Toyota 2007 Annual Report Download - page 103

ANNUAL REPORT 2007 101
computed on the declining-balance method for the parent
company and Japanese subsidiaries and on the straight-line
method for foreign subsidiary companies at rates based on esti-
mated useful lives of the respective assets according to general
class, type of construction and use. The estimated useful lives
range from 2 to 65 years for buildings and from 2 to 20 years for
machinery and equipment.
Vehicles and equipment on operating leases to third parties
are originated by dealers and acquired by certain consolidated
subsidiaries. Such subsidiaries are also the lessors of certain
property that they acquire directly. Vehicles and equipment on
operating leases are depreciated primarily on a straight-line
method over the lease term, generally 5 years, to the estimated
residual value.
Long-lived assets—
Toyota reviews its long-lived assets, including investments in
affiliated companies, for impairment whenever events or
changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be
recognized when the carrying amount of an asset exceeds the
estimated undiscounted cash flows expected to result from the
use of the asset and its eventual disposition. The amount of the
impairment loss to be recorded is calculated by the excess of
the carrying value of the asset over its fair value. Fair value is
determined mainly using a discounted cash flow valuation
method.
Goodwill and intangible assets—
Goodwill is not material to Toyota’s consolidated balance
sheets.
Intangible assets consist mainly of software. Intangible assets
with a definite life are amortized on a straight-line basis with
estimated useful lives mainly of 5 years. Intangible assets with
an indefinite life are tested for impairment whenever events or
circumstances indicate that a carrying amount of an asset (asset
group) may not be recoverable. An impairment loss would be
recognized when the carrying amount of an asset exceeds the
estimated undiscounted cash flows used in determining the fair
value of the asset. The amount of the impairment loss to be
recorded is generally determined by the difference between
the fair value of the asset using a discounted cash flow valuation
method and the current book value.
Employee benefit obligations—
Toyota has both defined benefit and defined contribution plans
for employees’ retirement benefits. Retirement benefit obliga-
tions are measured by actuarial calculations in accordance with
a Statement of Financial Accounting Standard (“FAS”) No. 87
Employers’ accounting for pensions (“FAS 87”). Toyota adopt-
ed the provisions regarding recognition of funded status and
disclosure under FAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106, and 132(R)
(“FAS 158”) as of March 31, 2007. Under the provisions of FAS
158, the overfunded or underfunded status of the defined ben-
efit postretirement plans is recognized on the consolidated bal-
ance sheets as prepaid pension and severance costs or accrued
pension and severance costs, and the funded status change is
recognized in the year in which it occurs through comprehen-
sive income. Prior to the adoption of FAS 158, a minimum pen-
sion liability had been recorded for plans where the
accumulated benefit obligation net of plan assets exceeded the
accrued pension and severance costs. After the adoption of
FAS 158, a minimum pension liability is not recorded.
Environmental matters—
Environmental expenditures relating to current operations are
expensed or capitalized as appropriate. Expenditures relating
to existing conditions caused by past operations, which do not
contribute to current or future revenues, are expensed.
Liabilities for remediation costs are recorded when they are
probable and reasonably estimable, generally no later than the
completion of feasibility studies or Toyota’s commitment to a
plan of action. The cost of each environmental liability is esti-
mated by using current technology available and various engi-
neering, financial and legal specialists within Toyota based on
current law. Such liabilities do not reflect any offset for possible
recoveries from insurance companies and are not discounted.
There were no material changes in these liabilities for all peri-
ods presented.
Income taxes—
The provision for income taxes is computed based on the pre-
tax income included in the consolidated statement of income.
The asset and liability approach is used to recognize deferred
tax assets and liabilities for the expected future tax conse-
quences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Valuation
allowances are recorded to reduce deferred tax assets when it
is more likely than not that a tax benefit will not be realized.
Derivative financial instruments—
Toyota employs derivative financial instruments, including for-
ward foreign currency exchange contracts, foreign currency
options, interest rate swaps, interest rate currency swap agree-
ments and interest rate options to manage its exposure to fluc-
tuations in interest rates and foreign currency exchange rates.
Toyota does not use derivatives for speculation or trading pur-
poses. Changes in the fair value of derivatives are recorded
each period in current earnings or through other comprehen-
sive income, depending on whether a derivative is designated
as part of a hedge transaction and the type of hedge transac-
tion. The ineffective portion of all hedges is recognized currently
in operations.