Honda 2008 Annual Report Download - page 70

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1. General and Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
Honda Motor Co., Ltd. and Subsidiaries
(a) Description of Business
Honda Motor Co., Ltd. (the “Company”) and its subsidiaries
(collectively “Honda”) mainly develop, manufacture and
distribute motorcycles, automobiles, power products,
and also provide financing for the sale of those products.
Honda’s manufacturing operations are principally conducted
in 33 separate factories, four of which are located in Japan.
Principal overseas manufacturing facilities are located in
the United States of America, Canada, Mexico, the United
Kingdom, France, Italy, Spain, China, India, Indonesia,
Malaysia, Pakistan, the Philippines, Taiwan, Thailand,
Vietnam, Argentina, Brazil and Turkey.
(b) Basis of Presenting Consolidated Financial Statements
The Company and its domestic subsidiaries maintain their
books of account in conformity with financial accounting
standards of Japan, and its foreign subsidiaries generally
maintain their books of account in conformity with those of
the countries of their domicile.
The consolidated financial statements presented herein
have been prepared in a manner and reflect the adjustments
which are necessary to conform them with U.S. generally
accepted accounting principles.
(c) Consolidation Policy
The consolidated financial statements include the accounts
of the Company, its subsidiaries and those variable interest
entities where Honda is the primary beneficiary under the
Financial Accounting Standards Board (FASB) Interpretation
(FIN) No. 46 (revised December 2003), “Consolidation of
Variable Interest Entities”. All significant intercompany
balances and transactions have been eliminated in
consolidation.
Investments in affiliates in which Honda has the ability
to exercise significant influence over their operating and
financial policies, but where Honda does not have a
controlling financial interest are accounted for using the
equity method.
(d) Use of Estimates
Management of Honda has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues and expenses, and the disclosure of contingent
assets and liabilities to prepare its consolidated financial
statements in conformity with U.S. generally accepted
accounting principles. Significant items subject to such
estimates and assumptions include, but are not limited to,
allowance for credit losses, losses on lease residual values,
retained interests in the sold pools of finance receivables,
realizable values of inventories, realization of deferred tax
assets, impairment of long-lived assets, unrecognized tax
benefits, product warranty obligations, the fair values of
assets and obligations related to employee benefits, and the
fair value of derivative financial instruments. Actual results
could differ from those estimates.
(e) Revenue Recognition
Sales of manufactured products are recognized when
persuasive evidence of an arrangement exists, delivery has
occurred, title and risk of loss have passed to the customers,
the sales price is fixed or determinable, and collectibility is
probable.
Honda provides dealer incentives passed on to the end
customers generally in the form of below-market interest
rate loans or lease programs. The amount of interest or
lease subsidies paid is the difference between the amount
offered to retail customers and the amount stemmed from
a market-based interest or lease rate. Honda also provides
dealer incentives retained by the dealer, which generally
represent discounts provided from Honda to the dealers.
These incentives are classified as a reduction of sales
revenue as the consideration is paid in cash, because Honda
does not receive an identifiable benefit in exchange for this
consideration. The incentives are estimated and accrued at
the time the product is sold to the dealer.
Operating lease revenues are recorded on a straight-line
basis over the term of the lease.
Interest income from finance receivables is recognized
using the interest method. Finance receivable origination
fees and certain direct origination costs are deferred, and
the net fee or cost is amortized using the interest method
over the contractual life of the finance receivables.
Finance subsidiaries of the Company periodically sell
finance receivables. Gain or loss is recognized equal to
the difference between the cash proceeds received and
the carrying value of the receivables sold and is recorded
in the period in which the sale occurs. Honda allocates the
recorded investment in finance receivables between the
portion(s) of the receivables sold and portion(s) retained,
based on the relative fair values of those portions on the
date the receivables are sold. Honda recognizes gains
or losses attributable to the change in the fair value of the
retained interests, which are recorded at estimated fair
value and accounted for as “trading” securities. Honda
determines the fair value of the retained interests by
discounting the future cash flows. Those cash flows are
estimated based on prepayments, credit losses and other
information as available and are discounted at a rate which