[This is an English translation prepared for the convenience of non-resident shareholders. Should there be any inconsistency
between the translation and the official Japanese text, the latter shall prevail.]March 2, 2018

To Our Shareholders

MATERIALS DISCLOSED VIA THE INTERNET CONCERNINGNOTICE OF CONVOCATION OF
THE 33RD ANNUAL SHAREHOLDERS’ MEETING“Notes to Consolidated Financial Statements” and “Notes to Nonconsolidated Financial Statements” are posted on
the Company’s website (https://www.jti.co.jp/) to be offered to shareholders, pursuant to the provisions of laws andregulations as well as Article 17 of our Articles of Incorporation.

Notes to Consolidated Financial Statements
Notes to Nonconsolidated Financial Statements(For the fiscal year from January 1, 2017 to December 31, 2017)

Japan Tobacco Inc.

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Notes to Consolidated Financial Statements
1.

Significant matters for preparing consolidated financial statements(1) Accounting principles for preparing consolidated financial statements
The consolidated financial statements of Japan Tobacco Inc. (hereinafter referred to as the “Company”) and its
subsidiaries (hereinafter collectively referred to as the “Group”) are prepared in accordance with International
Financial Reporting Standards (hereinafter referred to as “IFRS”) pursuant to the provisions of Article 120,
Paragraph 1 of the Ordinance on Accounting of Companies. Pursuant to the provisions of the second sentence ofthe same paragraph of the same Ordinance, some disclosure items required under IFRS are omitted.
(2) Early adoption of new standards
The Group has early adopted IFRS 9 “Financial Instruments” (amended in November 2013) (hereinafter referred
to as “IFRS 9”) from January 1, 2015. IFRS 9 replaces IAS 39 “Financial Instruments: Recognition andMeasurement” (hereinafter referred to as “IAS 39”) and provides two measurement categories for financial
instruments: amortized cost and fair value. Changes in fair value of financial assets measured at fair value arerecognized in profit or loss. However, changes in fair value of investments in equity instruments, except for equity
instruments held for trading purposes, are allowed to be recognized in other comprehensive income.
For hedge accounting, the hedging relationships that meet the qualifying criteria are reviewed to appropriatelyreflect an entity’s risk management activities in the consolidated financial statements.
(3) Scope of consolidation
Number of consolidated subsidiaries: 210 companies
Major consolidated subsidiaries: TS Network Co., Ltd., Japan Filter Technology, Ltd., JT International S.A.,
Gallaher Ltd., Torii Pharmaceutical Co., Ltd., and TableMark Co., Ltd.
(4) Scope of equity method
Number of affiliates accounted for using the equity method: 13 companies
Major affiliates accounted for using the equity method: Megapolis Distribution B.V.
Joint ventures are accounted for using the equity method.

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(5) Accounting policies
A. Basis and method of valuation for financial assets other than derivativesi) Initial recognition and measurement
Financial assets are classified into financial assets measured at fair value through profit or loss, fair value
through other comprehensive income, and amortized cost. The Group determines the classification at initialrecognition.
Financial assets are classified as financial assets measured at amortized cost if both of the following conditions
are met. Otherwise, they are classified as financial assets measured at fair value.
• The asset is held within a business model whose objective is to hold assets in order to collect contractual
cash flows.
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
For financial assets measured at fair value, each equity instrument is designated as measured at fair value
through profit or loss or as measured at fair value through other comprehensive income, except for equity
instruments held for trading purposes that must be measured at fair value through profit or loss. Suchdesignations are applied consistently.
All financial assets are measured at fair value plus transaction costs that are attributable to the financial assets,
except for the case of being classified in the category of financial assets measured at fair value through profit
or loss.
ii) Subsequent measurement
After initial recognition, financial assets are measured based on the classification as follows:(a) Financial assets measured at amortized cost
Financial assets measured at amortized cost are measured at amortized cost using the effective interest method.
(b) Other financial assets
Financial assets other than those measured at amortized cost are measured at fair value.
Changes in the fair value of financial assets measured at fair value are recognized as profit or loss.
However, changes in the fair value of equity instruments designated as measured at fair value through othercomprehensive income are recognized as other comprehensive income and the amount in other comprehensive
income is transferred to retained earnings when equity instruments are derecognized or the decline in its fairvalue compared to its acquisition cost is significant. Dividends on the financial assets are recognized in profit
or loss for the year.
iii) Derecognition
Financial assets are derecognized when the rights to receive benefits from them expire or are transferred, orwhen substantially all the risks and rewards of the ownership are transferred.
iv) Impairment of financial assets
In accordance with IAS 39, the Group assesses at the end of each reporting period whether there is any
objective evidence that financial assets measured at amortized cost are impaired. Evidence of impairment
includes significant financial difficulty of the borrower or a group of borrowers, a default or delinquency ininterest or principal payments, and bankruptcy of the borrower.
The Group assesses whether objective evidence of impairment exists individually for financial assets that are
individually significant and collectively for financial assets that are not individually significant.
If there is objective evidence that impairment losses on financial assets measured at amortized cost have been
incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and thepresent value of estimated future cash flows.
When impairment is recognized, the carrying amount of the financial asset is reduced by an allowance for
doubtful accounts and impairment losses are recognized in profit or loss. The carrying amount of financial
assets measured at amortized cost is directly reduced for the impairment when they are expected to become
uncollectible in the future and all collaterals are implemented or transferred to the Group. If, in a subsequent
period, the amount of the impairment loss provided changes due to an event occurring after the impairment-3-

was recognized, the previously recognized impairment losses are adjusted through the allowance for doubtful
accounts.
B.

Basis and method of valuation for derivatives
The Group utilizes derivatives, including forward foreign exchange contracts and interest rate swap contracts,
to hedge foreign exchange and interest rate risks. These derivatives are initially measured at fair value when
the contract is entered into, and are subsequently remeasured at fair value. Changes in the fair value ofderivatives are recognized as profit or loss in the consolidated statement of income. However, the gains orlosses on the hedging instrument relating to the effective portion of cash flow hedges and hedges of net
investment in foreign operations are recognized as other comprehensive income.

C.

Basis and method of valuation for inventories
The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing
the inventories to their present location and condition.
Inventories are measured at the lower of cost or net realizable value, and the costs are determined by using theweighted-average method. Net realizable value is determined as the estimated selling price in the ordinary
course of business less the estimated costs of completion and estimated costs necessary to make the sale.
Leaf tobacco which is stored for more than 12 months before being used for production is included in current
assets since it is held within the normal operating cycle.

D. Depreciation methods for significant depreciable assetsi) Property, plant and equipment and investment property (excluding leased assets)
Property, plant and equipment is measured by using the cost model and is stated at cost less accumulated
depreciation and accumulated impairment losses.
The acquisition cost includes any costs directly attributable to the acquisition of the asset and dismantlement,
removal and restoration costs, as well as borrowing costs eligible for capitalization.
Except for assets that are not subject to depreciation such as land, assets are depreciated using the straight-line
method over their estimated useful lives.
Investment property is property held to earn rentals or for capital appreciation or both.
Investment property is measured by using the cost model and is stated at cost less accumulated depreciation
and accumulated impairment losses.
The estimated useful lives of major asset items are as follows:• Buildings and structures: 38 to 50 years• Machinery and vehicles:
10 to 15 years
The estimated useful lives and depreciation method are reviewed at each fiscal year end and if there are anychanges made to the estimated useful lives and depreciation method, such changes are applied prospectively aschanges in estimate.
ii) Intangible assets (excluding leased assets)
Intangible assets are measured by using the cost model and are stated at cost less accumulated amortization
and accumulated impairment losses.
Intangible assets acquired separately are measured at cost at the initial recognition, and the costs of intangible
assets acquired through business combinations are recognized at fair value at the acquisition date.
Expenditures on internally generated intangible assets are recognized as expense in the period when incurred,
except for development expenses that satisfy the capitalization criteria.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimateduseful lives and are tested for impairment whenever there is any indication of impairment. The estimateduseful lives and amortization method of intangible assets with finite useful lives are reviewed at each fiscal
year end, and the effect of any changes in estimate would be accounted for on a prospective basis.

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The estimated useful lives of major intangible assets with finite useful lives are as follows:• Trademarks:
10 to 20 years• Software:
5 years
Intangible assets with indefinite useful lives and intangible assets that are not ready to use are not amortized,
but they are tested for impairment individually or by cash-generating unit annually or whenever there is any
indication of impairment.
iii) Leased assets
Leases are classified as finance leases whenever substantially all the risks and rewards incidental to ownership
are transferred to the Group. All other leases are classified as operating leases.
In finance lease transactions, leased assets and lease obligations are recognized in the consolidated statementof financial position at the lower of the fair value of the leased property or the present value of the minimum
lease payments, each determined at the inception of the lease. Lease payments are apportioned between thefinancial cost and the reduction of the lease obligations based on the effective interest method. Financial costs
are recognized in the consolidated statement of income. Leased assets are depreciated using the straight-line
method over their estimated useful lives or lease terms, whichever is shorter.
In operating lease transactions, lease payments are recognized as an expense using the straight-line method
over the lease terms in the consolidated statement of income. Contingent rents are recognized as an expense in
the period when they are incurred.
Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement inaccordance with IFRIC 4 “Determining Whether an Arrangement Contains a Lease,” even if the arrangement
does not take the legal form of a lease.
E.

Policy on accounting of significant provisions
The Group has present obligations (legal or constructive) resulting from past events and recognizes provisions
when it is probable that the obligations are required to be settled and the amount of the obligations can be
estimated reliably.
Where the effect of the time value of money is material, the amount of provisions is measured at the present
value of the expenditures expected to be required to settle the obligations. In calculating the present value, theGroup uses the pretax discount rate reflecting current market assessments of the time value of money and therisks specific to the liability.
In accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets,” the Group recognizes aprovision for restructuring when it has a detailed formal plan for the restructuring and has raised a valid
expectation in those affected that it will carry out the restructuring by starting to implement that plan or
announcing its main scheme to those affected by it. Restructuring provisions include only the direct
expenditures arising from the restructuring, which meet both of the following criteria:• necessarily entailed by the restructuring;• not associated with the ongoing activities of the entity.

F.

Post-employment benefits
The Group sponsors defined benefit plans and defined contribution plans as employee retirement benefit plans.
The Company is obligated to bear pension expenses for a mutual assistance association incurred with respect
to services in or before June 1956 (prior to the enforcement of the Act on the Mutual Aid Association of Public
Corporation Employees). Such obligations are calculated and included in liabilities related to the retirement
benefits.
For each plan, the Group calculates the present value of defined benefit obligations, related current service costand past service cost using the projected unit credit method. For a discount rate, a discount period isdetermined based on the period until the expected date of benefit payment in each fiscal year, and the discountrate is determined by reference to market yields for the period corresponding to the discount period at the endof the fiscal year on high quality corporate bonds or government bonds. Liabilities or assets for defined benefit
plans are calculated by the present value of the defined benefit obligation, deducting the fair value of any plan-5-

assets (including adjustments for the asset ceiling for defined benefit plans and minimum funding
requirements, if necessary). Expected interest costs and interest income are recognized as financial costs.
Remeasurements of defined benefit plans are recognized in full as other comprehensive income in the period
when they are incurred and transferred to retained earnings immediately. Past service costs are recognized as
profit or loss in the period when incurred.
The cost for retirement benefits for defined contribution plans is recognized as an expense at the time ofcontribution.
G. Accounting for revenuei) Sale of goods
The Group mainly engages in the sale of tobacco products, prescription drugs, and processed foods. Revenue
from the sale of these goods is recognized when the significant risks and rewards of ownership of the goods
transfer to the buyers, the Group retains neither continuing managerial involvement nor effective control overthe goods sold, it is probable that the future economic benefits will flow to the Group, and the amount ofrevenue and the corresponding costs can be measured reliably. Therefore, revenue is usually recognized at thetime of delivery of goods to customers. In addition, revenue is recognized at fair value of the consideration
received or receivable less discounts, rebates and taxes, including consumption taxes.
Since the amount of turnover where the Group is involved as an agency, including tobacco excise taxes, isdeducted from revenue, the Group recognizes only the economic benefit inflow, excluding such amount asrevenue in the consolidated statement of income.
ii) Interest income
Interest income is recognized using the effective interest rate method.
iii) Dividend income
Dividend income is recognized when the shareholder’s right to receive payment is established.
iv) Royalties
Royalties are recognized on an accrual basis in accordance with the substance of the relevant agreement.
H. Goodwill
Goodwill is stated at acquisition cost less accumulated impairment losses.
Goodwill is not amortized. It is allocated to cash-generating units that are identified according to locations andtypes of businesses and tested for impairment annually or whenever there is any indication of impairment.
Impairment losses on goodwill are recognized in the consolidated statement of income and no subsequent
reversal is made.
I.

Method of foreign currency translation
Consolidated financial statements of the Group are presented in Japanese yen, which is the functional currencyof the Company. Each company in the Group specifies its own functional currency and measures transactions
based on it.
Foreign currency transactions are translated into the functional currency at the rates of exchange prevailing at
the dates of transactions or an approximation of the rate. Monetary assets and liabilities denominated inforeign currencies are translated into the functional currency at the rates of exchange prevailing at the fiscal
year end date. Differences arising from the translation and settlement are recognized as profit or loss.
However, exchange differences arising from the translation of financial instruments designated as hedging
instruments for net investment in foreign operations (foreign subsidiaries), financial assets measured at fairvalue through other comprehensive income, and cash flow hedges are recognized as other comprehensive
income.
The assets and liabilities of foreign operations are translated into Japanese yen at the rates of exchange
prevailing at the fiscal year end date, while income and expenses of foreign operations are translated into-6-

Japanese yen at the rates of exchange prevailing at the dates of transactions or an approximation to the rate.
The resulting translation differences are recognized as other comprehensive income. In cases where foreign
operations are disposed of, the cumulative amount of translation differences related to the foreign operations is
recognized as profit or loss in the period of disposition.
J.

Method of significant hedge accounting
The Group utilizes derivatives, including forward foreign exchange contracts and interest rate swap contracts,
to hedge foreign exchange and interest rate risks. These derivatives are initially measured at fair value when
the contract is entered into, and are subsequently remeasured at fair value. Changes in the fair value ofderivatives are recognized as profit or loss in the consolidated statement of income. However, the gains orlosses on the hedging instrument relating to the effective portion of cash flow hedges and hedges of net
investment in foreign operations are recognized as other comprehensive income.
At the inception of the hedge, the Group formally designates and documents the hedging relationship to which
hedge accounting is applied and the objectives and strategies of risk management for undertaking the hedge.
The documentation includes identification of hedging instruments, the hedged items, the nature of the risks
being hedged and how the hedging relationship’s effectiveness is assessed. These hedges are assessed on an
ongoing basis to determine whether the hedging relationship is effective prospectively, even though it isexpected that there is an economic relationship between the hedged item and the hedging instrument, that theeffect of credit risk does not dominate the value changes that result from that economic relationship, and thatthe hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged itemthat the Group actually hedges and the quantity of the hedging instrument that the Group actually uses tohedge that quantity of the hedged item.
If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio due tochanges in an economic relationship between the hedged item and the hedging instrument but the risk
management objective remains the same, the Group would adjust the hedge ratio so that it meets the qualifying
criteria again. The Group discontinues hedge accounting for the part that does not meet the requirement when
the hedging relationship ceases to meet the qualifying criteria after adjusting the hedge ratio.
Hedges that meet the stringent requirements for hedge accounting are classified into the following categories
and accounted for in accordance with IFRS 9.

i) Fair value hedge
The gain or loss on the hedging instrument is recognized as profit or loss in the consolidated statement ofincome. However, changes in the fair value of the hedging instrument are recognized as other comprehensive
income if the hedging instrument hedges an equity instrument designated as at fair value through othercomprehensive income. Regarding the hedging gain or loss on the hedged item, the carrying amount of thehedged item is adjusted and the change is recognized as profit or loss in the consolidated statement of income.
However, changes in fair value of an equity instruments which the Group elected to present in othercomprehensive income are recognized as other comprehensive income.
ii) Cash flow hedge
The effective portion of gains or losses on hedging instruments is recognized as other comprehensive incomein the consolidated statement of comprehensive income, while the ineffective portion is recognized
immediately as profit or loss in the consolidated statement of income.
The amounts of hedging instruments recognized in other comprehensive income are reclassified to profit orloss when the transactions of the hedged items affect profit or loss. In cases where hedged items result in therecognition of non-financial assets or liabilities, the amounts recognized as other comprehensive income areaccounted for as adjustments to the original carrying amount of non-financial assets or liabilities.
If the hedged future cash flows are no longer expected to occur, any related cumulative gain or loss that has
been recognized in equity as other comprehensive income is reclassified to profit or loss. If the hedged future
cash flows are still expected to occur, amounts that have been recognized in other comprehensive income arecontinued to be recognized in other comprehensive income until the future cash flows occur.

-7-iii) Hedge of net investment in foreign operations
Translation differences resulting from the hedge of net investment in foreign operations are accounted forsimilarly to a cash flow hedge. The effective portion of gains or losses on hedging instruments is recognized asother comprehensive income, while the ineffective portion is recognized as profit or loss in the consolidated
statement of income. At the time of the disposal of the foreign operations, any related cumulative gain or loss
that has been recognized in equity as other comprehensive income is reclassified to profit or loss.
K. National consumption tax and local consumption tax are excluded from the consolidated statement of income.

-8-2. Notes to consolidated statement of financial position(1) Accumulated depreciation of assets (including accumulated impairment losses)
Property, plant and equipment:¥893,824 million

Goodwill and intangible assets:¥817,808 million

Investment property:¥29,068 million(2) Assets pledged as collateral and liabilities relating to collaterali)

Pursuant to Article 6 of the Japan Tobacco Inc. Act, the Company’s properties are pledged as generalcollateral for its corporate bonds.
Amount of liabilities relating to collateral
Bonds:

ii)¥332,242 million

Assets pledged as collateral related to some consolidated subsidiaries are ¥1,097 million.
The amount of liabilities related to assets pledged as collateral is ¥241 million.

(3) Allowance for doubtful accounts directly deducted from assets
Trade and other receivables:¥23,589 million

Other financial assets:¥6,569 million

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3.

Notes to consolidated statement of changes in equity(1) Class and total number of issued shares and class and total number of treasury shares(Thousands of shares)
Increase for theyear ended
December 31, 2017

Decrease for theyear ended
December 31, 2017

2,000,000––

2,000,000

209,044088

208,957

Number of shares as ofJanuary 1, 2017

Number of shares as ofDecember 31, 2017

Issued shares
Ordinary shares
Treasury shares
Ordinary shares(Notes)

The increase of 0 thousand treasury shares (ordinary shares) is due to purchase of shares less than one
unit. The decrease of 88 thousand treasury shares (ordinary shares) is due to the exercise of shareoptions.

(2) Cash dividendsi) Dividends payments
Dividends per
share (Yen)

Ordinary shares

118,20366

December 31, 2016

March 27, 2017

Ordinary shares

125,369

70

June 30, 2017

September 1, 2017Class of shares

Annual Shareholders’Meeting(March 24, 2017)
Board of Directors(August 2, 2017)

Total dividends(Millions of yen)

Resolution

Basis date

Effective dateii) Dividends whose basis date is in the year ended December 31, 2017 but whose effective date falls in the year
ending December 31, 2018.
The following proposal will be placed on the agenda of the Annual Shareholders’ Meeting to be held on March 27,
2018.
(Proposal)

Class ofsharesTotal dividends(Millions of yen)

Annual Shareholders’
Ordinary
Meeting
shares(March 27, 2018)

125,373

Source ofdividends
Retainedearnings

Dividends per
share (Yen)70

Basis date

Effective date

December 31, 2017 March 28, 2018

(3) Class and number of shares under subscription rights to shares as of December 31, 2017 (excluding rights whose
exercise period has not yet begun)
1,031,200 shares

Ordinary shares- 10 -

4.

Financial instruments(1) Status of financial instruments
The Group is exposed to financial risks (credit risk, liquidity risk, foreign exchange risk, interest rate risk andmarket price fluctuation risk) in the process of its management activities, and it manages risks based on a specificpolicy in order to avoid or reduce said risks. The results of risk management are regularly reported by theTreasury Division to the president and the Board of Directors.
The Group policy limits derivatives to transactions for the purpose of mitigating risks from transactions based on
actual demand. Therefore, we do not transact derivatives for speculation purposes or trading purposes.
(2) Fair value of financial instruments
The carrying amounts on the consolidated statement of financial position and the fair values as of December 31,
2017 are as follows:(Millions of yen)
Carrying amount on consolidated statement offinancial position

Fair value

1) Long-term borrowings

71,854

71,8292) Bonds

332,242

331,998

With regard to short-term financial assets and short-term financial liabilities measured at amortized cost, the fairvalue approximates the carrying amount.
The fair value of long-term borrowings is calculated based on the present value which is obtained by discounting
the total of the principal and interest by the interest rate assumed in a case where the same loan is newly made.
The fair value of bonds issued by the Group is based on the market price for those having market prices, andbased on the present value that is obtained by discounting the total of principal and interest by the interest rate, forwhich the remaining period and credit risk of such bonds are taken into consideration.
5.

Investment property(1) Status of investment property
The Group owns some rental properties such as office buildings in Tokyo Prefecture and other areas.
(2) Fair value of investment property
The carrying amount on the consolidated statement of financial position and the fair value of investment
properties as of December 31, 2017 are as follows:(Millions of yen)
Carrying amount on consolidated statement offinancial position
Investment property(Notes)

16,700Fair value
36,567

1. The carrying amount on the consolidated statement of financial position is the acquisition cost lessaccumulated depreciation and accumulated impairment losses, if any.
2. The fair value of investment properties is determined based on a valuation conducted by an external
real estate appraiser. The valuation is made in accordance with the appraisal standards of the country
where the investment property is located and based on market evidence of transaction prices for
similar assets.

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6.

Per share information(1) Equity attributable to owners of the parent company per share:¥1,541.94(2) Basic earnings per share:¥219.10(3) Diluted earnings per share:¥218.97

7.

Contingencies
Contingent liabilities
The Company and some of its subsidiaries are defendants in legal proceedings. Provisions are not accounted for inmatters it is not practicable to reasonably estimate the final outcomes.
The Company and some of its subsidiaries, who are defendants in such legal proceedings, believe that our
defenses asserted in these proceedings are based on substantial evidence and implement the system for response toaction with the assistance of external lawyers.

(1) Smoking and health related litigation
The Company and some of its subsidiaries become defendants in lawsuits filed by plaintiffs seeking damages forharm allegedly caused by smoking, the marketing of tobacco products, or exposure to tobacco smoke. As of
December 31, 2017, there were a total of 21 smoking and health related cases pending in which one or moremembers of the Group were named as a defendant or for which the Company may have certain indemnity
obligations pursuant to the agreement such as for the Company’s acquisition of RJR Nabisco Inc.’s overseas (nonU.S.) tobacco operations.
The major ongoing smoking and health related cases are as follows:i)

Individual claim
There is one individual case brought against the Company’s indemnitee in South Africa.

ii) Class actions
There are eight ongoing class actions in Canada against the Company’s subsidiary and/or indemnitees.
iii) Health-care cost recovery litigation
There are ten ongoing health-care cost recovery cases in Canada pending against the Company’s subsidiaryand indemnitees brought by all the Canadian provinces (except three Canadian territories).
(2) Other legal proceedings
The Company and some of its subsidiaries are also engaged in other legal proceedings such as commercial andtax disputes, which may include proceedings that are conducted pursuant to applicable confidentiality obligations.
Details of such proceedings and their outcomes are disclosed by the Company only where permitted by suchconfidentiality obligations. There is one main lawsuit that is pending in Japan with regard to claims for damages
against some of the Company’s subsidiaries.
8.

All figures are rounded off to the nearest unit.

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Notes to Nonconsolidated Financial Statements
1.

Significant accounting policies(1) Basis and method of valuation for securities
Shares of subsidiaries and affiliates:
Stated at cost determined by the moving-average method.
Available-for-sale securities:
Securities with a fair value:
Stated at fair value based on market prices on the closing date of the accounting period. (Valuationdifference is stated as a component of net assets and the cost of securities sold is calculated by applying
the moving-average method.)
Securities without a fair value:
Stated at cost determined by the moving-average method.
(2) Basis and method of valuation for derivatives
Stated based on the fair value method.
(3) Basis and method of valuation for inventories
Stated at the lower of cost as determined by the average cost method, .
(Balance sheet amounts are measured at the lower of cost or net selling value.)(4) Depreciation methods for depreciable assetsi)

Property, plant and equipment (excluding leased assets)
The declining-balance method is applied. However, the straight-line method is applied for buildings(excluding accompanying facilities) acquired on or after April 1, 1998 and for accompanying facilities
and structures acquired on or after April 1, 2016.
The main useful lives are as follows:
Buildings (excluding accompanying facilities): 38 to 50 years
Machinery and equipment:ii)

10 years

Intangible assets (excluding leased assets)
Straight-line method
The main useful lives are as follows:
Patent right:

8 years

Right of trademark:

10 years

Software:5 years

Goodwill:

10 yearsiii) Leased assets
For finance leases that do not transfer ownership of the leased property to the lessee, depreciation
expense is mainly computed by the straight-line method over the lease period as the useful life assuming
no residual value.

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(5) Policy on accounting of provisionsi)

Allowance for doubtful accounts
Provided for possible losses from bad debts at an amount determined based on the historical default rate
for ordinary receivables and the individual recoverability of specific doubtful receivables from
customers experiencing financial difficulties.

ii) Provision for bonuses
Provided based on the estimated payable amount to provide for the payment of bonuses to employees
and directors.
iii) Provision for retirement benefits
Provided in preparation for the payment of retirement benefits to employees based on the estimatedretirement benefit obligations and fair values of plan assets as of the end of this fiscal year. In
calculating retirement benefit obligations, the benefit formula basis is used as the method of attributing
expected benefit to periods up to the year ended December 31, 2017.
Past service cost is amortized using the straight-line method over the average remaining years of serviceof the employees (10 years).
Actuarial gains and losses are amortized from the year following the year in which the gains or losses
are recognized using the straight-line method over the average remaining years of service of theemployees (10 years).
Also included in the provision for retirement benefits is the portion of public pension expenses formutual assistance association during certain periods in or before June 1956 (prior to the enforcement of
the Act on the Mutual Aid Association of Public Corporation Employees).
(6) Policy on translation of assets and liabilities denominated in foreign currency into Japanese yen
Receivables and payables denominated in foreign currencies are translated into Japanese yen at the rates
prevailing at the closing date of the accounting period with translation differences treated as gains or losses
occurring in the corresponding fiscal year.
(7) Method of hedge accounting
Deferral hedge accounting is applied.
For interest rates and currency swaps, if they satisfy the requirements for treatment that incorporates swaps into
underlying accounting items (accounting by applying foreign exchange rate stipulated in the contracts;
exceptional treatment), they are accounted for by incorporating swaps into underlying accounting items.
(8) National consumption tax and local consumption tax are excluded from the nonconsolidated statement of income.
(9) Additional information(Application of the Implementation Guidance on Recoverability of Deferred Tax Assets)
The “Implementation Guidance on Recoverability of Deferred Tax Assets” (Accounting Standards Board of Japan
Guidance No. 26, March 28, 2016) was applied from this fiscal year.

- 14 -

2.

Notes to nonconsolidated balance sheet(1) Receivables and payables with respect to subsidiaries and affiliates (excluding items separately presented)
Short-term receivables:¥20,939 million

Short-term payables:¥25,106 million

Long-term payables:¥4,890 million(2) Accumulated depreciation of property, plant and equipment:¥472,131 million(3) Pursuant to Article 6 of the Japan Tobacco Inc. Act, the Company’s assets are pledged as general collateral for its
corporate bonds.
Amount of liabilities relating to collateral:

Bonds¥330,338 million(4) Guarantee obligations
Guaranteed party

Guarantee amountType of guarantee obligation(Millions of yen)
32,450Loan guarantee, guarantee
denominated in foreign currencies¥32,450 million(EUR 239 million)

JT International S.A.

27,411

Loan guarantee, guarantee
denominated in foreign currencies¥27,411 million(USD 160 million)(CHF 48 million)(EUR 22 million) others

JT International Hellas A.E.B.E.

24,404

Loan guarantee, guarantee
denominated in foreign currencies¥24,404 million(EUR 180 million)

JT International (Philippines) Inc.

19,848

Loan guarantee, guarantee
denominated in foreign currencies¥19,848 million(PHP 8,785 million)

LLC Petro

10,153

Loan guarantee, guarantee
denominated in foreign currencies¥10,153 million(RUB 5,175 million)

JT International Korea Inc.

10,143

Loan guarantee, guarantee
denominated in foreign currencies¥10,143 million(KRW 95,810 million)

Other (39 companies)

64,448

Loan guarantee

Total

188,858

JT International Company
Netherlands B.V.

(5) Payables to Directors and Audit & Supervisory Board Members
Long-term payables:¥7 million(6) “Cash management system deposits received” are funds entrusted in the cash management system for domestic
group companies.

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3.

Notes to nonconsolidated statement of income(1) Net sales including tobacco excise taxes for the year ended December 31, 2017 amounted to ¥1,780,038 million.
Net sales including tobacco excise taxes are the amount of net sales plus the amount equivalent to tobacco excise
taxes.
(2) Amount of transactions with subsidiaries and affiliates
Net sales:¥76,550 million

Purchase of goods:¥67,433 million

Selling, general and administrative expenses:¥64,550 million

Dividends income:¥28,857 million

Amount of non-operating transactions:¥22,311 million(3) Total research and development expenses are ¥50,442 million, all of which were recorded as general andadministrative expenses.
4. Notes to nonconsolidated statement of changes in net assets

Class and number of shares of treasury shares(Thousands of shares)
Number of shares asof January 1, 2017

Increase for the year
ended December 31,
2017

Decrease for the year
ended December 31,
2017

Number of shares asof December 31, 2017

Ordinaryshares209,044088

208,957

Total

209,044088

208,957

Treasury shares(Note) The increase of 0 thousand treasury shares (ordinary shares) is due to purchase of shares less than one
unit. The decrease of 88 thousand treasury shares (ordinary shares) is due to the exercise of share options.

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5.

Tax effect accounting(1) Breakdown of deferred tax assets and deferred tax liabilities by major cause
Deferred tax assets
Provision for retirement benefits
Obligations pertaining to mutual assistance pension benefits
Other
SubtotalLess valuation allowance
Deferred tax assets total¥25,599 million¥14,331 million¥23,150 million¥63,080 million(¥10,162) million¥52,918 million

Deferred tax liabilities
Reserve for reduction entry
Deferred gains or losses on hedges
Valuation difference on available-for-sale securities
Other
Deferred tax liabilities total
Net deferred tax liabilities(¥18,803) million(¥10,665) million(¥13,515) million(¥13,631) million(¥56,614) million(¥3,696) million(2) The breakdown of major items that caused significant differences between the effective statutory tax rate and theactual tax rate when applying tax effect accounting

Effective statutory tax rate

30.66%(Adjustments)

Permanent difference arising from non-deductible items including
entertainment expenses
Permanent difference arising from non-taxable items including
dividends income
Tax credit of items including research and development expenses
Other
Actual effective tax rate after applying tax effect accounting- 17 -

0.21%(4.33%)(1.31%)
0.30%
25.52%

6. Related-party transactions
Subsidiaries and Affiliates

Type

Name

Ownership
ratio ofvotingrightsRelation
Description
withofrelatedtransaction
parties

Transaction amountLending offunds
millions ofyen

Table Mark Direct
Holdings Co., ownership
Ltd.
100%

Lendingof funds

Lendingof funds(Notes 1,
2)

42,812

Receipt of
repayment of
funds
millions ofyen

45,484

Subsidiary

JT
International
Holding B.V.

Type

Name

Indirectownership100%

Lendingof funds

Lendingof funds(Note 1)

159,229

Ownership Relation with
Description
ratio ofrelatedof transaction
voting rights
parties–

Transaction
amountEnd-ofperiodbalanceItemmillions ofyen
Short-term
loan
receivablesfromsubsidiaries
andaffiliates

39,576Long-term
loan
receivablesfromsubsidiaries
andaffiliates

5,006

Short-term
loan
receivablesfromsubsidiaries
andaffiliates

159,330End-ofperiodbalancemillions of
yen

Item

millions of
yen
–

Cash
management
systemdeposits
received202,112

Guarantee ofobligations(Note 3)32,450––Return ofpaid-in
capital(Note 4)

125,896––

Directownership
74.5%

Deposits
received for
cash
management
systemReceipt of
surplus funds(Notes 1, 2)

Subsidiary JT International
IndirectCompany
ownership
Netherlands
100%
B.V.

Guarantee ofobligations–

TS Network
Co., Ltd.

JT International Direct
Group Holding ownership
B.V.
100%

Transaction conditions and policy on determination of transaction conditions(Notes) 1. Interest rates on lending of funds and that on receipt of surplus funds are reasonably determinedtaking into account interest rates on the market.
2. For lending/borrowing from the cash management system, transaction amounts are omitted from thetable above because of their frequent occurrence.
3. Guarantees of obligations are made for bank loans, and guarantee fees are calculated based on theguarantee amount.
4. JT International Group Holding B.V. reduced its paid-in capital and repaid $ 1,106 million.

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7.

Per share information(1) Net assets per share:¥888.31(2) Net income per share:¥89.40(3) Diluted net income per share:¥89.358.

All figures are rounded off to the nearest unit.

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