Due to the complexity of the valuation, the underlying assumptions, and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.

In determining the appropriate discount rate, the JBIC Group considers the market yield of high-quality corporate bonds in the respective currency, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation.

See Note 21 “Employee Benefits” for further details about the assumptions used.

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5. Standards Issued but Not Yet Effective

Early application of standards and interpretations

The JBIC Group has not opted for early application of standards.

Standards and interpretations issued but not yet applied

The following is a listing of standards and interpretations issued but not yet applied by the JBIC Group as of the date of the issuance of the consolidated financial statements. The JBIC Group intends to apply the standards and interpretations from the date they become effective.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments sets out new principles for classification, measurement, impairment and hedge accounting for financial instruments, replacing IAS 39 Financial Instruments: Recognition and Measurement.

Classification and measurement

IFRS 9 requires that all financial assets be classified into the following three major categories on the basis of an entity’s business model and the contractual cash flow characteristics of the financial assets: financial assets measured at amortized cost, fair value through profit or loss (“FVPL”), and fair value through other comprehensive income (“FVOCI”). A financial asset is measured at amortized cost if the asset is held within a business model whose objective is to hold the asset in order to collect contractual cash flows, and the asset’s contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. Financial assets are measured at FVOCI if they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the SPPI requirements are met. Financial assets that would otherwise be measured at amortized cost or FVOCI can be designated as financial assets measured at FVPL if doing so eliminates or significantly reduces an accounting mismatch. Any financial assets that do not meet the criteria of amortized cost or FVOCI are measured at FVPL. However, for non-trading equity instruments, an entity may irrevocably elect to recognize changes in fair value and any gains or losses on disposal in other comprehensive income instead of in profit or loss. As JBIC’s business model basically is to hold the assets in order to collect contractual cash flows, most of financial assets, including loans, are measured at amortized cost. However, some securities that do not meet the SPPI condition are measured at FVPL. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9.

Impairment

IFRS 9 introduces the expected credit loss (“ECL”) model, which replaces the incurred credit loss model in IAS 39. The ECL model is applied in recognizing impairment losses for financial assets measured at amortized cost and FVOCI, contract assets, lease receivables, certain loan commitments and financial guarantee contracts. Under the ECL model, an entity is required to recognize expected credit losses for financial assets on the basis of the stages depending on the extent of an increase in credit risk since initial recognition.

For financial assets that have not had a significant increase in credit risk since initial recognition (Stage 1), a loss allowance is recognized for the expected credit losses that result from default events that are possible within the 12 months after the reporting date. For financial assets that have had a significant increase in credit risk since initial recognition but that do not have objective evidence of impairment (Stage 2); and those that are credit impaired at the reporting date (Stage 3), a loss allowance is recognized for the expected credit losses that result from all possible default events over the expected life of a financial asset. In determining whether the credit risk of financial assets has increased significantly since the initial recognition, an entity is required to assess the credit risk using the change in the risk of a default occurring over the expected life of the financial assets. If, however, the credit risk is determined to be low at the reporting date, financial assets may be accounted for by assuming that the credit risk of those financial assets has not increased significantly since the initial recognition. JBIC determines the stage allocation of financial assets based on the credit rating, past due information and other factors at initial recognition and at the reporting date. Expected credit losses should be measured to reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, the time value of money, and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. JBIC uses macroeconomic information to estimate the expected credit losses in three probability-weighted scenarios (baseline, upside and downside scenarios).

In order to clarify the impact of credit risk on the future cash flows of financial assets, IFRS 7 as amended by IFRS 9 sets forth enhanced disclosure requirements on the information about entity’s credit risk management practices, quantitative and qualitative information to evaluate the amounts in the consolidated financial statements arising from expected credit losses and information about an entity’s credit risk exposure.

Hedge accounting

IFRS 9 introduces a new hedge accounting model that aims to better represent the effect of an entity’s risk management activities in the consolidated financial statements. For a hedging relationship, hedge accounting generally expands the range of hedging instruments and hedged items, eliminates the hedge effectiveness range of 80-125% determined in IAS 39, and focuses more on the economic relationship between the hedging instrument and hedged item.

In order to clarify the relationship between an entity’s risk management activities and how hedge accounting is applied, IFRS 7 as amended by IFRS 9 sets forth enhanced disclosure requirements on the information about an entity’s risk management strategy, how an entity’s hedging activities may affect its future cash flows, and the effects of hedge accounting on financial position and performance.

Transition

The estimated impact of applying IFRS 9 is a decrease in Total equity of approximately ¥20 billion at April 1, 2018, the date of initial application.

IFRS 9 is effective for fiscal years beginning on or after January 1, 2018.

The classification and measurement and impairment are applied retrospectively without any requirements to restate prior years. The JBIC Group adopted IFRS 9 on April 1, 2018 and will not restate prior year financial statements.

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IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from Contracts with Customers supersedes IAS 18 Revenue, IAS 11 Construction Contracts, and related interpretations.

The new revenue recognition model consisting of the following five steps requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

• Identify the contract with a customer

• Identify separate performance obligations in the contract

• Determine the transaction price

• Allocate the transaction price to the performance obligations in the contract

• Recognize revenue when (or as) the entity satisfies a performance obligation

Moreover, IFRS 15 requires an entity to provide more useful and relevant disclosure information to the users of consolidated financial statements, including information on the following: disaggregation of revenue, details of performance obligations, changes in contract assets and liabilities during the period, and a description of significant judgments and estimates.

The JBIC Group has evaluated the effect of applying the IFRS 15 and expects that it will have no significant impact on the consolidated financial statements.

IFRS 15 is effective for fiscal years beginning on or after January 1, 2018.

IFRS 16 Leases

IFRS 16 Leases, which sets out the new principles for the recognition, measurement, presentation and disclosure of leases, supersedes IAS 17 Leases and related interpretations.

The standard introduces a single lessee accounting model and eliminates the classification of leases as either operating leases or finance leases. A lessee will be required to recognize assets and liabilities arising from all leases except for short-term leases or leases for which the underlying asset is of low value. The standard substantially carries forward the lessor accounting requirements in IAS 17 to classify its leases as operating leases or finance leases, and to account for them differently.

As of the date of the issuance of the consolidated financial statements, the JBIC Group is in the process of evaluating the effect of applying the new standard.

IFRS 16 is effective for fiscal years beginning on or after January 1, 2019.

IFRS 17 Insurance

IFRS 17 Insurance Contracts replaces IFRS 4 and sets out new principles for the recognition, measurement, presentation and disclosure of insurance contracts.

IFRS 4 allowed entities to account for insurance contracts using national accounting standards, resulting in a variety of different accounting practices. IFRS 17 requires that all insurance contracts be accounted for in a consistent manner.

In principal, insurance contracts are required to be measured at the total of the fulfilment cash flows and the contractual service margin and are required to be remeasured at the end of each reporting period.

As of the date of the issuance of the consolidated financial statements, the JBIC Group is in the process of evaluating the effect of applying IFRS 17.

IFRS 17 is effective for fiscal years beginning on or after January 1, 2021.

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6. Segment Information

The JBIC Group’s operating segments are those for which discrete financial information is available, and whose operating results are regularly reviewed by the JBIC Group’s management. Figures reported to management, including those used for purposes of budget management and performance evaluation, are prepared under Japanese GAAP. Therefore, Japanese GAAP-based figures are reported in operating segments. For business operations defined under the Act on Japan Bank for International Cooperation and other acts, the JBIC Group has two reporting segments: “Ordinary Operations” account and “Special Operations” account. Accounting operations are separately carried out for respective accounts.

The Ordinary Operations account covers the businesses that are not included in the Special Operations account. The Ordinary Operations account also includes the investment business of the consolidated subsidiaries. The Special Operations account includes the businesses that offer financing services such as lending to overseas infrastructure business projects that generate a higher expected return in exchange for higher risk.

Reportable segment information is prepared on a non-consolidated basis for the fiscal year ended March 31, 2017 because no subsidiaries existed at that time. However, for the fiscal year ended March 31, 2018, reportable segment information is presented on a consolidated basis to include entities that were consolidated during the year. Consequently, for the fiscal year ended March 31, 2018, JBIC applied the equity method to its interest in associates under Japanese GAAP and added “Profits of equity method investments” and “Equity method investments” to the following reportable segment information.

The reconciliation tables show differences between the amounts reported in the reportable segments and those reported in the IFRS-based consolidated financial statements.

A. Reportable segment information

	(Millions of yen)
	March 31, 2018
	Ordinary Operations		Special Operations			Sub-total for reportable segments		Adjustments *			Amount reported in the Japanese GAAP-based consolidated financial statements
Ordinary income
Ordinary income from customers		390,057		2			390,060		—			390,060
Intersegment Ordinary income		12		0			12		(12	)		—
Total		390,070		2			390,073		(12	)		390,060
Segment profit (loss)		62,286		(204	)		62,081		—			62,081
Segment assets		17,760,961		251,110			18,012,072		(11	)		18,012,060
Segment liabilities		15,465,378		222			15,465,600		(11	)		15,465,589
Other items
Depreciation and amortization		1,460		—			1,460		—			1,460
Interest income		336,767		1			336,768		—			336,768
Interest expense		249,256		0			249,256		—			249,256
Profits of equity method investments		22,207		—			22,207		—			22,207
Extraordinary income		9		—			9		—			9
Gain on disposal of noncurrent assets		9		—			9		—			9
Extraordinary loss		8		—			8		—			8
Loss on disposal of noncurrent assets		8		—			8		—			8
Income tax expenses		0		—			0		—			0
Equity method investments		100,453		—			100,453		—			100,453
Increase in Property and equipment and intangible assets		3,024		—			3,024		—			3,024
Provision of allowance for loan losses		51,505		22			51,528		—			51,528

* The “Adjustments” above represents elimination of intersegment transactions.

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	(Millions of yen)
	March 31, 2017
	Ordinary Operations		Special Operations			Sub-total for reportable segments		Adjustments *			Amount reported in the Japanese GAAP-based financial statements
Ordinary income
Ordinary income from customers		294,655		0			294,656		—			294,656
Intersegment Ordinary income		5		—			5		(5	)		—
Total		294,661		0			294,661		(5	)		294,656
Segment profit (loss)		41,693		(81	)		41,612		—			41,612
Segment assets		18,369,251		202,432			18,571,683		(10	)		18,571,673
Segment liabilities		16,063,972		99			16,064,072		(10	)		16,064,061
Other items
Depreciation and amortization		1,209		—			1,209		—			1,209
Interest income		259,250		—			259,250		—			259,250
Interest expense		177,433		—			177,433		—			177,433
Extraordinary income		75		—			75		—			75
Gain on disposal of noncurrent assets		75		—			75		—			75
Extraordinary loss		—		—			—		—			—
Increase in Property and equipment and intangible assets		1,129		—			1,129		—			1,129
Provision of allowance for loan losses		53,855		—			53,855		—			53,855

* The “Adjustments” above represents elimination of intersegment transactions.

B. Reconciliation of reportable segment information to consolidated statement of financial position and consolidated income statement

Reconciliation of ordinary income

	(Millions of yen)
	March 31, 2018			March 31, 2017
Ordinary income under Japanese GAAP		390,060			294,656
Interest income		8,033			2,121
Fees and commission income		(8,896	)		(11,293	)
Reversal of impairment losses on financial assets *2,*4		—			108,640
Others		(3,255	)		(194	)
Ordinary income under IFRS *1		385,941			393,929

Reconciliation of net profit (loss) attributable to shareholder of JBIC

	(Millions of yen)
	March 31, 2018			March 31, 2017
Segment profit under Japanese GAAP		62,081			41,612
Interest income		8,050			2,121
Fees and commission income		(8,896	)		(11,293	)
Net expense from derivative financial instruments *3		(92,979	)		(122,057	)
Reversal of impairment losses on financial assets *4		(58,449	)		162,495
Other expenses		2,844			1,252
Others		(4,244	)		(186	)
Net profit (loss) attributable to shareholder of JBIC under IFRS		(91,592	)		73,944

17

Reconciliation of assets

	(Millions of yen)
	March 31, 2018			March 31, 2017
Segment assets under Japanese GAAP		18,012,060			18,571,673
Derivative financial instrument assets *5		106,150			165,304
Financial assets designated as fair value through profit or loss		(633	)		—
Securities		(7,299	)		2,638
Loans and other receivables *6		(2,129,414	)		(2,187,145	)
Equity method investments		10,996			20,471
Total assets under IFRS		15,991,860			16,572,942

Reconciliation of liabilities

	(Millions of yen)
	March 31, 2018			March 31, 2017
Segment liabilities under Japanese GAAP		15,465,589			16,064,061
Derivative financial instrument liabilities *5		106,327			166,022
Bonds payable		(3,842	)		(2,067	)
Financial guarantee contracts *6		(2,241,388	)		(2,365,627	)
Other liabilities		20,296			27,984
Others		226			159
Total liabilities under IFRS		13,347,209			13,890,532

Reconciliation of interest income

	(Millions of yen)
	March 31, 2018		March 31, 2017
Interest income under Japanese GAAP		336,768		259,250
Securities		3,324		1,490
Loans and other receivables		4,425		312
Others		284		318
Interest income under IFRS		344,801		261,372

Reconciliation of interest expense

	(Millions of yen)
	March 31, 2018			March 31, 2017
Interest expense under Japanese GAAP		249,256			177,433
Derivative financial instrument liabilities		(43,192	)		(26,836	)
Others		559			(372	)
Interest expense under IFRS		206,624			150,223

Reconciliation of Equity method investments

	(Millions of yen)
	March 31, 2018
Equity method investments under Japanese GAAP		100,453
Difference in the scope of the equity method		36,625
Equity method investments under IFRS		137,078

Reconciliation of Impairment losses (reversals) on financial assets

	(Millions of yen)
	March 31, 2018		March 31, 2017
Provision of allowance for loan losses under Japanese GAAP		51,528		53,855
Securities		709		2,753
Loans and other receivables *4		57,740		(165,248	)
Impairment losses (reversals) on financial assets under IFRS		109,978		(108,639	)

18

*¹  “Ordinary income under IFRS” is an aggregate of “Interest income,” “Fee and commission income,” “Net investment income,” “Other income,” “Reversal of impairment losses on financial assets,” and “Profits of equity method investments” reported in the consolidated income statement.

*²  This represents, for the fiscal year ended March 31, 2017, an impact of adjusting the difference in presentation between IFRS and Japanese GAAP, where income is recognized as “Reversal of impairment losses on financial assets” under IFRS, whereas an expense is recognized as “Provision of allowance for loan losses” under Japanese GAAP.

*³  This primarily represents an impact of reversing “Deferred gains (losses) on hedges” recognized as a result of applying hedge accounting under Japanese GAAP.

*⁴  This primarily represents a difference between “Provision of allowance for loan losses” under Japanese GAAP and “Impairment losses (reversals) on financial assets” under IFRS.

*⁵  This primarily represents a difference in presentation of derivative financial instrument assets and derivative financial instrument liabilities between a net basis under Japanese GAAP and a gross basis under IFRS.

*⁶ This primarily represents a difference between the amounts of financial guarantee contracts recognized under Japanese GAAP and those recognized under IFRS.

C. Information about geographical areas

i. Interest income

	(Millions of yen)
	March 31, 2018		March 31, 2017
Japan		91,201		59,546
Australia		35,339		30,587
Asia and Oceania (excluding Japan and Australia)		64,490		54,398
Europe, the Middle East, and Africa		82,824		64,614
North America and Latin America		70,840		52,146
Other *		105		78
Total interest income in the consolidated income statement		344,801		261,372

The above information is based on the locations of customers.

* “Other” includes interest income from international organizations.

ii. Noncurrent assets

Noncurrent assets mainly consist of property and equipment. Information about noncurrent assets is omitted since the majority of the noncurrent assets on the consolidated statement of financial position are located in Japan.

D. Information about major customers

There are no transactions with a single external customer resulting in more than 10% of ordinary income.

7. Cash and Due from Banks

Cash and due from banks as of March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Cash and due from banks
Cash on hand		0		0
Due from banks		1,751,287		1,526,208
Total cash and due from banks		1,751,287		1,526,209

Cash and cash equivalents in the consolidated statement of cash flows reconcile to cash and due from banks in the consolidated statement of financial position as of March 31, 2018 and 2017, respectively, as follows:

	(Millions of yen)
	As of March 31, 2018			As of March 31, 2017
Cash and due from banks		1,751,287			1,526,209
Due from banks (excluding demand deposits)		(252,480	)		(443,884	)
Cash and cash equivalents		1,498,807			1,082,325

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8. Derivative Financial Instrument Assets and Liabilities

Derivative financial instrument assets and derivative financial instrument liabilities as of March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	As of March 31, 2018
	Notional amounts		Derivative financial instrument assets		Derivative financial instrument liabilities
Interest rate-related transactions
Interest rate swaps		4,914,962		14,716		134,677
Currency-related transactions
Currency swaps		3,274,459		134,789		152,131
Forward foreign exchange contracts		94,832		0		620
Total		—		149,506		287,429

	(Millions of yen)
	As of March 31, 2017
	Notional amounts		Derivative financial instrument assets		Derivative financial instrument liabilities
Interest rate-related transactions
Interest rate swaps		3,839,263		21,496		80,242
Currency-related transactions
Currency swaps		3,904,090		145,772		418,678
Forward foreign exchange contracts		362		7		7
Total		—		167,277		498,928

9. Financial Assets designated as Fair Value through Profit or Loss

Financial assets designated as fair value through profit or loss as of March 31, 2018 consisted of the following:

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Equity instruments		9,204		—
Total		9,204		—

10. Securities

Securities as of March 31, 2018 and 2017, which were all classified as available-for-sale securities, consisted of the following:

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Securities
Listed equity securities		—		4
Unlisted equity securities		132,187		124,763
Unlisted debt securities		76,197		65,387
Securities, total		208,385		190,155

20

11. Loans and Other Receivables

Loans and other receivables as of March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	As of March 31, 2018			As of March 31, 2017
Sovereign		604,384			629,633
Non-sovereign		13,030,568			13,794,577
Total sovereign and non-sovereign		13,634,953			14,424,211
Allowance for loan losses		(182,003	)		(71,490	)
Loans and other receivables, total		13,452,950			14,352,720

The portfolio of loans and other receivables is disclosed in more detail in Note 40 “Concentration of Credit Risk.”

Details of changes in the allowance for loan losses for the years ended March 31, 2018 and 2017 were as follows:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Allowance for loan losses
Beginning of the year		71,490		181,268
Impairment losses (reversal of impairment losses) *		109,268		(111,393	)
Write-offs		—		(82	)
Adjustments on interests and others		1,244		1,697
End of the year		182,003		71,490

The policy for managing credit risk is disclosed in Note 37 “Financial Risk Management.”

* Impairment losses (reversal of impairment losses) for the fiscal year ended March 31, 2017 include a decrease of ¥134,374 million in the allowance for loan losses due to an improvement in credit risk of a certain debtor. For the fiscal year ended March 31, 2018, they include an increase of ¥119,167 million in the allowance for loan losses due to a deterioration in credit risk of a certain debtor.

12. Interests in Other Entities

The JBIC Group’s principal subsidiaries at March 31, 2018 are shown in the table below. The JBIC Group consolidates all entities over which the JBIC Group has control. See Note 3 “Significant accounting policies” for additional information.

Name of entity	Country of incorporation	Ownership interest held by the JBIC Group (%)		Voting rights (%)		Principal activities
JBIC IG Partners	Japan		51		51	Management services for investments
Russia-Japan Investment Fund, L.P. *	Cayman Islands		100		—	Investments

* JBIC does not have decision-making rights in Russia-Japan Investment Fund, L.P. JBIC, however, has determined that Russia-Japan Investment Fund, L.P. is a subsidiary of JBIC because an entity that has all of the decision-making rights is deemed to be an agent of JBIC.

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13. Equity Method Investments

13-1. Investments in Associates

Investments in associates are accounted for using the equity method. The JBIC Group does not have any investments in associates that are individually material. Investments in associates that were not individually material were as follows:

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Total carrying amount		134,828		111,899

Financial information of associates that were not individually material was as follows (the amount presented is based on the JBIC Group’s ownership interest):

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Total comprehensive income		22,480		8,151

Associates did not record other comprehensive income. Therefore, profits from equity method investments were equal to associates’ total comprehensive income presented above.

13-2. Investments in Joint Ventures

Investments in joint ventures are accounted for using the equity method. The JBIC Group does not have any joint ventures that are individually material, and the aggregate balance of investments in joint ventures that are not individually material are not significant. Accordingly, the carrying amount of the investment and the financial information of the joint ventures are not presented.

14. Unconsolidated Structured Entities

The JBIC Group has interests in structured entities formed by other entities (“unconsolidated structured entities”) for the purpose of providing project financing, mainly to resources and infrastructure projects, aircraft leasing, ship leasing, and others. These unconsolidated structured entities obtain funds mainly through bank borrowings. The JBIC Group has interests in these unconsolidated structured entities in the form of loans, financial guarantees, or investments, and therefore the JBIC Group is exposed to credit risk and market risk of these unconsolidated structured entities.

The JBIC Group’s maximum exposure to losses from its interests in these unconsolidated structured entities consists of the carrying amounts of its investments in debt securities, the amounts of loans and loan commitments, and the amount of financial guarantee obligations. The maximum exposure represents the possible amount of total losses the JBIC Group could ever incur without considering any collateral held and other credit enhancements, and does not represent the probability of loss occurrence. Income received from interests in unconsolidated structured entities is mainly interest income and guarantee fees.

The following table summarizes the carrying amounts of assets and liabilities recognized in the consolidated statement of financial position of the JBIC Group and its maximum exposure to losses from its interests in the unconsolidated structured entities.

	(Millions of yen)
	As of March 31, 2018				As of March 31, 2017
	Carrying amount		Maximum exposure		Carrying amount		Maximum exposure
Loans and other receivables		6,136,192		7,239,966		6,281,459		7,749,616
Assets, total		6,136,192		7,239,966		6,281,459		7,749,616
Financial guarantee contracts		10,068		444,110		9,557		515,595
Liabilities, total		10,068		444,110		9,557		515,595

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15. Property and Equipment

Changes in the carrying amounts of property and equipment for the years ended March 31, 2018 and 2017 were as follows:

	(Millions of yen)
	Land			Building			Other			Total
Cost
As of April 1, 2016		24,427			3,597			1,287			29,312
Additions		—			222			396			618
Disposals		(115	)		(27	)		(67	)		(209	)
Other decreases		—			—			(330	)		(330	)
As of March 31, 2017		24,311			3,792			1,286			29,390
Additions		—			121			1,416			1,538
Disposals		—			(2	)		(100	)		(102	)
Other decreases		—			—			(320	)		(320	)
As of March 31, 2018		24,311			3,912			2,281			30,505
Accumulated depreciation
As of April 1, 2016		—			714			792			1,507
Depreciation		—			168			174			340
Disposals		—			(6	)		(66	)		(70	)
As of March 31, 2017		—			876			900			1,777
Depreciation		—			171			243			415
Disposals		—			(1	)		(86	)		(87	)
As of March 31, 2018		—			1,046			1,057			2,104
Carrying amount
As of April 1, 2016		24,427			2,882			494			27,804
As of March 31, 2017		24,311			2,916			385			27,613
As of March 31, 2018		24,311			2,865			1,224			28,401

16. Other Assets

Other assets as of March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Other assets
Cash collateral paid for financial instruments		141,180		189,920
Intangible assets		3,472		2,711
Other *		110,393		2,130
Other assets, total		255,046		194,762

* “Other” for the fiscal year ended March 31, 2018 includes ¥106,829 million of receivables related to terminated currency swaps.

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17. Borrowings

Borrowings, including the currency of denomination and maturity dates, as of March 31, 2018 and 2017 consisted of the following:

	As of March 31, 2018			As of March 31, 2017
Currency	Maturity dates	Millions of yen		Maturity dates	Millions of yen
USD	August 2018 to January 2023		5,892,072	May 2017 to October 2021		7,007,032
EUR	October 2018 to January 2023		145,143	January 2018 to November 2020		147,331
JPY	April 2018 to November 2037		2,333,542	May 2017 to December 2036		2,754,341
Borrowings, total			8,370,758			9,908,705

Weighted-average contractual interest rates as of March 31, 2018 and 2017 were 1.52% and 1.12%, respectively.

The amounts of undiscounted contractual cash flows for borrowings by maturity date are disclosed in Note 43 “Maturity Analysis of Financial Liabilities.”

18. Bonds Payable

Bonds payable, including the currency of denomination, maturity dates and associated contractual interest rates, as of March 31, 2018 and 2017 consisted of the following:

	As of March 31, 2018				As of March 31, 2017
Currency	Maturity dates	Contractual interest rates	Millions of yen		Maturity dates	Contractual interest rates		Millions of yen
USD	July 2018 to November 2027	(Fixed) 1.500% – 3.375%		3,869,538	July 2017 to November 2026		(Fixed) 1.125% – 3.375%		2,965,725
	November 2018 to July 2020	(Floating) 2.134% – 2.513%		265,426	November 2018 to February 2020		(Floating) 1.393% – 1.624%		807
CAD	—	—		—	March 2018		(Fixed) 2.300%		41,991
GBP	December 2020	(Fixed) 2.625%		63,116	December 2020		(Fixed) 2.625%		59,356
JPY	March 2019 to December 2025	(Fixed) 0.001% – 2.090%		190,673	September 2017 to December 2025		(Fixed) 0.120% – 2.090%		231,616
Bonds payable, total				4,388,754					3,299,498

JBIC’s bonds are secured by JBIC’s assets in the form of general liens in accordance with Article 34 of the JBIC Act.

The amounts of undiscounted contractual cash flows for bonds payable by maturity date are disclosed in Note 43 “Maturity Analysis of Financial Liabilities.”

19. Financial Guarantee Contracts

Financial guarantee contracts as of March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Sovereign		37,450		45,856
Non-sovereign		34,835		39,056
Financial guarantee contracts, total		72,285		84,912

Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of: (a) the amount initially recognized less accumulated amortization recognized in accordance with IAS 18 and (b) the best estimate of loss amount (determined in accordance with IAS 37) required for settling the guarantee obligation at the reporting date.

20. Other Liabilities

Other liabilities as of March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Other liabilities
Accrued expenses		54,130		43,592
Unearned revenue		20,385		28,013
Cash collateral received for financial instruments		56,280		18,880
Liability for retirement benefits		7,037		6,983
Other *		90,147		1,017
Other liabilities, total		227,980		98,486

* “Other” for the fiscal year ended March 31, 2018 includes ¥89,448 million of payables related to terminated currency swaps.

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21. Employee Benefits

21-1. Post-employment Benefits

i. Defined benefit plans

JBIC has defined benefit pension plans composed of funded-type defined benefit corporate pension plans and unfunded-type lump-sum severance indemnity plans. Benefits provided under the plans are determined based on multiple factors, such as the employees’ number of years of service and their salary levels.

In accordance with Japanese laws and regulations, JBIC’s defined benefit corporate pension plans are operated by corporate pension funds that are legally separate from JBIC. The laws and regulations require that JBIC or the board of the corporate pension funds and pension-managing trustees act in the best interests of the plan members and are responsible for managing the plan assets based on the prescribed policy.

JBIC is responsible for contributing funds determined based on a prescribed proportion of the salaries stipulated in JBIC’s pension rules. If the funded balance is below the minimum funding requirement at the annual close of the pension fund, JBIC is required to pay an additional contribution. Further, the contribution is calculated to maintain the balance in future periods and is recalculated every five years at the fiscal year-end of the pension fund.

JBIC’s defined benefit corporate pension plans are multi-employer plans, which are different from single-employer plans from the following perspectives:

a. Assets contributed to multi-employer plans may be used to provide benefits to employees of other entities participating in the plan.

b. When certain employers discontinue contributions, other employers may bear the unfunded obligations.

c. When multi-employer plans are wound up or when an entity withdraws from a multi-employer plan, the entity may be required to pay for unfunded obligations as a special contribution.

The plans expose JBIC to the following actuarial risks, including investment risk, interest rate risk, and longevity risk:

a. Investment risk

The present value of defined benefit obligations is calculated using a discount rate, which is determined based on market yields on high-quality corporate bonds. Should the return on plan assets fall below this discount rate, a deficit in the defined benefit plan could arise.

b. Interest rate risk

A decline in market yields on high-quality corporate bonds leads to an increase in defined benefit obligations. The increase in obligations, however, is partly offset by an increase in the fair value of debt instruments (i.e., plan assets).

c. Longevity risk

JBIC’s defined benefit plans include lifelong annuity plans, which require JBIC’s guarantee at the time of the employees’ retirement to pay retirement benefits to plan members over their lifetime. The present value of defined benefit obligations is determined based on JBIC’s best estimate of the mortality of plan members both during and after their employment. An extended average longevity of plan members will cause an increase in defined benefit obligations.

Subsequent to returning the substitutional portion of welfare pension fund plans to the government, JBIC introduced defined benefit corporate pension plans on October 1, 2014. The welfare pension fund plans previously served as substitute for that portion of the benefits that should have been covered by the public pension plan, but JBIC obtained approvals from the Minister of Health, Labor and Welfare for an exemption from the obligation to pay benefits related to future employee service periods on April 1, 2013, and past employee service periods on October 1, 2014. Plan assets of the welfare pension funds were transferred to the corporate pension funds operated by the defined benefit corporate pension plans on October 1, 2014. The corporate pension funds paid to the government ¥52,817 million of the refund (i.e., minimum reserve) on September 22, 2017. During the fiscal year ended March 31, 2018, JBIC recognized a loss of ¥3 million due to the costs of retirement benefits related to the refund. This loss was included in operating expenses.

25

Changes in the present value of defined benefit obligations and the fair value of plan assets

		(Millions of yen)
		March 31, 2018			March 31, 2017
(a)	Net defined benefit liability for funded and unfunded type plans (beginning) (b)-(d)+(g)		6,983			7,172
Changes in the present value of defined benefit obligations for funded type plans:
(b)	Beginning balance		8,984			9,226
	Current service cost		120			139
	Interest expense		37			32
	Remeasurements
	Actuarial gains and losses arising from changes in demographic assumptions		—			(116	)
	Actuarial gains and losses arising from changes in financial assumptions		123			(120	)
	Other		98			61
	Payments by the plan		(229	)		(238	)
	Decrease due to the transfer of the substitutional portion of the welfare pension fund		(2,706	)		—
(c)	Ending balance		6,428			8,984
Changes in the fair value of plan assets:
(d)	Beginning balance		6,964			6,956
	Interest income		25			21
	Remeasurements
	Return on plan assets		237			108
	Contributions by the employer		122			116
	Payments by the plan		(229	)		(238	)
	Decrease due to the transfer of the substitutional portion of the welfare pension fund		(2,709	)		—
(e)	Ending balance		4,411			6,964
(f)	Net defined benefit liability for funded type plans (ending) (c)-(e)		2,017			2,020
Changes in the present value of defined benefit obligations for unfunded type plans:
(g)	Beginning balance		4,963			4,902
	Current service cost		332			352
	Interest expense		29			24
	Remeasurements
	Actuarial gains and losses arising from changes in demographic assumptions		—			(64	)
	Actuarial gains and losses arising from changes in financial assumptions		41			19
	Other		159			155
	Payments by the plan		(507	)		(426	)
(h)	Ending balance		5,019			4,963
(i)	Net defined benefit liability for funded and unfunded type plans (ending) (f)+(h)		7,037			6,983

26

Significant actuarial assumptions used in determining the present value of defined benefit obligations

Items	March 31, 2018		March 31, 2017
Discount rate (%)		0.5%		0.6%
Salary increase rate (%)		4.4%		4.4%

An assessment of defined benefit obligations requires judgments in respect of uncertain future events. The following table shows the impact in the form of a sensitivity analysis of changes in discount rates on the defined benefit obligations at each reporting date. The sensitivity analysis is prepared based on the assumption that other variables remain constant; however, in practice, variables do not necessarily change in isolation. Negative amounts represent a decrease, while positive amounts show an increase in the defined benefit obligations.

Sensitivity analysis (discount rate)

	(Millions of yen)
	0.5% increase			0.5% decrease
Effect on defined benefit obligations as of March 31, 2018		(794	)		865
Effect on defined benefit obligations as of March 31, 2017		(790	)		861

Fair value by plan asset category

	(Millions of yen)
	As of March 31, 2018
Categories of plan assets	With quoted market prices in an active market		Without quoted market prices in an active market		Total
Equity securities (Japan)		549		—		549
Equity securities (foreign countries)		496		—		496
Total equity securities		1,046		—		1,046
Debt securities (Japan)		2,397		—		2,397
Debt securities (foreign countries)		337		—		337
Total debt securities		2,735		—		2,735
General accounts of life insurance companies		—		605		605
Cash and due from banks		24		—		24
Plan assets, total		3,805		605		4,411

	(Millions of yen)
	As of March 31, 2017
Categories of plan assets	With quoted market prices in an active market		Without quoted market prices in an active market		Total
Equity securities (Japan)		482		—		482
Equity securities (foreign countries)		456		—		456
Total equity securities		939		—		939
Debt securities (Japan)		2,307		—		2,307
Debt securities (foreign countries)		314		—		314
Total debt securities		2,622		—		2,622
General accounts of life insurance companies		—		586		586
Cash and due from banks		22		—		22
Prepayment of the transfer amount of the substitutional portion (minimum reserve)		—		2,794		2,794
Plan assets, total		3,583		3,381		6,964

Expected contribution to plan assets for the fiscal year ending March 31, 2019: ¥147 million

27

Weighted-average duration of defined benefit obligations
As of March 31, 2018	15years
As of March 31, 2017	15years

ii. Defined contribution plans

On October 1, 2014, JBIC introduced defined contribution plans.

JBIC recognized costs of ¥25 million and ¥24 million related to the defined contribution plans for the year ended March 31, 2018 and 2017, respectively.

21-2. Employee Benefit Expenses

Total employee benefit expenses included in operating expenses in the consolidated income statement were as follows:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Employee benefit expenses		6,932		6,610

22. Capital Stock and Other Reserves

In accordance with a plan under Article 3 of the Supplementary Provisions of the Act for Partial Revision of the Japan Bank for International Cooperation Act (Act No. 41 of 2016) (the “Supplementary Provisions of the Act”), due from banks and ¥150,000 million of legal retained earnings were transferred from the “Ordinary Operations” account to the “Special Operations” account in the fiscal year ended March 31, 2017. ¥150,000 million of legal retained earnings transferred to the “Special Operations” account was reclassified as Capital stock in the “Special Operations” account based on Article 3 Paragraph (3) of the Supplementary Provisions of the Act.

Total number of authorized shares

	(Thousands of shares)
	March 31, 2018		March 31, 2017
Common stock with no stated value		5,164,000,000		5,164,000,000

Shares of common stock issued and fully paid (common stock with no stated value)

	March 31, 2018				March 31, 2017
	Thousands of shares		Millions of yen		Thousands of shares		Millions of yen
Beginning of the year		1,533,000,000		1,533,000		1,391,000,000		1,391,000
Issuance of new shares		82,200,000		82,200		142,000,000		142,000
End of the year		1,615,200,000		1,615,200		1,533,000,000		1,533,000

Total amount of capital stock

	(Millions of yen)
	March 31, 2018		March 31, 2017
Capital stock		1,765,200		1,683,000

Other reserves presented in the consolidated statement of changes in equity

Available-for-sale financial assets

The amount represents valuation changes in respect of the fair value of available-for-sale financial assets.

Deferred gains or losses on hedges

For hedges that qualify for hedge accounting under Japanese GAAP but that do not meet the conditions for hedge accounting under IAS 39, JBIC discontinued hedge accounting in respect of each hedge category. For cash flow hedges under Japanese GAAP, deferred gains or losses on hedges are recognized in other reserves at the date of transition and are recognized in profit or loss based on cash flows arising from hedged transactions.

Remeasurement of defined benefit plans

Remeasurement of defined benefit plans represents the changes in actuarial gains and losses and the return on plan assets, excluding amounts included in interest income. Actuarial gains and losses represent experience adjustments to the defined benefit obligations (i.e., differences between the actuarial assumptions at the beginning of the year and what has actually occurred) and the effects of changes in actuarial assumptions. Actuarial gains and losses are recognized in other comprehensive income as incurred and are immediately transferred from other reserves to retained earnings.

Exchange differences on translation of foreign operations

The amount represents the JBIC Group’s share of the translation differences arising on translating the consolidated financial statements of foreign subsidiaries, associates and joint ventures into the functional currency of JBIC.

Capital Controls

JBIC is not subject to either the Banking Act or capital adequacy regulations; however, JBIC is subject to the JBIC Act, and it has the following agreements with the Japanese government:

• The government, at all times, holds the total number of outstanding shares of JBIC (Article 3 of the JBIC Act).

• The government may make contributions to JBIC, if necessary, limited to the amount appropriated in the budget (Article 4 of the JBIC Act).

• JBIC prepares a budget for revenues and expenditures and submits it to the Minister of Finance each fiscal year. After the Cabinet’s decision is made, the Cabinet submits the budget to the Diet together with the national budget (Article 16 and Article 19 of the JBIC Act). JBIC’s business plans and financial plans (e.g., borrowings from the fiscal loan funds and foreign exchange funds, corporate bonds, capital contribution from the general account, and loans) are attached to the above-mentioned budget and submitted to the Diet (Article 17 of the JBIC Act).

JBIC manages the equity presented in the consolidated statement of financial position as its capital. Capital stock as of March 31, 2018 and 2017 is as presented above.

28

23. Dividend Distribution

JBIC is restricted in its ability to distribute dividends in accordance with Article 31 of the JBIC Act.

JBIC paid ¥21,386 million to the national treasury on June 29, 2016, for the year ended March 31, 2016, ¥20,846 million on June 29, 2017, for the year ended March 31, 2017, and ¥ 31,150 million on June 28, 2018, for the year ended March 31, 2018, in accordance with the JBIC Act as noted below. These amounts are calculated based on the amount of the retained earnings under Japanese GAAP.

In the event that the amount of the retained earnings recorded at each year-end closing in respective accounts for operations defined in each item of Article 26-2 of the JBIC Act:

i. exceeds zero, JBIC accumulates an amount calculated in accordance with the standards prescribed by the Cabinet Order as a reserve, until it reaches a certain amount stipulated by the Cabinet Order; and if there is a surplus, JBIC pays such a surplus into the national treasury within three months after the annual closing date (Paragraph 1 of Article 31 of the JBIC Act); or

ii. falls below zero, the reserve is transferred to the retained earnings to the extent that the amount of retained earnings becomes zero (Paragraph 2 of Article 31 of the JBIC Act).

24. Interest Income and Interest Expense

Interest income and interest expense for the years ended March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Interest income
Due from banks		10,948		4,822
Securities		5,153		2,245
Loans and other receivables		328,687		254,303
Other		12		0
Interest income, total		344,801		261,372
Interest expense
Borrowings		115,370		91,175
Bonds payable		90,885		58,729
Financial guarantee contracts		301		318
Other		65		—
Interest expense, total		206,624		150,223
Net interest income		138,177		111,148

Interest income earned on financial assets that were impaired was ¥17,964 million and ¥15,544 million for the years ended March 31, 2018 and 2017, respectively.

29

25. Fee and Commission Income and Fee and Commission Expense

Fee and commission income, as well as fee and commission expense for the years ended March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Fee and commission income
Guarantee fees		14,775		14,661
Other		242		880
Fee and commission income, total		15,018		15,542
Fee and commission expense
Outsourcing expenses		1,965		1,864
Other		78		55
Fee and commission expense, total		2,043		1,919

26. Net Expense from Derivative Financial Instruments

Net expense from derivative financial instruments for the years ended March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	March 31, 2018			March 31, 2017
Net expense from derivative financial instruments
Net interest expense from interest rate swaps		43,182			26,854
Net loss on valuation of derivative financial instruments		100,561			124,689
Other		(5,353	)		(2,227	)
Net expense from derivative financial instruments, total		138,389			149,316

27. Net Loss from financial assets designated as fair value through profit or loss

Net loss from financial assets designated as fair value through profit or loss for the years ended March 31, 2018 consisted of the following:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Net loss from equity instruments		146		—
Net loss from financial assets designated as fair value through profit or loss, total		146		—

28. Net Investment Income

Net investment income for the years ended March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Net investment income
Gains on sales or redemptions		88		—
Net investment income, total		88		—

30

29. Impairment Losses (Reversals) on Financial Assets

Impairment losses (reversals) on financial assets for the years ended March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Impairment losses (reversals) on financial assets
Securities		709		2,753
Loans and other receivables *		109,268		(111,393	)
Impairment losses (reversals) on financial assets, total		109,978		(108,639	)

* Impairment losses (reversal of impairment losses) for the fiscal year ended March 31, 2017 include a decrease of ¥134,374 million in the allowance for loan losses due to an improvement in credit risk of a certain debtor. For the fiscal year ended March 31, 2018, they include an increase of ¥119,167 million in the allowance for loan losses due to a deterioration in credit risk of a certain debtor.

30. Other Income and Other Expenses

Other income and other expenses for the years ended March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Other income
Reversals of financial guarantee contracts		549		—
Gain on foreign exchange transactions *		2,841		—
Other		162		223
Other income, total		3,552		223
Other expenses
Provision for financial guarantee contracts		—		665
Loss on foreign exchange transactions *		—		199
Other		822		644
Other expenses, total		822		1,508

* The amount includes gains or losses arising on the foreign currency translation of notional amounts of the currency swap contracts by using the exchange rate at the reporting date.

31. Operating Expenses

Operating expenses for the years ended March 31, 2018 and 2017 consisted of the following:

	(Millions of yen)
	March 31, 2018		March 31, 2017
Operating expenses
Salaries and allowances		5,635		5,332
Retirement benefit costs		524		552
Welfare expenses		773		726
Depreciation and amortization		1,460		1,209
Travel expenses		1,504		1,377
Other		9,647		7,817
Operating expenses, total		19,545		17,017

32. Income Taxes

JBIC is a nontaxable entity in accordance with Paragraph 2, Item 5 of the Corporate Tax Act of Japan (Act No. 34, 1965) and has no obligation to pay corporate taxes. JBIC IG Partners is a taxable entity and has an obligation to pay corporate taxes as applicable under relevant laws. Russia-Japan Investment Fund, L.P. is a tax-exempt limited partnership established under Cayman Islands laws and has no obligation to pay corporate taxes. As the balances of income taxes are insignificant, the financial information for income taxes is not presented.

31

33. Analysis of Financial Assets and Liabilities by Measurement Basis

Subsequent to initial recognition, financial assets and liabilities are primarily measured either at fair value or amortized cost in accordance with the measurement classifications defined in IAS 39. Note 3 “Significant Accounting Policies” describes how these classifications of financial assets and liabilities are measured, and how income and expenses are recognized either in profit or loss, or in other comprehensive income.

The following tables present the carrying amounts of the financial assets and liabilities in the consolidated statement of financial position, by category and by line item, as of March 31, 2018 and 2017:

	(Millions of yen)
	As of March 31, 2018
	Financial assets or liabilities measured at fair value through profit or loss		Loans and receivables		Available-for- sale financial assets		Financial liabilities measured at amortized cost		Total
Financial assets
Cash and due from banks		—		1,751,287		—		—		1,751,287
Derivative financial instrument assets		149,506		—		—		—		149,506
Financial assets designated as fair value through profit or loss		9,204		—		—		—		9,204
Securities		—		—		208,385		—		208,385
Loans and other receivables		—		13,452,950		—		—		13,452,950
Financial assets, total		158,711		15,204,237		208,385		—		15,571,334
Financial liabilities
Derivative financial instrument liabilities		287,429		—		—		—		287,429
Borrowings		—		—		—		8,370,758		8,370,758
Bonds payable		—		—		—		4,388,754		4,388,754
Financial liabilities, total		287,429		—		—		12,759,513		13,046,943

In addition to the above, JBIC had ¥72,285 million of financial guarantee contracts measured in accordance with IAS 39 as of March 31, 2018.

	(Millions of yen)
	As of March 31, 2017
	Financial assets or liabilities measured at fair value through profit or loss		Loans and receivables		Available-for- sale financial assets		Financial liabilities measured at amortized cost		Total
Financial assets
Cash and due from banks		—		1,526,209		—		—		1,526,209
Derivative financial instrument assets		167,277		—		—		—		167,277
Securities		—		—		190,155		—		190,155
Loans and other receivables		—		14,352,720		—		—		14,352,720
Financial assets, total		167,277		15,878,929		190,155		—		16,236,362
Financial liabilities
Derivative financial instrument liabilities		498,928		—		—		—		498,928
Borrowings		—		—		—		9,908,705		9,908,705
Bonds payable		—		—		—		3,299,498		3,299,498
Financial liabilities, total		498,928		—		—		13,208,203		13,707,132

In addition to the above, JBIC had ¥84,912 million of financial guarantee contracts measured in accordance with IAS 39 as of March 31, 2017.

32

34. Offsetting Financial Assets and Financial Liabilities

The following tables present quantitative information in respect of financial instruments that are subject to enforceable master netting arrangements or similar agreements as of March 31, 2018 and 2017. Of the financial assets held by the JBIC Group, amounts related to master netting agreements in respect of derivative transactions are disclosed in the following tables. The right to offset in accordance with these master netting agreements only becomes effective in the event of default or certain other events outside the normal course of business. The excess portion of the collateral received and collateral pledged is excluded.

	(Millions of yen)
	As of March 31, 2018
	Gross amounts of financial assets and liabilities recognized (a)		Amounts that are offset (b)		Net amounts presented in the consolidated statement of financial position (c)=(a)-(b)		Amounts subject to an enforceable master netting agreement or similar agreement and not  included in (b) (d)						Net amount (e)=(c)-(d)
							Amounts related to financial instruments recognized that do not meet the offsetting criteria			Amounts related to financial collateral (including cash collateral)
Financial assets
Derivative financial instrument assets		149,505		—		149,505		(106,350	)		(56,280	)		—
Financial assets, total		149,505		—		149,505		(106,350	)		(56,280	)		—
Financial liabilities
Derivative financial instrument liabilities		286,809		—		286,809		(106,350	)		(141,180	)		39,278
Financial liabilities, total		286,809		—		286,809		(106,350	)		(141,180	)		39,278
	(Millions of yen)
	As of March 31, 2017
	Gross amounts of financial assets and liabilities recognized (a)		Amounts that are offset (b)		Net amounts presented in the statement of financial position (c)=(a)-(b)		Amounts subject to an enforceable master netting agreement or similar agreement and not included in (b) (d)						Net amount (e)=(c)-(d)
							Amounts related to financial instruments recognized that do not meet the offsetting criteria			Amounts related to financial collateral (including cash collateral)
Financial assets
Derivative financial instrument assets		167,277		—		167,277		(165,304	)		(18,880	)		—
Financial assets, total		167,277		—		167,277		(165,304	)		(18,880	)		—
Financial liabilities
Derivative financial instrument liabilities		498,928		—		498,928		(165,304	)		(189,920	)		143,704
Financial liabilities, total		498,928		—		498,928		(165,304	)		(189,920	)		143,704

33

35. Fair Value of Financial Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair values stated below represent the best estimate determined using various valuation methods and assumptions, and the JBIC Group gives the highest priority to quoted prices in active markets. If such prices are not available, the fair values are determined using valuation techniques. The valuation techniques, if used, maximize the use of observable inputs and minimize the use of unobservable inputs.

The table below sets forth the carrying amounts and fair values of major financial assets and liabilities as of March 31, 2018 and 2017:

	(Millions of yen)
	As of March 31, 2018				As of March 31, 2017
	Carrying amount		Fair value		Carrying amount		Fair value
Financial Assets
Derivative financial instrument assets		149,506		149,506		167,277		167,277
Financial assets designated as fair value through profit or loss		9,204		9,204		—		—
Securities *		196,597		196,597		178,367		178,367
Loans and other receivables		13,452,950		13,414,746		14,352,720		14,322,466
Financial Liabilities
Derivative financial instrument liabilities		287,429		287,429		498,928		498,928
Borrowings		8,370,758		8,425,665		9,908,705		9,973,774
Bonds payable		4,388,754		4,315,172		3,299,498		3,276,524
Financial guarantee contracts		72,285		7,427		84,912		10,904

* The carrying amounts of securities are different from the amounts presented in the consolidated statement of financial position by the carrying amounts of unlisted equity securities, which are presented below.

Valuation methods used in determining the fair values of financial assets and liabilities

Derivative financial instrument assets and liabilities

Derivative financial instrument assets and liabilities held by JBIC are all over-the-counter (“OTC”) derivatives.

The fair values of OTC derivatives are measured using the projected future cash flows with observable inputs, mainly interest rates and foreign exchange rates. In determining the fair values, counterparty and JBIC’s credit risks are incorporated. In reflecting these credit risks, the default rates are determined with reference to observable market data, and the impact of master netting agreements and the effect of collateral are also incorporated.

Financial assets designated as fair value through profit or loss

Financial assets designated as fair value through profit or loss comprise listed equity securities and unlisted equity securities.

Fair values of listed equity securities are determined using observable market information and recent transaction prices. For unlisted equity securities, the fair values at the reporting date are determined using recent transaction prices.

Securities

Securities held by JBIC are composed of listed equity securities, unlisted equity securities and unlisted debt securities.

Fair values of listed equity securities are determined using quoted market prices. As it pertains to stocks included in unlisted equity securities, their fair values, except for those whose fair values cannot be reliably measured, are determined using valuation techniques, including the DCF method. The inputs used include unobservable inputs, such as the expected rate of return. For investments in partnerships that are included in unlisted equity securities, the reported net asset values are considered to represent the fair values of these investments at the reporting date. For unlisted debt securities, quoted prices that are made available by third parties, such as brokers, are used.

34

Loans and other receivables

Since loans with variable interest rates reflect market interest rates in the short term, amounts calculated by applying the floating rate note method and a risk-free rate adjusted by unobservable inputs, such as the default ratio and collateral coverage ratio, represent the fair values of the loans.

For loans with fixed interest rates, the total amounts of the contractual principal and interest are discounted by using a risk-free rate adjusted by unobservable inputs, such as the default ratio and collateral coverage ratio, to calculate the fair values. Further, in respect of claims against bankrupt borrowers, substantially bankrupt borrowers, and potentially bankrupt borrowers, estimated loan losses are calculated based on the amounts expected to be collected from the collateral or guarantees. Thus, the amortized amount, net of an allowance for loan losses as of the reporting date approximates the fair value and such an amount represents the fair value.

Borrowings

Borrowings with variable interest rates reflect short-term market interest rates, and the credit risk of JBIC has not been significantly affected by these borrowings. Accordingly, the carrying amount is used as fair value as it is considered to approximate the fair value. For borrowings with fixed interest rates, fair value is calculated by discounting the total amount of the contractual principal and interest of the borrowings by the standard government bond rate.

Bonds payable

Market value is used as the fair value of the bonds.

Financial guarantee contracts

The fair value of financial contracts is determined by discounting the estimated future losses arising from guarantee obligations using a risk-free rate adjusted by the credit default swap spread of government bonds. Unobservable inputs, such as the default ratio and coverage ratio, are used to determine the estimated future losses associated with guarantee obligations.

The fair value hierarchy of financial assets and liabilities is described in Note 36 “Fair Value Hierarchy.”

With respect to the following unlisted equity securities (stocks), there are no quoted market prices in an active market nor is sufficient data available to determine their fair values using valuation techniques. Since their fair values cannot be reliably measured, the unlisted equity securities (stocks) are measured at historical cost.

	(Millions of yen)
	As of March 31, 2018		As of March 31,2017
Unlisted equity securities (stocks)		11,787		11,787

As of the reporting date of the consolidated financial statements, none of these unlisted equity securities are scheduled to be disposed of.

36. Fair Value Hierarchy

The inputs used in the valuation techniques that measure the fair values of assets and liabilities are categorized into the following three-level hierarchy:

• Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

• Level 2: inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly; and

• Level 3: unobservable inputs.

The fair value hierarchy of an asset or liability is determined based on the hierarchy of inputs used in the fair value measurement of that asset or liability. If the inputs used to measure the fair value of an asset or a liability are categorized within different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

35

The following table shows a breakdown of assets and liabilities measured at fair value by level of the fair value hierarchy as of March 31, 2018 and 2017:

	(Millions of yen)
	As of March 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instrument assets
Interest-related derivatives
Interest rate swaps		—		14,716		—		14,716
Currency-related derivatives
Currency swaps		—		134,789		—		134,789
Forward foreign exchange contracts		—		0		—		0
Derivative financial instrument assets, total		—		149,506		—		149,506
Financial assets designated as fair value through profit or loss		—		921		8,282		9,204
Securities		—		76,197		120,400		196,597
Liabilities
Derivative financial instrument liabilities
Interest-related derivatives
Interest rate swaps		—		134,677		—		134,677
Currency-related derivatives
Currency swaps		—		152,131		—		152,131
Forward foreign exchange contracts		—		620		—		620
Derivative financial instrument liabilities, total		—		287,429		—		287,429
	(Millions of yen)
	As of March 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instrument assets
Interest-related derivatives
Interest rate swaps		—		21,496		—		21,496
Currency-related derivatives
Currency swaps		—		145,772		—		145,772
Forward foreign exchange contracts		—		7		—		7
Derivative financial instrument assets, total		—		167,277		—		167,277
Securities		4		65,387		112,975		178,367
Liabilities
Derivative financial instrument liabilities
Interest-related derivatives
Interest rate swaps		—		80,242		—		80,242
Currency-related derivatives
Currency swaps		—		418,678		—		418,678
Forward foreign exchange contracts		—		7		—		7
Derivative financial instrument liabilities, total		—		498,928		—		498,928

As it pertains to Level 3 securities, the fair values of unlisted equity securities are determined using valuation techniques, including the DCF method. The valuation techniques used maximize the use of relevant observable inputs for each type of unlisted equity security and minimize the use of unobservable inputs. For unlisted debt securities categorized as Level 3 securities, quoted prices that are made available by third parties, such as brokers, are used. Recent transaction prices are used for financial assets designated as fair value through profit or loss categorized as Level 3.

36-1. Transfers between Level 1 and Level 2

There were no transfers between Level 1 and Level 2 during the years ended March 31, 2018 and 2017.

36

36-2. Quantitative Information about the Significant Unobservable Inputs Used in the Fair Value Measurement of Level 3 Financial Assets

The following tables present the significant unobservable inputs used in the fair value measurement of Level 3 financial assets that are recorded in the consolidated statement of financial position at fair value:

	As of March 31, 2018
	Fair value (Millions of yen)		Valuation method	Unobservable input	Range (Weighted average)
Financial assets designated as fair value through profit or loss
Listed equity securities (stocks)		8,282	Recent transaction price	—  *1		—  *1
Unlisted equity securities (stocks)		0	Recent transaction price	—  *1		—  *1
Securities
Unlisted equity securities (stocks)		69,066	DCF method	Discount rates		2.8%–8.2% (4.8%)
				Expected cash flows		—  *2
Unlisted equity securities (investments in partnerships)		50,952	Net asset value	—  *3		—  *3

	As of March 31, 2017
	Fair value (Millions of yen)		Valuation method	Unobservable input	Range (Weighted average)
Securities
Unlisted equity securities (stocks)		67,322	DCF method	Discount rates		2.9%–8.0% (4.9%)
				Expected cash flows		—  *2
Unlisted equity securities (investments in partnerships)		45,653	Net asset value	—  *3		—  *3

*¹  The fair value as of the reporting date is based on recent transaction prices.

*²  Expected cash flows used in the valuation based on the DCF method are unobservable inputs, and accordingly, various scenarios reflecting the performance of the issuers are taken into account in performing the valuation.

*³  The net asset values reported by the partnerships are deemed to represent the fair value as of the reporting date.

36-3. Movements in the Fair Value of Level 3 Financial Assets

The following table presents a reconciliation of the beginning and ending amounts of Level 3 financial assets that are recorded at fair value in the consolidated statement of financial position for the years ended March 31, 2018 and 2017:

	(Millions of yen)
	Securities						Financial assets designated as fair value through profit or loss
	Unlisted equity securities			Unlisted debt securities			Listed equity securities		Unlisted equity securities		Total
As of April 1, 2016		101,490			1,408			—		—		102,899
Total gains (losses) recorded in profit or loss		(2,156	)		(18	)		—		—		(2,174	)
Other comprehensive income		718			—			—		—		718
Purchases		16,426			—			—		—		16,426
Sales and redemptions		(3,503	)		(1,389	)		—		—		(4,893	)
As of March 31, 2017		112,975			—			—		—		112,975
Total gains (losses) recorded in profit or loss		2,517			—			—		—		2,517
Other comprehensive income		4,377			—			—		—		4,377
Purchases		11,149			—			8,282		0		19,432
Sales and redemptions		(10,619	)		—			—		—		(10,619	)
As of March 31, 2018		120,400			—			8,282		0		128,682

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36-4. Sensitivity Analysis of Level 3 Instruments

The fair value measurements of Level 3 financial assets are performed using valuation techniques based on inputs, such as prices and rates that are not observable in the market. The following sensitivity analysis provides the impact on the profit or loss and other comprehensive income when changing the unobservable inputs used in determining the fair value measurements of Level 3 financial assets recorded at fair value in the consolidated statement of financial position, to the extent reasonably possible.

The nature of the sensitivity analysis is determined based on the type of financial instrument and the market conditions at the time. As of March 31, 2018 and 2017, the sensitivity analysis was performed by increasing or decreasing the discount rates used in the DCF method by 1%.

	(Millions of yen)
	As of March 31, 2018
	Total fair value measured using valuation techniques		Impact on profit or loss				Impact on other comprehensive income
			Favorable change		Unfavorable change		Favorable change		Unfavorable change
Securities
Unlisted equity securities (stocks)		62,855		—		—		4,761		(4,356	)

	(Millions of yen)
	As of March 31, 2017
	Total fair value measured using valuation techniques		Impact on profit or loss				Impact on other comprehensive income
			Favorable change		Unfavorable change		Favorable change		Unfavorable change
Securities
Unlisted equity securities (stocks)		61,833		—		—		5,075		(4,461	)

For the listed equity securities, certain unlisted equity securities (i.e., some of the stocks and investments in partnerships) and debt securities, the sensitivity analysis was not performed since the effect of changing the unobservable inputs to reflect reasonably possible alternative assumptions did not change their fair values significantly.

36-5. Fair Value Hierarchy of Assets and Liabilities for which Fair Values are Not Measured at Fair Value

The breakdown by fair value hierarchy of assets and liabilities that were not measured at fair value in the consolidated statement of financial position as of March 31, 2018 and 2017 was as follows:

	(Millions of yen)
	As of March 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Loans and other receivables		—		—		13,414,746		13,414,746
Liabilities
Borrowings		—		8,425,665		—		8,425,665
Bonds payable		—		4,315,172		—		4,315,172
Financial guarantee contracts		—		—		7,427		7,427

	(Millions of yen)
	As of March 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Loans and other receivables		—		—		14,322,466		14,322,466
Liabilities
Borrowings		—		9,973,774		—		9,973,774
Bonds payable		—		3,276,524		—		3,276,524
Financial guarantee contracts		—		—		10,904		10,904

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37. Financial Risk Management

JBIC is a policy-based financial institution, conducting financial operations to achieve policy objectives, and its operations involve various risks, including credit risk, market risk (interest rate risk and exchange rate risk), liquidity risk, and operational risk. As such, JBIC has the following risk management policies in place.

37-1. Risk management structure

The types and magnitude of the risks associated with JBIC’s financial operations and its risk mitigation measures are different from those of risks associated with private financial institutions’ operations and their risk mitigation measures. Nonetheless, JBIC, as a financial institution, recognizes the importance of managing risk appropriately, and has built an organizational structure for risk management tailored to the types of risks and integrated risk management.

More specifically, JBIC identifies, measures, and monitors various risks to which JBIC is exposed in its operations, and defines ensuring the soundness and integrity of its operations and increasing transparency as the risk management objective. For this purpose, JBIC has designated staff responsible for managing various risks and established a department responsible for controlling the risk management efforts. In addition, the Corporate Risk Management Committee and the Asset Liability Management (ALM) Committee have also been set up to facilitate evaluations and discussions regarding successful risk management. JBIC has also established the Risk Advisory Committee, which mainly consists of external experts, to provide JBIC’s board of directors with advice for matters requiring their review, such as a risk assessment and the management structure of large credit exposures and issues related to the risk of large-scale projects.

37-2. Credit risk management

Credit risk refers to the potential loss from a decline or loss in the value of credit assets due to deterioration in the financial conditions of a debtor. This risk is inherent in JBIC’s operations as it primarily engages in lending activities. The credit risk exposure of JBIC may be classified into the following categories: sovereign risk, which involves financing to foreign governments; corporate risk, which involves financing to business firms; project risk, which occurs when a project is financed by project financing—a financing structure in which a loan is primarily secured by the cash flows generated from the project—fails to generate the planned cash flows; and country risk, which involves financing to foreign firms as well as projects located in foreign countries (a risk arising from the country where the debtor resides and the project is located that adds to corporate risk and project risk). Given the very nature of the financial support the JBIC Group provides, including support for developing and securing strategically important resources for Japan overseas, for maintaining and improving the international competitiveness of Japanese industries, and for promoting overseas business in order to preserve the global environment, such as preventing global warming, the JBIC Group frequently extends loans to foreign governments, government agencies, and foreign companies. As such, sovereign and country risks account for a significant portion of the credit risk accompanying JBIC’s lending activities.

Credit risk management structure

The cornerstone of credit risk management at JBIC is the evaluation of an individual borrower’s creditworthiness in advance of credit approval. When a new credit application is processed, the relevant finance departments (sales promotion departments) and credit departments collect and analyze information on the borrower. JBIC’s overseas representative offices also play a part in collecting information on foreign governments and corporations. Credit appraisal takes place based on the information that has been gathered and analyzed with the different departments ensuring appropriate checks throughout the process, leading to the final decision by the management. In providing credit to foreign governments and companies, JBIC takes maximum advantage of its unique position as a public financial institution. This includes exchanging views and information with the governments and relevant authorities in the recipient countries, multilateral institutions such as the International Monetary Fund and the World Bank, other regional development banks such as export credit agencies, and private financial institutions in developed countries. Using all these channels to exchange views and information, JBIC evaluates sovereign and country risks based on the broad range of information collected on the borrowing governments, the government agencies, and the political and economic conditions in their countries.

In providing credit to domestic and foreign companies, JBIC evaluates their creditworthiness and the appropriateness of the collateral and guarantees they offer. In respect of the credit provision related to overseas projects, credit evaluation involves examining the certainty of transactions to be financed, feasibility studies of the projects, and the industry in which the borrower operates. The concentration of credit risk is managed by setting a certain ratio to capital. The relevant finance departments and credit departments conduct proper credit risk management based on the credit risk rating system for segmented risk categories and the asset self-assessment system based on the Financial Inspection Manual of the Japanese Financial Services Agency. In addition, an Integrated Risk Management Committee is held regularly to report the status of credit management to the management. The credit management situation is also checked by an independent auditing department.

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Credit risk management methodology

A. Credit risk assessment

Internal credit rating

JBIC has established an internal credit rating system, which covers, in principle, all borrowers. Internal credit ratings are the cornerstone of credit risk management, being used for individual credit appraisals and quantifying credit risk as described below.

Self-assessment of asset quality

Japanese private financial institutions carry out a self-assessment of asset quality in accordance with the Financial Inspection Manual issued by the Financial Services Agency of Japan. JBIC also performs a self-assessment of asset quality based on the Financial Inspection Manual to ensure that the characteristics of its assets will be accurately reflected in its assessment results. In carrying out the self-assessment of the asset quality, the first-stage of the assessment is conducted by the finance departments, while the second-stage of the assessment is conducted by the credit department, and the internal inspection is performed by the internal audit department. The results of the self-assessment of the asset quality are used for determining the existence of objective evidence indicating that a financial asset or group of financial assets classified into loans and receivables is impaired. In addition, they are used for the continuous reviews of the loan portfolio as well as actively used in the disclosures of assets to enhance the transparency of the JBIC Group’s financial position.

The “borrower category” is used to classify borrowers by their repayment abilities used in the self-assessment of asset quality, and borrowers are classified depending on their financial conditions as below:

Borrower Category	Borrowers’ financial condition
Normal borrowers	Borrowers with good business performances and no significant financial problems
Borrowers needing attention	Borrowers requiring close monitoring, excluding substandard borrowers
Substandard borrowers	Borrowers in the “borrowers needing attention category” with loans that are completely or partially more than three months past due or borrowers whose loans have been restructured
Potentially bankrupt borrowers	Borrowers perceived to have a high risk of becoming bankrupt
Substantially bankrupt borrowers	Borrowers who may not have legally or formally declared bankruptcy but are essentially bankrupt
Bankrupt borrowers	Borrowers who have legally or formally declared bankruptcy

B. Quantifying credit risk

In addition to the above credit risk management related to individual borrowers, JBIC quantifies credit risk with a view to evaluating the risk of the overall loan portfolio. To quantify credit risk, it is important to take into account the characteristics of JBIC’s loan portfolio, which are not typically seen in other private financial institutions, namely that JBIC holds a significant portion of long-term loans that entail sovereign and country risks. Also to be taken into account are mechanisms for securing assets under an international supporting framework, such as the Paris Club*, which is a unique framework of debt management by official creditors. JBIC’s own credit risk quantification model, incorporating these factors, measures credit risk and is utilized for internal control purposes.

* The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties encountered by debtor nations. Since the first meeting took place in 1956 to resolve the debt problem of Argentina, the meeting has been held in Paris, with the French Treasury (in Paris) acting as its secretariat. Hence, it is called as the Paris Club.

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37-3. Credit risk management in financial markets

Credit risk in financial markets is the risk that JBIC will suffer losses if a counterparty to a derivative financial instrument transaction is unable to execute the transactions in accordance with the terms of the contract due to its financial difficulties or bankruptcy. As such, JBIC continuously gathers information on the market value of derivative financial instruments, the credit risk amount in respect of each counterparty and counterparties’ financial conditions. JBIC also monitors and utilizes such data in assessing the appropriateness of counterparties.

JBIC mitigates credit risk in financial markets arising from derivatives transactions by entering into master netting agreements.

Under IFRS, JBIC’s derivative financial instrument assets and liabilities do not meet the offsetting criteria and they are presented on a gross basis in the consolidated statement of financial position.

In addition to the above, collateral is pledged by both parties to a transaction in accordance with market trends and risk levels.

38. Maximum Exposure to Credit Risk

The following tables summarize the JBIC Group’s maximum exposure to credit risk before recognizing risk mitigation by collateral or other credit enhancements as of March 31, 2018 and 2017:

	(Millions of yen)
	As of March 31, 2018				As of March 31, 2017
	Carrying amount		Maximum exposure		Carrying amount		Maximum exposure
Financial assets designated as fair value at through profit or loss *1		9,204		9,398		—		—
Securities *1		208,385		307,283		190,155		305,121
Loans and other receivables *2		13,452,9503		15,118,422		14,352,720		16,800,536
Financial guarantee contracts *3		72,285		2,452,171		84,912		2,619,642

*¹  Maximum exposure represents the total of investments and equity participation commitments.

*²  Maximum exposure represents the total of loans and loan commitments.

*³  Maximum exposure represents the total of guarantee obligations and guarantee commitments.

The tables above exclude financial instruments whose carrying amounts best represent their maximum exposure to credit risk.

39. Collateral

Financial assets pledged as collateral

JBIC held ¥141,180 million and ¥189,920 million in cash collateral for derivatives transactions as of March 31, 2018 and 2017, respectively, which was included in “Other assets” in the consolidated statements of financial position. The general collateral in respect of bonds payable is described in Note 18 “Bonds Payable.”

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40. Concentration of Credit Risk

The following tables present an analysis of the concentration of credit risk in respect of loans and other receivables by borrowers’ attributes as of March 31, 2018 and 2017:

Loans and other receivables

	(Millions of yen)
	As of March 31, 2018
	Neither past due nor impaired						Past due and impaired *		Total
	Normal		Borrowers needing attention		Subtotal
Sovereign
Asia and Oceania		357,257		—		357,257		49,868		407,126
Europe, the Middle East, and Africa		129,901		—		129,901		13,199		143,100
North America and Latin America		13,895		—		13,895		40,262		54,158
Total sovereign		501,055		—		501,055		103,329		604,384
Non-sovereign
Manufacturing industry		1,434,056		220,103		1,654,159		111,003		1,765,163
Mining industry		1,929,665		967,323		2,896,989		—		2,896,989
Electricity, gas, heat supply, and water industry		2,058,873		127,549		2,186,422		10,928		2,197,350
Transport industry		569,252		87,763		657,015		42,146		699,162
Wholesale and retail industry		639,109		1,518		640,627		26,210		666,838
Finance and insurance industry		3,887,442		12,278		3,899,720		203,952		4,103,673
Other		687,743		13,459		701,203		187		701,391
Total non-sovereign		11,206,142		1,429,997		12,636,139		394,429		13,030,568
Total sovereign and non-sovereign		11,707,197		1,429,997		13,137,195		497,758		13,634,953
Allowance for loan losses										(182,003	)
Total loans and other receivables										13,452,950
Loans and other receivables
	(Millions of yen)
	As of March 31, 2017
	Neither past due nor impaired						Past due and impaired *		Total
	Normal		Borrowers needing attention		Subtotal
Sovereign
Asia and Oceania		301,654		—		301,654		53,336		354,991
Europe, the Middle East, and Africa		124,228		—		124,228		13,534		137,762
North America and Latin America		13,674		10,352		24,026		112,852		136,879
Total sovereign		439,556		10,352		449,909		179,723		629,633
Non-sovereign
Manufacturing industry		1,482,424		235,327		1,717,752		80,670		1,798,423
Mining industry		2,199,156		974,733		3,173,890		63,627		3,237,517
Electricity, gas, heat supply, and water industry		2,180,227		82,765		2,262,993		9,914		2,272,907
Transport industry		400,521		64,363		464,884		44,992		509,877
Wholesale and retail industry		785,809		1,615		787,424		46,607		834,032
Finance and insurance industry		4,006,278		15,113		4,021,392		248,272		4,269,664
Other		871,978		124		872,103		52		872,155
Total non-sovereign		11,926,396		1,374,043		13,300,440		494,137		13,794,577
Total sovereign and non-sovereign		12,365,953		1,384,396		13,750,349		673,861		14,424,211
Allowance for loan losses										(71,490	)
Total loans and other receivables										14,352,720

* JBIC obtains collateral, such as financial assets and real estate, and utilizes guarantees to strengthen loan recovery and minimize the credit risk. The financial effects of collateral and other credit enhancements in respect of these loans and other receivables as of March 31, 2018 and 2017, were ¥63,088 million and ¥84,081 million, respectively. If the value of the collateral exceeds the carrying amount of the loan, the maximum amount of collateral is limited to the carrying amount of the corresponding loan.

There were no loans and other receivables that were past due but not impaired as of March 31, 2018 and 2017.

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The following table presents an analysis of the concentration of credit risk in respect of financial guarantee contracts by the guaranteed parties’ key characteristics as of March 31, 2018 and 2017:

Financial guarantee contracts

	(Millions of yen)
	As of March 31, 2018		As of March 31, 2017
Sovereign
Asia and Oceania		9,954		12,541
Europe, the Middle East, and Africa		23,133		27,715
North America and Latin America		4,362		5,598
Total sovereign		37,450		45,856
Non-sovereign
Manufacturing industry		2,067		3,192
Mining industry		16,890		19,262
Electricity, gas, heat supply, and water industry		8,616		7,896
Transport industry		3,728		4,258
Finance and insurance industry		2,026		2,655
Other		1,505		1,789
Total non-sovereign		34,835		39,056
Total financial guarantee contracts *		72,285		84,912

* JBIC obtains collateral, such as movable property, for credit enhancement purposes in order to minimize the credit risk in relation to the financial guarantee contracts.

41. Exercise of Rights to Obtain Collateral or Other Credit Enhancements

JBIC did not exercise its right to obtain any collateral or other credit enhancements.

42. Market Risk and Liquidity Risk

Market risk is the risk that the value of assets and liabilities (including off-balance-sheet items) will fluctuate and losses will be incurred, or profits derived from assets and liabilities (including off-balance-sheet items) will fluctuate and losses will be incurred, due to changes in various market risk factors, such as interest rates and foreign exchange rates.

The market risk borne by JBIC mainly consists of foreign exchange risk and interest rate risk, and JBIC may suffer losses from these risks due to fluctuations in the markets, such as market turmoil. These risks are hedged, in principle, by interest rate swaps, currency swaps, and forward foreign exchange contracts.

Liquidity risk is the risk that losses will be incurred as a result of difficulties in obtaining the funds necessary due to a maturity mismatch between financing and funding, or unexpected outflow of funds, or being forced to fund at an interest rate significantly higher than that under normal circumstances (funding risk). It is also the risk that losses will be incurred from being unable to conduct market transactions due to market turmoil or being forced to transact at far more unfavorable prices than those under normal circumstances (market liquidity risk).

Long-term and stable funds, such as fiscal loan funds, government-guaranteed bonds and FILP agency bonds, are secured to finance JBIC. Deposits are not accepted. Therefore, JBIC considers liquidity risk to be limited. However, financing costs could increase due to market turmoil and unexpected events.

Overview of market risk and liquidity risk management

i. Market risk management

JBIC manages foreign exchange risk and interest rate risk through its ALM. Market risk management protocols contain detailed stipulations in respect of risk management methods and procedures, and JBIC established an ALM Committee to assess and confirm the execution of ALM, and to discuss future responses to market risk. In addition, JBIC assesses and monitors the interest rate and terms of financial assets and liabilities in detail through a gap analysis and an interest rate sensitivity analysis as well as Value at Risk (“VaR”). The results are reported to the ALM Committee on a regular basis.

The basic policy for managing foreign exchange risk and interest rate risk at JBIC is described below:

a. Foreign exchange risk

Foreign currency-denominated loans conducted in the JBIC Group involve risks related to exchange rate fluctuations. We have a consistent policy of managing this risk by fully hedging this risk exposure through the use of currency swaps and forward foreign exchange contracts. Furthermore, a portion of the foreign exchange risk arising from investments in affiliates denominated in foreign currencies is hedged using forward foreign exchange contracts as hedging instruments.

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b. Interest rate risk

Interest rate risk arises from exposure to market interest rate fluctuations for yen-denominated loan and foreign currency-denominated loan operations and the policy for managing interest rate risk is described below.

(i) Yen-denominated loan operations

Yen-denominated loan operations are managed based on fixed interest rates by matching the maturities of the loans and funds. As a result, JBIC’s exposure to interest rate risk is limited. For any loan operations that are significantly impacted by interest rate fluctuations, JBIC hedges the interest rate risk through hedging instruments, such as swaps.

(ii) Foreign currency-denominated loan operations

For foreign currency-denominated loan operations, interest rate risk is hedged through the application of a consistent policy of using interest rate swaps and managing the funds with floating interest rates for both loans and related funding arrangements.

c. Status of market risk

JBIC only maintains a banking book and does not have financial instruments in a trading book. While in principle JBIC holds derivatives only for hedging purposes, stated previously, market risk is measured in order to assess potential risk exposures. The following represents the market risk exposure (VaR) in the current fiscal year. JBIC measures market risk (VaR) by taking into account the degree of correlation between interest rate risk and foreign exchange risk.

Risk management using VaR

VaR is a market risk measure that assesses the maximum possible fluctuation of gains or losses in fair values that could occur after a certain period of time (“holding period”) based on historical market movements of interest rates or exchange rates, etc., over a specific period in the past (or observation period) within a given probability (confidence interval), that is derived statistically by employing the theory of possibility distribution.

The measurement assumes historical market trends and the theory of probability distribution. However, bearing in mind that future market trends could deviate from these assumptions, JBIC validates the effectiveness of its market risk measurements using the VaR model by back-testing, which cross-checks the measured VaR against the actual gains or losses. In addition, a stress test, which goes beyond the probability distribution of historical market movements, is carried out in order to capture risks from various perspectives.

The following points should generally be noted in measuring VaR:

• VaR will differ depending on the choice of confidence interval, holding period, and observation period;

• VaR indicates the maximum fluctuation of gains or losses in fair values at the time of measurement. In practice, the actual results at a point in the future may differ from the VaR calculation due to changes in the assumptions caused by market movements during the holding period; and

• VaR indicates the maximum value based on specific assumptions. As such, when utilizing VaR as a risk management measure, it is imperative to keep in mind that VaR may underestimate the potential losses.

The table below provides VaR calculated as of March 31, 2018 and March 31, 2017.

	(Billions of yen)
	As of March 31, 2018		As of March 31, 2017
VaR		159.4		152.1

JBIC calculated VaR based on a historical model. The calculation is based on a 99% confidence interval, a one-year holding period and a five-year observations period.

ii. Liquidity risk management

Long-term and stable funds, such as fiscal loan funds, government-guaranteed bonds and FILP agency bonds, are used to finance these operations and deposits are not accepted.

Cash flows are assessed and proper measures, including establishing overdraft facility accounts with multiple private sector financial institutions, are taken to maintain daily cash flows for proper risk management.

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43. Maturity Analysis of Financial Liabilities

The following tables present the amounts of financial liabilities by contractual maturity based on undiscounted contractual cash flows as of March 31, 2018 and 2017.

For financial liabilities, payments related to financial guarantee contracts are made when all the relevant contractual requirements for payment are met. Accordingly, total guarantee amounts do not indicate the settlement amounts. Financial guarantee contracts represent the total of guarantee obligations and guarantee commitments.

For off-balance-sheet items, loan commitments and equity participation commitments are exercised based on the status of the corresponding businesses. Accordingly, total commitment amounts do not indicate the settlement amounts.

	(Millions of yen)
	As of March 31, 2018
	On demand		Not later than one year		Later than one year and not later than three years		Later than three years and not later than five years		Later than five years and not later than seven years		Later than seven years and not later than ten years		Later than ten years		Total
Financial liabilities
Derivative financial instrument liabilities		—		98,310		144,045		176,425		96,783		50,148		24,640		590,353
Borrowings		—		953,509		2,496,105		4,190,024		593,348		634,901		176,940		9,044,830
Bonds payable		—		779,213		1,442,322		966,393		392,171		1,305,313		—		4,885,414
Financial guarantee contracts		2,452,171		—		—		—		—		—		—		2,452,171
Off-balance-sheet items
Loan commitments		1,665,471		—		—		—		—		—		—		1,665,471
Equity participation commitments		142,575		—		—		—		—		—		—		142,575
	(Millions of yen)
	As of March 31, 2017
	On demand		Not later than one year		Later than one year and not later than three years		Later than three years and not later than five years		Later than five years and not later than seven years		Later than seven years and not later than ten years		Later than ten years		Total
Financial liabilities
Derivative financial instrument liabilities		—		242,613		165,114		105,825		210,012		86,073		31,092		840,731
Borrowings		—		1,127,523		5,234,588		2,440,487		788,642		624,331		83,724		10,299,297
Bonds payable		—		431,716		1,290,525		656,627		168,181		1,112,261		—		3,659,312
Financial guarantee contracts		2,619,642		—		—		—		—		—		—		2,619,642
Off-balance-sheet items
Loan commitments		2,447,815		—		—		—		—		—		—		2,447,815
Equity participation commitments		114,965		—		—		—		—		—		—		114,965

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44. Related-Party Disclosures

Shares held by the Government

The total number of outstanding shares of JBIC is required to be held, at all times, by the Japanese government (Article 3 of JBIC Act). Accordingly, all the shares outstanding are wholly owned by the Japanese government (the Ministry of Finance). Transactions between JBIC and the Japanese government or entities controlled by the Japanese government were as follows:

Transactions with the Japanese government, which controls JBIC

		(Millions of yen)
		Transactions and transaction amounts										Balance
		Underwriting of capital increase *1		Receipt of funds *2		Repayment of borrowings		Payment of interest on borrowings		Guarantee of corporate bonds *3		Borrowings		Other liabilities (interest payable)
Ministry of Finance (Minister of Finance)	Year ended March 31, 2018		82,200		4,808,429		6,004,411		115,370		4,202,610		8,370,758		27,232
	Year ended March 31, 2017		142,000		1,673,239		1,194,214		91,175		3,071,586		9,908,705		26,210

*¹  The underwriting of capital increase represents the increase in capital through shareholder allocation by JBIC at an allocation amount of ¥1 per share.

*²  The receipt of funds represents borrowings from the fiscal investment and loan program (FILP) special account and foreign exchange funds special account. FILP interest rates are applied to the borrowings from the FILP, while the interest rates in accordance with the respective agreements related to the foreign exchange funds special account are applied to the borrowings from the foreign exchange funds special account.

*³  No guarantee fees have been paid in respect of the guarantee of bonds.

Transactions with entities controlled by the Japanese government

	(Millions of yen)
	Transactions	As of March 31, 2018		As of March 31, 2017
Japan International Cooperation Agency (JICA)	Joint obligations		100,000 *1,*4		200,000 *1,*4
Japan Finance Corporation (JFC)	Joint obligations		152,800 *2,*4		160,237 *2,*4
	Joint obligations		140,000 *3,*4		210,000 *3,*4

*¹  JBIC assumed the obligations of the JBIC bonds in accordance with Article 12 (1) of the Supplementary Provisions of the JBIC Act, and JICA is jointly responsible for the obligations of these bonds in accordance with Article 4 (1) of Supplementary Provisions of the JICA Act. According to Article 4 (2) hereof, all of JICA assets are pledged as general collateral for these joint obligations.

*²  JBIC assumed the obligations of the JFC bonds in accordance with Article 12 (1) of Supplementary Provisions of the JBIC Act, and JFC is jointly responsible for the obligations of these bonds in accordance with Article 46-2 (1) of Supplementary Provisions of the JFC Act. According to Article 46-2 (2) hereof, all of JFC’s assets are pledged as general collateral for these joint obligations.

*³  JBIC is jointly responsible for the obligations of the JFC bonds in accordance with Article 17 (1) (ii) of Supplementary Provisions of the JBIC Act. In accordance with Article 17 (2) hereof, all of JBIC’s assets are pledged as general collateral for these joint obligations. Accordingly, the creditors of the bonds are entitled to JBIC assets prior to other creditors. The statutory lien is secondary to the general statutory lien under the Civil Code of Japan.

*⁴  No transactions are recognized in the consolidated income statement for these joint obligations.

Remuneration of the JBIC Group’s key management personnel

	(Millions of yen)
	March 31, 2018		March 31, 2017
Short-term employee benefits		123		94
Post-employment benefits		7		7
Total		130		101

The above represents the remuneration expenses of the members of board of directors of JBIC recognized in the consolidated income statement.

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45. Current and Noncurrent Distinction

Carrying amounts expected to be recovered or settled in no more than and more than 12 months after March 31, 2018 and 2017 were as follows:

	(Millions of yen)
	As of March 31, 2018
	No more than 12 months *1		More than 12 months *2		Total
Assets
Cash and due from banks		1,751,287		—		1,751,287
Derivative financial instrument assets		1,981		147,524		149,506
Financial assets designated as fair value through profit or loss		—		9,204		9,204
Securities		13,771		194,614		208,385
Loans and other receivables		1,531,299		11,921,650		13,452,950
Equity method investments		—		137,078		137,078
Property and equipment		—		28,401		28,401
Other assets		251,573		3,472		255,046
Liabilities
Derivative financial instrument liabilities		47,668		239,761		287,429
Borrowings		809,379		7,561,378		8,370,758
Bonds payable		667,957		3,720,797		4,388,754
Financial guarantee contracts		72,285		—		72,285
Other liabilities		220,943		7,037		227,980

	(Millions of yen)
	As of March 31, 2017
	No more than 12 months *1		More than 12 months *2		Total
Assets
Cash and due from banks		1,526,208		—		1,526,208
Derivative financial instrument assets		8,855		158,421		167,277
Securities		13,955		176,199		190,155
Loans and other receivables		1,538,304		12,814,416		14,352,720
Equity method investments		—		114,204		114,204
Property and equipment		—		27,613		27,613
Other assets		191,842		2,919		194,762
Liabilities
Derivative financial instrument liabilities		167,829		331,098		498,928
Borrowings		1,015,293		8,893,412		9,908,705
Bonds payable		366,870		2,932,628		3,299,498
Financial guarantee contracts		84,912		—		84,912
Other liabilities		91,499		6,987		98,486

*¹  Includes demand deposits.

*²  Includes amounts with no fixed maturity dates.

46. Events after the Reporting Period

There were no reportable events after the reporting period.

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