3.	Fair Value Measurements

The Company and its subsidiaries adopted ASC 820-10 (“Fair Value Measurements and Disclosures”). This Codification Section defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

This Codification Section classifies and prioritizes inputs used in valuation techniques to measure fair value into the following three levels:


Level 1 —		Inputs of quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 —		Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.
Level 3 —		Unobservable inputs for the assets or liabilities.

This Codification Section differentiates between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). The Company and its subsidiaries measure mainly trading securities, available-for-sale securities, certain investment funds and derivatives at fair value on a recurring basis.

The following table presents recorded amounts of major financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2011:

March 31, 2011


	Millions of yen
	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Trading securities	¥	71,991	¥	763	¥	71,228	¥	—
Available-for-sale securities		883,410		74,914		492,820		315,676
Japanese and foreign government bond securities		169,345		19,995		149,350		—
Japanese prefectural and foreign municipal bond securities		34,968		—		34,968		—
Corporate debt securities		292,032		—		289,459		2,573
Specified bonds issued by SPEs in Japan		222,314		—		—		222,314
CMBS and RMBS in the U.S., and other asset-backed securities		87,874		—		2,591		85,283
Other debt securities		5,506		—		—		5,506
Equity securities		71,371		54,919		16,452		—
Other securities		10,023		—		10,023		—
Investment funds		10,023		—		10,023		—
Derivative assets		22,985		1,306		18,497		3,182
Interest rate swap agreements		2,070		—		2,070		—
Options held/written, caps held, and other		3,467		—		333		3,134
Futures, foreign exchange contracts		2,633		1,306		1,327		—
Foreign currency swap agreements		14,766		—		14,766		—
Credit derivatives held/written		49		—		1		48

	¥	988,409	¥	76,983	¥	592,568	¥	318,858

Financial Liabilities:
Derivative liabilities	¥	42,076	¥	977	¥	40,863	¥	236
Interest rate swap agreements		1,320		—		1,320		—
Options held/written, caps held, and other		2,071		—		2,071		—
Futures, foreign exchange contracts		4,968		977		3,991		—
Foreign currency swap agreements		33,481		—		33,481		—
Credit derivatives held/written		236		—		—		236

	¥	42,076	¥	977	¥	40,863	¥	236

December 31, 2011


	Millions of yen
	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Loans held for sale*	¥	8,896	¥	—	¥	8,896	¥	—
Trading securities		33,818		166		33,652		—
Available-for-sale securities		880,582		107,107		501,632		271,843
Japanese and foreign government bond securities		173,482		50,321		123,161		—
Japanese prefectural and foreign municipal bond securities		58,644		27		58,617		—
Corporate debt securities		306,217		—		303,328		2,889
Specified bonds issued by SPEs in Japan		162,396		—		—		162,396
CMBS and RMBS in the U.S., and other asset-backed securities		100,591		—		1,619		98,972
Other debt securities		7,586		—		—		7,586
Equity securities		71,666		56,759		14,907		—
Other securities		5,239		—		5,239		—
Investment funds		5,239		—		5,239		—
Derivative assets		19,666		559		15,381		3,726
Interest rate swap agreements		4,625		—		4,625		—
Options held/written, caps held and other		4,101		—		375		3,726
Futures, foreign exchange contracts		2,107		559		1,548		—
Foreign currency swap agreements		8,671		—		8,671		—
Credit derivatives held		162		—		162		—

	¥	948,201	¥	107,832	¥	564,800	¥	275,569

Financial Liabilities:
Derivative liabilities	¥	9,595	¥	557	¥	9,038	¥	—
Interest rate swap agreements		1,433		—		1,433		—
Options held/written, caps held and other		2,678		—		2,678		—
Futures, foreign exchange contracts		1,793		557		1,236		—
Foreign currency swap agreements		3,687		—		3,687		—
Credit derivatives held		4		—		4		—

	¥	9,595	¥	557	¥	9,038	¥	—

A subsidiary elected the fair value option under ASC825-10 (“Financial Instruments—Fair Value Option”) on the loans held for sale originated on and after October 1, 2011. These loans are multi-family and seniors housing loans and are sold to Federal National Mortgage Association (“Fannie Mae”) or institutional investors. Included in other operating revenues in the consolidated statements of income are gains from the change in the fair value of the loans of ¥404 million and ¥404 million, for the nine months ended December 31, 2011 and for the three months ended December 31, 2011, respectively. No gains or losses were recognized in earnings during the nine months ended December 31, 2011 and for the three months ended December 31, 2011, attributable to changes in instrument-specific credit risk. The amounts of aggregate unpaid principal balance and aggregate fair value at December 31, 2011, are ¥8,492 million and ¥8,896 million, respectively, and the amount of aggregate fair value exceeds the amount of aggregate unpaid principal balance by ¥404 million. There are no loans that are 90 days or more past due, in non-accrual status, or both.

Changes in economic conditions or valuation methodologies may require the transfer of assets and liabilities from one fair value level to another. In such instances, the Company and its subsidiaries recognize the transfer at the beginning of the reporting period. The Company and its subsidiaries evaluate the significance of transfers between levels based upon size of the transfer relative to total assets, total liabilities or total earnings. For the nine months and the three months ended December 31, 2010 and 2011, there were no significant transfers between Level 1 and Level 2.

The following table presents the reconciliation for financial assets and liabilities (net) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended December 31, 2010 and 2011:

Nine months ended December 31, 2010


	Millions of yen
	Balance at April 1, 2010		Gains or losses (realized/unrealized)									Purchases, sales, and settlements (net)			Transfers in and/ or out of Level 3 (net) *2			Balance at December 31, 2010		Change in unrealized gains or losses included in earnings for assets and liabilities still held at December 31, 2010 *1
	Balance at April 1, 2010		Included in earnings *1			Included in other comprehensive income			Total			Purchases, sales, and settlements (net)			Transfers in and/ or out of Level 3 (net) *2			Balance at December 31, 2010
Trading securities	¥	53	¥	(26	)	¥	(2	)	¥	(28	)	¥	(25	)	¥	—		¥	—	¥	—
Available-for-sale securities		401,804		(7,705	)		(3,192	)		(10,897	)		(47,333	)		(43,536	)		300,038		(7,733	)
Corporate debt securities		6,841		10			(66	)		(56	)		(2,080	)		(2,057	)		2,648		(23	)
Specified bonds issued by SPEs in Japan		246,305		(4,993	)		1,491			(3,502	)		(41,473	)		7,929			209,259		(5,031	)
CMBS and RMBS in the U.S., and other asset-backed securities		143,176		(2,722	)		(4,635	)		(7,357	)		(3,780	)		(49,408	)		82,631		(2,679	)
Other debt securities		5,482		—			18			18			—			—			5,500		—
Derivative assets and liabilities (net)		493		(2,068	)		—			(2,068	)		—			2,659			1,084		(2,068	)
Options held/written, caps held and other		—		(1,621	)		—			(1,621	)		—			2,659			1,038		(1,621	)
Credit derivatives held/written		493		(447	)		—			(447	)		—			—			46		(447	)

Nine months ended December 31, 2011


	Millions of yen
				Gains or losses (realized/unrealized)									Purchases		Sales			Settlements			Transfers in and/ or out of Level 3 (net) *2		Balance at December 31, 2011		Change in unrealized gains or losses included in earnings for assets and liabilities still held at December 31, 2011 *1
	Balance at April 1, 2011			Included in earnings *1			Included in other comprehensive income			Total			Purchases		Sales			Settlements			Transfers in and/ or out of Level 3 (net) *2		Balance at December 31, 2011
Available-for-sale securities		315,676			(1,851	)		(632	)		(2,483	)		53,681		(6,777	)		(88,254	)		—		271,843		(2,487	)
Corporate debt securities		2,573			(105	)		203			98			2,549		—			(2,331	)		—		2,889		(108	)
Specified bonds issued by SPEs in Japan		222,314			(3,451	)		3,112			(339	)		100		(10	)		(59,669	)		—		162,396		(3,476	)
CMBS and RMBS in the U.S., and other asset-backed securities		85,283			1,705			(3,336	)		(1,631	)		45,341		(6,767	)		(23,254	)		—		98,972		1,097
Other debt securities		5,506			—			(611	)		(611	)		5,691		—			(3,000	)		—		7,586		—
Derivative assets and liabilities (net)		2,946			592			—			592			—		—			188			—		3,726		592
Options held/written, caps held and other		3,134			592			—			592			—		—			—			—		3,726		592
Credit derivatives held/written		(188	)		—			—			—			—		—			188			—		—		—

Principally, gains and losses from trading securities are included in brokerage commissions and net gains on investment securities; available-for-sale securities are included in write-downs of securities or life insurance premiums and related investment income and derivative assets and liabilities (net) are included in other operating revenues/expenses, respectively. Also, for available-for-sale securities, amortizations of interest recognized in interest on loans and investment securities are included in these columns.

*2	The amount reported in “Transfers in and/or out of Level 3 (net)” is the fair value at the beginning of quarter during which the transfers occur.

Three months ended December 31, 2010


	Millions of yen
	Balance at September 30, 2010		Gains or losses (realized/unrealized)									Purchases, sales, and settlements (net)			Transfers in and/ or out of Level 3 (net) *2		Balance at December 31, 2010		Change in unrealized gains or losses included in earnings for assets and liabilities still held at December 31, 2010 *1
	Balance at September 30, 2010		Included in earnings *1			Included in other comprehensive income			Total			Purchases, sales, and settlements (net)			Transfers in and/ or out of Level 3 (net) *2		Balance at December 31, 2010
Trading securities	¥	24	¥	—		¥	1		¥	1		¥	(25	)	¥	—	¥	—	¥	—
Available-for-sale securities		308,955		(922	)		(1,971	)		(2,893	)		(6,024	)		—		300,038		(889	)
Corporate debt securities		3,147		(22	)		(4	)		(26	)		(473	)		—		2,648		(23	)
Specified bonds issued by SPEs in Japan		213,852		(183	)		(148	)		(331	)		(4,262	)		—		209,259		(215	)
CMBS and RMBS in the U.S., and other asset-backed securities		86,462		(717	)		(1,825	)		(2,542	)		(1,289	)		—		82,631		(651	)
Other debt securities		5,494		—			6			6			—			—		5,500		—
Derivative assets and liabilities (net)		3,288		(2,204	)		—			(2,204	)		—			—		1,084		(2,204	)
Options held/written, caps held and other		2,720		(1,682	)		—			(1,682	)		—			—		1,038		(1,682	)
Credit derivatives held/written		568		(522	)		—			(522	)		—			—		46		(522	)

Three months ended December 31, 2011


	Millions of yen
				Gains or losses (realized/unrealized)								Purchases		Sales			Settlements			Transfers in and/ or out of Level 3 (net) *2		Balance at December 31, 2011		Change in unrealized gains or losses included in earnings for assets and liabilities still held at December 31, 2011 *1
	Balance at September 30, 2011			Included in earnings *1			Included in other comprehensive income		Total			Purchases		Sales			Settlements			Transfers in and/ or out of Level 3 (net) *2		Balance at December 31, 2011
Available-for-sale securities		292,909			(520	)		1,939		1,419			14,346		(6,452	)		(30,379	)		—		271,843		(978	)
Corporate debt securities		2,681			(37	)		17		(20	)		546		—			(318	)		—		2,889		(37	)
Specified bonds issued by SPEs in Japan		180,191			(1,576	)		964		(612	)		100		(10	)		(17,273	)		—		162,396		(1,601	)
CMBS and RMBS in the U.S., and other asset-backed securities		99,624			1,093			785		1,878			13,700		(6,442	)		(9,788	)		—		98,972		660
Other debt securities		10,413			—			173		173			—		—			(3,000	)		—		7,586		—
Derivative assets and liabilities (net)		3,253			463			—		463			—		—			10			—		3,726		463
Options held/written, caps held and other		3,263			463			—		463			—		—			—			—		3,726		463
Credit derivatives held/written		(10	)		—			—		—			—		—			10			—		—		—

*2	The amount reported in “Transfers in and/or out of Level 3 (net)” is the fair value at the beginning of quarter during which the transfers occur.

From April 1, 2010, the Company and its subsidiaries adopted Accounting Standards Update 2009-16 (ASC 860 (“Transfers and Servicing”)), and Accounting Standards Update 2009-17 (ASC 810 (“Consolidation”)). As a result, there was an increase of ¥9,225 million in the Level 3 specified bonds issued by SPEs in Japan because these bonds are held by variable interest entities that have become subject to consolidation. On the other hand, there was a decrease of ¥49,408 million in the Level 3 CMBS and RMBS in the United States and other asset-backed securities, and a decrease of ¥1,296 million in the Level 3 specified bonds issued by SPEs in Japan, respectively, that are held by the Company and its subsidiaries, because these securities were issued by newly consolidated variable interest entities and accordingly have been eliminated in consolidation.

The following table presents recorded amounts of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2011 and December 31, 2011. These assets are measured at fair value on a nonrecurring basis mainly to recognize impairment.

March 31, 2011


	Millions of yen
	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Unlisted securities	¥	3,776	¥	—	¥	—	¥	3,776
Loans held for sale		11,439		—		11,439		—
Real estate collateral-dependent loans (net of allowance for probable loan losses)		110,329		—		—		110,329
Investment in operating leases and other operating assets		26,813		—		—		26,813
Land and buildings undeveloped or under construction		30,595		—		—		30,595
Certain investment in affiliates		2,090		236		—		1,854

	¥	185,042	¥	236	¥	11,439	¥	173,367

December 31, 2011
	Millions of yen
	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Unlisted securities	¥	1,138	¥	—	¥	—	¥	1,138
Real estate collateral-dependent loans (net of allowance for probable loan losses)		81,362		—		—		81,362
Investment in operating leases and other operating assets		11,478		—		—		11,478
Land and buildings undeveloped or under construction		14,307		—		—		14,307
Certain investment in affiliates		11,063		10,775		—		288

	¥	119,348	¥	10,775	¥	—	¥	108,573

The following is a description of the main valuation methodologies used for assets and liabilities measured at fair value.

Loans held for sale

Certain loans, which the Company and its subsidiaries have the intent and ability to sell to outside parties in the foreseeable future, are considered held for sale. The loans held for sale in the United States are classified as Level 2, because the Company and its subsidiaries measure their fair value based on a market approach using inputs other than quoted prices that are observable for the assets such as treasury rate, swap rate and market spread.

Real estate collateral-dependent loans

The valuation allowance for large balance non-homogeneous loans is individually evaluated based on the present value of expected future cash flows, the loan’s observable market price or the fair value of the collateral securing the loans if the loans are collateral-dependent. According to ASC 820-10 (“Fair Value Measurements and Disclosures”), measurement for impaired loans determined using a present value technique is not considered a fair value measurement. However, measurement for impaired loans determined using the loan’s observable market price or the fair value of the collateral securing the collateral-dependent loans are fair value measurements and are subject to the disclosure requirements for nonrecurring fair value measurements.

The Company and its subsidiaries determine the fair value of the real estate collateral of real estate collateral-dependent loans using appraisals prepared by independent third party appraisers or our own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flows methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate. We generally obtain a new appraisal once a fiscal year. In addition, we periodically monitor circumstances of the real estate collateral and then obtain a new appraisal in situations involving a significant change in economic and/or physical conditions, which may materially affect the fair value of the collateral. Real estate collateral-dependent loans whose fair values are estimated using an appraisal of the underlying collateral based on techniques other than recent transactions involving sales of similar assets are classified as Level 3 because such techniques involve unobservable inputs.

Investment in operating leases and other operating assets and Land and buildings undeveloped or under construction

Investment in operating leases measured at fair value is mostly real estate. The Company and its subsidiaries determine the fair value of Investment in operating leases and other operating assets and Land and buildings undeveloped or under construction using appraisals prepared by independent third party appraisers or the Company’s own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flow methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate. The Company and its subsidiaries classified the assets as Level 3 because such techniques involve unobservable inputs.

Trading securities, Available-for-sale securities and Investment in affiliates

If active market prices are available, fair value measurement is based on quoted active market prices and, accordingly, these securities are classified as Level 1. If active market prices are not available, a fair value measurement is based on observable inputs other than quoted prices included within Level 1, such as prices for similar assets and accordingly these securities are classified as Level 2. If market prices are not available, then fair value is estimated by using valuation models including discounted cash flow methodology and commonly used option-pricing models. Such securities are classified as Level 3, as the valuation models are based on inputs that are unobservable in the market.

The Company and its subsidiaries classified CMBS and RMBS in the United States, as level 3 due to a certain market being inactive. In determining whether a market is active or inactive, the Company and its subsidiaries evaluate various factors such as the lack of recent transactions, price quotations that are not based on current information or vary substantially over time or among market makers, a significant increase in implied risk premium, a wide bid-ask spread, significant decline in new issuances, little or no public information (e.g. a principal-to-principal market) and other factors. With respect to the CMBS and RMBS in the United States, the Company and its subsidiaries judged that the market was inactive because there were few recent transactions and broker quotes or pricing evaluations from independent pricing service vendors for these securities were not available. As a result, the Company and its subsidiaries established internally developed pricing models (Level 3 inputs) using valuation techniques such as present value techniques in order to estimate fair value of these securities and classified them as Level 3. Under the models, the Company and its subsidiaries use anticipated cash flows of the security discounted at a risk-adjusted discount rate that incorporates our estimate of credit risk and liquidity risk that a market participant would consider. The cash flows are estimated based on a number of assumptions such as default rate and prepayment speed, as well as seniority of the security.

The Company and its subsidiaries classified the specified bonds issued by SPEs in Japan as Level 3 because the Company and its subsidiaries measure their fair value using unobservable inputs. Since the specified bonds do not trade in an open market, no relevant observable market data is available. Accordingly the Company and its subsidiaries use a discounted cash flow model that incorporates significant unobservable inputs to measure their fair value. When evaluating the specified bonds issued by SPEs, the Company and its subsidiaries estimate the fair value by discounting future cash flows using a discount rate based on market interest rates and a risk premium. The future cash flows for the specified bonds issued by the SPEs are estimated based on contractual principal and interest repayment schedules on each of the specified bond issued by the SPEs. Since the discount rate is not observable for the specified bonds, the Company and its subsidiaries use an internally developed model to estimate a risk premium considering the value of the real estate collateral (which also involves unobservable inputs in many cases when using valuation techniques such as discounted cash flow methodology) and the seniority of the bonds. Under the model, the Company and its subsidiaries consider the loan-to-value ratio and other relevant available information to reflect both the credit risk and the liquidity risk in our own estimate of the risk premium. Generally, the higher the loan-to-value ratio, the larger the risk premium the Company and its subsidiaries estimate under the model. The fair value of the specified bonds issued by SPEs rises when the fair value of the collateral real estate rises and the discount rate declines. The fair value of the specified bonds issued by SPEs declines when the fair value of the collateral real estate declines and the discount rate rises.

Investment funds

The fair value is based on the net asset value if the investments meet certain requirements that the investees have all of the attributes specified in ASC 946-10 (“Financial Services—Investment Companies”) and the investees calculate the net asset value. These investments are classified as Level 2, because they are not redeemable at the net asset value per share at the measurement date but they are redeemable at the net asset value per share in the near term after the measurement date.

Derivatives

For exchange-traded derivatives, fair value is based on quoted market prices, and accordingly, classified as Level 1. For non-exchange traded derivatives, fair value is based on commonly used models and discounted cash flow methodology. If the inputs used for these measurements including yield curves and volatilities, are observable, the Company and its subsidiaries classify it as Level 2. If the inputs are not observable, the Company and its subsidiaries classify it as Level 3.