[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.]

February 28, 2020

To Our Shareholders

MATERIALS DISCLOSED VIA THE INTERNET CONCERNINGNOTICE OF CONVOCATION OF
THE 35TH 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, 2019 to December 31, 2019)Japan Tobacco Inc.

1

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, 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 in charge of compliance with overseeing the Compliance
Office in an effort to establish and promote a group-wide, cross-sectional system and shed light on 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.

2

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.

3

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 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-wide business 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

4

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 of6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, Chief
Executive Officer and the Board of Directors in accordance with the Basic Rules on Financial Work of theGroup.

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.

7

Consolidated Statement of Changes in Equity(Year ended December 31, 2019)(Millions of yen)
Equity attributable to owners of the parent company
Other components of equity

Share capital

Capital surplus Treasury shares

Subscription
rights tosharesExchangedifferenceson translationof foreign
operations

Net gain(loss) on
derivatives
designated as
cash flow
hedgesNet gain (loss)
on revaluationof financial
assets measured
at fair value
through othercomprehensive
incomeAs of January 1, 2019

100,000

736,400(442,829)

1,547(454,918)

443

29,570

Profit for the period

－

－

－

－

－

－

－

Other comprehensive income(loss)－－－－

10,553(391)(2,486)Comprehensive income (loss) forthe period

－

－

－

－

10,553(391)(2,486)

Acquisition of treasury shares－－(50,001)

－

－

－

－

Disposal of treasury shares

－

－

361

(281)

－

－

－

Share-based payments

－

－

－

290

－

－

－

Dividends

－

－

－

－

－

－

－

Changes in the scope of
consolidation

－

－

－

－

－

－

－

Changes in the ownership interestin a subsidiary without a loss ofcontrol

－

－

－

－

－

－

－

Transfer from other componentsof equity to retained earnings

－

－

－

－

－

－

(15,883)

Other increase (decrease)

－

－

－

－

－

(185)

－

－

－

(49,640)

10

－

(185)

(15,883)

100,000

736,400(492,469)

1,556(444,366)(132)

11,201

Total transactions with the owners
As of December 31, 20198

(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, 2019－

(423,357)

2,660,381

2,630,594

69,8512,700,445

Profit for the period－－

348,190

348,190

13,432361,622

Other comprehensive income(loss)(2,913)

4,763

－

4,763

(569)

4,194

Comprehensive income (loss) forthe period(2,913)

4,763

348,190352,953

12,863365,816

Acquisition of treasury shares

－

－

－

(50,001)－(50,001)

Disposal of treasury shares

－

(281)

(80)

0

－

0

Share-based payments

－

290

(19)

271

47

319

Dividends－－(270,936)(270,936)(2,051)(272,987)

Changes in the scope of
consolidation

－

－

－

－

－

－

Changes in the ownership interestin a subsidiary without a loss ofcontrol

－

－

(1)

(1)

206

205

Transfer from other componentsof equity to retained earnings

2,913(12,971)

12,971

－

－

－

－

(185)

－

(185)

－

(185)

2,913

(13,146)(258,065)(320,851)(1,798)(322,650)－(431,741)

2,750,506

2,662,696

80,916

2,743,611

Other increase (decrease)
Total transactions with the owners
As of December 31, 20199

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 ofCompanies. Pursuant to the provisions of the second sentence of the same paragraph of the same Ordinance, some disclosure
items required under IFRS are omitted.
(2) Scope of consolidation
Number of consolidated subsidiaries: 231 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: 13 companies
Major affiliates accounted for using the equity method: Megapolis Distribution B.V.
Joint ventures are accounted for using the equity method.
(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 othercomprehensive income, and amortized cost. The Group determines the classification at initial recognition.
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 orloss 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. Such designations are applied consistently.
All financial assets are measured at fair value plus transaction costs that are attributable to the financial assets, except for thecase 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 istransferred to retained earnings when equity instruments are derecognized or the decline in its fair value 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, or whensubstantially all the risks and rewards of the ownership are transferred.

10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 full lifetime
expected credit losses. In principle, with respect to financial assets except for trade receivables, an allowance 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 expected credit 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 of the default risk
considering the past due information, financial difficulties of obligors or downgrades of the internal credit rating.
The Group assesses a whole or part of a financial asset which is deemed uncollectible or extremely difficult to be 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 are measured
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 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 foreignexchange and interest rate risks. These derivatives are initially measured at fair value when the contract is entered into, and aresubsequently 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 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 the weightedaverage method. Net realizable value is determined as the estimated selling price in the ordinary course of business less theestimated 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 isheld within the normal operating cycle.
D. Depreciation methods for significant depreciable assetsi) Property, plant and equipment and investment property (excluding right-of-use assets)
Property, plant and equipment is measured by using the cost model and is stated at cost less accumulated depreciation andaccumulated impairment losses.
The acquisition cost includes any costs directly attributable to the acquisition of the asset and dismantlement, removal andrestoration 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 overtheir 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 any changes made to
the estimated useful lives and depreciation method, such changes are applied prospectively as changes in estimate.

11ii) Intangible assets (excluding right-of-use 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 thecapitalization criteria.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and aretested for impairment whenever there is any indication of impairment. The estimated useful 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.
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 aretested for impairment individually or by cash-generating unit annually or whenever there is any indication of impairment.
iii) Right-of-use assets
At inception of a contract, the Group assesses whether the contract is, or contains, a lease if the contract conveys the right tocontrol the use of an identified asset for a period of time in exchange for consideration. The Group elects not to recognize
right-of-use assets and lease liabilities for short-term leases within 12 months and leases of low-value assets.
If a contract is, or contains, a lease, except for short-term leases and leases of low-value assets, the Group recognizes rightof-use assets and lease liabilities on the consolidated statement of financial position at the commencement date. The Group
recognizes the lease payments associated with short-term leases and leases of low-value assets as an expense on a straight-line
basis over the lease term.
Right-of-use asset is measured by using the cost model and is stated at cost less accumulated depreciation and accumulated
impairment losses.
An acquisition cost of a right-of-use asset includes the amount of the initial measurement of the lease liability, any lease
payments made at or before the commencement date, and any initial direct costs. The right-of-use asset is depreciated using
the straight-line method over its estimated useful life or lease term, whichever is shorter. The lease liability is initiallymeasured at the present value of the lease payment that is not paid at the commencement date. The lease payments areapportioned between the financial cost and the reduction in the lease liability based on the effective interest method. The
financial costs are recognized in the consolidated statement of income.
E. Policy on accounting of significant provisions
The Group has present obligations (legal or constructive) resulting from past events and recognizes provisions when it isprobable 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 theexpenditures expected to be required to settle the obligations. In calculating the present value, the Group uses the pretax
discount rate reflecting current market assessments of the time value of money and the risks specific to the liability.
In accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets,” the Group recognizes a provision 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.

12

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). Suchobligations 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 cost and past
service cost using the projected unit credit method. For a discount rate, a discount period is determined based on the period
until the expected date of benefit payment in each fiscal year, and the discount rate is determined by reference to market yields
for the period corresponding to the discount period at the end of 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 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 whenincurred.
The cost for retirement benefits for defined contribution plans is recognized as an expense at the time of contribution.
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 upon delivery, by which the Groupevaluates that the performance obligation is satisfied. Revenue is measured at the consideration promised in a contract with acustomer, less discounts, rebates and taxes, including consumption tax.
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 and types ofbusinesses 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.

13

I. Method of foreign currency translation
Consolidated financial statements of the Group are presented in Japanese yen, which is the functional currency of theCompany. 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 oftransactions 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 thetranslation and settlement are recognized as profit or loss. However, exchange differences arising from the translation offinancial instruments designated as hedging instruments for net investment in foreign operations (foreign subsidiaries),
financial assets measured at fair value through other comprehensive income, and cash flow hedges are recognized as othercomprehensive 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 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 asother comprehensive income. In cases where foreign operations are disposed of, the cumulative amount of translationdifferences 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 foreignexchange and interest rate risks. These derivatives are initially measured at fair value when the contract is entered into, and aresubsequently 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 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 is expected that there is an economic relationship between the hedged
item and the hedging instrument, that the effect of credit risk does not dominate the value changes that result from that
economic relationship, and that the hedge ratio of the hedging relationship is the same as that resulting from the quantity of thehedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge
that quantity of the hedged item.
If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio due to changes in an
economic relationship between the hedged item and the hedging instrument but the risk management objective remains thesame, 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 of income. 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 other comprehensive income. Regarding the hedging gain orloss on the hedged item, the carrying amount of the hedged item is adjusted and the change is recognized as profit or loss inthe consolidated statement of income. However, changes in fair value of an equity instruments which the Group elected topresent in other comprehensive income are recognized as other comprehensive income.

14ii) Cash flow hedge
The effective portion of gains or losses on hedging instruments is recognized as other comprehensive income in the
consolidated statement of comprehensive income, while the ineffective portion is recognized immediately as profit or loss inthe consolidated statement of income.
The amounts of hedging instruments recognized in other comprehensive income are reclassified to profit or loss when thetransactions of the hedged items affect profit or loss. In cases where hedged items result in the recognition of non-financial
assets or liabilities, the amounts recognized as other comprehensive income are accounted 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 recognizedin equity as other comprehensive income is reclassified to profit or loss. If the hedged future cash flows are still expected tooccur, amounts that have been recognized in other comprehensive income are continued to be recognized in othercomprehensive 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 for similarly to a cash
flow hedge. The effective portion of gains or losses on hedging instruments is recognized as other comprehensive income,while the ineffective portion is recognized as profit or loss in the consolidated statement of income. At the time of thedisposal of the foreign operations, any related cumulative gain or loss that has been recognized in equity as othercomprehensive income is reclassified to profit or loss.
K. National consumption tax and local consumption tax are excluded from the consolidated statement of income.
L. The Company and certain subsidiaries apply for the consolidated taxation system.
(5) Changes in accounting policies
The Group has adopted the following new accounting standards, amended standards and new interpretations from the fiscal year
ended December 31, 2019.
IFRS
IFRS 16

Leases

IAS 19

Employee Benefits

Description of new standards and amendments
Amendments to accounting treatment for lease arrangements
Clarifying treatment on a defined benefit plan curtailment or
settlement

In adopting IFRS 16, the Group used a transition method by which the cumulative effect of initially adopting this standard wasrecognized at the date of initial application. The lessee’s weighted average incremental borrowing rate which applied to leaseliabilities on the consolidated statement of financial position at the date of initial application is 4.1%.
The Group has adopted this standard for contracts that were previously identified as leases adopting IAS 17 and IFRIC 4,“Determining whether an Arrangement Contains a Lease” (hereinafter referred to as “IFRIC 4”), without reassessing whether acontract is, or contains, a lease at the date of initial application. The Group has not adopted this standard for contracts that were
not previously identified as containing a lease adopting IAS 17 and IFRIC 4.
For leases previously classified as operating leases adopting IAS 17, the following practical expedients permitted as transition
methods are adopted:• A single discount rate is applied to a portfolio of leases with reasonably similar characteristics.
• Leases for which the lease term ends within 12 months of the date of initial application are accounted for in the same way as
short-term leases.
• Initial direct costs are excluded from the measurement of right-of-use assets at the date of initial application.
As a result of the adoption of IFRS 16, “Assets” and “Liabilities” increased by ¥39,033 million at the date of initial application.
There is an immaterial impact on operating profit and profit for the period.
The effect of adopting IAS 19 on the consolidated financial statements is immaterial.

15

2. Notes to consolidated statement of financial position(1) Accumulated depreciation of assets (including accumulated impairment losses)
Property, plant and equipment:¥
Goodwill and intangible assets:
Investment property:¥¥

969,715

million893,146
23,674

millionmillion(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 general collateral for its corporate
bonds.
Amount of liabilities relating to collateral
Bonds:¥

371,675

millionii) Assets pledged as collateral related to some consolidated subsidiaries are ¥2,060 million.
(3) Allowance for doubtful accounts directly deducted from assets
Trade and other receivables:
Other financial assets:

¥
¥

16

2,475
5,935

millionmillion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)
Number of shares as ofJanuary 1, 2019

Increase for theyear ended
December 31, 2019

Decrease for theyear ended
December 31, 2019

Number of shares as ofDecember 31, 2019

2,000,000--

2,000,000

208,577

17,788168

226,197

Issued shares
Ordinary shares
Treasury shares
Ordinary shares(Notes) The increase of 17,788 thousand treasury shares (ordinary shares) is composed of 17,788 thousand treasury shares due toacquisition based on the resolution made by the Board of Directors and 0 thousand treasury shares due to purchase of sharesless than one unit. The decrease of 168 thousand treasury shares (ordinary shares) is due to the exercise of share options.
(2) Cash dividendsi) Dividends payments
Resolution

Class of shares

Total dividends Dividends per share(Millions of yen)
(Yen)

Basis date

Effective date

Annual Shareholders’Meeting(March 20, 2019)
Board of Directors(July 31, 2019)

Ordinary shares

134,357

75

December 31, 2018

March 22, 2019

Ordinary shares

136,579

77

June 30, 2019

September 2, 2019ii) Dividends whose basis date is in the year ended December 31, 2019 but whose effective date falls in the year ending
December 31, 2020.
The following proposal will be placed on the agenda of the Annual Shareholders’ Meeting to be held on March 19, 2020.
(Proposal)
AnnualShareholders’Meeting(March 19, 2020)

Class ofsharesOrdinarysharesTotal dividends(Millions of yen)

136,583

Source ofdividends
Retainedearnings

Dividends per
share (Yen)77

Basis date

December 31, 2019

Effective date

March 23, 2020

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

974,600

17

shares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 and market pricefluctuation risk) in the process of its management activities, and it manages risks based on a specific policy in order to avoid or
reduce said risks. The results of risk management are regularly reported by the Treasury Division to the president and the Boardof 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, 2019 are as
follows:(Millions of yen)
Carrying amount on consolidated statement offinancial position

Fair value

1) Long-term borrowings

115,297

116,804

2) Bonds

666,623

683,650

With regard to short-term financial assets and short-term financial liabilities measured at amortized cost, the fair value
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 theprincipal 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, and based on thepresent value that is obtained by discounting the total of principal and interest by the interest rate, for which 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 ofDecember 31, 2019 are as follows:(Millions of yen)
Carrying amount on consolidated statement offinancial position
Investment property

Fair value

16,58836,204(Notes) 1. The carrying amount on the consolidated statement of financial position is the acquisition cost less accumulated
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 locatedand based on market evidence of transaction prices for similar assets.

6. Per share information(1) Equity attributable to owners of the parent company per share:(2) Basic earnings per share:¥¥

1,501.12
195.97(3) Diluted earnings per share:¥

195.8718

7. Contingencies
Contingent liabilities
The Company and some of its subsidiaries are defendants in legal proceedings. Provisions are not accounted for in matters it is notpracticable 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 theseproceedings are based on substantial evidence and implement the system for response to action with the assistance of externallawyers.
(1) Smoking and health related litigation
The Company and some of its subsidiaries become defendants in lawsuits filed by plaintiffs seeking damages for harm allegedly
caused by smoking, the marketing of tobacco products, or exposure to tobacco smoke. As of December 31, 2019, there were atotal of 20 smoking and health related cases pending in which one or more members 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 (non-U.S.) tobacco operations.
In March 2019, the Quebec Court of Appeal dismissed the appeal by three Canadian tobacco manufacturers including JTIMacdonald Corp. (hereinafter referred to as “JTI-Mac”), the Company’s Canadian subsidiary, of the lower court decision in thetwo class action lawsuits in Quebec. The Quebec Court of Appeal ordered a total damage award against the appellants ofapproximately ￥1.147 trillion (approximately CAD 13.7 billion), in which the share of the total damage award against JTI-Mac
is approximately ￥148.7 billion (approximately CAD 1.8 billion). Given the Quebec Court of Appeal’s decision, JTI-Mac filed
for protection from its creditors under the Companies’ Creditors Arrangement Act (CCAA), and the Ontario Superior Court has
granted the CCAA application and extended protection in favor of JTI-Mac (hereinafter referred to as “CCAA Proceedings”). Allof the below Canadian matters against JTI-Mac have been stayed by the CCAA Proceedings, under which JTI-Mac carries on
business in the ordinary course.
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. The cases are stayed by
the CCAA Proceedings.
iii) Health-care cost recovery litigation
There are ten ongoing health-care cost recovery cases in Canada pending against the Company’s subsidiary and indemnitees
brought by all the Canadian provinces (except three Canadian territories). The cases are stayed by the CCAA Proceedings.
(2) Other legal proceedings
The Company and some of its subsidiaries are also engaged in other legal proceedings such as commercial and tax disputes.

19

8. Significant subsequent events
The Company entered into loan agreements with banks as follows:(1) Lenders : Mizuho Bank, Ltd., MUFG Bank, Ltd., Sumitomo Mitsui Banking Corporation and Sumitomo Mitsui Trust Bank,
Limited(2) Aggregate amount of borrowings : ￥100 billion(3) Interest rates : Floating rates（TIBOR plus spread）(4) Drawdown date : January 31, 2020
(5) Repayment date : January 31, 2080
The Company may, at its option, repay early all or a portion of the principal on any Interest Payment Date on or after theInterest Payment Date of January 2025.
(6) Collateral/Guarantee : None
(7) Use of proceeds : Repayment of existing debts and working capital(8) Other borrowing terms :a. Interest deferral clause
The Company may, at its option, defer the payment of interest.
b. Subordination clause
The lenders shall have subordinated claim rights subordinated to senior debts in liquidation proceedings, bankruptcy
proceedings, reorganization proceedings, civil rehabilitation proceedings or any other equivalent proceedings other thanthose under the laws of Japan.
No terms and conditions of the Subordinated Loan Agreement may be amended in a manner detrimental in any way to any
creditors of the Company other than the creditors of the subordinated receivables.
c. Replacement restrictions
There is no contractual provision on replacement restrictions.
Provided, when making a prepayment of the Subordinated Loan, the Company intends to replace it with the funds raised bycommon stock or financial instruments that have equity credit attributes approved by rating agencies to be equal to or higher
than the Subordinated Loan within twelve months prior to the prepayment date. However, the Company may decide not toreplace the Subordinated Loan with the approved funds that have equal or higher equity credit attributes, if predefined
financial requirements are met.

9. All figures are rounded off to the nearest unit.

20Nonconsolidated Statement of Changes in Net Assets(Year ended December 31, 2019)(Millions of yen)
Shareholders’ equity
Capital surplus

Retained earnings
Other retained earnings

Capitalstock

As of January 1, 2019

Reserve forLegal capital Total capital Legal retained investment
surplussurplusearnings
loss ondeveloping
newbusiness

Reserve for
reduction
entry

Specialaccount for
reduction
entry

Retainedearnings
brought
forward

Total retained
earnings

100,000

736,400

736,400

18,776287

41,753

10,179996,757

1,067,752

Provision of reservefor investment loss
on developing new
business

－

－

－

－

378

－

－

(378)

－

Reversal of reservefor investment loss
on developing new
business

－

－

－

－

(287)

－

－

287

－

Provision of reserve
for reduction entry

－

－

－

－

－

8,395

－

(8,395)－

Reversal of reserve
for reduction entry

－

－

－

－

－

(4,775)

－

4,775

－

Provision of special
account for reduction
entry

－

－

－

－

－

－

1,747

(1,747)－

Reversal of special
account for reduction
entry

－

－

－

－

－

－

(10,179)

10,179－Dividends fromsurplus

－

－

－

－

－

－

－

(270,936)(270,936)

Net income

－

－

－

－

－

－

－

262,469

262,469

Purchase of treasury
shares

－

－

－

－

－

－

－

－

－

Disposal of treasury
shares

－

－

－

－

－

－

－

(80)

(80)

Net changes of items
other thanshareholders’ equity

－

－

－

－

－

－

－

－

－

Total changes of items
during the period

－

－

－

－

91

3,620

(8,432)(3,826)(8,547)100,000

736,400

736,400

18,776378

45,373

1,747

992,930

1,059,205

Changes of items
during the period

As of December 31,
2019

21

(Millions of yen)
Shareholders’ equity

Valuation and translation adjustments
Subscription
rights tosharesTotal net
assets30,693

1,547

1,493,562

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

Provision of special
account for reduction
entry

－

－

－

－

－

－

－

Reversal of special
account for reduction
entry

－

－

－

－

－

－

－

Dividends fromsurplus－(270,936)

－

－

－

－

(270,936)

Net income－

262,469

－

－

－

－

262,469

Purchase of treasury
shares(50,001)(50,001)

－

－

－

－

(50,001)

Disposal of treasury
shares

361

281

－

－

－

－

281

Net changes of items
other thanshareholders’ equity－－(18,533)513(18,020)10(18,010)

Total changes of items
during the period(49,640)(58,187)(18,533)513(18,020)

10(76,197)

As of December 31,
2019(492,469)

1,403,136

7,283

5,390

12,673

1,556

1,417,365

Treasury shares

Total
shareholders’equityValuationdifference on
available-forsale securities(442,829)

1,461,323

25,815

4,877

Provision of reservefor investment loss
on developing new
business－－－

Reversal of reservefor investment loss
on developing new
business－－

Provision of reserve
for reduction entry－

Reversal of reserve
for reduction entry

As of January 1, 2019

Deferred
gains orlosses onhedgesTotalvaluation andtranslation
adjustments

Changes of items
during the period

22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. (Valuation difference is stated as acomponent 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):
Machinery and equipment:

38 to 50 years
10 yearsii) Intangible assets (excluding leased assets)
Straight-line method
The main useful lives are as follows:
Patent right:
Right of trademark:

8 years
10 years

Software:
Goodwill:

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

23

(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 estimated retirement benefit
obligations and fair values of plan assets as of the end of this fiscal year. In calculating retirement benefit obligations, thebenefit formula basis is used as the method of attributing expected benefit to periods up to the year ended December 31, 2019.
Past service cost is amortized using the straight-line method over the average remaining years of service of 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 thestraight-line method over the average remaining years of service of the employees (mainly 10 years).
Also included in the provision for retirement benefits is the portion of public pension expenses for mutual assistanceassociation 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 areaccounted 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
The Company applies for the consolidated taxation system.
(10) Changes in method of presentationi)"Partial Amendments to Accounting Standard for Tax Effect Accounting" (Statement No.28 issued by the AccountingStandards Board of Japan on February 16, 2018) was applied from this fiscal year, which required deferred tax assets to beclassified as investments and other assets ,and deferred tax liabilities to be as noncurrent liabilities.
ii) For the year ended December 31,2018, "Gain on sale of investment securities" was included in "Other" in "Extraordinary
income" in the nonconsolidated statement of income; however, for the year ended December 31, 2019,it is presented separately
due to its increased materiality.

24

2. Notes to nonconsolidated balance sheet(1) Receivables and payables with respect to subsidiaries and affiliates (excluding items separately presented)
Short-term receivables:
23,832 million¥
Short-term payables:
Long-term payables:¥¥(2) Accumulated depreciation of property, plant and equipment:¥

32,012 million
5,010 million
474,872

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

¥

371,904

million(4) Guarantee obligations
Guaranteed party

Guarantee amountType of guarantee obligation(Millions of yen)
JT International
Financial Services B.V.

JT International S.A.

298,183

68,609PT. Karyadibya Mahardhika

54,878JT International Holding B.V.

44,129JT International Company
Netherlands B.V.
JTI Ireland Limited
JT International
Hellas A.E.B.E.

37,926
28,772
24,123

JT International(Philippines) Inc.

14,768

LLC Petro

11,838JT International Spol s r.o.

¥298,183 million

Bond guarantee, guarantee(EUR

1,050 million)

denominated in foreign currencies(USD

1,025 million)(GBP

400 million)¥

68,609 million

Loan guarantee, guarantee(USD

411 million)

denominated in foreign currencies(EUR

69 million)(CHF

67 million) others

Loan guarantee, guarantee

54,878 million¥

denominated in foreign currencies(IDR

Loan guarantee, guarantee
denominated in foreign currencies¥

Loan guarantee, guarantee

6,986,512 million) others(EUR¥

44,129 million
360 million) others
37,926 million

denominated in foreign currencies(EUR

310 million)

Loan guarantee, guarantee
denominated in foreign currencies¥

28,772 million(EUR

235 million)¥

24,123 million

denominated in foreign currencies(EUR

197 million)

Loan guarantee, guarantee
denominated in foreign currencies¥

14,768 million(PHP

6,850 million)

Loan guarantee, guarantee¥

11,838 million

denominated in foreign currencies(RUB

6,689 million)

10,209Loan guarantee, guarantee
denominated in foreign currencies¥

10,209 million(CZK

2,108 million)

Other (61 companies)

87,457

Loan guarantee

Total

680,892

Loan guarantee, guarantee(5) Payables to Directors and Audit & Supervisory Board Members
Long-term payables:¥

236

million(6) “Cash management system deposits received” are funds entrusted in the cash management system for domestic group companies.

25

3. Notes to nonconsolidated statement of income(1) Net sales including tobacco excise taxes for the year ended December 31, 2019 amounted to ¥1,655,611 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:
Purchase of goods:¥¥

86,017 million
62,101 million

Selling, general and administrative expenses:
Dividends income:¥¥

58,902 million
146,767 million

Amount of non-operating transactions:¥

63,542 million(3) Total research and development expenses are ¥54,017 million, all of which were recorded as general and administrative
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 as ofJanuary 1, 2019

Increase for the year
ended December 31,
2019

Decrease for the year
ended December 31,
2019

Number of shares asof December 31, 2019

Ordinary shares

208,577

17,788168

226,197

Total

208,577

17,788168

226,197

Treasury shares(Note) The increase of 17,788 thousand treasury shares (ordinary shares) is composed of 17,788 thousand treasury shares due toacquisition based on the resolution made by the Board of Directors and 0 thousand treasury shares due to purchase of sharesless than one unit. The decrease of 168 thousand treasury shares (ordinary shares) is due to the exercise of share options.

26

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¥¥

28,287 million
10,759 million

Investments in subsidiaries
Other

¥
¥

12,232 million
31,501 million

SubtotalLess valuation allowance¥¥

82,779 million(23,301)million

Deferred tax assets total¥

59,478 million

Reserve for reduction entry
Deferred gains or losses on hedges¥¥(19,846)million(10,962)million

Valuation difference on available-for-sale securities
Other

¥
¥

(3,085)million(12,532)million

Deferred tax liabilities total¥(46,425)million

Net deferred tax assets¥

13,053 million

Deferred tax liabilities(Changes in method of presentation)
For the year ended December 31,2018,"Investments in subsidiaries" was included in "Other" in "Deferred tax assets";
however,
for the year ended December 31, 2019, it is presented separately due to its increased materiality.
(2) The breakdown of major items that caused significant differences between the effective statutory tax rate and the actual tax rate
when applying tax effect accounting
Effective statutory tax rate

30.43%(Adjustments)
Permanent difference arising from non-deductible items including entertainment expenses

0.32%

Permanent difference arising from non-taxable items including dividends income
Tax credit of items including research and development expenses(14.35%)(2.12%)Taking over tax losses carried forward from liquidation of subsidiaries
Loss on liquidation of subsidiaries(4.97%)
2.10%

Other

(0.12%)

Actual effective tax rate after applying tax effect accounting

11.29%

27

6. Related-party transactions
Subsidiaries and Affiliates
Type

Ownership
ratio ofvoting rights

Name

Table Mark
Holdings Co.,Ltd.

Directownership
100%

Relationwithrelated-parties

Lending offunds

Transaction amount
Description oftransaction

Lending offunds

Receipt of
repayment of
funds

millions of yen

millions of yen

Lending offunds(Notes 1, 2)－

49,868

Table Mark
Co., Ltd.

JTInternational
Holding B.V.

Type

Indirectownership
100%

Name

Lending offunds

Lending offunds

Ownership
ratio ofvoting rights

Lending offunds(Notes 1, 2)

Lending offunds(Note 1)

Relationwith relatedparties

70,271

Description of transaction

millions of yen
Short-term loan
receivables fromsubsidiaries andaffiliates－

Long-term loan
receivables fromsubsidiaries andaffiliates－

31,003Long-term loan
receivables fromsubsidiaries andaffiliates

7,481

Short-term loan
receivables from－subsidiaries andaffiliates

54,78031,78754,265

Transaction
amountItem

millions of yen

TS Network Co., Ltd.

Torii PharmaceuticalCO., Ltd.

Subsidiary

Directownership
85.25%

Deposits received
for cashmanagement
systemDirectownership
54.85%

Marketing ofpharmaceuticalproducts
Deposits received
for cashmanagement
systemReceipt of surplus funds(Notes 1, 2)
Transfer of rights tomarket from termination oflicense agreements(Notes 3)-

42,137

Receipt of surplus funds(Notes 1, 2)-

End-of-periodbalance

Short-term loan
receivables fromsubsidiaries andaffiliates

Subsidiary
Directownership
100%

Item

End-ofperiodbalancemillions of yen

Cash management
system deposits
received-

Cash management
system deposits
received

205,564-

37,796

JT International
Financial Services
B.V.

Indirectownership
100%

Guarantee ofobligations

Guarantee of obligations(Note 4)

298,183--

JT International S.A.

Indirectownership
100%

Guarantee ofobligations

Guarantee of obligations(Note 4)70,793--

PT. Karyadibya
Mahardhika

Indirectownership
100%

Guarantee ofobligations

Guarantee of obligations(Note 4)54,878--JT International
Holding B.V.

Indirectownership
100%

Guarantee ofobligations

Guarantee of obligations(Note 4)

44,129--JT International
Company Netherlands
B.V.

Indirectownership
100%

Guarantee ofobligations

Guarantee of obligations(Note 4)37,926--28

JTI Ireland Limited

Indirectownership
100%

Guarantee ofobligations

Guarantee of obligations(Note 4)

28,772--

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 determined taking into account interest
rates on the market.
2. For lending/borrowing from the cash management system, transaction amounts are omitted from the table above because of
their frequent occurrence.
3.Taking into account general transaction and past trading performance, transfer of rights to market from termination of license
agreements is conducted at reasonable price after mutual consultation.
4. Guarantees of obligations are made for bank loans, and guarantee fees are calculated based on the guarantee amount.

7. Per share information(1) Net assets per share:¥

798.18(2) Net income per share:(3) Diluted net income per share:¥¥

147.72147.65

8. Significant subsequent events
The Company entered into loan agreements with banks as follows:(1) Lenders : Mizuho Bank, Ltd., MUFG Bank, Ltd., Sumitomo Mitsui Banking Corporation and Sumitomo Mitsui Trust Bank,
Limited(2) Aggregate amount of borrowings : ￥100 billion(3) Interest rates : Floating rates（TIBOR plus spread）(4) Drawdown date : January 31, 2020
(5) Repayment date : January 31, 2080
The Company may, at its option, repay early all or a portion of the principal on any Interest Payment Date on or after theInterest Payment Date of January 2025.
(6) Collateral/Guarantee : None
(7) Use of proceeds : Repayment of existing debts and working capital(8) Other borrowing terms :a. Interest deferral clause
The Company may, at its option, defer the payment of interest.
b. Subordination clause
The lenders shall have subordinated claim rights subordinated to senior debts in liquidation proceedings, bankruptcy
proceedings, reorganization proceedings, civil rehabilitation proceedings or any other equivalent proceedings other thanthose under the laws of Japan.
No terms and conditions of the Subordinated Loan Agreement may be amended in a manner detrimental in any way to any
creditors of the Company other than the creditors of the subordinated receivables.
c. Replacement restrictions
There is no contractual provision on replacement restrictions.
Provided, when making a prepayment of the Subordinated Loan, the Company intends to replace it with the funds raised bycommon stock or financial instruments that have equity credit attributes approved by rating agencies to be equal to or higher
than the Subordinated Loan within twelve months prior to the prepayment date. However, the Company may decide not toreplace the Subordinated Loan with the approved funds that have equal or higher equity credit attributes, if predefined
financial requirements are met.

9. All figures are rounded off to the nearest unit.

29