Financial Information: Annual Report 2005

	Notes to Consolidated Financial Statements
	NSK Ltd. and Subsidiaries For the year ended March 31, 2005

1. Summary of Significant Accounting Policies

(a) Basis of Presentation
NSK Ltd. (the “Company”) and its domestic subsidiaries maintain their books of account in conformity with the financial accounting standards of Japan, and its foreign subsidiaries maintain their books of account in conformity with those of their countries of domicile.
  The accompanying consolidated financial statements have been compiled from the consolidated financial statements prepared by the Company as required under the Securities and Exchange Law of Japan and have been prepared in accordance with accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards.
  As permitted by the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. As a result, the totals shown in the accompanying consolidated financial statements (both in yen and in U.S. dollars) do not necessarily agree with the sums of the individual amounts.
  Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.

(b) Principles of Consolidation and Accounting for Investments in Affiliated Companies
The accompanying consolidated financial statements include the accounts of the Company and all companies controlled directly or indirectly by the Company. Companies over which the Company exercises significant influence in terms of their operating and financial policies have been included in the consolidated financial statements on an equity basis. All significant intercompany balances and transactions have been eliminated in consolidation.
  The excess cost over underlying net equity at fair value of investments in consolidated subsidiaries and in companies accounted for by the equity method is being amortized by the straight-line method over a period of 10 years except for immaterial amounts which have been charged or credited to income in the year in which a controlling interest or an equity interest in such companies was acquired.
  In consolidating the financial statements of NSK Brasil Ltda. (“NSK Brazil”), the amount of the Company’s investment in NSK Brazil has been offset against the adjusted amount of NSK Brazil’s shareholders’ equity as of March 31, 1997 based on the indexation accounting system.

(c) Foreign Currency Translation
Monetary assets and liabilities denominated in foreign currencies are translated into yen at the exchange rates prevailing at the balance sheet dates, except for assets and liabilities hedged by forward foreign exchange contracts.
  All revenues and expenses associated with foreign currencies are translated at the rates of exchange prevailing when such transactions were made. The resulting exchange gains and losses are credited or charged to income.
  The revenue and expense accounts of the foreign subsidiaries are translated at the average exchange rates prevailing during the year, and, except for the components of shareholders’ equity, the balance sheet accounts are translated into yen at the rates of exchange in effect at the balance sheet date. The components of shareholders’ equity are translated at their historical exchange rates.

(d) Cash Equivalents
The Company and its subsidiaries consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

(e) Securities
In general, securities are classified into three categories: trading, held-to-maturity or other securities. Securities held by the Company and its subsidiaries are all classified as other securities. Other securities with a determinable market value are stated at fair value with any changes in unrealized holding gain or loss, net of the applicable income taxes, included directly in shareholders’ equity. Other securities without a determinable market value are stated at cost. Cost of securities sold is determined by the moving average method.

(f) Inventories
Finished products are stated at the lower of cost or market, cost being determined by the weighted average method. Work in process is stated at cost determined principally by the weighted average method. Supplies are stated at cost determined principally by the moving average method. Raw materials are stated at the lower of cost or market, cost being determined principally by the weighted average method.

(g) Property, Plant and Equipment and Depreciation
Depreciation of property, plant and equipment is determined mainly by the declining-balance method at rates
based on the estimated useful lives of the respective assets. The useful lives of property, plant and equipment are summarized as follows:

(h) Leases
Noncancelable leases are primarily accounted for as operating leases (whether such leases are classified as operating or finance leases) except that leases which stipulate the transfer of ownership of the leased assets to the lessee are accounted for as finance leases.

(i) Retirement Benefits
Accrued employees’ retirement benefits or prepaid pension cost are provided mainly at an amount calculated based on the retirement benefit obligation and the fair value of the pension plan assets at the balance sheet dates, as adjusted for unrecognized actuarial gain or loss and unrecognized prior service cost. The retirement benefit obligation is attributed to each period by the straight-line method over the estimated years of service of the eligible employees. Actuarial gain and loss are amortized in the year following the year in which the gain or loss is recognized, primarily by the straight-line method and principally over 10 years. Certain foreign subsidiaries adopt the corridor approach for the amortization of actuarial gain and loss. Prior service cost is amortized as incurred by the straight-line method principally over 5 years.
  Effective the year ended March 31, 2005, the Company and domestic subsidiaries have early adopted amended provisions to the accounting standard for retirement benefits. As a result of the early adoption of these amendments, operating income and income before income taxes and minority interests increased by ¥339 million ($3,168 thousand) for the year ended March 31, 2005 as compared with the corresponding amount which would have been recorded if the previous method had been followed.
  Effective the year ended March 31, 2005, NSK EUROPE LTD., NSK STEERING SYSTEMS EUROPE LTD., and AKS PRECISION BALL EUROPE LTD., have implemented early adoption of a new accounting standard for retirement benefits in the United Kingdom. The effect of this change was to increase operating income by ¥229 million ($2,140 thousand) and to decrease income before income taxes and minority interests by ¥199 million ($1,860 thousand) for the year ended March 31, 2005 as compared with the corresponding amounts which would have been recorded if the previous method had been followed. Retained earnings also decreased by¥19,442 million ($181,701 thousand) since the net retirement benefit obligation at transition and actuarial gains and losses were charged directly to retained earnings for the year ended March 31, 2005.
  The effect of the above changes on segment information is explained in Note 18.
  Members of the Board of Directors and executive officers of the Company are customarily entitled to severance payments. Provisions for retirement benefits for them are made at estimated amounts.

(j) Income Taxes
Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.

(k) Research and Development Costs
Research and development costs are charged to income when incurred.

(l) Appropriation of Retained Earnings
Dividends and other appropriations of retained earnings are resolved by the Board of Directors held subsequent to the end of the fiscal year, and are reported to the shareholders at a meeting. The accompanying consolidated financial statements reflect the applicable appropriations of retained earnings as resolved by the Board of Directors subsequent to the fiscal year end.

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