Toyota 2008 Annual Report Download - page 91

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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 •
primarily by two factors: frequency of occurrence and severity of
loss. For evaluation purposes, exposures to credit loss are seg-
mented into the two primary categories of “consumer” and
“dealer”. Toyota’s consumer portfolio consists of smaller bal-
ances that are homogenous retail finance receivables and lease
earning assets. The dealer portfolio consists of wholesale and
other dealer financing receivables. The overall allowance for
credit losses is evaluated at least quarterly, considering a variety
of assumptions and factors to determine whether reserves are
considered adequate to cover probable losses.
• Sensitivity Analysis
The level of credit losses, which could significantly impact
Toyota’s results of operations, is influenced primarily by two fac-
tors: frequency of occurrence and severity of loss. The overall
allowance for credit losses is evaluated at least quarterly, consid-
ering a variety of assumptions and factors to determine whether
reserves are considered adequate to cover probable losses. The
following table illustrates the effect of an assumed change in
expected severity of loss, which we believe is one of the key criti-
cal estimates for determining the allowance for credit losses,
assuming all other assumptions are held consistent. The table
below represents the impact on the allowance for credit losses
in Toyota’s financial services operations as any change impacts
most significantly on the financial services operations.
Yen in millions
Effect on the allowance
for credit losses
as of March 31, 2008
10 percent increase in expected severity of loss.... ¥6,713
■Investment in Operating Leases
• Natures of Estimates and Assumptions
Vehicles on operating leases, where Toyota is the lessor, are
valued at cost and depreciated over their estimated useful lives
using the straight-line method to their estimated residual values.
Toyota utilizes industry published information and its own histor-
ical 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 pres-
sure. 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 determina-
tion of the contractual residual value are still considered reason-
able. 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 peri-
od. A higher rate of vehicle returns exposes Toyota to higher
potential losses incurred at lease termination. Severity of loss 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 residual value losses, holding all
other assumptions constant. The following table represents the
impact on the residual value losses in Toyota’s financial services
operations as those changes have a significant impact on
financing operations.
Yen in millions
Effect on the residual
value losses over
the remaining terms
of the operating leases
on and after April 1, 2008
1 percent increase in vehicle return rate.............. ¥1,202
■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 circum-
stances 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 rea-
sonable. 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 assumptions
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 assumptions are accumulated and
amortized over future periods and, therefore, generally affect
recognized expense in future periods. While management
believes that the assumptions used are appropriate, differences
in actual experience or changes in assumptions may affect
Toyota’s pension costs and obligations.
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