The Items Published on the Internet Website
Concerning the Notice of the 194th Ordinary
General Meeting of Shareholders–1–

6. System to ensure that Directors’ execution of duties complies with laws andthe Articles of Incorporation, other systems to ensure proper execution ofbusiness and overview of operation status of such systems
At the Board of Directors Meeting of May 24, 2006, the Company made a resolution
regarding the basic policies on the establishment of internal control systems pursuant to
the Companies Act and confirmed the status of established internal control systems.
Henceforth, whenever there are organizational changes or changes to internal regulations,resolutions are made at Board of Directors Meetings with regard to the revision of thebasic policies. The details of resolutions regarding the basic policies as of the end of the
fiscal year under review and an overview of the operation status of internal control
systems for the fiscal year under review are as follows:
I. Basic policy for developing a system for internal controls
The KHI Group develops and maintains systems for internal controls to establish
systems to ensure formation of proper organizational structures, development ofcompany rules and regulations, dissemination of information and proper execution ofoperations. KHI’s management philosophy is indicated in the Group Mission (missions
and roles which must be carried out) “Kawasaki, working as one for the good of theplanet” (Enriching lifestyles and helping safeguard the environment: Global Kawasaki),“Kawasaki Value,” “The Kawasaki Group Management Principles” and “The Kawasaki
Group Code of Conduct.” KHI strives to improve its internal controls by constantly
reviewing them, and in doing so improves the efficiency and lawfulness of company
systems which contribute to the Group’s sound and sustained growth.
More specifically, a resolution was made at the Board of Directors Meeting with respect
to the Company’s efforts to establish the following internal control systems and to
streamline, maintain, and improve them based on this basic policy.
1. Necessary systems to ensure proper execution of business of the Company(1) Systems to ensure that execution of duties by the Company’s Directors andemployees are compliant with laws and the Articles of Incorporation(i) We are thoroughgoing in ensuring compliance with laws and the Articles ofIncorporation and other KHI regulations and policies, and bind KHI’s officers(directors and corporate auditors are collectively called “Officers”) andemployees: “put an ethics into practice as business person,” “respectindividuals and individual rights and prohibit discrimination,” “promote
protection of the environment,” “comply with laws and social rules,” and “useproper accounting practices and ensure reliability of financial reports”(hereinafter, “Fundamental Principles of Corporate Ethics”) as stipulated in
KHI Code of Corporate Ethics.
(ii) We establish a system to promote measures, with President as the chief
executive of internal controls and General Manager of each division as the
manager in charge of internal controls, and manage the internal control
systems in a unified way. We do so based on the roles and responsibilities
given to Officers and employees, in order to ensure the appropriateness ofbusiness operations by achieving objectives such as effective and efficientbusiness operations, reliable financial reporting, compliance with laws, andsafeguarding of assets.
(iii) We deliberate and make decisions on policies and measures, under thegovernance of President, for the Company-wide CSR Committee and the CSR
Committee for Business Divisions (consisting of Officers and other
employees) to comply with the “Fundamental Principles of Corporate Ethics”
and to take thoroughgoing compliance initiatives for the KHI Group (which–2–means the corporate group consisting of the Company and its subsidiaries).
We continue to improve understanding and awareness of compliancethrough ongoing education and training activities for various types of legal
compliance and also monitor operational status.
(iv) We work to enhance compliance systems by establishing the internal
whistleblower system to report information regarding compliance breaches.
(v) Executive Officers who are delegated to execute business operations within
an appropriate scope are appointed at Board of Directors Meetings. And byappointing outside directors (independent officers stipulated in theRegulations of the Tokyo Stock Exchange) who are not likely to have any
conflict of interest with any general shareholder, the Company enhances thesupervisory and monitoring functions of the Board of Directors for overallmanagement. In addition, by appointing outside auditors who are not likely
to have any conflict of interest with any general shareholder (independent
officers stipulated in the Regulations of the Tokyo Stock Exchange), theCompany ensures the objectivity and neutrality of the managementmonitoring function, and enhances the monitoring function.
(vi) The Internal Audit Department carries out KHI’s business audits andevaluation/assessment of internal controls over financial reporting to ensure
the proper execution of duties and the reliability of financial reporting.
(2) Systems for storage and management of information related to execution ofduties by the Company’s Directors(i) Information pertaining to execution of duties by the Company’s Directors(meeting minutes, decision making records and appurtenant materials,
account books, account invoices and other information) shall beappropriately stored and managed in accordance with applicable internal
regulations. The information shall be made accessible at any time to Officers
and employees nominated thereby.
(ii) Confidential information and personal information shall be appropriately
stored and managed in accordance with internal regulations andenforcement thereof shall be ensured through such measures as businessaudits.
(3) Systems for management of risk of loss of the Company(i) With President as the chief executive of risk management, General Manager
of Corporate Planning Division at the head office as chief risk officer andGeneral Manager of each division as risk manager, we grasp the assumed
risk in detail, and establish a risk management system, which is designed to
avoid or minimize risk or losses caused by such risk.
(ii) With respect to risks pertaining to management strategies, risk analysis andconsideration of countermeasures shall be conducted in advance by theconcerned divisions in accordance with applicable internal regulations. Then,deliberations and decision making regarding those risks shall be carried out
at Board of Directors Meetings. In particular, we implement risk
management individually for major projects that have a significant impact
on business operations.
(iii) As a measure to be taken when a risk becomes evident, we set forth codes ofconduct in the event of emergencies, and also appoint persons in charge ofcrisis management at each place of business to establish the system, which
is designed to minimize losses.
(iv) When a material risk becomes evident, reports are immediately given to
President, who is the chief executive of risk management, in accordance withthe reporting route specified in advance.
(v) In particular, in anticipation of the occurrence of disasters, including–3–

large-scale earthquakes and pandemic diseases, we predetermine important
operations to which priority should be given to ensure the continuation or
recovery of the operations in order to minimize the impact on KHI’s business.
We also formulate a business continuity plan to shorten the length of time
until recovery.
(4) Systems to ensure efficient execution of duties by the Company’s Directors(i) Based on the KHI Group’s role and objectives as articulated in the Kawasaki
Group Mission Statement, we share final goals for the future by setting fortha long-term vision for the whole group and each business division.
(ii) To attain the goals set forth in the long-term vision, we have formulated
specific action plans, including the Medium-Term Business Plan andShort-Term Business Plan, and have determined goals for each organization,
Officer and employee. Furthermore, by conducting regular reviews of theserespective plans and goals, we aim to secure a system that enables more
appropriate and efficient execution of business operations.
(iii) We have stipulated matters such as division of roles and approval authority
in internal regulations. We have also appointed Executive Officers based ona resolution passed at Board of Directors Meetings to clarify the Systems for
Execution of Business Operations. As a result of establishing these systems,
we aim to efficiently execute business operations in each business andfunction area.
(iv) We have established the Management Committee, which acts as adeliberative organ to support the Board of Directors Meetings’ resolutions
and President’s decision making, to ensure efficient execution of duties by
Board Members through discussions at Management Committees.
Furthermore, we hold meetings of Executive Officers Committee, which
consists of all Executive Officers, to ensure familiarity and a common
understanding of management strategies and plans.
(v) According to the in-house company system, each business division makes
decisions on its own under delegated authority and responsibility, andexecutes flexible business operations to adapt to changes in theenvironment. We have also established the Company Management
Committee in each Company, and it is led by the Company President who
assumes the ultimate responsibility for execution of duties of company’sbusiness operations.
2. Necessary systems to ensure proper execution of business of KHI Group
Companies
We ensure proper execution of business of the KHI Group through efforts toestablish the following systems according to business contents, size, region andsignificance of each subsidiary and affiliate (hereinafter, “Group Companies”).
(1) Systems to ensure that execution of duties by Directors and employees ofGroup Companies are compliant with laws and the Articles of Incorporation(i) The Company governs internal controls of Group Companies from theperspective of the parent company and establishes a system to ensure theappropriateness of business operations. It does so by achieving objectives
regarding matters such as the effectiveness and efficiency of business
operations, reliability of financial reporting, compliance with laws andsafeguarding of assets as a whole group.
(ii) The Company establishes a system to have the Company-wide CSR
Committee deliberate strategies and policies and measures concerning the“Fundamental Principles of Corporate Ethics” and compliance as the entire
KHI Group, and check operational status.
(iii) The Company implements controls as shareholders of Group Companies–4–through the execution of voting rights at the General Meeting of
Shareholders, and also carries out management supervision and monitoringover the operation thereof by dispatching non-full-time Directors or
non-full-time Corporate Auditors, or both (collectively referred to as“Non-Full-Time Officer”), to Group Companies, on an as-needed basis. In
addition, we secure appropriate Group business management systems by
establishing a department which presides over subsidiaries’ operation.
(iv) The Auditing Department, which presides over the Group’s internal audits,
ensures the appropriateness of operations and reliability of financial reports
through business audits and assessment of internal controls over financial
reporting at Group Companies.
(2) Systems with regard to reporting to the Company on execution of duties byDirectors of Group Companies(i) The Company receives reports regarding the status of execution of duties byDirectors of Group Companies through a Non-Full-Time Officer who isdispatched thereto.
(ii) Group Companies regularly report on the status of business operation as amanagement report and have discussions in advance with the relevant
department of the Company with regard to important matters subject todecision-making on corporate management in accordance with applicableinternal regulations.
(3) Regulations for management of risk of loss of Group Companies and othersystems(i) The Company promotes group-wide risk management, striving to prevent or
minimize risk or losses caused by such risk.
(ii) As a measure to be taken when a risk becomes evident at Group Companies,
the Company instructs Group Companies to formulate crisis handlingmeasures and policies to establish the crisis management system.
(iii) When a material risk becomes evident, reports are immediately given to theCompany, in accordance with the reporting route specified in advance.
(4) Systems to ensure efficient execution of duties by Directors of Group
Companies(i) With respect to the management at each Group Company, while respecting
the autonomy thereof, the Company establishes a system in which executionof duties is ensured in a fair and efficient manner by sharing the basic
philosophy and vision indicated in the Kawasaki Group Mission Statement,
long-term vision, the Medium-Term Business Plan, and so forth, andclarifying group-wide final goals.
(ii) The Company instructs Group Companies to establish Approval Regulations
to ensure efficient execution of duties.
3. Necessary matters for the Company’s Corporate Auditors to execute duties(1) Policies regarding employees in cases where the Company’s Corporate Auditor
requests appointment of employees to assist with his/her duties
We allocate the required staff according to the Corporate Auditors’ requests.
(2) Policies regarding independence of employees who assist with the duties of theCompany’s Corporate Auditors from the Company’s Directors and mattersregarding ensuring efficiency in directions given to employees who assist withthe duties of the Company’s Corporate Auditors
The employee who assists with the duties of the Corporate Auditor shallfollow the Corporate Auditor’s directions and orders. For personal transfer,–5–personnel performance evaluation and disciplinary punishment, prior consent
of the Board of Corporate Auditors is required.
(3) Systems for the Company’s Directors and employees to report to theCompany’s Corporate Auditors and systems for Directors and employees ofGroup Companies and those who receive reports from the said Directors andemployees of Group Companies to give reports to the Company’s Corporate
Auditors(i) The Company’s Corporate Auditors attend Board of Directors Meetings, theManagement Committee, Executive Officers Committee and company-wide
meetings, including Company-wide CSR Committees and Company-wide
Risk Management Committees. At these meetings, the Company’s Directors
and employees shall provide the Company’s Board of Corporate Auditorswith reports concerning important matters about group management andbusiness operations, including matters regarding compliance, risk
management and internal controls, and the status of execution of duties.
(ii) The Company’s Directors and employees shall immediately report to theCompany’s Board of Corporate Auditors when discovering that there is a riskof the KHI Group suffering significant damage.
(iii) Directors and employees of Group Companies shall immediately report to
the relevant department of the Company when discovering that there is arisk of the KHI Group suffering significant damage. Upon receiving reports,
the said department shall report the details to the Company’s Board of
Corporate Auditors.
(iv) The Company’s employees shall, in accordance with applicable internal
regulations, report to the Company’s Board of Corporate Auditors regarding
the execution of business operations of the KHI Group by circulation ofinternal memos.
(v) The Company’s Auditing Department and Accounting Auditors from time totime report to, and exchange information with the Company’s Board of
Corporate Auditors regarding the status of audits on the KHI Group.
(4) System to ensure that those who give reports described in the preceding Item(3) will not be treated disadvantageously for reason of having made suchreport
The Company stipulates a provision regarding the prohibition of unfair andunfavorable treatment of those who give reports described in the preceding
Item (3). The Company also instructs Group Companies to stipulate aprovision of the same contents in their company regulations.
(5) Policies on prepaid expenses for the execution of the duties of the Company’s
Corporate Auditors, or expenses for procedures for repayment and theexecution of other relevant duties, or on debt processing
When the Company’s Corporate Auditors request the Company to makeprepayment on execution of duties pursuant to the Companies Act, theCompany shall promptly proceed with payment of appropriate expenses anddebt settlement, except where the expense or debt whose payment isrequested is deemed unnecessary to execute their duties.
(6) Other systems to ensure the effective conduct of audits by the Company’s
Corporate Auditors(i) The Company’s Directors and Corporate Auditors regularly hold meetings toensure mutual understanding, and the Company’s Corporate Auditors also
attend important meetings such as Board of Directors Meeting andManagement Committee meeting, and directly express their opinion–6–

regarding execution of duties by the Company’s Directors.
(ii) The Company’s Directors and Group Companies’ Directors promotecollaboration between the Company’s Corporate Auditors, the Company’s
Auditing Department and Group Companies’ Corporate Auditors, andcooperate to establish systems which enable greater effectiveness in the
conduct of audits.
(iii) The Company and Group Companies obtain the consent of the Board of
Corporate Auditors or approval of the Board of Corporate Auditors withregard to the election of Corporate Auditors and their remuneration, and soforth, in accordance with laws and the Articles of Incorporation.
(iv) Of Corporate Auditors appointed by the Company, one or more shall havesubstantial knowledge about finance and accounting.
4. System regarding expulsion of anti-social forces
Because our Group resolutely refuses to comply with any unreasonable
demands from anti-social forces, and works to cut off all relations with anti-social
forces, we distribute the “Compliance Guidebook” to all Officers and employees.
The Guidebook explains the prohibition of “giving favors to anti-social forces” bylisting specific examples of prohibited acts. We work to ensure that Officers andemployees are thoroughly familiar with the matters contained in the Compliance
Guidebook by conducting training, and so forth, and do not merely distribute theguidebook.
Furthermore, with respect to internal systems, we have established adepartment in the headquarters which is responsible for overseeing handling of
expulsion of anti-social forces, established close cooperation with external
specialized organizations such as the police force, and in collaboration with theconcerned departments, we systematically handle unreasonable requests fromanti-social forces.
II. Overview of the operation status of internal control systems
An overview of the operation status of internal control systems for the fiscal year
under review is as follows. The said operating status is assessed at the end of every
fiscal period and the assessment results are reported to the Board of Directors
Meeting.
1. Efforts on internal control systems in general(i) We set forth the “Fundamental Principles of Corporate Ethics” in KHI Code ofCorporate Ethics, distribute guidebooks that describe the contents of theprinciples, and conduct various training programs to ensure that the saidprinciples are thoroughly disseminated.
(ii) The Company’s Audit Department carries out evaluation/assessment ofinternal controls over business audits and financial reporting for the KHI Groupto ensure effectiveness and efficiency of business operations and reliability offinancial reporting.
2. Efforts on compliance(i) We establish the Company-wide CSR Committee, which is responsible fordeliberating and making decisions on policies and measures to promotecompliance at a group-wide level and monitoring the compliance status
thereof (performed three times during the fiscal period under review). The
said committee also plays the leading role in the establishment of related
internal regulations, preparation and distribution of the “Compliance
Guidebook” (hereinafter, the “Guidebook”), provision of various training
programs, and operation of the whistle-blowing system. In addition, weestablish the CSR Committee for Business Divisions and therewith implement–7–

appropriate measures for each business environment through complianceactivities performed by each business division.
(ii) In an effort to eliminate anti-social forces, we distribute the Guidebook to all
Officers and employees. The Guidebook lists specific examples of prohibited
acts. We work to ensure that Officers and employees are thoroughly familiar
with the contents thereof. We also offer training and education to ensure
thorough dissemination.
3. Efforts on risk management(i) We build a risk management system on a company-wide level based on the
Risk Management Regulations. We also prepare a manual to explain theprocedures of specific risk management practices and exhaustively grasp theassumed risks on a scale common to the Group to prevent and minimize risk orlosses caused by such risk. In addition, we hold Risk Management Committee
meetings on an as-needed basis at both the company-wide level and divisional
level to report and deliberate on determination of material risks, designation ofrisks to be addressed, results of risk monitoring and other important matters.
(ii) For major projects that have a significant impact on business operations, ahead office division conducts risk assessment and considers risk control
measures before accepting orders. In addition, while strengthening progress
monitoring control of projects underway and working to prevent incidents
before they occur, including those of profitability deterioration, and so forth,
we also evaluate the profitability after completion, conduct factor analysis on
projects that have significantly deteriorated and aim for the mean level
development of other projects.
(iii) In anticipation of the occurrence of large-scale disasters and pandemic
diseases, we proactively formulate a business continuity plan for eachbusiness division, and conduct annual assessment and review thereof. We alsoestablish and build a system to minimize losses in case we suffer damage indisasters.
During the fiscal period under review, we reviewed estimates of damage by
disasters in major areas in Japan, performed disaster prevention drills and BCP
drills, and conducted safety confirmation drills for all the employees.
4. Efforts to ensure efficient execution of duties(i) Based on the company-wide policies and strategies determined with reference
to the contents of the Kawasaki Group Mission Statement, which stipulates the
KHI Group’s role and objectives, we determine the ideal way to be in eachbusiness area as well as the medium-term business plan and the short-termbusiness plan to clearly show our final goals. We also strive to share objectives
by holding a brief meeting in each business division.
(ii) We articulate division of roles and approval authority to enhance efficiency of
execution of duties in each business and function area. We also give various
types of guidance to Group Companies to enhance efficiency of execution ofduties.
(iii) We strive to form a common understanding among Directors through thoroughdeliberation of important management policies, management strategies andmanagement issues at Management Committee meetings (held 34 times
during the fiscal period under review) to ensure that Directors efficiently
execute duties.
5. Efforts on management of Group Companies(i) We exert group-wide efforts to work on compliance and risk management andsuccessively develop these systems to overseas Group Companies. In order toensure further dissemination and familiarization, we will establish and operate–8–the systems according to business contents, size, region and significance ofeach Group Company.
(ii) We carry out management supervision and monitoring over the operation ofGroup Companies by dispatching Non-Full-Time Officers to Group Companies
to attend meetings of the Board of Directors thereof. We regularly receive
reports on the status of business operation from Group Companies and havediscussions in advance with the relevant department of the Company withregard to important matters subject to decision-making on corporate
management in accordance with applicable internal regulations.
6. Efforts on ensuring appropriateness of audits performed by Corporate Auditors(i) We assign two employees who are dedicated to assist with the duties of theCompany’s Corporate Auditor. For personnel transfer, personnel performance
evaluation and disciplinary punishment of these employees, we obtain priorconsent of the Board of Corporate Auditors.
(ii) The Company’s Corporate Auditor attends the Company’s important meetings.
The Company’s Directors and employees provide the Company’s Board of
Corporate Auditors with reports concerning important matters about corporate
management and business operations as well as the status of execution ofduties through the said meetings, and report to the Company’s Board of
Corporate Auditors regarding the execution of business operations by
circulation of internal memos.
(iii) We establish regulations that prohibit unfair and unfavorable treatment of
those who cooperate with a Corporate Auditor to perform audits and givereports to a Corporate Auditor pursuant to the “Basic Policy for the
Establishment of Internal Control System.” We also instruct Group Companies
to stipulate regulations similar thereto.
(iv) The Company’s Auditing Department and Accounting Auditor regularly holdliaison meetings or discussions with the Company’s Corporate Auditor toexchange information and opinions with him/her so as to ensure close
communication.
During the fiscal period under review, we held liaison meetings/discussions ten
times with the Auditing Department and five times with the Accounting Auditor
to communicate with the Company’s Corporate Auditor.
(v) We establish regulations regarding requests for prepaid expenses incurred forthe execution of the duties of the Company’s Corporate Auditor, and so forth.

–9–Consolidated Statement of Changes in Net Assets(From April 1, 2016 to March 31, 2017)(Unit: Millions of yen)
Shareholders’ equity
Common stock
Balance at the beginning of
the period

104,484

CapitalsurplusRetained earnings

Treasury stock

Total
shareholders’equity54,394

279,627(86)

438,419

Changes of items during
the period
Cash dividends(18,376)(18,376)

Net income attributableto owners of parent

26,204

26,204(7)(7)

Change of scope of
consolidation
Treasury stock purchased
Treasury stock disposed

(0)

(10)

(10)

0

0

Net changes of items
other than shareholders’equityTotal changes of items
during the period
Balance at the end of theperiod



(0)

7,820

(9)

7,810

104,484

54,393

287,448(96)

446,230

Accumulated other comprehensive income
Net
Accumulated
Total
Foreign
DeferredTotal
unrealized
adjustment accumulated Non-controllingcurrency
gains
interests
net
assetsgains onfor
other(losses) on translation
securities,
retirement comprehensive
hedges adjustments
incomenet of tax
benefits
Balance at the beginning of
the period

2,705

692

8,990

(19,439)(7,051)

14,257 445,625

Changes of items during
the period
Cash dividends(18,376)

Net income attributableto owners of parent

26,204

Change of scope of
consolidation(7)

Treasury stock purchased(10)

Treasury stock disposed0

Net changes of items
other than shareholders’equity527(1,874)(9,331)

8,747(1,931)(176)(2,108)

Total changes of items
during the period

527(1,874)(9,331)

8,747(1,931)

(176)

5,702

Balance at the end of theperiod3,232(1,182)(341)(10,692)(8,983)14,080 451,327– 10 –

Notes to the Consolidated Financial Statements(Notes to the basis for preparation of consolidated financial statements)
1. Scope of consolidation(1) Number of consolidated subsidiaries and names of
93 in total
principal consolidated subsidiaries(Domestic) Kawasaki Trading Co., Ltd., Kawasaki Machine Systems, Ltd., NIPPICorporation, Kawasaki Thermal Engineering Co., Ltd., Kawasaki Motors
Corporation Japan, EarthTechnica Co., Ltd.
(Overseas) Kawasaki Motors Corp., U.S.A., Kawasaki Motors Manufacturing Corp.,
U.S.A., Kawasaki Motors Enterprise (Thailand) Co., Ltd., Kawasaki Rail
Car, Inc., Kawasaki Motors Europe N.V., PT. Kawasaki Motor Indonesia,
Kawasaki Motors (Phils.) Corporation, Kawasaki Robotics (U.S.A.), Inc.,
Flutek, Ltd.
Two newly established subsidiaries have been included in the scope of consolidation.
Of the eight consolidated subsidiaries excluded from the scope of consolidation, KCMJ
Corporation was excluded from the scope of consolidation following the completion ofits liquidation. Green Park Chiba New Port and six other subsidiaries have been
excluded from the scope of consolidation due to the decrease of significance.
(2) Names of principal non-consolidated subsidiaries, etc.
Green Park Chiba New Port and other companies(Reason for exclusion from scope of consolidation)
The non-consolidated subsidiaries were excluded from the scope of consolidation
because they are small in size, and its accounts, such as total assets, net sales, net
income (for the Company’s equity interest) and retained earnings (for the Company’s
equity interest), have no significant effects on the Company’s consolidated financial
statements.
2. Application of the equity method(1) Number of affiliates which are subject to application of
18 in total
the equity method
Name of principal company
Nantong COSCO KHI Ship Engineering Co., Ltd.
Of the two affiliates excluded from the scope of application of the equity methodfrom the current consolidated fiscal year, Tongfang Kawasaki Energy Saving
Equipment Co., Ltd. was excluded from the scope of application of the equity
method due to the transfer of shares, and other company was excluded from thescope of application of the equity method due to the decrease of significance.
(2) Non-consolidated subsidiaries not subject to application of the equity method(Green Park Chiba Shin-Minato and other companies) and affiliates (Commercial
Airplane Co., Ltd. and other companies) are excluded from the scope of applicationof the equity method, because they only have minimal effects on the Company’s
consolidated financial statements with respect to net income (for the Company’s
equity interest) and retained earnings (for the Company’s equity interest), and they
have no significance as a whole.

– 11 –

3. Significant accounting policies(1) Standards and methods for evaluation of significant assets(i) Marketable securities
a. Bonds held to maturity
Amortized cost method (straight-line method) is principally applied.
b. Other marketable securities
Securities with market quotations
Market value method based on the market value as of the account closing
date (with all valuation differences charged to net assets and the cost ofsale computed mainly by the moving-average method) is applied.
Securities without market quotations
The cost method based on the moving-average method is principally
applied.
(ii) Inventories
Stated at cost principally using the specific identification method, themoving-average method and the first-in first-out method (balance sheet
amounts are determined based on the method of lowering the book value inaccordance with the deterioration of profitability).
(iii) Derivatives
Stated at market value.
(2) Depreciation and amortization method for significant depreciable assets(i) Net property, plant and equipment (other than leased assets)
The straight-line method is principally applied.
(ii) Intangible assets (other than leased assets)
The straight-line method is applied. The software used by the Company issubject to amortization based on the internal useful life (generally five years).
(iii) Leased assets
The leased assets involved in finance lease transactions that involve transfer ofownership
The same method as that applied to property, plant and equipment isapplied.
The leased assets involved in finance lease transactions that do not involve
transfer of ownership
The straight-line method, whereby the leasing period is deemed to be theduration of useful life and the residual value as zero is applied.
Of the finance lease transactions that do not involve transfer of ownership,
the lease transactions which commenced on or prior to March 31, 2008 are
accounted for in conformity with the accounting process applicable tooperating lease transactions.
(3) Accounting standards for significant provisions(i) Allowance for doubtful receivables
In order to provide for losses due to doubtful accounts from tradereceivables and loan receivables, allowance for doubtful receivables isprovided based on the historical default rate of normal receivables and withreference to the collectability of receivables from companies in financial
difficulty.
(ii) Accrued bonuses
To cover bonus payments to employees, provision for bonuses is provided
in the amount for the consolidated fiscal year based on the estimated amountof payment.
(iii) Provision for product warranties
A provision is recorded for expenditures for warranties concerning– 12 –

construction contracts based on past experience or on estimations ofindividual cases.
(iv) Provision for losses on construction contracts
A provision for an estimated amount of losses is recorded for the next fiscal
year and thereafter concerning construction works which are anticipated toincur significant losses and which allow reasonable estimation of the loss
incurred at the end of the consolidated fiscal year under review among those
construction works that have not been delivered as of the end of the fiscal
year.
(v) Provision for environmental measures
The Company provided an estimated amount to cover expenditures such as
the disposal of polychlorinated biphenyl (PCB) waste required under the “Law
Concerning Special Measures for Promotion of Appropriate Disposal of PCB
Waste.”(4) Method of accounting treatment for retirement benefits(i) Method of allocation of expected retirement benefit payments
In calculation of retirement benefit obligations, the method of attributing
the projected benefits to periods until the end of the current consolidated fiscal
year is based on the benefit formula basis.
(ii) Method of amortization of actuarial gains or losses and prior service cost
Prior service cost will be recognized as expenses mainly by amortizing theamount by the straight-line method over a certain period of time (mainly 10
years) which is shorter than the employees’ average remaining service period.
Actuarial differences are amortized from the year following the year inwhich the differences are recognized using the straight-line method over the
average remaining years of service of the employees (mainly 10 years).
(iii) Method of accounting treatment for unrecognized actuarial gains and losses,
and unrecognized past service costs
Unrecognized actuarial gains and losses, and unrecognized past service
cost, net of applicable taxes, are recorded in “Accumulated adjustment for
retirement benefits” of “Accumulated other comprehensive income” in “Netassets.”(iv) Simplified accounting method used by small companies
Certain consolidated subsidiaries apply a simplified accounting method inwhich the calculation of liabilities for retirement benefits and retirement
benefit expenses is carried out by using a method in which the retirement
benefit obligations are deemed to be the amount of retirement benefits to be
paid in cases where all eligible employees retired at the fiscal year-end date.
(5) Standards for the recognition of significant revenues and expenses
Recognition of net sales of completed construction contracts and cost of sales ofcompleted construction contracts
a. Construction activities whose outcome from the completed portion as of theend of the consolidated fiscal year are deemed to be definite
Percentage-of-completion method (the cost-to-cost method is used toestimate the percentage of completion) is applied.
b. Other construction activities
Completed-contract method is applied.
(6) Standards for the translation of major assets or liabilities denominated in foreign
currencies
Receivables and payables denominated in foreign currencies are translated into
yen at the foreign exchange spot rate on the date of the balance sheet, and– 13 –

differences arising from the translation are calculated as gains or losses. The
Company translates assets and liabilities of foreign consolidated subsidiaries into
yen at the foreign exchange spot rate on the date of the balance sheet of each of
those subsidiaries. Revenues and expenses are translated using the average
foreign exchange rate of the statement of income’s period. Translation
adjustments are included in “Foreign currency translation adjustments” and“Non-controlling interests” in “Net assets.”(7) Method of significant hedge accounting(i) Method of hedge accounting
Deferred hedge accounting is applied.
(ii) Hedging instruments and hedged items
Hedging instrument
Hedged items
Forward exchange contracts,
Receivables and payables (including
currency options
forecast transactions) denominated inforeign currency
Interest rate swaps, currency swaps
Borrowings(iii) Hedging policy
Hedging is conducted as a measure against the risk of interest rate variationand foreign currency variation based on internal regulations of respective
subsidiaries.
(iv) Method of assessing hedging effectivenessHedging effectiveness is evaluated based on fluctuation amounts of hedged
items and hedging instruments by comparing the cumulative changes ofmarket fluctuations between the hedged item with the hedging instrument
during the period between the start of the transaction to the point at which
effectiveness is assessed.
(8) Method and period for amortization of goodwill
Goodwill equivalent is equally amortized over the estimated effective period of
the investment. However, goodwill is amortized in lump-sum in the fiscal year
when incurred if the amount is minimal.
(9) Other significant matters for preparing the consolidated financial statements(i) Accounting treatment for consumption taxes
The tax-exclusion method is applied for the consumption tax and the local
consumption tax.
(ii) Application of the consolidated taxation system
The consolidated tax system is applied.

– 14 –

(Additional Information)
Application of ASBJ Guidance on Recoverability of Deferred Tax Assets
Effective from the consolidated fiscal year ended March 31, 2017, the Company has
applied the “Guidance on Recoverability of Deferred Tax Assets” (ASBJ Guidance No.
26, March 28, 2016).
(Change in Presentation Methods)
Consolidated statement of income
From this consolidated fiscal year under review, a “subsidy income” (¥1,028 million
in the consolidated fiscal year under review) was included and presented in “other”
under non-operating income as a result of the decline in the significance of theamount. “Loss on retirement of non-current assets” (¥1,119 million in the previous
consolidated fiscal year), in the meantime, is presented independently as a result of
the increase in the significance of the amount.
(Notes to Consolidated Balance Sheet)
1. The amounts presented are rounded down to the nearest unit.
2. Accumulated depreciation of property, plant and equipment¥780,439 million
3. Assets pledged as collateral
Buildings and structures, net¥69 million
Investments in securities¥14 million
Other¥83 million
Liabilities relating to collateral
Short-term debt
¥9 million
Long-term debt
¥61 million
Other¥4 million
4. Guarantee obligations for bank loans of subsidiaries andaffiliates, etc. and employees¥18,252 million
5. With respect to some work in process, a trust beneficiary right has been establishedwith the expected trade receivables as a trust asset. Work in process related to thesaid trust asset amounts to ¥7,373 million.
(Notes to Consolidated Statement of Income)1. The amounts presented are rounded down to the nearest unit.
2. Gain on sale of fixed assets as non-operating income was realized by gains of deferred
revenue in conjunction with sale and leaseback related to fixed assets of a North
American subsidiary.
3. Gain on sales of fixed assets as extraordinary income was generated by the sale of landand buildings of Tokyo Office of the Company.
(Notes to Consolidated Statement of Changes in Net Assets)
1. The amounts presented are rounded down to the nearest unit.
2. Total number of shares issued as of end of the consolidated fiscal year under review
Ordinary share 1,670,805,320 shares– 15 –

3. Dividends
Resolution
General Meetingof Shareholders
on June 24,
2016
Board ofDirectors
Meeting on
September 30,
2016
Scheduled dateof resolution
General Meetingof Shareholders
on June 28,
2017

Total dividend(million yen)

Dividend pershare (yen)Record date

Effective date

11,694

7

March 31, 2016

June 27, 2016

6,682

4

September 30,
2016

December 1,
2016

Record date

Effective date

March 31, 2017

June 29, 2017

Total dividend(million yen)

Dividend pershare (yen)

3,341

2

(Notes to financial instruments)
1. Matters regarding financial instruments
KHI Group raises necessary funds, in light of its business plans; for long-term working
capital and capital expenditure funds the Group predominantly raises funds through bankloans and issuance of corporate bonds, for short-term working capital it raises funds
through bank loans and issuance of short-term bonds (electronic commercial paper), andso forth. Temporary surplus funds are invested in highly secure financial assets. We use
derivatives to avoid risks described hereunder and do not engage in speculativetransactions.
Operating receivables, namely, trade receivables are exposed to counterparty credit
risk. The currency exchange risk of the debts and credits in foreign currencies which arise
from global business operations is hedged by using foreign exchange forward contracts,
and so forth in principle against the net amount of the debts and credits in the foreign
currency. Investments in securities are mainly shares of corporations which we havebusiness dealings with, and of these investments, those shares that are listed are
exposed to the risk of market price fluctuations.
Most trade payables, which are operating liabilities, have maturities of less than one
year. Some of those are denominated in foreign currencies due to the import of materials,
and so forth, and although they are exposed to the risk of currency fluctuation, most arewithin the limit of the balance of accounts receivable in the same foreign currency. Debts
payable that are composed of borrowings and corporate bonds are raised for the purposeof securing working capital and capital investments, and the longest maturity from thedate of balance sheet is about 20 years. Some of those instruments have floating interest
and are denominated in foreign currencies and are therefore exposed to the risk ofinterest rate and currency exchange fluctuations, however we hedge those risks asrequired by using derivatives transactions (interest rate swap transactions and currency
swap transactions).
Derivative transactions are transactions which include exchange forward contracts andcurrency options and currency swap transactions for the purpose of hedging exchange
fluctuation risks of the debts and credits in foreign currencies, and interest rate swap
transactions and so forth for the purpose of hedging interest fluctuation risks of debts
payable. Details of hedging instruments, hedged items, hedging policies, assessment ofhedging effectiveness of hedge accounting are stated in “3. Significant accounting policies,(7) Method of significant hedge accounting” of “Notes to the basis for preparation of– 16 –

consolidated financial statements” described above.
2. Matters concerning market value, etc. of financial instruments
The prices recorded in the consolidated balance sheet, market values and the difference
between those as of the end of this consolidated fiscal year are as follows.
(Unit: Millions of yen)Price recorded in
the consolidatedbalance sheet (*)
55,388444,633
8,562[240,572][101,449](1) Cash on hand and in banks(2) Trade receivables(3) Investments in securities(4) Trade payables(5) Electronically recorded
obligations(6) Short-term debt
[111,456](7) Current portion of bonds[10,000](8) Bonds payable[130,000](9) Long-term debt, less current[147,492]
portion(10) Derivative transactions[1,595](*) Figures which are posted as liabilities are shown in [ ].

Marketvalue (*)

Difference

55,388444,588
8,562[240,572][101,449](45)-[111,456][10,000][131,714][147,299](1,714)
193[1,595]-(Note 1) Matters concerning the method for calculating the market value of financial
instruments and marketable securities and derivatives transactions(1) Cash on hand and in banks
These instruments can be settled within short term and the market value is roughly
equal to book value, therefore the fair market value is stated at book value.
(2) Trade receivables
Trade receivables are grouped into a specified period, and are stated at market value
calculated by the discount rate, which takes into account the respective period tomaturity and credit risk.
(3) Investments in securities
The market value for these securities is stated at the price listed on the exchange.
(4) Trade payables, (5) Electronically recorded obligations, (6) Short-term debt,(7) Current portion of bonds
These instruments can be settled within short term and market value is roughly equal
to book value, therefore the fair market value is stated at book value.
(8) Bonds payable
The fair market value of these instruments is stated at the market value.
(9) Long-term debt, less current portion
The market value of long-term debt is determined by discounting the total of principal
and interest by the interest rate on similar new debt.
(10) Derivatives transactions
The market value of derivatives is stated at the forward exchange rate or the priceoffered by the trading financial institution.
(Note 2) Financial instruments whose market value is deemed extremely difficult toascertain
Shares of affiliates, investments in affiliates and unlisted stocks, and investments insilent partnerships (amount recorded in the consolidated balance sheet was ¥76,726
million) are not included in the table above, as it is deemed to be extremely difficult toascertain fair market value because those instruments have no market prices, and it is
not possible to estimate their future cash flows.

– 17 –

(Notes to per share information)
1. Net assets per share¥ 261.73
2. Net income per share¥ 15.68(Other)(Damage caused to NIPPI Corporation by snowfall)
The heavy snowfall on February 15, 2014 caused a hangar roof in Atsugi Works of
NIPPI Corporation, which is KHI’s consolidated subsidiary, to collapse, causing
damage to aircrafts of the Japan Maritime Self-Defense Force that was undergoingregular maintenance. The Company and NIPPI Corporation are currently having
discussions with the Japan Ministry of Defense regarding the way to handle this case.
Some discussion results could have a material impact on the KHI Group’s financial
performance.

– 18 –

Non-consolidated Statement of Changes in Net Assets(From April 1, 2016 to March 31, 2017)

Balance at beginning of theperiodChanges of items during
the period
Cash dividends
Net income
Treasury stock
purchased
Treasury stock disposed
Reserve for special
depreciation
Reversal of provision for
special depreciation
Reserve for advanced
depreciation of fixed
assets
Reversal of provision foradvanced depreciationof fixed assets
Net changes of items
other thanshareholders’ equity
Total changes of items
during the period
Balance at end of theperiodCommonstock

Shareholders’ equity
Capital surplus
Retained earnings
Other retained earnings
Provision for Retained
Legal
Other
for advanced
capitalcapital Provision
specialdepreciation earnings
surplus surplus depreciation
brought
of fixed
forwardassets104,484

52,210

0

162

7,674

(Unit: Millions of yen)

Total
Treasury shareholders’stockequity139,863(86)(18,376)
17,493

304,308(18,376)
17,493

(0)

(10)

(10)

0

0

1,194

(1,194)



(140)

140



1,939

(1,939)



(916)

916







(0)

1,053

1,023

(2,958)

(9)

(892)

104,484

52,210

0

1,215

8,697

136,904(96)

303,416

Valuation and translation adjustments
Net
Deferred
unrealized
Total valuation
gains
gains onand translation(losses) on
securities,
adjustments
hedgesnet tax
Balance at beginning of the period
Changes of items during theperiodCash dividends

1,957

633

2,590

Total
net assets

306,899(18,376)

Net income

17,493

Treasury stock purchased(10)

Treasury stock disposed0

Reserve for special depreciation－

Reversal of provision for special
depreciation
Reserve for advanced
depreciation of fixed assets
Reversal of provision foradvanced depreciation of
fixed assets
Net changes of items other thanshareholders’ equity
Total changes of items during theperiodBalance at end of the period

－
－
－
395

(1,677)(1,281)(1,281)395(1,677)(1,281)(2,174)2,353(1,044)

1,308

304,725– 19 –

Notes to the Non-consolidated Financial Statements(Significant accounting policies)
1. Valuation standards and methods of assets(1) Valuation standards and methods of marketable securities(i) Shares of subsidiaries and affiliates
Stated at cost using the moving-average method.
(ii) Other marketable securities
Securities with market quotations
Stated at market value based on the market price on the account closing date(net unrealized gains or losses on these securities are reported as a separate
item in the net assets on a net-of-tax basis. Cost of securities sold isdetermined by the moving average method).
Securities without market quotations
Stated at cost using the moving-average method.
(2) Valuation standards and methods of inventories
Stated at cost using the specific identification method and the moving-averagemethod (balance sheet amounts are determined based on the method of
writing down book value in accordance with decreased profitability of assets).
(3) Valuation standards and methods of derivatives
Stated at market value.
2. Method of depreciation of fixed assets(1) Net property, plant and equipment (other than leased assets)
The straight-line method is used.
(2) Intangible assets (other than leased assets)
The straight-line method is used.
Software for internal use is amortized by the straight-line method over theinternally estimated useful lives (within 5 years).
(3) Leased assets
Finance lease transactions not involving the transfer of ownership
The leased assets involved in finance lease transactions that do not involve
transfer of ownership are subject to the straight-line method, whereby the leasing
period is deemed to be the duration of useful life and the residual value as zero.
In addition, out of the finance lease transactions that do not transfer ownership,lease transactions whose lease transaction commencement date was on or prior to
March 31, 2008 are accounted for on a basis similar to ordinary rental
transactions.
3. Standards of accounting for provisions(1) Allowance for doubtful receivables
In order to provide for losses due to doubtful accounts from trade receivables andloan receivables, allowance for doubtful receivables is provided principally basedon the historical default rate of normal receivables and with reference to thecollectability of receivables from companies in financial difficulty.
(2) Accrued bonuses
To prepare for the bonus payments to employees, provision for bonuses isprovided in the amount based on the estimated amount of bonus payment.
(3) Provision for product warranties
A provision is recorded for expenditures for warranties concerning construction
contracts based on past experience or on estimations of individual cases.
(4) Provision for losses on construction contracts
A provision for an estimated amount of losses is recorded for the next fiscal year
and thereafter concerning construction works which are anticipated to incur
significant losses and which allow reasonable estimation of the loss incurred at theend of the fiscal year under review among those construction works that have notbeen delivered as of the end of the fiscal year.
– 20 –

(5) Provision for environmental measures
The Company provided an estimated amount to cover expenditures such as thedisposal of polychlorinated biphenyl (PCB) waste required under the “Law
Concerning Special Measures for Promotion of Appropriate Disposal of PCB Waste.
(6) Employees’ retirement and severance benefits
Employees’ retirement and severance benefits is recorded based on the estimatedamount of retirement benefit obligations and plan assets as of the end of the fiscal
year under review (including the retirement benefit trust) in order to coveremployee retirement benefits.
(i) Allocation of expected retirement benefit payments
When calculating retirement benefit obligations, the benefit formula basis isused to allocate expected retirement benefit payments to the period as of theend of the fiscal year.
(ii) Method of recognizing actuarial differences and prior service costs
The past service costs are amortized using the straight-line method over acertain years (10 years) within the average remaining service period of theemployees when the costs incurred in each year.
Actuarial differences are amortized from the year following the year in which
the differences are recognized using the straight-line method over the averageremaining years of service of the employees (10 years).
4. Standards for recognition of revenue and expenses
Recognition of net sales of completed construction contracts and cost of sales ofcompleted construction contracts(i) Construction activities whose outcome from the completed portion as of the end of
the fiscal year are deemed to be definite.
Percentage-of-completion method (the cost-to-cost method is principally used toestimate the percentage of completion) is applied.
(ii) Other construction activities
Completed-contract method is applied.
5. Other important matters forming the basis for preparing the non-consolidated
financial statements(1) Accounting treatment for hedges(i) Method of hedge accounting
Deferred hedge accounting is applied.
(ii) Hedging instruments and hedged items
Hedging instrument
Hedged items
Forward exchange contracts,
Receivables and payables (including
currency options
forecast transactions) denominated inforeign currency
Interest rate swaps, currency swaps
Borrowings(iii) Hedging policy
Hedging is conducted as a measure against the risk of foreign currency
variation and interest rate variation based on internal regulations.
(iv) Method of assessing hedging effectivenessHedging effectiveness is evaluated based on fluctuation amounts of hedged
items and hedging instruments by comparing the cumulative changes ofmarket fluctuations between the hedged item with the hedging instrument
during the period between the start of the transaction to the point at which
effectiveness is assessed.
(2) Standards for the translation of assets or liabilities denominated in foreign
currencies
Receivables and payables denominated in foreign currencies are translated into
yen at the foreign exchange spot rate on the date of the balance sheet, anddifferences arising from the translation are calculated as gains or losses.
(3) Accounting treatment for retirement benefits
Accounting treatment for unrecognized actuarial gains or losses and unrecognized– 21 –

past service cost for retirement benefits are different from accounting treatment
for them in the consolidated financial statements.
(4) Accounting treatment for consumption taxes
Consumption tax and local consumption tax are accounted for by the tax-exclusion
method.
(5) Application of the consolidated taxation system
The consolidated taxation system is applied.
(Change in Presentation)
Non-consolidated statement of income
From the fiscal year under review, a “subsidy income” (¥1,028 million in the fiscal year
under review) was included and presented in “other” under non-operating income as aresult of the decline in the significance of the amount. “Interest on bonds” (¥1,040 million
in the fiscal year under review), in the meantime, is included and presented in “other”
under non-operating expenses as a result of the decline in the significance of the amount.
(Notes to Non-Consolidated Balance Sheet)
1. The amounts presented are rounded down to the nearest unit.
2. Accumulated depreciation of property, plant and equipment
3. Monetary receivables from and payables to affiliates
Short-term monetary assets
Long-term monetary assets
Short-term monetary liabilities
4. Asset pledged as collateral and liability relating to collateral(1) Assets pledged as collateral
Investments in securities
Shares of affiliates
Buildings
Total¥592,644 million¥160,108 million¥27,333 million¥82,754 million¥14 million¥67 million¥69 million¥150 million(2) Liability relating to collateral
Short-term debt
¥9 million
Long-term debt
¥61 million
5.
Guarantee liability for bank loans of subsidiaries andaffiliates, etc. and employees¥23,028 million
6.
With respect to some work in process, a trust beneficiary right has been
established with the expected trade receivables as a trust asset. Work inprocess related to the said trust asset amounts to ¥7,373 million.

– 22 –

(Notes to Non-consolidated Statement of Income)1. The amounts presented are rounded down to the nearest unit.
2. Transactions with affiliates
Transaction from operating transactions
Net sales¥406,153 million
Purchases¥191,758 million
Transaction from non-operating transactions¥23,533 million
3. Gain on sales of fixed assets as extraordinary income was generated by the sale of landand buildings of Tokyo Office of the Company.
(Notes to Non-consolidated Statement of Changes in Net Assets)
1. The amounts presented are rounded down to the nearest unit.
2. Type of treasury shares and number of shares at the end of the current fiscal year
Common stock 259,108 shares(Notes to Tax Effect Accounting)Among other factors, the main contributing factor to deferred tax assets is thedisallowance of various provisions such as the employees’ retirement and severance
benefits and the losses on construction contracts, and the main contributing factor to thedeferred tax liabilities incurred is net unrealized gain on securities.
(Additional information)
Application of Implementation Guidance on Recoverability of Deferred Tax Assets
Effective from the fiscal year ended March 31, 2017, the Company has applied the“Guidance on Recoverability of Deferred Tax Assets” (ASBJ Guidance No. 26, March 28,2016).
(Notes to Leased Fixed Assets)
Other than the fixed assets recorded on the balance sheet, certain manufacturing
facilities are used under finance lease contracts not involving the transfer of theownership of the leased property.

– 23 –

(Notes to transactions with interested parties)
Unit: Millions of yen
Attributes

Affiliate

Affiliate

Company
nameCommercial AirplaneCo., Ltd.

EnseadaIndústria
Naval S.A.

Percentage
of votingrights held40%
directlyheld

31.09%
directly
held

Relationshipwith interested
party
Sale of thecompany’s
products
Directors
concurrently
serving

Sale of thecompany’s
products
Loan of funds

Content oftransaction

Amount oftransaction

Sale of thecompany’s
products

130,785

Sale of thecompany’s
products



Loan of
funds



Item

Balance at
fiscalyear-end

Accounts
receivable

37,320

Advancesfromcustomers

46,476Claimsprovable inbankruptcy,
claimsprovable inrehabilitationand otherTerms and conditions of trade and policy, etc. on deciding terms and conditions of trade(Note 1) The Company presents its preferred price in consideration of the overall cost and then decides
the terms and conditions of trade through price negotiations.
(Note 2) The Company decides the loan of funds in consideration of market interest rates.
(Note 3) The year-end balance of receivables to Enseada Industria Naval S.A. is the amount after
deducting an allowance for doubtful receivables. The balance of allowance for doubtfulreceivables is ¥14,871 million and the provision therefor for the current fiscal year is ¥4,583
million.
(Note 4) Of the above amounts, consumption taxes are not included in the trade amount, but areincluded in the balance at the end of fiscal year.

(Notes to per Share Information)
1. Net assets per share¥182.41
2. Net income per share¥10.47(Other)(Damage caused to NIPPI Corporation by snowfall)
The heavy snowfall on February 15, 2014 caused a hangar roof in Atsugi Works of
NIPPI Corporation, which is KHI’s consolidated subsidiary, to collapse, causing
damage to aircrafts of the Japan Maritime Self Defense Force that was undergoingregular maintenance. The Company and NIPPI Corporation are currently having
discussions with the Japan Ministry of Defense regarding the way to handle this case.
Some discussion results could have a material impact on the KHI Group’s financial
performance.

– 24 –