Notes to Consolidated Financial Statements Chiyoda Corporation and Consolidated Subsidiaries Years Ended March 31, 2003 and 2002 The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principles and practices generally accepted in Japan, which are different in certain respects as to appli- cation and disclosure requirements of International Financial Reporting Standards. The consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consoli- dated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications and rearrangements have been made in the 2002 financial statements in order for them to conform to classifications and presentations used in 2003. The consolidated financial statements are stated in Japanese yen, the currency of the country in which Chiyoda Corporation (the "Company") is incorporated and principally operates. The transla- tions of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥120 to $1, the approximate rate of exchange at March 31, 2003. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. 1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation  — The consolidated financial statements for the year ended March 31, 2003, include the accounts of the Company and its 24 (27 in 2002) significant subsidiaries (together, the "Group"). Under the control or influence concept, those companies in which the Parent, directly or indirectly, has a control over opera- tions are fully consolidated. Investments in 8 (6 in 2002) associated companies are accounted for by the equity method. Investments in the remaining unconsoli- dated subsidiaries and associated companies are stated at cost. If the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements would not be material. The excess of the cost of the Company’s investments in consoli- dated subsidiaries and associated companies accounted for by the equity method over its equity in the net assets at the respective dates of acquisition, was charged to income at the time of acquisition as the amount involved was not material. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is eliminated. Payments received in excess of costs and estimated earnings on the contracts, which are accounted for by the percentage-of-comple- tion method, and costs incurred on the other contracts are presented as a current liability. Costs of preparation work for unsuccessful proposals and other projects which are not realized are charged to income and are includ- ed in costs of construction contracts. c. Cash and Cash Equivalents  — Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits and short-term investments, all of which mature or become due within 3 months of the date of acquisition. d. Investment Securities  — All securities are classified as available- for-sale securities and are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate com- ponent of shareholders’ equity. The cost of securities sold is deter- mined based on the moving-average method. Non-marketable securities are stated at cost determined by the moving-average method. For other than temporary declines in fair value, non-marketable securities are reduced to net realizable value by a charge to income. e. Allowance for Doubtful Accounts  — The allowance for doubt- ful accounts is stated in amounts considered to be appropriate based on the Group’s past credit loss experience and an evaluation of esti- mated losses on the receivables outstanding. b. Construction Contracts  — Revenues on construction contracts greater than ¥5 billion and having a construction duration of more than 18 months are recognized on the percentage-of-completion method based on the ratio of costs incurred to total estimated costs. Under this method, related costs and estimated earnings in excess of progress billings are presented as a current asset. Unbilled costs on the other contracts, which are accounted for by the completed-contract method, are stated as costs of construction contracts in process. 32