| Financial Instruments | 24. Financial Instruments (1) Capital Managemen t Sawai sets a basic policy for capital management to maintain the optimum capital composition, which improves capital efficiency securing financial soundness and flexibility to continue corporate value improvement and realize return improvement to shareholders. Sawai conducts monitoring of financial indices to maintain the optimum capital composition. Sawai continuously monitors its credit rating for soundness and flexibility of finance and return on the interest attributable to owner of the Company (ROE) for its capital efficiency. There are no material capital regulations applied to Sawai. (2) Risk Management Policy Sawai is exposed to various financial risks (credit risk, market risk and liquidity risk) in performing business activities. Therefore, based on internal rules, Sawai monitors financial risks on a regular basis and carries out measures for avoiding or reducing risks as necessary. Sawai does not conduct any derivative transactions. (3) Credit Risk 1 Overview Credit risk means the risk of financial losses incurred by Sawai if customers or counterparties of financial instrument transactions cannot perform obligations under contracts, which mainly arises from the receivables and contract assets of Sawai from customers. (i) Credit risk management The credit risk in Sawai arises principally from receivables from customers, which resulted in Sawai mainly focusing on the credit risk management for its trade receivables. Sawai considers that its cash and cash equivalents have low credit risk based on the external credit ratings of banks that hold the cash and cash equivalents. Sawai has established a credit policy under which each new customer is analyzed individually for creditworthiness before Sawai’s standard payment and delivery terms and conditions are offered. Sawai’s review includes financial statements, industry information and in some cases bank references. Sale limits are established for each customer and reviewed annually. Any increase from those limits requires approval of the person in charge, in accordance with Sawai’s internal policy. In order to limit its exposure to credit risk from trade receivables, Sawai receives cash from small sized customers as guarantee deposits to secure the payment from these customers. (ii) Concentration of credit risk In the Japan Business segment, Sawai sells products mainly through a small number of wholesalers. Total revenue from the top four companies account for approximately 55% of revenue in the Japan Business. Trade receivables with the top four companies were JPY 22,566 million and JPY 31,832 million as of March 31, 2020 and 2021, respectively. 2 Credit Exposure The maximum exposure to credit risk of financial assets equals to the carrying amount of the financial assets which is net of allowances for ECLs, while there was no material impairment loss in the previous years. 3 Changes in Loss Allowance Loss allowance for the years ended March 31, 2020 and 2021 were as follows: Year ended March 31, 2020 Yen in millions Loss allowance measured Loss allowance measured 12-month expected credit Total Balance at the beginning of the year 55 — 55 Increased amount during the year 3 — 3 Decreased amount during the year (utilization) (22 ) — (22 ) Decreased amount during the year (reversal) (16 ) — (16 ) Other (Note) (1 ) — (1 ) Balance at the end of the year 19 — 19 (Note) Other mainly includes changes from the effect of foreign exchanges. Year ended March 31, 2021 Yen in millions Loss allowance measured Loss allowance measured 12-month expected credit Total Balance at the beginning of the year 19 — 19 Increased amount during the year 6 — 6 Decreased amount during the year (utilization) — — — Decreased amount during the year (reversal) (1 ) — (1 ) Other (Note) (0 ) — (0 ) Balance at the end of the year 24 — 24 (Note) Other mainly includes changes from the effect of foreign exchanges. 4 Exposure to Credit Risk for Financial Assets The following table provides aging analysis of the exposure to credit risk of financial assets at the end of reporting period. The cash and cash equivalents are not included in the table below as the impairment allowance is not material for the cash and cash equivalents: As of March 31, 2020 Yen in millions Trade receivables and Other receivables for to 12-month Total Not past due 57,848 802 58,650 Within 30 days 2 51 53 Over 30 days within 60 days 1 — 1 Over 60 days within 90 days — — — Over 90 days within 1year — — — Over 1 year — — — Total 57,851 853 58,704 As of March 31, 2021 Yen in millions Trade receivables and Other receivables for 12-month Total Not past due 67,805 2,322 70,127 Within 30 days — 1 1 Over 30 days within 60 days — — — Over 60 days within 90 days 3 — 3 Over 90 days within 1year — — — Over 1 year — — — Total 67,808 2,323 70,131 5 Details of Security and Other Credit Supplementation Sawai holds guarantee deposits as a security for some trade receivables. Balance of guarantee deposits recorded in other financial liabilities at the end of reporting period is as follows: Yen (in millions) March 31, 2020 2021 Guarantee deposits 2,590 2,635 (4) Liquidity Risk 1 Overview Liquidity risk is the risk that Sawai will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Sawai’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to Sawai’s reputation. 2 Maturity Analysis Balance by maturity date of financial liabilities of Sawai is as follows (see Note 16 for detail): As of March 31, 2020 Yen in millions Carrying Contractual Within Over Over Over Over Over Bonds 19,975 20,149 10,080 59 10,010 — — — Borrowings 55,048 55,316 4,489 3,849 3,131 3,047 3,214 37,586 Refund liabilities 7,989 7,989 7,989 — — — — — Guarantee deposits 2,590 2,590 2,590 — — — — — Liabilities associated with deferred fixed payments for separately acquired intangible assets 3,189 3,265 762 2,503 — — — — Total 88,791 89,309 25,910 6,411 13,141 3,047 3,214 37,586 Refund liabilities includes ¥1,748 million of liabilities for right of return and ¥6,241 million of liabilities for rebates as of March 31, 2020. For lease liabilities, please refer to Note 19. As of March 31, 2021 Yen in millions Carrying Contractual Within Over Over Over Over Over Bonds 9,991 10,069 59 10,010 — — — — Borrowings 60,584 62,311 4,110 3,379 3,279 3,439 13,330 34,774 Refund liabilities 7,541 7,541 7,541 — — — — — Guarantee deposits 2,635 2,635 2,635 — — — — — Liabilities associated with deferred fixed payments for separately acquired intangible assets 2,528 2,546 2,546 — — — — — Total 83,279 85,102 16,891 13,389 3,279 3,439 13,330 34,774 Refund liabilities includes 1,769 million of liabilities for right of return and 5,772 million of liabilities for rebates as of March 31, 2021. For lease liabilities, please refer to Note 19. 3 Committed Credit Line Sawai has committed credit lines with five financial institutions in order to efficiently procure working capital as follows: Yen in millions March 31, 2020 2021 Total committed credit lines 16,000 16,000 Usage during the year — — Unused credit lines 16,000 16,000 (5) Market Risk 1 Overview Market risk is the risk related to market price changes, including foreign exchange rate, interest rate and stock price, which impacts Sawai’s income or the value of financial instruments held by Sawai. The purpose of market risk management is to maximize returns while managing and controlling exposure to market risk within a tolerable range. 2 Exchange Risk Sawai is mainly exposed to transactional foreign currency risk to the extent that there is a mismatch between the currencies in which purchases are dominated. The currency in which these transactions are primarily denominated in U.S. dollars. Sawai hedges the estimated foreign currency exposure in its purchase transaction in U.S. dollars by investing a foreign currency deposit in U.S. dollars under its risk management policy. (i) Exposure to exchange risk Summary of quantitative data of Sawai’s exchange risk exposure, which were submitted to Sawai’s management based on the risk management policy, is as follows: U.S. Dollars (in thousands) March 31, 2020 2021 Financial assets 846 846 Financial liabilities (166 ) (1,309 ) Net amount of exposure in the consolidated statement of financial position 680 (464 ) Net amount of exposure 680 (464 ) (ii) Exchange sensitivity analysis Sawai is exposed mainly to U.S. dollars exchange risk. The strengthening (weakening) of Yen against the U.S. dollars by 10% would have affected the measurement of financial instruments denominated in a foreign currency and affected equity and profit or loss by the amounts shown below (net of tax). This analysis assumes that all other variables, in particular interest rates, remain constant. In this regard, they do not include the impact on translation into Yen for assets, liabilities, revenue and expenses of foreign operations. Year ended March 31, 2020 Yen in millions Profit or loss Equity, net of tax Strengthening Weakening Strengthening Weakening (5) 5 (5) 5 Year ended March 31, 2021 Yen in millions Profit or loss Equity, net of tax Strengthening Weakening Strengthening Weakening 4 (4) 4 (4) 3 Interest Rate Risk Sawai conducts financing by interest-bearing liabilities. Variable interest rate applies to some interest-bearing liabilities, which are exposed to interest rate fluctuation risk. If the interest rate increases by 1% on the financial instruments issued by Sawai as of the reporting date to which the variable interest rate applies, an impact on net profit or (loss), gross of tax, is JPY (414) million and JPY(376) million in the year ended March 31, 2020 and 2021, respectively. See Note 16 for borrowings with variable interest rate. Exposure to interest fluctuation risk is as follows: Yen in millions March 31, 2020 2021 Borrowings to which variable interest rate applies 41,416 37,584 4 Stock Price Risk (i) Exposure to stock price risk Sawai holds equity securities in certain companies and is exposed to the market price risks. These equity instruments were acquired for the strategic purposes, taking into consideration of various relationships and factors with customers or other business partners. Sawai periodically confirms the validity and reasonableness of holding the instruments, both from strategic and financial perspective. (ii) Stock price sensitivity analysis The following summarizes the impact (net of tax) to the equity of Sawai at the reporting date if equity instruments would have decreased by 10%: Yen in millions March 31, 2020 2021 10% change in stock price (295 ) (318 ) Equity securities whose fair value classified as Level 3 are not included in the above stock price sensitivity analysis, because the effect is not material. (6) Accounting classifications and fair values 1 Calculation Method of Fair Value (i) Equity securities Fair value of equity securities is measured by market price. For investment in private company, fair value is measured using appropriate valuation method based on investees’ financial condition and projections. (ii) Bonds and Fair value thereof is measured by the method calculating by discounting at the interest rate expected in the case of similar new financing for the total of principal and interest and with the same terms. 2 Fair value Hierarchy Level Each level is defined as follows: Level 1: Market price (unadjusted) of the same assets and liabilities in active markets Level 2: Input directly (that is, by price) or indirectly (that is, due to price) observable for assets and liabilities other than market price included in Level 1. Level 3: Input about assets and liabilities not based on the observable market data (unobservable input) The FV level of the financial instrument is the lowest level of inputs used for the measurement that is significant for the entire measurement. Transfer between fair value hierarchy levels is recognized on the day of change of events or situations that caused transfer. 3 Comparison between Fair Value and Carrying Amount Yen in millions March 31, 2020 2021 Carrying Fair Carrying Fair Financial liabilities measured at amortized cost Bonds 19,975 20,119 9,991 10,059 Borrowings 55,048 54,252 60,584 60,883 Total 75,023 74,371 70,575 70,942 The carrying amount of financial assets and financial liabilities other than the above is a reasonable approximation of fair value. The Level of fair value of bonds is classified as Level 2 and level of fair value of borrowings is classified as Level 3. 4 Measurement of Fair Value Recognized in the Consolidated Statement of Financial Position As of March 31, 2020 Yen in millions Level 1 Level 2 Level 3 Total Equity instruments measured at FVOCI Equity securities 4,246 — 1,358 5,604 There was no financial instrument transferred between levels of the fair value hierarchy. As of March 31, 2021 Yen in millions Level 1 Level 2 Level 3 Total Debt instruments measured at FVTPL Redeemable preferred shares — — 210 210 Equity instruments measured at FVOCI Equity securities 4,581 — 1,289 5,870 Total 4,581 — 1,499 6,080 There was no financial instrument transferred between levels of the fair value hierarchy. The following table illustrates a reconciliation from the beginning to the ending balance for Level 3 financial assets, which solely consists of equity investment in private companies: Yen in millions March 31, 2020 2021 Balance at the beginning of the year 1,301 1,358 Gain recognized as changes in fair value of financial instruments measured at FVOCI 68 (72 ) Purchases — 210 Other (11 ) 3 Balance at the end of the year 1,358 1,499 Reasonableness of the valuations is reviewed by the accounting department and approved by the department manager. (7) Offsetting Financial Assets and Financial Liabilities Financial assets and liabilities are offset and the net amount is reported in the consolidated statements of financial position where Sawai currently has a legally enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. Sawai gives chargeback programs to wholesalers in the United States. Under the term of the agreement, the amounts payable by S a The following table presents the recognized financial instruments that are offset as of March 31, 2020 and 2021: Yen in millions Effect of offsetting on the statement Gross Gross Net As of March 31, 2020 Financial assets: Trade and other receivables 64,296 (5,611 ) 58,685 Financial Liabilities: Refund liabilities 13,600 (5,611 ) 7,989 As of March 31, 2021 Financial assets: Trade and other receivables 75,486 (5,379 ) 70,107 Financial Liabilities: Refund liabilities 12,920 (5,379 ) 7,541 |
