Statements of cash flows— The Company defines cash equivalents as highly liquid investments with original maturities of three months or less. 

Trading assets and trading liabilities— Trading assets and liabilities including securities and financial derivatives for trading purposes held by securities companies are stated on a trade date basis at fair value in the consolidated balance sheets. Gains and losses, including unreal- ized gains and losses, related to transactions for trading purposes are reported as “Net gain on trading” in the accompanying consolidated statements of income. Fair value is determined based on market prices, quoted prices, internal pricing models (utilizing indicators of general market conditions or other economic measurements), or  management’s estimates of amounts to be realized on settlement, assuming current market conditions and an orderly disposition over a reasonable period of time. Securities owned for non-trading purposes, shown in the accompanying consolidated balance sheets as “Cash and cash equivalents,” “Securities,” “Private equity and other invest- ments” and “Investment securities,” are discussed below. 

Securities other than trading assets and trading liabilities— Daiwa examines the intent of holding investments and classifies those invest- ments as (a) securities intended to be held for trading purposes by non-securities companies which are carried at fair value with recog- nized unrealized gain or loss included in the consolidated statements of income, (b) debt securities intended to be held to maturity (“Held- to-maturity debt securities”) which are carried at amortized cost, and (c) all other securities not classified in any of the above categories (“Available-for-sale securities”). Marketable available-for-sale securities are stated at their fair values based on quoted market closing prices with unrealized gain or loss reported in a separate component within the net assets on a net-of-tax basis, or other non-marketable invest- ments (non-marketable “Available-for-sale securities”) are carried at cost. Investment business partnerships which are regarded as equiva- lent to securities by Article 2 (2) of the Financial Instruments and Exchange Act are reported as “Private equity and other investments” and “Investment securities” in the accompanying consolidated bal- ance sheets. The share of net income of investment business partner- ships has been reflected in the consolidated statements of income and the share of net unrealized gains and losses held by investment business partnerships is directly reported in a separate component within the net assets on a net-of-tax basis in proportion to the Company and its subsidiaries’ share of the investment business partnership. The cost of those investments is determined by the moving average method. 

Daiwa holds, as a common practice in Japan, non-marketable equity securities generally for the purpose of maintaining good  relationships with the investee companies and promoting Daiwa’s securities businesses. 

Impairment is assessed for investments (including private equity holdings). For marketable securities, if the year-end market value declines 30% or more but less than 50% from the carrying value for individual securities, an impairment loss is recognized if there is no chance of recoverability in value. Recoverability is assessed by  determining whether the decline is temporary by considering the 

movements of the market price and the financial conditions of the issuer. If the year-end market value declines 50% or more from the carrying value, then an impairment loss is recognized immediately. For non-marketable equity investments, Daiwa generally compares the carrying amount and the net asset value of the issuing company attributable to Daiwa’s holding share, and recognizes an impairment loss if the net asset value attributable to Daiwa’s holding share is significantly lower from the carrying value and such decline is con- sidered other than temporary. For non-marketable investments in “Private equity and other investments” in the accompanying consoli- dated financial statements, Daiwa reviews the financial conditions of the issuers and provides for allowance for possible investment losses, if necessary. 

Derivatives used for non-trading purpose— Daiwa records deriva- tive financial instruments at fair value except for certain cases as described below, and recognizes changes in the fair value as gains or losses unless the derivative financial instruments are used for hedging purposes. Valuation gains or losses on hedging instruments are deferred in a separate component within the net assets until the gains or losses on the underlying hedged instruments are realized. Plain vanilla hedging interest swap agreements satisfying the required conditions under Japanese GAAP, are not required to be marked-to- market. Interests received or paid on such exempt interest rate swap agreements for hedging purposes are accrued without being marked- to-market under special treatment. Also, certain forward foreign exchange contracts are exempted from marked-to-market valuation. The premium or discount on such exempt forward foreign exchange contracts used for hedging purposes is allocated to each fiscal term without being marked-to-market under special treatment. 

Collateralized short-term financing agreements— Collateralized short-term financing agreements consist of securities purchased under agreements to resell (“Resell transactions”) or securities sold under agreements to repurchase (“Repurchase transactions”), and securities borrowed or loaned. Repurchase transactions and resell transactions are carried at their contractual amounts. Securities bor- rowed or loaned are stated at the amount of cash collateral advanced or received. 

Allowance for doubtful accounts— Allowance for doubtful accounts is provided for probable losses on loans and receivables, based on the actual historical default rate for general loans, and based on individually assessed amounts for doubtful and default loans. 

Property and equipment— Property and equipment are stated at the acquisition cost, net of accumulated depreciation. Daiwa computes depreciation principally by the straight-line method over estimated useful lives. 

Intangible fixed assets— Intangible fixed assets are generally amor- tized by the straight-line method. Daiwa computes the amortization over estimated useful lives. The useful lives of software of in-house use, which is the most significant intangible fixed asset, are generally five years. 

