Toyota 2005 Annual Report Download - page 75

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS >73
Investment in Operating Leases
Natures of estimates and assumptions
Vehicles on operating leases, where Toyota is the lessor, is
valued at acquisition cost and depreciated over its
estimated useful life using the straight-line method to its
estimated residual value. Toyota utilizes industry
published information and its own historical experience to
determine estimated residual values for these vehicles.
Toyota evaluates the recoverability of the carrying values
of its leased vehicles for impairment when there are
indications of declines in residual values, and if impaired,
Toyota recognizes an allowance for its residual values. In
addition, to the extent that sales incentives remain an
integral part of sales promotion with the effect of reducing
new vehicle prices, resale prices of used vehicles and,
correspondingly, the fair value of Toyota’s leased vehicles
could be subject to downward pressure. If resale prices of
used vehicles decline, future operating results of the
financial services operations are likely to be adversely
affected by incremental charges to reduce estimated
residual values. Throughout the life of the lease,
management performs periodic evaluations of estimated
end-of-term market values to determine whether
estimates used in the determination of the contractual
residual value are still considered reasonable. Factors
affecting the estimated residual value at lease maturity
include, but are not limited to, new vehicle incentive
programs, new vehicle pricing, used vehicle supply,
projected vehicle return rates, and projected loss severity.
The vehicle return rate represents the number of leased
vehicles returned at contract maturity and sold by Toyota
during the period as a percentage of the number of lease
contracts that, as of their origination dates, were
scheduled to mature in the same period. A higher rate of
vehicle returns exposes Toyota to higher potential losses
incurred at lease termination. Loss severity is the extent to
which the end-of-term market value of a lease is less than
its carrying value at lease end.
Sensitivity analysis
The following table illustrates the effect of an assumed
change in the vehicle return rate, which we believe is one
of the critical estimates, in determining the allowance for
residual value, holding all other assumptions constant.
The following table represents the impact on the
allowance for residual values in Toyota’s financial services
operations as those changes impact most significantly on
financing operations.
Yen in millions
Effect on the allowance for
residual value as of March 31, 2005
5 percent increase in
vehicle return rate ............... ¥1,074
Impairment of Long-Lived Assets
Toyota periodically reviews the carrying value of its long-
lived assets held and used and assets to be disposed of,
including goodwill and other intangible assets, when
events and circumstances warrant such a review. This
review is performed using estimates of future cash flows. If
the carrying value of a long-lived asset is considered
impaired, an impairment charge is recorded for the
amount by which the carrying value of the long-lived asset
exceeds its fair value. Management believes that the
estimates of future cash flows and fair values are
reasonable; however, changes in estimates of such cash
flows and fair values would affect the evaluations and
negatively affect future operating results of the automotive
operations.
Pension Costs and Obligations
Natures of estimates and assumptions
Pension costs and obligations are dependent on assump-
tions used in calculating such amounts. These assumptions
include discount rates, benefits earned, interest costs,
expected rate of return on plan assets, mortality rates and
other factors. Actual results that differ from the assump-
tions are accumulated and amortized over future periods
and, therefore, generally affect recognized expense and the
recorded obligations in future periods. While manage-
ment believes that the assumptions used are appropriate,
differences in actual experience or changes in assumptions
may affect Toyota’s pension costs and obligations.