Toyota 2011 Annual Report Download - page 67

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Financial Section and
Investor Information
Business and
Performance Review
Special FeatureMessage/Vision
Management and
Corporate Information
suppliers. The foregoing evaluations are inherently
uncertain, as they require material estimates and
some products’ warranties extend for several
years. Consequently, actual warranty costs may
differ from the estimated amounts and could
require additional warranty provisions. If these
factors require a significant increase in Toyota’s
accrued estimated warranty costs, it would
negatively affect future operating results of the
automotive operations.
An estimate of warranty claim accrued for
each fiscal year is calculated based on the
estimate of warranty claim per unit. The estimate
of warranty claim per unit is calculated by dividing
the actual amounts of warranty claim, net of claim
recovery cost received from suppliers, by the
number of sales units for the fiscal year.
As the historical recovery amounts received
from suppliers is used as a factor in Toyota’s
calculation of estimated accrued warranty cost,
the estimated accrued warranty cost may change
depending on the average recovery amounts
received from suppliers in the past. However,
Toyota believes that there is not a significant
uncertainty of estimated amounts based on
historical experience regarding recoveries
received from suppliers. Toyota may seek
recovery to suppliers over the life of the warranty,
and there are no other significant special terms
and conditions including cap on amounts that
can be recovered.
Toyota accrues for costs of recalls and other
safety measures, as well as product warranty cost
described above, included as a component of
cost of sales, at the time of vehicle sale based on
the amount estimated from historical experience
with consideration of individual occurrences of
recalls and other safety measures.
Below are the important factors, judgments
and assumptions taken into accounts for estimating
costs of recalls and other safety measures.
Toyota accrues for cost of recalls and other
safety measures based on the average repair
cost per unit and pattern of payment occurrence
in the past at the time of product sale. The average
repair cost per unit is calculated based on histor-
ical expenses incurred in relation of recalls and
other safety measures.
Factors that may bring material uncertainties
to the estimated or actual amount include the
important changes in the average repair cost for
products.
Retail receivables and finance lease receivables
consist of retail installment sales contracts
secured by passenger cars and commercial
vehicles. Collectability risks include consumer
and dealer insolvencies and insufficient collateral
values (less costs to sell) to realize the full carrying
values of these receivables. As a matter of policy,
Toyota maintains an allowance for doubtful
accounts and credit losses representing manage-
ment’s estimate of the amount of asset impairment
in the portfolios of finance, trade and other receiv-
ables. Toyota determines the allowance for
doubtful accounts and credit losses based on a
systematic, ongoing review and evaluation
performed as part of the credit-risk evaluation
process, historical loss experience, the size and
composition of the portfolios, current economic
events and conditions, the estimated fair value
and adequacy of collateral, and other pertinent
factors. This evaluation is inherently judgmental
and requires material estimates, including the
amounts and timing of future cash flows expected
to be received, which may be susceptible to
significant change. Although management
Management's Discussion and Analysis of Financial Condition and Results of Operations
Allowance for Doubtful Accounts and
Credit Losses
Natures of estimates and assumptions
considers the allowance for doubtful accounts
and credit losses to be adequate based on
information currently available, additional
provisions may be necessary due to (i) changes
in management estimates and assumptions about
asset impairments, (ii) information that indicates
changes in expected future cash flows, or (iii)
changes in economic and other events and
conditions. 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
collateral value of Toyota’s retail receivables and
finance lease receivables could experience
further downward pressure. If these factors
require a significant increase in Toyota’s allowance
for doubtful accounts and credit losses, it could
negatively affect future operating results of the
financial services operations. The level of credit
losses, which has a greater impact on Toyota’s
results of operations, is influenced by two factors:
frequency of occurrence and expected severity
of loss. For evaluation purposes, exposures to
credit losses are segmented into the two primary
categories of “consumer” and “dealer”. Toyota’s
“consumer” category consists of smaller balances
that are homogenous retail receivables and
finance lease receivables. The “dealer” category
consists of wholesale and other dealer loan
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.
The level of credit losses, which could significantly
impact Toyota’s results of operations, is influenced
by two factors: frequency of occurrence and
expected 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 effect of an assumed change
in frequency of occurrence or expected severity
of loss mainly in the United States, assuming all
other assumptions are held consistent respec-
tively. The table below represents the impact on
the allowance for credit losses in Toyota’s financial
services operations of the change in frequency of
occurrence or expected severity of loss as any
change impacts most significantly on the financial
services operations.
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
losses on its residual values.
Throughout the life of the lease, management
performs periodic evaluations of estimated end-of-
term fair values to determine whether estimates
used in the determination of the contractual
Sensitivity analysis
Yen in millions
Effect on the allowance
for credit losses
as of March 31, 2011
10 percent change in frequency of
occurrence or expected severity
of loss ¥6,153
Investment in Operating Leases
Natures of estimates and assumptions
67TOYOTA ANNUAL REPORT 2011