Toyota 2010 Annual Report Download - page 60

58
TOYOTA ANNUAL REPORT 2010
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 signifi cantly
impact Toyotas results of operations, is
infl uenced primarily by two factors: frequency
of occurrence and severity of loss. 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.
The following table illustrates the eff ect of an
assumed change in expected severity of loss,
which Toyota believes is one of the key critical
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 fi nancial services operations as
any change impacts most signifi cantly on the
fi nancial services operations.
Yen in millions
Eff ect on the allowance
for credit losses
as of March 31, 2010
10 percent increase in
expected severity of loss ··
¥14,421
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 historical 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 eff ect 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
pressure. If resale prices of used vehicles decline,
future operating results of the fi nancial services
operations are likely to be adversely aff ected
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
determination of the contractual residual value
are still considered reasonable. Factors aff ecting
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
period. 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 eff ect of an
assumed change in the vehicle return rate, which
Toyota believes 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 fi nancial services operations
as those changes have a signifi cant impact on
fi nancing operations.
Yen in millions
Eff ect on the residual
value losses over
the remaining terms
of the operating leases
on and after April 1, 2010
1 percent increase in
vehicle return rate ········· ￥2,047
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 intangible assets, when
events and circumstances warrant such a review.
This review is performed using estimates of
future cash fl ows. 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 fl ows and fair values
are reasonable. However, changes in estimates
of such cash fl ows and fair values would aff ect
the evaluations and negatively aff ect 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, benefi ts earned, interest costs, expected
rate of return on plan assets, mortality rates
and other factors. Actual results that diff er
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, diff erences in
actual experience or changes in assumptions may
aff ect Toyotas pension costs and obligations.
The two most critical assumptions impacting
the calculation of pension costs and obligations
are the discount rates and the expected rates
of returns on plan assets. Toyota determines
the discount rates mainly based on the rates of
high quality fi xed income bonds or fi xed income
governmental bonds currently available and
expected to be available during the period to
maturity of the defi ned benefi t pension plans.
Toyota determines the expected rates of return
for pension assets after considering 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 2.8% and
a weighted-average expected rate of return on
plan assets of 3.6% are the results of assumptions
used for the various pension plans in calculating
Toyotas consolidated pension costs for fi scal
2010. Also, a weighted-average discount rate
of 2.8% is the result of assumption used for the
various pension plans in calculating Toyotas
consolidated pension obligations for fi scal 2010.
Financial Section
Financial Section Investor Information
Corporate Information Special Feature
Consolidated
Performance Highlights
Business Overview
Top Messages
Management's Discussion and Analysis of
Financial Condition and Results of Operations