Obayashi : Consolidated Financial Statements (Year Ended March 31, 2023) with Independent Auditor's Report

OBAYASHI CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

Year Ended March 31, 2023

Independent Auditor's Report

The Board of Directors

OBAYASHI CORPORATION

Opinion

We have audited the accompanying consolidated financial statements of OBAYASHI CORPORATION and its consolidated subsidiaries (the Group), which comprise the consolidated balance sheet as at March 31, 2023, and the consolidated statements of income, comprehensive income, changes in net assets, and cash flows for the year then ended, and notes to the consolidated financial statements.

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, 2023, and its consolidated financial performance and its consolidated cash flows 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 Consolidated Financial Statements section of our report. We are independent of the Group in accordance 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. 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 of the current period. These matters were addressed in the context of the audit of the 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.

Estimation of total construction revenue and total construction costs in applying the method to recognize revenue by satisfying performance obligations over a certain period of time

	Description of Key Audit Matter	Auditor's Response
As described in "(1) Application of the method	We mainly performed the following procedures
to recognize revenue by satisfying performance	to evaluate the estimates of total construction
obligations over a certain period of time" under "4.	revenue and total construction costs in applying the
Significant Accounting Estimates" in the notes to	method to recognize revenue by satisfying
the	consolidated	financial	statements,	performance obligations over a certain period of
OBAYASHI CORPORATION (the	Company)	time.(1) Evaluation of internal control
and its consolidated subsidiaries (the Group) apply	We evaluated the design and operation of the
the	method to recognize revenue by satisfying	following internal controls relating to estimates of

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performance obligations over a certain period of	total construction revenue and total construction
time for construction contracts based on estimates	costs.
of total construction revenue, total construction	・ We evaluated controls to ensure reliability by
costs, and progress towards satisfying performance	requiring that operating budgets on which
obligations, with the exception of construction	estimates of total construction costs are based
contracts having very short construction periods.	are prepared by persons in charge of
The method of estimating the degree of progress in	construction work who have specialized
satisfying performance obligations is calculated as	knowledge, and that the necessary approval for
the ratio of the cost incurred to the estimated total	such operating budgets is obtained from
cost of construction (input method). If it is likely	construction and other such departments that
that total construction costs associated with	perform functions such as construction
construction contracts will exceed total	management, progress management, and
construction revenue and if the amount of the	logistics support.
excess can be reasonably estimated, then the	・ We evaluated controls to confirm that each of
amount resulting from deducting the profit or loss	the elements of total construction costs is
already recorded for such construction contracts	accumulated and calculated in detail based on
from the expected amount of the excess of costs	objective prices such as internally-approved
over revenue ("Loss on construction contracts") is	standard unit prices and third party quotations.
accounted for as loss in the period in which Loss	・ We evaluated controls for revising estimates of
on construction contracts is expected, and a	total construction costs in a timely manner in
provision for Loss on construction contracts is	accordance with factors such as the status of
recorded. The Company recognized revenues from	construction and the amount of costs actually
construction contracts using the method to	incurred, or changes in specifications
recognize revenue by satisfying performance	instructed by customers, and controls to
obligations over a certain period of time of	confirm that revisions are made in a timely and
1,242,167 million yen, accounting for 67.2% of	appropriate manner.
consolidated revenues from construction contracts	・ We evaluated controls to ensure reliability by
of 1,847,688 million yen for the fiscal year ended	requiring that estimates of total construction
March 31, 2023. The provision for Loss on	revenue are calculated by accumulating
construction contracts was 43,205 million yen for	information from materials such as
the fiscal year ended March 31, 2023 (53,146	construction instructions and quotations, and
million yen for the fiscal year ended March 31,	that the necessary approval for such
2022).							calculations is obtained.
In applying the method to recognize revenue by	・ We evaluated controls for revising estimates of
satisfying performance obligations over a certain	total construction revenue in a timely manner
period	of	time, revenues		from	construction
	in accordance with factors such as the status of
contracts are determined by	multiplying total
discussions with ordering parties, and controls
construction	revenue by		progress	towards
	to confirm that revisions are made in a timely
satisfaction of performance obligations, which is
and appropriate manner.
based on total construction costs and corresponds
to costs actually incurred up until the end of the	(2) Evaluation of estimates of total construction
fiscal	year.	Accordingly,	it	is	necessary to	revenue
reasonably estimate total construction	revenue,
We identified construction contracts in which
total construction costs, and progress towards
there was either material or qualitative uncertainty
satisfaction of performance obligations as of the	over the estimate of total construction revenue in
end of the fiscal year. In addition to the	light of factors such as construction contract
construction contracts undertaken by the Group	amount, profit (loss) on construction, construction
being individual in nature as they involve	details, and the status of construction, and
specifications and construction periods that vary	performed the following procedures. We also
by project, many such contracts span long	identified construction contracts subject to
construction periods, making it likely that total	consideration that meet certain conditions set by us
construction revenue and total construction costs	(including construction profit margin levels and
will change during the course of construction due	fluctuations). In addition, to complement the
to additions	and changes to	construction details	identification of the aforementioned construction

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instructed by ordering parties, and changes to	contracts, we also used Project Progress Anomaly
construction details caused by certain facts coming	Detector (the tool that detects unusual progress in
to light and conditions at construction sites	construction contracts in which the method to
changing after the start of construction.	recognize revenue by satisfying performance
(Total construction revenue)	obligations over a certain period of time is applied
Although total construction revenue, which	based on forecasts of progress towards completion
serves as a basis for revenue recognition, is based	of construction using machine learning, as well as
on construction contract amounts, construction	makes forecasts of construction contracts in which
details and contracts tend to be modified while	total construction costs exceed total construction
construction	is still in progress due to new	revenue). (The same applies to (3) below).
agreements	between counterparties, making	・ We compared the construction contract
estimates of additional contract amounts arising	amounts, which are incorporated into
from changes in construction details uncertain	estimates of total construction revenue, to
until a final agreement is reached with the ordering	construction contracts.
party.		・ Of additional construction contract amounts
(Total construction costs)	that are incorporated into estimates of total
Although total construction costs are based on	construction revenue, we compared the portion
operating budgets for each construction contract	in existing contracts in effect to construction
and estimated in line with revisions in operating	contracts, and compared the portion in
budgets resulting from changes in construction	contracts not in effect to basis materials such
details and fluctuations in building material and	as construction instructions and quotations
labor prices, total construction costs are also based	submitted to ordering parties after making
on certain assumptions or the judgment of persons	inquiries of persons such as on-site
directly or indirectly responsible for cost	construction managers regarding the details
management or progress management over	and basis for such amounts and inspecting
construction contracts since there is no uniform	minutes of discussions with ordering parties.
rule for making determinations applicable to all
construction contracts for estimates of work	(3) Evaluation of estimates of total construction
details, working hours, and building material and	costs
labor costs necessary to complete construction or	We identified construction contracts in which
for the feasibility of cost reduction activities, and	there was either material or qualitative uncertainty
since many such contracts span long construction	over the estimate of total construction costs in light
periods.		of factors such as construction contract amount,
During the fiscal year ended March 31, 2023,	profit (loss) on construction, construction details,
raw materials and energy prices remained high due	and the status of construction, and performed the
to the impact of global supply chain disruptions	following procedures.
caused by the invasion of Ukraine by Russia and	・ We compared estimates of total construction
yen depreciation, as well as construction prices	costs to operating budgets, which serve as the
rose significantly. As a result, it became difficult	basis for calculating such estimates, and
in the domestic building construction segment to	considered whether the details of estimated
take measures to absorb all of these effects at the	costs were consistent with construction
purchasing stage and in negotiations with ordering	deliverables, whether estimated costs were
parties. Consequently, total construction costs and	calculated by aggregating amounts by type of
total construction revenue were revised during the	construction, and whether operating budgets
fiscal year, resulting in many construction projects	contained significant cost reduction initiatives.
in which profit (loss) on construction levels were	・ We compared the most recent estimates of
lower than initially expected.	total construction costs for each quarter with
Based on the above, we have determined that	the corresponding estimates of total
estimates of total construction revenue and total	construction costs for the preceding quarter
construction costs as it relates to application of the	and evaluated whether the details of material
method to recognize revenue by satisfying	quarter-to-quarter changes were reflected in
performance obligations over a certain period of	such estimates in a timely manner by making
time are of particular significance for the fiscal	inquiries of on-site construction managers
year ended March 31, 2023 and, accordingly, that	regarding these changes and reconciling these

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this is a key audit matter.	changes to revised basis materials prepared by
	on-site construction personnel.
	・ We inspected operating budgets and compared
	the estimated costs for each type of work to
	basis materials, such as quotations, from which
	costs are accumulated to serve as the basis for
	such estimated costs.	Additionally, we
	compared 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. In order to evaluate the feasibility of
	the significant cost reduction initiatives
	included in operating budgets, we considered
	the consistency between the cost reduction
	initiatives with construction progress by
	holding discussions with on-site construction
	managers regarding scenarios in which the
	initiatives could be implemented.
	・ 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.

Assessment of indicators of impairment of investment and rental properties

Description of Key Audit Matter	Auditor's Response
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
Accounting Estimates" in the notes to the	impairment of investment and rental properties.
consolidated financial statements, the Group	(1) Evaluation of internal control
recorded an impairment loss of 29 million yen on	We evaluated the design and operating
investment and rental properties of 475,971	effectiveness of internal controls relating to the
million yen for the fiscal year ended March 31,	recognition of impairment loss on noncurrent
2023 due to decreased profitability or property	assets, including investment and rental properties.
prices resulting from changes in the business
environment. The Group's investment and rental	(2) Evaluation of determinations of whether there
properties are used for various purposes, such as	are indicators of impairment
office buildings and logistics facilities, and are	・ We obtained materials prepared by the Group
geographically diverse since they are also located	for considering whether assets are impaired
overseas, such as in the UK and Thailand.	and evaluated the assessment of indicators of
In assessing indicators of impairment of	impairment for properties that we selected
investment and rental properties, estimates of net	based on materiality by, for example, agreeing
operating income and the capitalization rate for	profit (loss) and carrying value by property to
each individual investment and rental property that	the Group's accounting books.
are used to determine market value are subject to	・ We evaluated estimates of net operating
uncertainty since they are greatly affected by	income, which is used to determine fair value,
factors such as the economic environment, changes	for properties that we selected based on
in interest rates, and competition in the real estate	materiality by comparing estimates of net
market.	operating income for each property with actual

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