Non-consolidated Financial Statements (Year Ended March 31, 2021) with Independent Auditor's Report (PDF: 154.3 KB)

OBAYASHI CORPORATION

NON-CONSOLIDATED FINANCIAL STATEMENTS

Year Ended March 31, 2021

Independent Auditor's Report

The Board of Directors

OBAYASHI CORPORATION

Opinion

We have audited the accompanying non-consolidated financial statements of OBAYASHI CORPORATION (the Company), which comprise the non-consolidated balance sheet as at March 31, 2021, and the non-consolidated statements of income, and changes in net assets for the year then ended, and notes to the non-consolidated financial statements.

In our opinion, the accompanying non-consolidated financial statements present fairly, in all material respects, the non-consolidated financial position of OBAYASHI CORPORATION as at March 31, 2021, and its non-consolidated financial performance for the year then ended in accordance with accounting principles generally accepted in Japan.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in Japan. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Non-Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the non-consolidated financial statements in Japan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. 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 non-consolidated financial statements of the current period. These matters were addressed in the context of the audit of the non-consolidated financial statements as a whole, and in forming the auditor's opinion thereon, and we do not provide a separate opinion on these matters.

Estimates of total construction revenue and total construction costs when applying the percentage-of- completion method

Key audit matters	Auditor's response
As described in "(1) Application of the	We mainly performed the following procedures to
percentage-of-completion method" under "4.	evaluate the estimates of total construction revenue
Significant Accounting Estimates," the Company	and total construction costs when applying the
applies the percentage-of-completion method for	percentage-of-completion method.
the portion of work completed up to the end of	(1) Evaluation of internal control
the fiscal year ended March 31, 2021 for
construction contracts for which completion is	We evaluated the design and operating
	effectiveness of the following internal controls

deemed to be certain (the cost-to-cost method is used to estimate progress toward completion of construction). If it is likely that total construction costs associated with construction contracts will exceed total construction revenue and if the amount of the excess can be reasonably estimated, then the amount resulting from deducting the profit or loss already recorded for such construction contracts from the expected amount of the excess of costs over revenue ("Loss on construction contracts") is accounted for as loss in the period in which Loss on construction contracts is expected, and a provision for Loss on construction contracts is recorded.

Net sales accounted for by the percentage-of- completion method made up 91.9%, or 1,130,519 million yen, of total net sales for the fiscal year ended March 31, 2021. The provision for Loss on construction contracts was 3,069 million yen for the fiscal year ended March 31, 2021.

In applying the percentage-of-completion method, revenues from construction contracts are determined by multiplying total construction revenue by progress toward completion of construction, which is based on total construction costs and corresponds to costs actually incurred up until the end of the fiscal year. Accordingly, it is necessary to reasonably estimate total construction revenue, total construction costs, and progress toward completion of construction as of the end of the fiscal year.

In addition to the construction contracts undertaken by the Company being individual in nature as they involve specifications and construction periods that vary by project, many such contracts span long construction periods, making it likely that construction details and the like will change during the course of construction due to certain facts coming to light and conditions at construction sites changing after the start of construction.

Although total construction revenue, which serves as a basis for revenue recognition under the percentage-of-completion method, is based on construction contract amounts, construction details and contracts tend to be modified while

relating to estimates of total construction revenue and total construction costs.

• We evaluated controls to ensure reliability by requiring that operating budgets on which estimates of total construction costs are based are prepared by persons in charge of construction work who have specialized knowledge, and that the necessary approval for such operating budgets is obtained from construction and other such departments.
• We evaluated controls to confirm that each of the elements of total construction costs are accumulated and calculated in detail based on objective prices such as internally-approved standard unit prices and third party quotations.
• We evaluated a system for revising estimates of total construction costs in a timely manner in accordance with factors such as the status of construction and the amounts of costs actually incurred, or changes in specifications instructed by customers, and controls to confirm that revisions are made in a timely and appropriate manner.
• We evaluated controls to ensure reliability by requiring that estimates of total construction revenue are calculated by accumulating information from materials such as construction instructions and quotations, and that the necessary approval for such calculations is obtained.
• We evaluated a system for revising estimates of total construction revenue in a timely manner in accordance with factors such as the status of discussions with ordering parties, and controls to confirm that revisions are made in a timely and appropriate manner.

1. Evaluation of estimates of total construction revenue

We identified construction contracts in which there is either material or qualitative uncertainty over the estimate of total construction revenue in light of factors such as construction contract amount, profit (loss) on construction, construction details, and the status of construction, and performed the following procedures.

• We compared the construction contract amounts, which are incorporated into estimates of total construction revenue, to construction contracts.
• Of additional construction contract amounts

construction is still in progress due to new agreements between counterparties, making estimates of additional contract amounts arising from changes in construction details uncertain until a final agreement is reached with the ordering party.

In addition, although total construction costs, which serve as a basis for revenue recognition under the percentage-of-completion method, are based on operating budgets for each construction contract and estimated in line with revisions in operating budgets resulting from changes in construction details and fluctuations in building material and labor prices, total construction costs are also based on certain assumptions or the judgment of persons directly or indirectly responsible for cost management or progress management over construction contracts since there is no uniform rule for making determinations applicable to all construction contracts for estimates of work details, working hours, and building material and labor costs necessary to complete construction or for the feasibility of cost reduction activities, and since many such contracts span long construction periods.

Further, considering that it is necessary to take into consideration factors such as the political situation and economic conditions in countries where the Company does business as well as fluctuations in exchange rates since overseas construction projects, mainly in Asia and North America, in particular tend to be large in scale and span long periods of time, estimates of total construction costs for overseas construction projects involve an even greater degree of uncertainty, and estimates of total construction costs are becoming relatively more uncertain when taking into account the impact of work being halted on domestic and overseas construction projects as a result of the spread of the COVID-19 pandemic in the fiscal year ended March 31, 2021.

Based on the above, we have determined that estimates of total construction costs and total construction revenue as it relates to application of the percentage-of-completion method are key

that are incorporated into estimates of total construction revenue, we compared the portion in existing contracts in effect to construction contracts, and compared the portion in contracts not in effect to basis materials such as construction instructions and quotations submitted to ordering parties after making inquiries of persons such as on-site construction managers regarding the details and basis for such amounts and inspecting minutes of discussions with ordering parties.

• We evaluated the estimates of total construction revenue and the cutoff for the fiscal year ended March 31, 2021 by analyzing quarter-to-quarter changes in such estimates.

1. Evaluation of estimates of total construction costs

We identified construction contracts in which there is either material or qualitative uncertainty over the estimate of total construction costs in light of factors such as construction contract amount, profit (loss) on construction, construction details, and the status of construction, and performed the following procedures.

• We compared estimates of total construction costs to operating budgets, which serve as the basis for calculating such estimates, and considered whether the details of estimated costs are consistent with construction deliverables, whether estimated costs were calculated by grouping such details by type of construction, and whether operating budgets are free from material reconciling items included in response to future uncertainty.
• We compared the most recent estimates of total construction costs for each quarter with the corresponding estimates of total construction costs for the preceding quarter, and evaluated whether the details of material quarter-to- quarter changes were reflected in such estimates in a timely manner by making inquiries of on-site construction managers regarding these changes and reconciling these changes to revised basis materials prepared by on-site construction personnel.
• After inquiring about construction progress from construction departments and on-site construction managers, we made inquiries on a quarterly basis about determinations of whether to revise total construction costs and, for

Auditor's response

audit matters.		construction projects for which the Company
		determined that revision is necessary, we
		evaluated the timeliness and appropriateness of
		these determinations and revised operating
		budgets.
	・	We obtained operating budgets, and compared
		the estimated costs for each type of work to
		materials, such as quotations, from which costs
		are accumulated to serve as the basis for such
		estimated costs. Additionally, we confirmed the
		costs actually incurred relative to the estimated
		costs for each type of work, and considered if
		actual costs have not exceeded estimated costs
		while also considering consistency with
		construction progress.
	・	We performed on-site observations for a portion
		of construction projects to consider if the status
		of construction is consistent with construction
		progress that we heard about in advance from
		construction	departments	or	on-site
		construction managers, as well as with details
		of estimates of total construction costs and
		progress toward completion of construction.
	・	We evaluated the accuracy of estimates of
		ongoing operating budgets and the process for
		estimating total construction costs by
		comparing the most recent estimates of total
		construction costs for each quarter	to the
		corresponding estimates of total construction
		costs for the preceding quarter and considering
		the reasons for quarter-to-quarter changes in
		estimates on a quarterly basis.
	(4)	Evaluation of the amount recorded for
		provision of Loss on construction contracts
	In addition to the procedures noted in (1) through
	(3) above, we obtained a schedule of provision for
	Loss on construction contracts prepared by the
	Company, recalculated the amount to be recorded for
	provision for Loss on construction contracts, and
	found that the amount was the same as that recorded
	by the Company.

Assessment of indicators of impairment of investment and rental properties

Key audit matters

As described in "(2) Impairment of investment	We mainly performed the following procedures
and rental properties" under "4. Significant	to evaluate the assessment of indicators of