Toyota 2008 Annual Report Download - page 121

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•Annual Report 2008 • TOYOTA
Performance Messages from the Management &
•Overview •Management •Special Feature •Business Overview •Corporate Information •Financial Section •Investor Information •
Postretirement benefits other than pensions
and postemployment benefits
Toyota’s U.S. subsidiaries provide certain health care and life
insurance benefits to eligible retired employees. In addition,
Toyota provides benefits to certain former or inactive employ-
ees after employment, but before retirement. These benefits
are currently unfunded and provided through various insurance
companies and health care providers. The costs of these bene-
fits are recognized over the period the employee provides
credited service to Toyota. Toyota’s obligations under these
arrangements are not material.
U.S. dollars
Years ending March 31, Yen in millions in millions
2009 ................................................................................................................................................................................... ¥ 86,774 $ 866
2010 ................................................................................................................................................................................... 84,573 844
2011 ................................................................................................................................................................................... 81,674 815
2012 ................................................................................................................................................................................... 78,204 781
2013 ................................................................................................................................................................................... 77,373 772
from 2014 to 2018............................................................................................................................................................. 430,548 4,298
Total............................................................................................................................................................................... ¥839,146 $8,376
Toyota employs derivative financial instruments, including for-
eign exchange forward contracts, foreign currency options,
interest rate swaps, interest rate currency swap agreements and
interest rate options to manage its exposure to fluctuations in
interest rates and foreign currency exchange rates. Toyota does
not use derivatives for speculation or trading.
Fair value hedges
Toyota enters into interest rate swaps, and interest rate curren-
cy swap agreements mainly to convert its fixed-rate debt to
variable-rate debt. Toyota uses interest rate swap agreements
in managing its exposure to interest rate fluctuations. Interest
rate swap agreements are executed as either an integral part of
specific debt transactions or on a portfolio basis. Toyota uses
interest rate currency swap agreements to entirely hedge expo-
sure to currency exchange rate fluctuations on principal and
interest payments for borrowings denominated in foreign cur-
rencies. Notes and loans payable issued in foreign currencies
are hedged by concurrently executing interest rate currency
swap agreements, which involve the exchange of foreign cur-
rency principal and interest obligations for each functional cur-
rency obligations at agreed-upon currency exchange and
interest rates.
For the years ended March 31, 2006, 2007 and 2008, the inef-
fective portion of Toyota’s fair value hedge relationships which
are included in cost of financing operations in the accompany-
ing consolidated statements of income were not material. For
fair value hedging relationships, the components of each deriv-
ative’s gain or loss are included in the assessment of hedge
effectiveness.
Undesignated derivative financial instruments
Toyota uses foreign exchange forward contracts, foreign cur-
rency options, interest rate swaps, interest rate currency swap
agreements, and interest rate options, to manage its exposure
to foreign currency exchange rate fluctuations and interest rate
fluctuations from an economic perspective, and which Toyota is
unable or has elected not to apply hedge accounting.
Unrealized gains or losses on these derivative instruments are
reported in the cost of financing operations and foreign
exchange gain, net in the accompanying consolidated state-
ments of income together with realized gains or losses on those
derivative instruments.
Unrealized gains or (losses) on undesignated derivative finan-
cial instruments reported in the cost of financing operations for
the years ended March 31, 2006, 2007 and 2008 were ¥(8,418) mil-
lion, ¥(19,984) million and ¥(67,991) million ($(679) million) those
reported in foreign exchange gain, net were ¥4,270 million,
¥17,866 million and ¥45,670 million ($456 million), respectively.
Derivative financial instruments: 20 .
Toyota has certain financial instruments, including financial
assets and liabilities and off-balance sheet financial instruments
which arose in the normal course of business. These financial
instruments are executed with creditworthy financial institutions,
and virtually all foreign currency contracts are denominated in
U.S. dollars, euros and other currencies of major industrialized
countries. Financial instruments involve, to varying degrees, mar-
ket risk as instruments are subject to price fluctuations, and ele-
ments of credit risk in the event a counterparty should default. In
the unlikely event the counterparties fail to meet the contractual
terms of a foreign currency or an interest rate instrument,
Toyota’s risk is limited to the fair value of the instrument.
Although Toyota may be exposed to losses in the event of non-
performance by counterparties on financial instruments, it does
not anticipate significant losses due to the nature of its counter-
parties. Counterparties to Toyota’s financial instruments repre-
sent, in general, international financial institutions. Additionally,
Toyota does not have a significant exposure to any individual
counterparty. Based on the creditworthiness of these financial
institutions, collateral is generally not required of the counter-
parties or of Toyota. Toyota believes that the overall credit risk
related to its financial instruments is not significant.
Other financial instruments: 21 .