[This is an English translation prepared for reference purpose only. Should there be any inconsistency between the translationand the original Japanese text, the latter shall prevail.]March 1, 2019

To Our Shareholders

MATERIALS DISCLOSED VIA THE INTERNET CONCERNINGNOTICE OF CONVOCATION OF
THE 34TH ANNUAL SHAREHOLDERS’ MEETING
The items listed below are posted on the Company’s website (https://www.jti.co.jp/) to be offered to shareholders,pursuant to the provisions of laws and regulations as well as Article 17 of our Articles of Incorporation.

Business Report
Overview of the Resolutions on the Development of Systems Necessary to Ensure the Properness of
Operations and the Operating Status of the Systems

Consolidated Financial Statements
Consolidated Statement of Changes in Equity
Notes to Consolidated Financial Statements

Nonconsolidated Financial Statements
Nonconsolidated Statement of Changes in Net Assets
Notes to Nonconsolidated Financial Statements(For the fiscal year from January 1, 2018 to December 31, 2018)

Japan Tobacco Inc.
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Business Report
Overview of the Resolutions on the Development of Systems Necessary to Ensure the Properness
of Operations and the Operating Status of the Systems
The Board of Directors has resolved with regard to the development of systems necessary to ensure that theexecution of the duties by the Members of the Board complies with the laws and regulations and the Articles ofIncorporation, and other systems necessary to ensure the properness of operations of a stock company as follows:(1) Systems to ensure that the performance of duties by the Members of the Board and employees of theCompany, as well as by Directors, etc. (meaning “Directors, etc.” as provided for in Article 100, Paragraph
1, Item 5 (i) of the Ordinance for Enforcement of the Companies Act) and employees (with Directors, etc.
and employees hereafter collectively referred to as “directors and employees”) of subsidiaries, conforms tolaws, regulations, and the Articles of Incorporation
A.

Compliance system
The Company shall establish Code of Conduct based on regulations concerning the compliance system inorder to ensure that directors and employees of the Company and its subsidiaries comply with laws andregulations, Company’s Articles of Incorporation, the social norms, etc., and set up a JT Group Compliance
Committee as an organization responsible for ensuring thorough compliance. This committee, headed byCompany’s Chairman of the Board, mainly consists of outside members and reports directly to the Board of
Directors.
The Company appoints an Executive Officer (sikkoyakuin) in charge of compliance with overseeing theCompliance Office in an effort to establish and promote a group-wide, cross-sectional system and shed lighton issues.
The compliance promotion departments of the Company and its subsidiaries (meaning the Compliance
Office within the Company, and corresponding departments within subsidiaries) distribute materials
including the “JT Group Code of Conduct,” which explains the Code of Conduct, etc., to directors andemployees, and work to enhance the effectiveness of the compliance system by enlightening directors andemployees about compliance through training and other programs, etc.
(Internal reporting system)
In preparation for cases in which employees or other parties detect activities, etc. suspected of violating laws
and regulations, the Company and its subsidiaries maintain consultation and reporting desks as internal
whistleblower systems. Compliance promotion departments that receive a report or request for consultation
investigate the details and take necessary action, while working to prevent recurrence of the issue.
The Company will bring matters of particular importance involving the JT Group to the JT Group
Compliance Committee, and will request deliberation or will report on the issue.
(System for excluding anti-social elements)
The Company and its subsidiaries are resolved to fight against, not to comply with, an unreasonable demandand not to have any relations with anti-social elements.
The General Administration Division shall be the JT Group’s headquarters assuming the responsibility forsupervising efforts to exclude anti-social elements, the Company cooperates with police, lawyers and otherrelevant organizations and parties to gather and share information in order to deal with such elements in an
organized way.
In addition, the Company and its subsidiaries shall prohibit involving with anti-social elements and fullycommunicate to all directors and employees of the Company and its subsidiaries. At the same time, anawareness raising program for excluding anti-social elements is to be consistently administered for all
directors and employees, by providing relevant training, etc. as necessary.

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B.

System to ensure the reliability of financial reporting
The Company has in place and operates an internal control system relating to financial reporting of JT Groupin accordance with the Financial Instruments and Exchange Act. The Company strives to maintain andimprove the reliability of its financial reporting by allocating a sufficient level of staff to the task ofevaluating and reporting financial results.

C.

Internal audit system
The Operational Review and Business Assurance Division of the Company oversees the internal audit
system and examines and evaluates systems for supervising and managing the overall operations and thestatus of business execution from the viewpoints of legality and rationality, in order to protect theCompany’s assets and improve management efficiency. In coordination with the internal audit functions of
all subsidiaries, the Operational Review and Business Assurance Division also undertakes the planning andperformance of the JT Group’s internal audit systems and policies, and supplements the internal audit
functions of subsidiaries.

(2) Procedures and arrangements for storage and management of information on the performance of duties by
the Members of the Board of the Company
A.

Storage and management of minutes
The Company makes sure to properly store and manage the minutes of General Meetings of Shareholders
and meetings of the Board of Directors, in line with laws and regulations.

B.

Storage and management of other information
The Company makes sure that the information on important matters relating to business execution anddecision-making including the conclusion of corporate contracts is stored and managed by the relevant
departments and divisions as specified by the Responsibilities/Authorities Allocation Rules, and establishes
rules on managing the processes of decision-making, procurement and accounting.

(3) System for reporting matters concerning the performance of duties by Directors, etc. of subsidiaries to theCompany
The Company will require subsidiaries to regularly report important information to the Company’s departments
and divisions that are in charge of the subsidiaries.
(4) Rules on management of risk of loss of the Company and its subsidiaries, and procedures/arrangements forother matters
A.

System to evaluate and manage risk of loss under normal circumstances
The Company establishes internal policies, rules and manuals relating to JT Group for the management ofrisk of loss relating to monetary and financial affairs, and ensures that relevant reports are made to the
President and Chief Executive Officer and the Board of Directors on a quarterly basis via Chief Financial
Officer. With regard to the risk of loss relating to other affairs, in accordance with authority delegated toeach department and division as per the Responsibilities/Authorities Allocation Rules, responsible
departments and divisions take on a supervisory role creating all types of committees to conduct proper
management and, depending on the level of importance, report risks to the President and Chief Executive
Officer and obtain approval for countermeasures.
In cooperation with the internal audit functions of subsidiaries, the Operational Review and Business
Assurance Division of the Company examines and evaluates the internal control systems, etc. of the JT
Group companies in light of the level of importance and the risks involved, and from an objective standpointthat is independent of organizations responsible for business execution. It provides reports and counsel to the
President and Chief Executive Officer and also reports to the Board of Directors.

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B.

Preparedness for possible emergencies
The Company produces a manual for crisis management and disaster response. In the event of an emergency
or a disaster, JT is ready to establish an emergency project system, and make prompt and proper responses
under the leadership of senior management and through close cooperation between the relevant departments
and divisions and subsidiaries. Events to which a response is made and the details of such events shall bereported to the Board of Directors.

(5) System to ensure that Members of the Board of the Company and Directors, etc. of its subsidiaries canperform their duties efficiently
A.

Board of Directors of the Company
The Board of Directors of the Company meets once a month in principle and on more occasions asnecessary, in order to make decisions with regard to the matters specified by laws and regulations and otherimportant matters and to supervise business execution.
The Board of Directors of the Company receives reports from Members of the Board of the Company on thestatus of business execution at least once every three months.

B.

Proper delegation of authority and system of responsibilities of the Company
For important management issues, particularly management policy and basic plans regarding overallbusiness operations of the Company, in addition to matters to be referred to the Board of Directors of theCompany, a clear decision-making process is stipulated in the Responsibilities/Authorities Allocation Rules
to have a system that enables to realize swift decision-making and high-quality business execution.
Executive Officers (sikkoyakuin) appointed by the Board of Directors execute business properly by
exercising the authority delegated to them in their respective areas in accordance with a company-widebusiness strategy decided by the Board.
In order to manage business operations in ways that contribute to the business efficiency and flexibility of
the Company, basic matters concerning the Company’s organization, allocation of duties to officers and staff
and the roles of individual divisions are specified by the relevant internal rules.

C.

Formulation, etc. of rules and policies that apply to the JT GroupThe Company will construct an efficient system for business execution within the JT Group through theformulation, etc. of rules and policies that apply to the JT Group.

(6) Systems necessary to ensure the properness of operations in the Company and the business group which
consists of the Company and its subsidiaries
A.

Mission of the JT GroupThe JT Group has set itself the mission of creating, developing and nurturing its unique brands to win
consumer trust, while understanding and respecting the environment and the diversity of societies andindividuals, and there is a group-wide consensus on the mission.

B.

Group management
The JT Group shall specify the functions and rules common for all group companies to effectuate groupmanagement that optimizes the operations of the entire JT Group as a whole.
The Company has put in place systems for compliance (including the internal reporting system), internal
audits, financial affairs management, etc. in cooperation with its subsidiaries.

(7) Matters for employees assisting Audit & Supervisory Board Members of the Company in their duties in theevent such employees were requested by Audit & Supervisory Board Members

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A.

Establishment of Audit & Supervisory Board Member’s Office
The Company has established an Audit & Supervisory Board Member’s Office as an organization to assist
the duties of the Company’s Audit & Supervisory Board Members (hereinafter simply “Audit & Supervisory
Board Members,” with the terms “Audit & Supervisory Board,” “Audit & Supervisory Board Member’s
Office,” and “Manager of the Audit & Supervisory Board Member’s Office” also referring to those items
within the Company).

B.

Allocation of staff
The Company has allocated sufficient staff to the Audit & Supervisory Board Member’s Office. In addition,
the Company makes sure to review and reform the staffing structure as necessary based on consultations
with the Audit & Supervisory Board.

(8) Matters relating to the independence of employees belonging to the Audit & Supervisory Board Member’s
Office from the Company’s Members of the Board, and matters relating to the assurance of theeffectiveness of instruction by Audit & Supervisory Board Members to those employees
A.

Management of employees affiliated with the Audit & Supervisory Board Member’s Office
The evaluation of the Manager of the Audit & Supervisory Board Member’s Office is made by the Audit &Supervisory Board and the evaluation of the other employees assigned to the Audit & Supervisory Board
Member’s Office is made by the Manager of the Audit & Supervisory Board Member’s Office based on theadvice of the Audit & Supervisory Board. The transfer and discipline of employees assigned to the Audit &Supervisory Board Member’s Office is to be deliberated in advance with the Audit & Supervisory Board.

B.

Duties of employees belonging to the Audit & Supervisory Board Member’s Office
Employees belonging to the Audit & Supervisory Board Member’s Office will follow the direction andorders of Audit & Supervisory Board Members in assisting the duties of the latter, and will not be assigned
to other concurrent positions relating to the business execution of the Company.

(9) System for reporting by directors and employees of the Company and its subsidiaries or persons reported
by directors and employees of its subsidiaries to the Audit & Supervisory Board and Audit & Supervisory
Board Members
A.

Reporting to the Audit & Supervisory Board
When directors and employees of the Company and its subsidiaries detect any evidence of malfeasance infinancial documents or serious breaches of laws or regulations or the Company’s Articles of Incorporation,
they are due to report them to the Audit & Supervisory Board, along with other relevant matters that could
affect the Company’s management.

B.

Appropriate reporting in response to requests by Audit & Supervisory Board Members
Directors and employees of the Company and its subsidiaries shall respond in a prompt and appropriatemanner when they are asked by Audit & Supervisory Board Members to compile important documents fortheir perusal, to accept field audits and to submit reports.

C.

Reporting on the status of whistleblowing
The Compliance Office will report regularly to Audit & Supervisory Board Members on the status ofwhistleblowing involving the JT Group, and will make non-regular reports as necessary.

(10) System to ensure that persons reporting to Audit & Supervisory Board Members are not subject todisadvantageous treatment due to having reported-5-

The Company will thoroughly communicate within the JT Group that persons engaging in consultation orwhistleblowing are not to be subject to any disadvantageous treatment for reason of those actions.
(11) Matters concerning policies for the prepayment of expenses involving the performance of duties by Audit& Supervisory Board Members, procedures for reimbursement, and the handling of other expenses ordebts involving the performance of those duties
A.

Handling of expenses or debts in accordance with Article 388 of the Companies Act
When an Audit & Supervisory Board Member has made claim to the Company for the prepayment ofexpenses, etc. in accordance with Article 388 of the Companies Act, the Company will promptly handle therelevant expenses or debt, with the exception of cases in which the Company deems the claimed expenses ordebt to be unnecessary to the performance of the duties of the Audit & Supervisory Board Member.

B.

Setting of budgets, etc.
With regard to miscellaneous expenses for audits by Audit & Supervisory Board Members, the Company
will set a budget in order to secure the effectiveness of the audits. The Company will also bear the portion of
miscellaneous expenses for audits by Audit & Supervisory Board Members that are in excess of budget, withthe exception of cases in which the Company deems the expenses to be unnecessary to the performance of
duties.

(12) Other systems to ensure effective auditing by Audit & Supervisory Board Members
A.

Attendance at important meetings
Audit & Supervisory Board Members are allowed to attend not only meetings of the Board of Directors of
the Company but also other important meetings of the Company.

B.

Coordination between the Operational Review and Business Assurance Division and Compliance
Office and the Audit & Supervisory Board Members
The Operational Review and Business Assurance Division and the Compliance Office maintain cooperation
with Audit & Supervisory Board Members by exchanging information.

The status of systems necessary to ensure the properness of operations
A.

Status of initiatives concerning compliance

The JT Group has set itself the mission of creating, developing, and nurturing its unique brands to win
consumer trust, while understanding and respecting the environment and the diversity of societies andindividuals. The Company communicates this mission throughout the JT Group by means including its
inclusion in the “JT Group Code of Conduct” booklet, which is distributed to the directors and employees of
the Company and its subsidiaries.

In accordance with the JT Group Compliance Rules, the Company performs appropriate reporting to the Boardof Directors on the performance of the annual Compliance Plan, the occurrence of serious complianceviolations, actions taken in response to these, and other matters of importance.

In order to improve awareness of compliance and prevent improper actions, the Company conducts regulartraining for the directors and employees of the Company and its subsidiaries.

With regard to whistleblowing systems, the Company maintains consultation and reporting desks inside andoutside the Company, and thoroughly communicates to directors and employees of the Company and its
subsidiaries that persons who engage in consultation or whistleblowing are not to be subject to any
disadvantageous treatment for reason of those actions. In addition, the content of consultations andwhistleblowing are regularly reported within the JT Group Compliance Committee.

With regard to the handling of anti-social elements, the Company continues to collect related declarations andpledges from suppliers, and conducts regular training and other programs for the directors and employees of-6-the Company and its subsidiaries.
B.

C.

D.

Status of initiatives to manage the risk of lossWith regard to the monetary and financial risks, the Company makes quarterly reports to the President andChief Executive Officer and the Board of Directors in accordance with the Basic Rules on Financial Work of
the Group.

With regard to the evaluation and examination of internal management systems, the Operational Review andBusiness Assurance Division provides reports and counsel to the President and Chief Executive Officer andalso reports to the Board of Directors, in accordance with the Rules for Internal Audits.

With regard to crises and disasters, the Company makes quarterly reports to the Board of Directors concerning
events to which responses were made and the details of the events, in accordance with the “Decision
Concerning the Preparation of Basic Policies and Systems Concerning the Construction of Internal Control
Systems.”

Status of initiatives concerning the properness and efficiency of the execution of duties


Meetings of the Board of Directors are held every month and as appropriate, in accordance with theRegulations of the Board of Directors. The Members of the Board in charge of businesses make quarterly
reports to the Board of Directors on the status of business execution within each business, including within its
subsidiaries.

With regard to decision-making, etc. on execution of important business, etc., the Company is converting
resolution procedures to electronic methods and is constructing a fast and efficient management system. The
Company also accurately records and creates minutes of meetings of the Board of Directors, and performs
appropriate storage and management of the information.

Securing the effectiveness of audits by Audit & Supervisory Board Members


Audit & Supervisory Board Members receive reports as appropriate from directors and employees of theCompany and its subsidiaries, regarding necessary information for audits. In addition to attending important
conferences, Audit & Supervisory Board Members also perform appropriate checks of the content of electronic
resolutions concerning decision-making on the execution of business. In addition, Audit & Supervisory Board
Members regularly exchange opinions and otherwise communicate with each subsidiary’s own Audit &Supervisory Board Members to enhance audits performed by all Audit & Supervisory Board Members inside
the JT Group.



The Operational Review and Business Assurance Division and the Compliance Office also coordinate on
conducting regular exchanges of information with Audit & Supervisory Board Members.



In order to assist the duties of Audit & Supervisory Board Members, the Company has established an Audit& Supervisory Board Member’s Office that is independent of divisions responsible for execution, and has
assigned necessary personnel to the Office. In addition, through consultation with Audit & Supervisory Board
Members, the Company records a budget for expenses expected to be necessary for the duties of the Audit &Supervisory Board Members.

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Consolidated Financial Statements
Consolidated Statement of Changes in Equity(Year ended December 31, 2018)(Millions of yen)
Equity attributable to owners of the parent company
Other components of equity
Net gain (loss) onrevaluation ofSharecapitalCapitalsurplusTreasurysharesSubscription
rights tosharesExchange
Net gain (loss) financial assets
differences on on derivatives measured at fairtranslation of designated as value throughforeigncash flowotheroperations
hedgescomprehensive
incomeAs of January 1, 2018

100,000

736,400(443,636)

1,964(207,884)(88)

38,670

Profit for the period

－

－

－

－

－

－

－

Other comprehensive
income (loss)

－

－

－

－

(247,034)

1,012(8,239)Comprehensive income(loss) for the period

－

－

－

－

(247,034)

1,012(8,239)

－

－

(0)

－

－

－

－

－

－

807

(691)

－

－

－

Share-based payments

－

－

－

274

－

－

－

Dividends

－

－

－

－

－

－

－

Changes in the scope of
consolidation

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

(860)

Other increase (decrease)

－

－

－

－

－

(480)

－

Total transactions with theowners

－

－

807

(417)

－

(480)

(860)

As of December 31, 2018

100,000

736,400(442,829)

1,547(454,918)

443

29,570Acquisition of treasury
shares
Disposal of treasury
sharesChanges in the ownershipinterest in a subsidiary
without a loss of control
Transfer from othercomponents of equity toretained earnings-8-

(Millions of yen)
Equity attributable to owners of the parent company
Other components of equity
Remeasurements ofdefinedbenefit plans

Total

Retainedearnings

Total

Noncontrollinginterests

Total equity

As of January 1, 2018－

(167,338)

2,536,262

2,761,687

80,3402,842,027

Profit for the period－－

385,677

385,677

1,755

387,431

Other comprehensive
income (loss)(3,075)(257,337)－(257,337)(792)(258,129)

Comprehensive income(loss) for the period(3,075)(257,337)

385,677

128,340962

129,302

Acquisition of treasury
shares

－

－

－

(0)

－

(0)

Disposal of treasury
shares

－

(691)

(116)

0

－

0

Share-based payments

－

274

2

275

36

311

Dividends－－(259,724)(259,724)(1,914)(261,638)

－

－

－

－

139

139

－

－

495

495

(9,713)(9,218)

3,075

2,215

(2,215)－－－

Other increase (decrease)

－

(480)

－

(480)

－

(480)

Total transactions with theowners

3,075

1,318

(261,558)(259,433)(11,452)(270,885)

As of December 31, 2018－

(423,357)

2,660,381

2,630,594

69,8512,700,445

Changes in the scope of
consolidation
Changes in the ownershipinterest in a subsidiary
without a loss of control
Transfer from othercomponents of equity toretained earnings-9-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) Scope of consolidation
Number of consolidated subsidiaries: 224 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.
(3) Scope of equity method
Number of affiliates accounted for using the equity method: 11 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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(4) 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
With respect to financial assets measured at amortized cost, the Group recognizes an allowance for doubtful
accounts for expected credit losses. The expected credit losses are calculated based on historical loss
experience or future recoverable amounts.
An allowance for doubtful accounts for trade receivables is always recognized at an amount equal to the fulllifetime expected credit losses. In principle, with respect to financial assets except for trade receivables, anallowance for doubtful accounts is measured at an amount equal to the 12-month expected credit losses.
However, the allowance for doubtful accounts is measured at an amount equal to the full lifetime expectedcredit losses if a credit risk on the financial asset has increased significantly since initial recognition.
The Group assesses whether a credit risk on a financial asset has increased significantly based on a change ofthe default risk considering the past due information, financial difficulties of obligors or downgrades of theinternal credit rating.
The Group assesses a whole or part of a financial asset which is deemed uncollectible or extremely difficult tobe collected as a default and recognizes it as a credit-impaired financial asset.
The expected credit losses on trade receivables which are not assessed as credit-impaired financial assets aremeasured collectively by an asset group consisting of a number of homogeneous counterparties.
An allowance for doubtful accounts for financial assets is recognized in profit or loss. If an event which causes- 11 -

a reduction of the allowance for doubtful accounts occurs, a reversal of an allowance for doubtful accounts is
recognized in profit or loss.
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 thecontract is entered into, and are subsequently remeasured at fair value. Changes in the fair value of derivatives
are recognized as profit or loss in the consolidated statement of income. However, the gains or losses on thehedging 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.

- 12 -

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

- 13 -

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) Revenue from contracts with customers
Revenue is recognized based on the following five-step approach.
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when the entity satisfies a performance obligation
The Group mainly engages in the sale of tobacco products, prescription drugs, and processed foods. Revenue
is recognized upon delivery of the products because the customer obtains control of the products upondelivery, by which the Group evaluates that the performance obligation is satisfied. Revenue is measured at theconsideration promised in a contract with a customer, less discounts, rebates and taxes, including consumptiontax.
The tobacco excise taxes and other transactions in which the Group is involved as an agency are excluded
from revenue. The amount after deducting the tobacco excise taxes and other transactions is presented as“Revenue” 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.
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 in foreign
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 fair value throughother comprehensive income, and cash flow hedges are recognized as other comprehensive income.

- 14 -

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
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- 15 -

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.
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.
L.

In the fiscal year ended December 31, 2018, the Company and certain domestic subsidiaries applied forapproval of the adoption of the consolidated taxation system, and it is to be adopted from the following fiscal
year. Therefore, from the fiscal year ended December 31, 2018, deferred tax assets and liabilities areaccounted for assuming the adoption of the consolidated taxation system.

(5) Changes in accounting policies
The Group has adopted the following new accounting standards, amended standards and new interpretations fromthe fiscal year ended December 31, 2018.
IFRS

Description of new standards and amendments

IFRS 9Financial Instruments

Limited changes to classification and measurement of financial
assets, and introduction of an expected credit loss impairment model

IFRS 15

Revenue from Contracts
with Customers

Amendments to accounting treatment for recognizing revenue

The effect of adopting IFRS 9 on the consolidated financial statements is immaterial.

In adopting IFRS 15, the Group used a transition method by which the cumulative effect of initially applying thisStandard was recognized at the date of initial application.
As a result of identification of performance obligations under contracts with customers based on the five-step
approach stated in “G. Accounting for revenue i) Revenue from contracts with customers,” the sales promotion
and other expenses paid by the Group to customers, which have been previously accounted for as selling, generaland administrative expenses, are partially deducted from revenue from the fiscal year ended December 31, 2018.
In addition, shipping and warehousing expenses and other expenses necessary for satisfying performanceobligations that have been previously accounted for as selling, general and administrative expenses are accounted
for as cost of sales from the fiscal year ended December 31, 2018.
As a result, compared to the application of the former accounting standard, “Revenue” and “Selling, general andadministrative expenses” decreased by ¥10,944 million and ¥70,905 million respectively, and “Cost of sales”
increased by ¥59,962 million on the consolidated statement of income for the fiscal year ended December 31,
2018.
These changes have no effect on operating profit and profit for the period.

- 16 -

2. Notes to consolidated statement of financial position(1) Accumulated depreciation of assets (including accumulated impairment losses)
Property, plant and equipment:¥902,664 million

Goodwill and intangible assets:¥827,409 million

Investment property:¥20,797 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)¥373,384 million

Assets pledged as collateral related to some consolidated subsidiaries are ¥2,138 million.
The amount of liabilities related to assets pledged as collateral is ¥71 million.

(3) Allowance for doubtful accounts directly deducted from assets
Trade and other receivables:¥1,650 million

Other financial assets:¥6,108 million- 17 -

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, 2018

Decrease for theyear ended
December 31, 2018

2,000,000－－

2,000,000

208,957

0

380

208,577

Number of shares as ofJanuary 1, 2018

Number of shares as ofDecember 31, 2018

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 380 thousand treasury shares (ordinary shares) is due to the exercise of shareoptions.

(2) Cash dividendsi) Dividends payments
Total dividends

Dividends per
share (Yen)

Resolution

Class of shares

Annual Shareholders’Meeting(March 27, 2018)

Ordinary shares

125,37370 December 31, 2017

March 28, 2018

Board of Directors(August 1, 2018)

Ordinary shares

134,351

75 June 30, 2018

September 3, 2018

(Millions of yen)

Basis date

Effective dateii) Dividends whose basis date is in the year ended December 31, 2018 but whose effective date falls in the year
ending December 31, 2019.
The following proposal will be placed on the agenda of the Annual Shareholders’ Meeting to be held on March 20,
2019.
(Proposal)

Class ofsharesTotal dividends(Millions of yen)

Annual Shareholders’
Ordinary
Meeting
shares(March 20, 2019)

134,357

Source ofdividends
Retainedearnings

Dividends per
share (Yen)Basis date

Effective date75 December 31, 2018 March 22, 2019(3) Class and number of shares under subscription rights to shares as of December 31, 2018 (excluding rights whose
exercise period has not yet begun)
Ordinary shares

829,400 shares- 18 -

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,
2018 are as follows:(Millions of yen)
Carrying amount on consolidated statement offinancial position

Fair value

1) Long-term borrowings

129,313

129,978

2) Bonds

610,444606,495

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, 2018 are as follows:(Millions of yen)
Carrying amount on consolidated statement offinancial position
Investment property(Notes)17,558Fair value
37,164

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.

- 19 -

6.

Per share information(1) Equity attributable to owners of the parent company per share:¥1,468.44(2) Basic earnings per share:¥215.31(3) Diluted earnings per share:¥215.20

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, 2018, 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.

- 20 -

8.

Significant subsequent events
As part of the shareholder return based on our shareholder return policy, the Company’s Board of Directors madea resolution on February 7, 2019 for the Company to acquire its own shares according to the particulars statedbelow pursuant to the provision of Article 156 of the Companies Act, as applied by replacing the relevant terms
pursuant to the Act’s provision of Article 165, Paragraph 3.
a.
b.
c.
d.
e.

9.

Class of shares to be acquired
Common stock
Number of shares to be acquired
Up to 23,000,000 shares
Total payment to acquire shares
Up to ¥50,000 million
Period of share acquisition
From February 8, 2019 to April 22, 2019
Method of acquisition
Purchase on the stock exchange via a trust bank

All figures are rounded off to the nearest unit.

- 21 -

Nonconsolidated Financial Statements
Nonconsolidated Statement of Changes in Net Assets(Year ended December 31, 2018)(Millions of yen)
Shareholders’ equity
Capital surplus
Capitalstock

Retained earnings
Other retained earnings
Retainedearnings
brought
forwardTotal
retainedearnings

8,356

1,092,709

1,162,996

－

－

(287)

－

(169)

－

－

169

－

－

－

3,893

－

(3,893)

－

－

－

－

(5,127)

－

5,127

－

－

－

－

－

－

10,179(10,179)

－

－

－

－

－

－

－

(8,356)

8,356－

Dividends from surplus

－

－

－

－

－

－

－

(259,724)(259,724)

Net income

－

－

－

－

－

－

－

164,595

164,595

Purchase of treasury
shares

－

－

－

－

－

－

－

－

－

Disposal of treasury
shares

－

－

－

－

－

－

－

(116)

(116)

Net changes of items
other than shareholders’equity

－

－

－

－

－

－

－

－

－

－

－

－

－

118

(1,234)

1,823(95,952)(95,244)

100,000

736,400

736,400

18,776287

41,753

10,179996,757

1,067,752

Reserve forLegal retainedSpecial accountinvestment loss Reserve for
earnings
for reduction
on developing reduction entry
entry
new business

Legal capitalsurplus

Total capitalsurplus100,000

736,400

736,400

18,776

169

42,987

Provision of reserve forinvestment loss ondeveloping new business

－

－

－

－

287

Reversal of reserve forinvestment loss ondeveloping new business

－

－

－

－

Provision of reserve for
reduction entry

－

－

－

Reversal of reserve for
reduction entry－－

Provision of special
account for reduction
entry

－

Reversal of special
account for reduction
entry

As of January 1, 2018
Changes of items during
the period

Total changes of items
during the period
As of December 31, 2018- 22 -

(Millions of yen)
Shareholders’ equity

Valuation and translation adjustments

Treasury shares

Total
shareholders’equityValuationdifference on
available-forsale securities(443,636)

1,555,760

33,5791,662

35,242

1,964

1,592,966

Provision of reserve forinvestment loss ondeveloping new
business

–

–

–

–

–

–

–

Reversal of reserve forinvestment loss ondeveloping new
business

–

–

–

–

–

–

–

Provision of reserve for
reduction entry

–

–

–

–

–

–

–

Reversal of reserve for
reduction entry

–

–

–

–

–

–

–

Provision of special
account for reduction
entry

–

–

–

–

–

–

–

Reversal of special
account for reduction
entry

–

–

–

–

–

–

–

Dividends from surplus–(259,724)

–

–

–

–

(259,724)

Net income–

164,595

–

–

–

–

164,595

Purchase of treasury
shares

(0)

(0)

–

–

–

–

(0)

Disposal of treasury
shares

807

691

–

–

–

–

691

Net changes of items
other thanshareholders’ equity––(7,764)3,215(4,549)(417)(4,967)

Total changes of items
during the period

807(94,438)(7,764)3,215(4,549)(417)(99,404)(442,829)

1,461,323

25,815

4,877

30,693

1,547

1,493,562

As of January 1, 2018

Subscription

Deferred gains
or losses onhedgesTotal valuationand translation
adjustments

rights to shares

Total net assets

Changes of items during
the period

As of December 31, 2018

- 23 -

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.

- 24 -

(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, 2018.
Past service cost is amortized using the straight-line method over the average remaining years of serviceof the employees (mainly 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 (mainly 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) Adoption of consolidated taxation system
In the fiscal year ended December 31, 2018, the Company applied for approval of the adoption of the consolidated
taxation system, and it is to be adopted from the following fiscal year. Therefore, from the fiscal year ended
December 31, 2018, deferred tax assets and liabilities are accounted for assuming the adoption of the consolidated
taxation system.
(10) Additional information
The Company transferred a portion of its pension plan from a defined benefit plan to a defined contribution plan
as of April 1, 2018 and recognized a gain or loss on settlement in this fiscal year.

- 25 -

2.

Notes to nonconsolidated balance sheet(1) Receivables and payables with respect to subsidiaries and affiliates (excluding items separately presented)
Short-term receivables:¥19,991 million

Short-term payables:¥36,739 million

Long-term payables:¥4,233 million(2) Accumulated depreciation of property, plant and equipment:¥465,754 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¥373,692 million(4) Guarantee obligations
Guaranteed party

Guarantee amountType of guarantee obligation

JT International Financial Services B.V.

(Millions of yen)
240,023

Bond guarantee, guarantee
denominated in foreign currencies

JT International Holding B.V.

57,180Loan guarantee, guarantee
denominated in foreign currencies¥57,180 million(EUR 450 million) others

PT. Karyadibya Mahardhika

47,023

Loan guarantee, guarantee
denominated in foreign currencies¥47,023 million(IDR 6,167,141 million) others

JT International (Philippines) Inc.

36,380Loan guarantee, guarantee
denominated in foreign currencies¥36,380 million(PHP 17,215 million)

JT International S.A.

35,388

Loan guarantee, guarantee
denominated in foreign currencies¥35,388 million(USD 208 million)(CHF 60 million) others

JT International Company
Netherlands B.V.

34,245

Loan guarantee, guarantee
denominated in foreign currencies¥34,245 million(EUR 270 million)

JT International Hellas A.E.B.E.

27,297

Loan guarantee, guarantee
denominated in foreign currencies¥27,297 million(EUR 215 million)

JT International Germany GmbH

24,151

Loan guarantee, guarantee
denominated in foreign currencies¥24,151 million(EUR 190 million)

JT International Korea Inc.

17,283

Loan guarantee, guarantee
denominated in foreign currencies¥17,283 million(KRW 173,924 million)

Other (46 companies)

65,522

Loan guarantee

Total

584,492¥240,023 million(USD 1,025 million)(EUR 550 million)(GBP 400 million)(5) Payables to Directors and Audit & Supervisory Board Members
Long-term payables:¥109 million(6) “Cash management system deposits received” are funds entrusted in the cash management system for domestic
group companies.

- 26 -

3.

Notes to nonconsolidated statement of income(1) Net sales including tobacco excise taxes for the year ended December 31, 2018 amounted to ¥1,704,086 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:¥87,976 million

Purchase of goods:¥62,255 million

Selling, general and administrative expenses:¥69,448 million

Dividends income:¥34,596 million

Amount of non-operating transactions:¥22,613 million(3) Total research and development expenses are ¥53,154 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, 2018

Increase for the year
ended December 31,
2018

Decrease for the year
ended December 31,
2018

Number of shares asof December 31, 2018

Ordinaryshares

208,957

0

380

208,577

Total

208,957

0

380

208,577

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 380 thousand treasury shares (ordinary shares) is due to the exercise of shareoptions.

- 27 -

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¥27,270 million¥12,428 million¥27,397 million¥67,094 million(¥9,393) million¥57,701 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 assets(¥18,263) million(¥10,936) million(¥10,103) million(¥16,203) million(¥55,504) million¥2,197 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- 28 -

0.36%(4.57%)(1.20%)
0.31%
25.56%

6. Related-party transactions
Subsidiaries and Affiliates

Type

Name

Ownership
ratio ofvotingrightsRelationwithrelatedparties

Descriptionoftransaction

Transaction amountLending offunds
millions ofyen

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

Lending ofLending of funds(Notes 1,
funds
2)

44,947

Receipt of
repayment of
funds
millions of
yen

Type

Indirectownership100%–

Ownership
ratio ofvoting rights

Relationwith relatedparties

Description oftransaction

Directownership
85.25%

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

Indirect
JT International
ownership
Financial Services B.V.
100%

Guarantee ofobligations

JT International
Holding B.V.

Indirectownership100%

PT. Karyadibya
MahardhikaName

41,002Long-term loan
receivablesfromsubsidiaries andaffiliates

8,866

159,330

Short-term loan
receivablesfromsubsidiaries andaffiliates–

Transaction
amountItem

39,662End-ofperiodbalancemillions ofyenmillions of
yen
–

Cash
management
systemdeposits
received

165,192

Guarantee ofobligations(Note 3)240,023––

Guarantee ofobligations

Guarantee ofobligations(Note 3)57,180––Indirectownership
100%

Guarantee ofobligations

Guarantee ofobligations(Note 3)47,023––

JT International(Philippines) Inc.

Indirectownership
100%

Guarantee ofobligations

Guarantee ofobligations(Note 3)36,380––JT International S.A.

Indirectownership
100%

Guarantee ofobligations

Guarantee ofobligations(Note 3)35,388––JT International
Company Netherlands
B.V.

Indirectownership
100%

Guarantee ofobligations

Guarantee ofobligations(Note 3)34,245––

JT International Hellas
A.E.B.E.

Indirectownership
100%

Guarantee ofobligations

Guarantee ofobligations(Note 3)27,297––

JT International Group
Holding B.V.

Directownership
100%–

Return of paidin capital(Note 4)

47,130TS Network Co., Ltd.

Subsidiary

Lending ofLending of
funds
funds
(Note 1)

millions ofyen
Short-term loan
receivablesfromsubsidiaries andaffiliates

Subsidiary

JT
International
Holding B.V.

End-ofperiodbalanceItem- 29 -––

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 $424 million.
7.

Per share information(1) Net assets per share:¥832.87(2) Net income per share:¥91.89(3) Diluted net income per share:¥91.848.

Significant subsequent events
As part of the shareholder return based on our shareholder return policy, the Company’s Board of Directors madea resolution on February 7, 2019 for the Company to acquire its own shares according to the particulars statedbelow pursuant to the provision of Article 156 of the Companies Act, as applied by replacing the relevant terms
pursuant to the Act’s provision of Article 165, Paragraph 3.
a.
b.
c.
d.
e.

9.

Class of shares to be acquired
Common stock
Number of shares to be acquired
Up to 23,000,000 shares
Total payment to acquire shares
Up to ¥50,000 million
Period of share acquisition
From February 8, 2019 to April 22, 2019
Method of acquisition
Purchase on the stock exchange via a trust bank

All figures are rounded off to the nearest unit.

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