3. Non-Consolidated Statements of Cash Flows Significant Matters Pertaining to the Preparation of Non-Consolidated Financial Statements 1. Valuation of certain assets (1) Securities [1] Investments in subsidiaries and affiliated companies Investments in subsidiaries and affiliated companies are stated at cost, which are determined by the moving average method. [2] Other securities a. Marketable securities The securities whose fair value are readily determinable are stated at fair value as of balance sheet date with unrealized gains and losses directly reported as a separate component of shareholders' equity. The cost of securities sold is determined by the moving average method. b. Non-marketable securities The securities whose fair value are not readily determinable are stated at cost, which are determined by the moving average method. (2) Inventories Supplies are stated at cost, which are determined by the last purchase cost method. 2. Depreciation and amortization of fixed assets Property, plant, and equipment are depreciated by using the declining-balance method with the exception of buildings for which the straight-line method is used. Intangible assets are amortized on a straight-line basis. Their estimated useful lives and residual value are determined on the basis provided by the Corporate Income Tax Laws. Buildings, after having been depreciated over the depreciable periods based on the Corporate Income Tax Laws, keep depreciated up to the end of their actual useful lives. Internal-use software is amortized on a straight-line basis over their estimated useful lives within five years. 3. Allowance for doubtful accounts and liability for employees' severance payments (1) Allowance for doubtful accounts To cover expected losses from bad debts, estimated amounts to be uncollectible are accrued, for general claims, computing on historical bad-debt ratios, and for specific claims including doubtful accounts, considering their own recoverability. No allowance is accrued as of the end of this six-month period. (2) Liability for employees' severance payments To provide for employees' retirement benefits, based on estimated benefit obligations and plan assets as of the end of this fiscal year, a liability is accrued in the estimated amounts as of the end of this six-month period. Prior service cost is amortized on a straight-line basis over the average remaining service periods at the time of recognition. Actuarial net gain or loss is amortized on a straight-line basis over the average remaining services periods at the time of recognition. 4. Leases Finance leases other than those deemed to transfer the title of leased assets to lessees are accounted for in a similar manner as operating leases. 5. Hedging Activities (1) Accounting for Hedging Activities Hedging activities are principally accounted for under the "deferral hedge accounting." Designation ("Furiate-shori") is applied to forward exchange contracts and other foreign exchange contracts, and designated "exceptional accounting" ("Tokurei-shori") to interest-rate swaps that qualify for "exceptional accounting" (Footnote 14, Accounting Standards for Financial Instruments). (2) Hedging Instruments and Hedged Items [1] Hedging Instruments Hedging instruments include forward exchange contracts, currency swaps, coupon swaps (i.e. currency swap of interest portion only), interest-rate swaps, interest-rate options, and the combinations of the above. [2] Hedged Items Hedged items are assets (securities, loans, receivables, etc.) and liabilities (corporate bonds, borrowings, payables, etc.) exposed to variability of fair value or future cash flows derived from fluctuations of the exchange rate, interest rate, etc. (3) Hedging Policy To hedge the foreign exchange risks regarding assets and liabilities exposed to foreign exchange risks, forward exchange contracts, currency swaps, and other instruments are employed in compliance with internal rules. To hedge the interest-rate risks regarding assets and liabilities exposed to interest-rate risks, interest-rate swaps and other instruments are employed in compliance with internal rules. (4) Assessment of Hedge Effectiveness At the end of each quarter, hedge effectiveness is assessed on each hedging transaction. This quarterly assessment excludes any transaction where important terms and conditions such as principal, interest-rate, duration are identical between hedging instruments and hedged items. 6. Consumption Taxes Consumption tax is separately accounted for by excluding it from each transaction amounts. Notes to Non-Consolidated Balance Sheets 1. Accumulated depreciation on property, plant and equipment March 31, 2004: 207,819 million yen September 30, 2004:   213,717 million yen 2. In compliance with the provisions of Article 9 of the Law Concerning Nippon Telegraph and Telephone Corporation, Etc., the total assets of NTT have been pledged as general collateral for corporate bonds issued. In accordance with the provisions of Article 9 of the Supplementary Provisions to the Law Concerning Partial Revision to the Nippon Telegraph and Telephone Corporation Law (law No. 98 of 1997), NTT is jointly responsible with Nippon Telegraph and Telephone East Corporation, Nippon Telegraph and Telephone West Corporation, and NTT Communications Corporation for corporate bonds issued prior to June 30, 1999 and the total assets of the four companies above have been pledged as general collateral for the said bonds. 3. Outstanding guarantees March 31, 2004: 102,950 million yen September 30, 2004:   109,450 million yen Notes to Non-Consolidated Statements of Income 1. Major components of operating revenues 2. R&D expenses included in operating expenses 3. Component of extraordinary profits   (Millions of Yen) Gains on sales of investments in affiliated companies   319,173 Copyright (c) 2004 Nippon telegraph and telephone corporation