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## 14. Income taxes 

The Company and its domestic consolidated subsidiaries are subject to a number of taxes levied on income. The effective statutory tax rate in Japan was approximately 40.7% for the years ended March 31, 2012 and 2011. Overseas consolidated subsidiaries are subject to income taxes of the countries in which they operate. 

Reconciliation of the difference between the statutory income tax rate and the effective income tax rate for the year ended March 31, 2012 and 2011 are not presented, since net loss is reported in the consolidated statements of income. 

Details of deferred tax assets and liabilities at March 31, 2012 and 2011 are as follows: 

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The Company and certain consolidated subsidiaries provided valua- tion allowance to reflect the estimated unrealized amount of gross deferred tax assets. The valuation allowance was provided mainly against deferred tax assets stated at the Company and domestic subsidiaries with tax loss carry-forwards. In assessing the realizability of deferred tax assets, management considers, as part of its schedul- ing exercise, factors such as expected taxable income, reversal of temporary differences and utilization of tax loss carry-forwards, and determines whether it is more likely than not that the assets are not realizable in which case the valuation allowance is provided. 

## 15. Statutory reserves 

On December 2, 2011, amendments to the Japanese tax regula- tions were enacted into law. As a result of these amendments, the statutory income tax rate for the Company will be reduced to 38.01% for years beginning on or after April 1, 2012 and 35.64% for years beginning on or after April 1, 2015. For the year ended March 31, 2012, due to these changes in statutory income tax rate, net deferred tax assets decreased by ¥705 million ($8,598 thousand) and deferred income tax expenses increased by ¥1,385 million ($16,890 thousand) and valuation difference on available-for-sale securities increased by ¥798 million ($9,732 thousand) respectively. In addition, deferred gains or losses on hedges decreased by ¥118 million ($1,440 thousand). 

The Financial Instruments and Exchange Act of Japan requires a securities company to set aside a reserve in proportion to its securities transac- tions and other related trading to cover future eventual operational losses caused by the securities company for customer transactions. 

## 16. Contingent liabilities 

Daiwa had contingent liabilities amounting to ¥2,630 million ($32,073 thousand) and ¥3,059 million at March 31, 2012 and 2011, respectively, mainly arising as guarantors of employees’ borrowings. 

