Toyota 2006 Annual Report Download - page 93

91
Notes to Consolidated Financial Statements
Toyota Motor Corporation
Toyota is primarily engaged in the design, manufacture, and
sale of sedans, minivans, compact cars, sport-utility vehicles,
trucks and related parts and accessories throughout the
world. In addition, Toyota provides financing, vehicle and
equipment leasing and certain other financial services primari-
ly to its dealers and their customers to support the sales of
vehicles and other products manufactured by Toyota.
1. Nature of operations:
2. Summary of significant accounting policies:
The parent company and its subsidiaries in Japan maintain
their records and prepare their financial statements in accor-
dance with accounting principles generally accepted in Japan,
and its foreign subsidiaries in conformity with those of their
countries of domicile. Certain adjustments and reclassifications
have been incorporated in the accompanying consolidated
financial statements to conform to accounting principles gen-
erally accepted in the United States of America.
Significant accounting policies after reflecting adjustments
for the above are as follows:
Basis of consolidation and accounting for invest-
ments in affiliated companies—
The consolidated financial statements include the accounts of
the parent company and those of its majority-owned sub-
sidiary companies. All significant intercompany transactions
and accounts have been eliminated. Investments in affiliated
companies in which Toyota exercises significant influence, but
which it does not control, are stated at cost plus equity in
undistributed earnings. Consolidated net income includes
Toyota’s equity in current earnings of such companies, after
elimination of unrealized intercompany profits. Investments in
non-public companies in which Toyota does not exercise sig-
nificant influence (generally less than a 20% ownership inter-
est) are stated at cost. The accounts of variable interest
entities as defined by the Financial Accounting Standard Board
(“FASB”) Interpretation No. 46(R) Consolidation of Variable
Interest Entities (revised December 2003) - an interpretation of
ARB No.51 (“FIN 46(R)”) are included in the consolidated
financial statements, if applicable.
Estimates—
The preparation of Toyota’s consolidated financial statements
in conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. The
more significant estimates include: product warranties,
allowance for doubtful accounts and credit losses, residual
values for leased assets, impairment of long-lived assets, pen-
sion costs and obligations, fair value of derivative financial
instruments and other-than-temporary losses on marketable
securities.
Translation of foreign currencies—
All asset and liability accounts of foreign subsidiaries and affili-
ates are translated into Japanese yen at appropriate year-end
current exchange rates and all income and expense accounts
of those subsidiaries are translated at the average exchange
rates for each period. The foreign currency translation adjust-
ments are included as a component of accumulated other
comprehensive income.
Foreign currency receivables and payables are translated at
appropriate year-end current exchange rates and the resulting
transaction gains or losses are recorded in operations currently.
Revenue recognition—
Revenues from sales of vehicles and parts are generally recog-
nized upon delivery which is considered to have occurred
when the dealer has taken title to the product and the risk
and reward of ownership have been substantively transferred,
except as described below.
Toyota’s sales incentive programs principally consist of cash
payments to dealers calculated based on vehicle volume or a
model sold by a dealer during a certain period of time. Toyota
accrues these incentives as revenue reductions upon the sale
of a vehicle corresponding to the program by the amount
determined in the related incentive program.
Revenues from the sales of vehicles under which Toyota
conditionally guarantees the minimum resale value is recog-
nized on a pro rata basis from the date of sale to the first
exercise date of the guarantee in a manner similar to lease
accounting. The underlying vehicles of these transactions are
recorded as assets and are depreciated in accordance with
Toyota’s depreciation policy.
Revenues from retail financing contracts and finance leases
are recognized using the effective yield method. Revenues
from operating leases are recognized on a straight-line basis
over the lease term.
Toyota on occasion sells finance receivables in transactions
subject to limited recourse provisions. These sales 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 ¥371,677 million, ¥379,702
million and ¥397,599 million ($3,385 million) for the years
ended March 31, 2004, 2005 and 2006, respectively.