Central Japan Railway : Financial Results(FY2023.3)3.8MB

businesses. Passenger transportation revenue of the railway business for Central Japan Railway Company (the "Company") consists of the Tokaido Shinkansen and conventional lines in the Tokai region, amounted to 1,069,980 million yen, representing the majority of the operating revenues of the transportation business with external customers.

Passenger fares are subject to contracts with other Japan railway companies that allow passengers to pay the total fares on routes operated by all the railway companies, and the fares applicable to the Company's own routes are recorded as the Company's passenger transportation revenue. Since the Tokaido Shinkansen is responsible for the passenger transportation of Japan's main transportation artery between Tokyo and Osaka, the proportion allocated to the Company of tickets sold in the operating areas of other Japan railway companies, including travel agencies of each company, is relatively high.

Train tickets are sold through the Mars system, which is an online system that is jointly used by six Japan railway companies for selling designated seat tickets and other tickets. Regarding the utilization of the system, the six Japan railway companies have jointly signed a contract with Railway Information Systems Co., Ltd. (the "Contractor"), and entrust the Contractor with calculation work, such as revenue clearing for tickets sold mutually by each company. Passenger transportation revenue is determined by receiving the clearing results from the Contractor of the revenue clearing business by collecting the revenue data through equipment, such as ticket vending machines and the aforementioned online system. The main processes, such as the aggregation processing of the revenue data, the calculation of the revenue clearing amount, and the interface between the systems and the financial accounting system, are highly reliant on the IT system. In addition, the accuracy of the passenger transportation revenue that consists of high volume of daily usage data is dependent on a properly functioning IT system.

Passenger transportation revenue is determined through the aggregated ticket revenue amount of Japan railway companies and the revenue clearing amount. It does not include the amount solely sold by the Company. In addition, the effective design and stable operation of the Company's IT systems are imperative for accurately recording revenue derived from a high volume of daily revenue data, and our testing of controls over the IT systems required the

Regarding the design and operating effectiveness of the internal controls over the system related to the Contractor's revenue clearing operations, we inspected "Independent service auditor's assurance report on the description of the service organization's systems and the design and operating effectiveness of internal controls" issued by an independent auditor of the Contractor, and we examined whether the general information technology controls ("GITCs") and IT application controls corresponding to the accuracy of the calculation processing of revenue clearing were identified and tested.

1. Testing the Company's IT controls
2. • We tested the design and operating effectiveness of the IT application controls over the interfaces between the IT systems at the Contractor and the IT systems related to passenger transportation revenue at the Company through inspection of documents, such as design documents, and assessed the consistency of data for a series of IT systems.
   • We tested the design and operating effectiveness of GITCs over the relevant IT systems by inspecting test results at the time of program changes and approval trails for granting or changing access rights to information resources.
3. Testing of the internal controls for the accurate recording of passenger transportation revenue
   We tested the design and operating effectiveness of controls for the accurate recording of passenger transportation revenue through inquiries and inspection of related documents. We specifically focused on controls over the accuracy related to the process in the revenue data management system, such as

Accounting for capital investment in the railway business

How the Key Audit Matter Was

Addressed in the Audit Our audit procedures related to the accounting treatment of capital investment in the railway business included the following, among others:

1. Testing of the internal controls over the determination of accurate accounting for capital investment

We tested the design and operating effectiveness of controls over the determination of accounting treatments for various capital investments by making inquiries and inspecting documents. The evaluation focused specifically on the following:

• Controls over the appropriate

project is deemed to be long-term and large in scale, and the significance of capital investment related to the construction of the Chuo Shinkansen is increasing.

The Company's capital investment is often accompanied by constructions, and has the following characteristics:

• A large number of construction works are performed at the same time, and the monetary amount per construction contract is material. Also, changes in plans and specifications from the initial contract are often made in response to the progress of construction.
• Construction contracts often include a number of performance obligations, and they often include incidental construction, such as the equipment removal and repairs, without extending the useful life of the fixed assets or increasing the asset value.
• Large-scaleprojects can take several years to complete. In particular, most of the capital expenditures related to the construction of the Chuo Shinkansen are accounted for as construction in progress for a long period of time until future commencement of the operation.

We determined the accounting for capital investments in the railway business as a key audit matter given the following considerations:

• There are a large number of construction contracts consisting of transactions that are quantitatively material individually;
• Management judgment is required in determining the appropriate classification of whether costs should be capitalized or expensed; and
• The amount of construction in progress is extremely material, mainly due to the Chuo Shinkansen construction work.

classification of capitalizable expenditure (plan and approval of the classified construction works in accordance with the accounting policy for each type of construction)

• Controls over the accuracy of fixed assets recording (matching accounting slips for fixed assets and removal costs with related documents such as contracts)
• Controls over appropriate management of the construction in progress balances (regular examination of construction in progress detail by project)

2. Test of transactions related to the increase in fixed assets and the amount of construction in progress

• We selected samples from tangible fixed assets addition and tested the accuracy of amounts booked by matching them with contracts and other supporting documents.
• In order to understand the current status of the Chuo Shinkansen construction work, which is a large- scale and long-term project, we performed observations of the construction sites on a sample base.
• Regarding projects involving incidental construction activities, such as equipment removal and repair, we obtained an understanding of the nature of expenditures through inquiries of the Company's personnel and inspected related supporting documents such as contracts. In addition, we tested the appropriateness of the classification of capital expenditures and the expenditures to be expensed.
• We obtained an understanding of the nature of expenditures and the planned timing of completion of the construction by examining administrative data of each construction. We also tested whether any projects recorded in construction in progress should be transferred to