Toshiba 2009 Annual Report Download - page 70

18
M anagement ’s Discussion and Analysis
of more demanding environmental regulations or in accordance with societal requirements.
The Group’s operations involve use of various chemical compounds, radioactive materials, nuclear materials and other toxic mate-
rials. The Group operates with maximum attention to such matters, giving first priority to human life and safety. However, the
Group may incur damages, or the Group’s reputation may be affected, as a result of the occurrence or threatened occurrence of any
natural disaster, terrorism, accident or other contingency (including those beyond the Group’s control) that leads to environmental
pollution.
(22) Parent company’s guaranty
When a subsidiary of the Group, such as Westinghouse Electric Company, LLC or Toshiba International Corporation,
accepts orders for large projects, the Company, as its parent company, may provide guaranties with respect to performance
under the relevant contracts. Such guaranties of the Company are made, upon the request of the relevant customers, pur-
suant to business practice and in the ordinary course of business. If the relevant subsidiary fails to fulfil its obligations, the
Company may be obliged to bear the resulting loss.
(23) Financial covenants
Loan agreements entered into between the Company and financial institutions provide for financial covenants. Therefore, if
the Company records a consolidated operating loss in the year ending March 31, 2010 or if the Company’s consolidated net
assets or credit rating falls below the respective levels provided for in the financial covenants, the Company’s obligations with
respect to the relevant loan may be accelerated upon request from the relevant lending financial institutions. Furthermore,
any breach by the Company of such financial covenants may also trigger acceleration of the bonds or other borrowings of the
Company.
The Company intends to continuously take maximum measures to avoid breaches of the financial covenants in and after
the year ending March 31, 2010 and consequent acceleration by improving its earnings through implementation of the
Action Programs to Improve Profitability and making efforts to obtain understanding from the lending financial institutions.
However, any acceleration of the Company’s loan may materially affect the Company’s business operation.
(24) Financial risk
Apart from being affected by the business operations of the Company or the Group, the Company’s consolidated and non-
consolidated results and financial condition may be affected by the following major financial factors:
(i) Deferred tax assets
The Company accounted for a substantial amount of deferred tax assets. The Group reduces deferred tax assets by a valua-
tion allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Recording of valuation allowances includes estimates and therefore involves uncertainty.
The Group may also be required in FY2009 and thereafter to record further valuation allowances depending the judgment
about the realizability of the related deferred tax assets, and the Group’s future results and financial condition may be
adversely affected thereby.
(ii) Exchange rate fluctuations
The Group conducts business in various regions worldwide using a variety of foreign currencies and is therefore substantially
exposed to exchange rate fluctuations. Foreign currency denominated assets and liabilities held by the Group are translated
into yen as the currency for reporting consolidated financial results. The effects of currency translation adjustments are
included in “accumulated other comprehensive income (loss)” reported as a component of shareholders’ equity. As a result,
the Group’s shareholders’ equity may be materially affected by exchange rate fluctuations.
(iii) Accrued pension and severance costs
The Group recognizes the funded status (i.e., the difference between the fair value of plan assets and the benefit obligations)
of its pension plan in the consolidated statements of income with a corresponding adjustment, net of tax, included in “accu-
mulated other comprehensive income (loss)” reported as a component of shareholders’ equity. Such adjustment to “accumu-
lated other comprehensive income (loss)” represents the result of adjustment for the net unrecognized actuarial losses, unrec-
ognized prior service costs, and unrecognized transition obligations. These amounts will be subsequently recognized as net
periodic pension and severance costs pursuant to the applicable accounting standards. Funded status of the Group’s pension
plan may deteriorate due to declines in the fair value of plan assets caused by lower returns, increases of severance benefit
obligations caused by changes in the discount rate, salary increase rates or other actuarial assumptions. As a result, the
Group’s shareholders’ equity may be adversely affected, and the net periodic pension and severance costs to be recorded in
“cost of sales” or “selling, general and administrative expenses” may increase.