Notes to Consolidated Financial Statements


1. Scope of Consolidation
(1) Number of consolidated subsidiaries: 65
Principal subsidiaries: Osaka Shiseido Co., Ltd.; Shiseido Kako Co., Ltd.;
Shiseido Cosmetics Sales Co., Ltd.; Shiseido Cosmenity Co., Ltd.;
Shiseido Fine Toiletry Co., Ltd.

(a) Shiseido newly included the following four companies engaged in full-scale business in the scope of consolidation in the year under review:
 
Domestic Inter Act Co., Ltd.
Overseas Beauté Prestige International España S.A.
Shanghai Zotos Citic Cosmetics Co., Ltd.
Shiseido Dah Chong Hong Cosmetics Co., Ltd.
(b) Shiseido newly included the following company, for which temporary voting rights were converted to long-term voting rights, in the scope of consolidation:
 
Vivace Factory Co., Ltd.
(c) Shiseido International Europe B.V., which has been liquidated, was excluded from the scope of consolidation.
(2) Number of nonconsolidated subsidiaries: 6
Shiseido's six nonconsolidated subsidiaries are not engaged in full-scale operations. Since the combined assets of these companies are minimal and deemed to have no measurable effect on the Company's consolidated financial statements, they are excluded from the scope of consolidation.

2. Application of the Equity Method
The equity method is applied to five of Shiseido's six affiliates. The remaining company is no longer considered a going concern and investments in the company, which have minimal effect on consolidated income or retained earnings, are accounted for by the cost method instead of the equity method.
Investments in Shiseido's six nonconsolidated subsidiaries, which have minimal effect on consolidated income or retained earnings, are accounted for by the cost method instead of the equity method.

3. Fiscal Years of Consolidated Subsidiaries
Of the Company's consolidated subsidiaries, 32 overseas subsidiaries and one domestic subsidiary have fiscal years ending on December 31. Since the difference between this date and Shiseido's fiscal year-end is only three months, the normal business-year financial statements of those 33 subsidiaries are used as the basis for consolidation.

4. Notes on Accounting Standards
(1) Securities
The parent company values securities listed on stock exchanges at the lower of cost or market, based on the moving average method. Consolidated subsidiaries primarily value securities listed on stock exchanges at cost, based on the moving average method. Other securities are valued at cost, based on the moving average method.
(Supplementary Information)
In line with a revision of the Corporation Tax Law in fiscal 1999, application of the lower of cost or market method has been changed, and is now based on the initial purchase cost method. The effect of the change on the Company's Balance Sheets and Statements of Income is minimal.
(2) Inventory
The parent company values inventory at cost, based on the total average method. Consolidated subsidiaries primarily value inventory at cost, based on the final purchase cost method.
(3) Depreciation of Fixed Assets
Tangible fixed assets......Declining balance method (in principle)
Intangible fixed assets.....Straight line method
(4) Allowance for Employee Retirement Benefits
The balance sheets present data representing 100% of the liability the Company and its domestic consolidated subsidiaries would have to pay if all employees not in a company-funded pension plan voluntarily terminated employment. The retirement allowance reserve also includes an unliquidated excess reserve for retirement allowance as a result of Shiseido's adoption of the Welfare Pension Fund System in February 1989.
(5) Exchange Contract for Foreign-Currency-Denominated Bonds with Warrants
For foreign-currency-denominated bonds with warrants on which a long-term exchange contract is made, yen amounts calculated in the contract appear. Differences caused by the exchange contract are allocated to each month's settlement from April of the fiscal year when the contract commences to March of the fiscal year when the contract terminates.

5. Elimination of Offsetting between Investment Account and Capital Account
Step-by-step basis is adopted for offsetting between Shiseido' investment account and subsidiaries' capital account. For major items, the resulting difference in offsetting cancellations is equally amortized in the consolidation adjustments account for five years from the date of occurrence. Minor items are amortized in full at time of occurrence.

6. Unrealized Profits
All unrealized profit created through capital trade among consolidated companies (Shiseido and consolidated subsidiaries) is eliminated. The profit for minority shareholders' equity is subtracted from minority shareholders' equity. When unrealized profit, included in depreciation assets, is eliminated, the depreciation expense is adjusted.
Unrealized profit among consolidated companies and affiliates adopting the equity method is dealt with as follows:
(1) All unrealized profit created through a trade in which a consolidated company sells to an affiliate adopting the equity method is eliminated.
(2) When unrealized profit is created through a trade in which an affiliate adopting the equity method sells to a consolidated company, an amount equal to the profit multiplied by equity percentage is eliminated.

7. Yen Translations of Financial Statements of Overseas Consolidated Subsidiaries
Financial statements of overseas consolidated subsidiaries and subsidiaries applicable under the equity method are translated into yen based on Accounting Policy Standards for Foreign Currency Denominated and Other Transactions.

8. Appropriation of Earnings
The Consolidated Retained Earnings statements have been prepared based on the assumption that retained earnings will be appropriated within the accounting year of the consolidated subsidiaries.

9. Period Allocation of Corporation Tax and Other
Period allocation of corporation tax and other is conducted in relation to amounts affecting income tax caused through the elimination of unrealized profit on a consolidated basis.


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