Toyota 2005 Annual Report Download - page 84

are to trusts and Toyota retains the servicing rights and is
paid a servicing fee. Gains or losses from the sales of the
finance receivables are recognized in the period in which
such sales occur.
Other costs—
Advertising and sales promotion costs are expensed as
incurred. Advertising costs were ¥326,972 million, ¥371,677
million and ¥379,702 million ($3,536 million) for the
years ended March 31, 2003, 2004 and 2005, respectively.
Toyota generally warrants its products against certain
manufacturing and other defects. Provisions for product
warranties are provided for specific periods of time and/or
usage of the product and vary depending upon the nature
of the product, the geographic location of the sale and
other factors. Toyota records a provision for estimated
product warranty costs at the time the related sale is recog-
nized based on estimates that Toyota will incur to repair
or replace product parts that fail while under warranty.
The amount of accrued estimated warranty costs is primarily
based on historical experience as to product failures as
well as current information on repair costs. The amount
of warranty costs accrued also contains an estimate of
warranty claim recoveries to be received from suppliers.
Research and development costs are expensed as incurred
and ¥668,404 million, ¥682,279 million and ¥755,147
million ($7,032 million) for the years ended March 31,
2003, 2004 and 2005, respectively.
Cash and cash equivalents—
Cash and cash equivalents include all highly liquid invest-
ments with original maturities of three months or less,
that are readily convertible to known amounts of cash and
are so near maturity that they present insignificant risk of
changes in value because of changes in interest rates.
Marketable securities—
Marketable securities consist of debt and equity securities.
Debt and equity securities designated as available-for-sale
are carried at fair value with changes in unrealized gains or
losses included as a component of accumulated other
comprehensive income in shareholders’ equity, net of
applicable taxes. Debt securities designated as held-to-
maturity investments are carried at amortized cost.
Individual securities classified as either available-for-sale
or held-to-maturity are reduced to net realizable value for
other-than-temporary declines in market value. In deter-
mining if a decline in value is other-than-temporary,
Toyota considers the length of time and the extent to
which the fair value has been less than the carrying value,
the financial condition and prospects of the company and
Toyota’s ability and intent to retain its investment in the
company for a period of time sufficient to allow for any
anticipated recovery in market value. Realized gains and
losses, which are determined on the average-cost method,
are reflected in the statement of income when realized.
Security investments in non-public companies—
Security investments in non-public companies are carried
at cost as fair value is not readily determinable. If the value
of a non-public security investment is estimated to have
declined and such decline is judged to be other-than-
temporary, Toyota recognizes the impairment of the
investment and the carrying value is reduced to its fair
value. Determination of impairment is based on the
consideration of such factors as operating results, business
plans and estimated future cash flows. Fair value is deter-
mined principally through the use of the latest financial
information.
Finance receivables—
Finance receivables are recorded at the present value of the
related future cash flows including residual values for
finance leases.
Allowance for credit losses—
Allowance for credit losses are established to cover
probable losses on receivables resulting from the inability
of customers to make required payments. The allowance
for credit losses is based primarily on the frequency of
occurrence and loss severity. Other factors affecting
collectibility are also evaluated in determining the amount
to be provided.
Losses are charged to the allowance when it has been
determined that payments will not be received and
collateral cannot be recovered or the related collateral is
repossessed and sold. Any shortfall between proceeds
received and the carrying cost of repossessed collateral is
charged to the allowance. Recoveries are reversed from the
allowance for credit losses.
Allowance for residual value losses—
Toyota is exposed to risk of loss on the disposition of off-
lease vehicles to the extent that sales proceeds are not
sufficient to cover the carrying value of the leased asset at
lease termination. Toyota maintains an allowance to cover
probable estimated losses related to unguaranteed residual
values on its owned portfolio. The allowance is evaluated
considering projected vehicle return rates and projected
loss severity. Factors considered in the determination of
projected return rates and loss severity include historical
and market information on used vehicle sales, trends in
lease returns and new car markets, and general economic
conditions. Management evaluates the foregoing factors,
82 >NOTES TO CONSOLIDATED FINANCIAL STATEMENTS