Toyota 2005 Annual Report Download - page 83

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Toyota Motor Corporation
Toyota Motor Corporation (the “parent company”) and
its subsidiaries (collectively “Toyota”) are primarily engaged
in the design, manufacture, and sale of sedans, minivans,
compact cars, sport-utility vehicles, trucks and related
parts and accessories throughout the world. In addition,
Toyota provides retail and wholesale financing, retail
leasing and certain other financial services primarily to its
dealers and their customers related to vehicles manu-
factured by Toyota.
1. NATURE OF OPERATIONS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The parent company and its subsidiaries in Japan main-
tain their records and prepare their financial statements in
accordance with accounting principles generally accepted
in Japan, and its foreign subsidiaries in conformity with
those of their countries of domicile. Certain adjustments
and reclassifications have been incorporated in the accom-
panying consolidated financial statements to conform to
accounting principles generally accepted in the United
States of America.
Significant accounting policies after reflecting adjust-
ments for the above are as follows:
Basis of consolidation and accounting for investments in
affiliated companies—
The consolidated financial statements include the accounts
of the parent company and those of its majority-owned
subsidiary companies. All significant intercompany trans-
actions and accounts have been eliminated. Investments in
affiliated companies in which Toyota exercises significant
influence, but which it does not control, are stated at cost
plus equity in undistributed earnings. Consolidated net
income includes Toyota’s equity in current earnings of
such companies, after elimination of unrealized inter-
company profits. Investments in non-public companies in
which Toyota does not exercise significant influence
(generally less than a 20% ownership interest) are stated at
cost. The accounts of variable interest entities as defined
by the Financial Accounting Standard Board (“FASB”)
Interpretation No. 46(R) Consolidation of Variable Interest
Entities (revised December 2003)—an interpretation of ARB
No. 51 (“FIN 46(R)”) are included in the consolidated
financial statements, if applicable.
Estimates—
The preparation of Toyota’s consolidated financial state-
ments in conformity with accounting principles generally
accepted in the United States of America requires manage-
ment to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from
those estimates. The more significant estimates include:
product warranties, allowance for doubtful accounts and
credit losses, residual values for leased assets, impairment
of long-lived assets, pension costs and obligations, fair
value of derivative financial instruments and other-than-
temporary losses on marketable securities.
Translation of foreign currencies—
All asset and liability accounts of foreign subsidiaries and
affiliates are translated into Japanese yen at appropriate
year-end current exchange rates and all income and
expense accounts of those subsidiaries are translated at the
average exchange rates for each period. The foreign currency
translation adjustments are included as a component of
accumulated other comprehensive income.
Foreign currency receivables and payables are translated
at appropriate year-end current exchange rates and the
resulting transaction gains or losses are recorded in
operations currently.
Revenue recognition—
Revenues from sales of vehicles and parts are generally
recognized upon delivery which is considered to have
occurred when the dealer has taken title to the product
and the risk and reward of ownership have been substan-
tively transferred, except as described below.
Toyota’s sales incentive programs principally consist of
cash payments to dealers calculated based on vehicle
volume or a model sold by a dealer during a certain period
of time. Toyota accrues these incentives as revenue
reductions upon the sale of a vehicle corresponding to the
program by the amount determined in the related incen-
tive program.
Revenues from the sales of vehicles under which Toyota
conditionally guarantees the minimum resale value is
recognized on a pro rata basis from the date of sale to the
first exercise date of the guarantee in a manner similar to
lease accounting. The underlying vehicles of these transac-
tions are recorded as assets and are depreciated in accor-
dance with Toyota’s depreciation policy.
Revenues from retail financing contracts and finance
leases are recognized using the effective yield method.
Revenues from operating leases are recognized on a
straight-line basis over the lease term.
Toyota on occasion sells finance receivables in transac-
tions subject to limited recourse provisions. These sales