Toyota 2006 Annual Report Download - page 86

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available and expected to be available during the period to
maturity of the defined benefit pension plans. Toyota deter-
mines the expected rates of return for pension assets after con-
sidering several applicable factors including, the composition of
plan assets held, assumed risks of asset management, historical
results of the returns on plan assets, Toyota’s principal policy for
plan asset management, and forecasted market conditions. A
weighted-average discount rate of 2.6% and a weighted-aver-
age expected rate of return on plan assets of 2.9% is the result
of assumptions used for the various pension plans in calculating
Toyota’s consolidated pension costs and obligations for fiscal
2006.
Sensitivity analysis
The following table illustrates the effect of assumed changes in
weighted-average discount rate and the weighted-average
expected rate of return on plan assets, which we believe are
critical estimates in determining pension costs and obligations,
assuming all other assumptions are consistent.
Yen in millions
Effect on pre-tax income Effect on PBO
for the year ending as of March 31,
March 31, 2007 2006
Discount rates
0.5% decrease ................................. ¥(10,139) ¥ 127,688
0.5% increase .................................. 9,779 (110,001)
Expected rate of return on plan assets
0.5% decrease ................................. ¥(6,381)
0.5% increase .................................. 6,381
Derivatives and Other Contracts at Fair Value
Toyota uses derivatives in the normal course of business to
manage its exposure to foreign currency exchange rates and
interest rates. The accounting is complex and continues to
evolve. In addition, there are the significant judgments and esti-
mates involved in the estimating of fair value in the absence of
quoted market values. These estimates are based upon valua-
tion methodologies deemed appropriate in the circumstances;
however, the use of different assumptions may have a material
effect on the estimated fair value amounts.
Marketable Securities
Toyota’s accounting policy is to record a write-down of
such investments to realizable value when a decline in fair
value below the carrying value is other-than-temporary. In
determining 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.
Quantitative and Qualitative Disclosures
about Market Risk
Toyota is exposed to market risk from changes in foreign cur-
rency exchange rates, interest rates and certain commodity and
equity security prices. In order to manage the risk arising from
changes in foreign currency exchange rates and interest rates,
Toyota enters into a variety of derivative financial instruments.
A description of Toyota’s accounting policies for derivative
instruments is included in note 2 to the consolidated financial
statements and further disclosure is provided in notes 20 and
21 to the consolidated financial statements.
Toyota monitors and manages these financial exposures as
an integral part of its overall risk management program, which
recognizes the unpredictability of financial markets and seeks to
reduce the potentially adverse effects on Toyota’s operating
results.
The financial instruments included in the market risk analy-
sis consist of all of Toyota’s cash and cash equivalents, mar-
ketable securities, finance receivables, securities investments,
long-term and short-term debt and all derivative financial
instruments. Toyota’s portfolio of derivative financial instru-
ments consists of forward foreign currency exchange contracts,
foreign currency options, interest rate swaps, interest rate cur-
rency swap agreements and interest rate options. Anticipated
transactions denominated in foreign currencies that are covered
by Toyota’s derivative hedging are not included in the market
risk analysis. Although operating leases are not required to be
included, Toyota has included these instruments in determining
interest rate risk.
Foreign Currency Exchange Rate Risk
Toyota has foreign currency exposures related to buying, selling
and financing in currencies other than the local currencies in
which it operates. Toyota is exposed to foreign currency risk
related to future earnings or assets and liabilities that are
exposed due to operating cash flows and various financial