Toshiba 2012 Annual Report Download - page 84

14 TOSHIBA Annual Report 2012
Management's Discussion and Analysis
(6) Financial covenants
Loan agreements entered into between the Company and several financial institutions provide for financial covenants.
Therefore, if the Company's consolidated net assets, consolidated operating income or credit rating falls below the
respective levels provided for in the financial covenants, the Company's obligations with respect to relevant loan
repayments may be accelerated upon demand by the relevant lending financial institutions. Furthermore, any breach by
the Company of such financial covenants may trigger acceleration of the bonds or other borrowings of the Company.
The Company aims to improve business performance by promoting, among other things, restructuring programs and
business structure conversions, while making all possible efforts to obtain the lending financial institutions'
understanding of this, in order to avoid breaching financial covenants and consequent acceleration of repayments.
However, if any acceleration of the Company's loan repayments occurs, it may materially affect the Company's business
operations.
(7) Financial risk
Apart from being affected by the business operations of the Company or the Group, the Company's consolidated and
nonconsolidated 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
valuation allowance if, based on the weight of available evidence, some portion or all of the deferred tax assets are
unlikely to be realized. Recording of valuation allowances includes estimates and therefore involves inherent uncertainty.
The Group may also be required hereafter to record further valuation allowances, and the Group's future results and
financial condition may be adversely affected thereby.
The Group may be affected by future tax regulatory changes as the recordation of deferred tax assets and valuation
allowances have been made based on the currently-effective tax regulations.
(ii) Exchange rate fluctuations
The Group conducts business in various regions worldwide using a variety of foreign currencies and is therefore exposed
to exchange rate fluctuations.
Although the Group makes efforts to minimize the effect of fluctuation in exchange rates by balancing sales in foreign
currencies and purchase in foreign currencies, there is a possibility that operating income/loss will be affected by
exchange rate fluctuations due to changes in the balance of the scale of business segments and other factors. Also, there
is a possibility that such foreign exchange losses will occur, as resulting from a difference between the exchange rates at
the time of recognizing and at the time of settlement of the credits and debts in foreign currencies, in case of steep
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 equity attributable to shareholders of the Company
(“shareholders' equity”). As a result, the Group's shareholders' equity may be 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
Management's Discussion and Analysis obligations) of its pension plan in the consolidated balance sheets, with a
corresponding adjustment, net of tax, included in “accumulated other comprehensive loss” reported as a component of
shareholders' equity. Such adjustment to “accumulated other comprehensive loss” represents the result of adjustment for
the net unrecognized actuarial losses, unrecognized prior service costs, and unrecognized transition obligations. These
amounts will be subsequently recognized as net periodic pension and severance costs calculated pursuant to the
applicable accounting standards. The 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.
(iv) Impairment of long-lived assets, goodwill and listed shares.
If there is an indication of impairment for a long-lived asset and the carrying amount of such asset will not be recovered
by the future undiscounted cash flow, the carrying amount may be reduced to its fair value and a loss may be recognized
as an impairment with respect to such difference. A substantial amount of goodwill has been recorded in the Company's
consolidated balance sheets in accordance with U.S. generally accepted accounting principles. Goodwill is required to be
tested for impairment annually. If an impairment test shows that the total of the carrying amounts, including goodwill, in
relation to the business related to such goodwill exceeds its fair value, the relevant goodwill must be recalculated, and
the difference between the current amount and the recalculated amount will be recognized as an impairment. Therefore,
additional impairments may be recorded, depending on the valuation of long-lived assets and the estimate of future cash