Toyota 2008 Annual Report Download - page 100

98 TOYOTA •Annual Report 2008 •
Financial Section
records a provision for estimated product warranty costs at the
time the related sale is recognized based on estimates that
Toyota will incur to repair or replace product parts that fail while
under warranty. The amount of accrued estimated warranty
costs is primarily based on historical experience as to product
failures as well as current information on repair costs. The
amount of warranty costs accrued also contains an estimate of
warranty claim recoveries to be received from suppliers.
Research and development costs are expensed as incurred
and ¥812,648 million, ¥890,782 million and ¥958,882 million
($9,571 million) for the years ended March 31, 2006, 2007 and
2008, respectively.
Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments
with original maturities of three months or less, that are readily
convertible to known amounts of cash and are so near maturity
that they present insignificant risk of changes in value because
of changes in interest rates.
Marketable securities
Marketable securities consist of debt and equity securities.
Debt and equity securities designated as available-for-sale are
carried at fair value with unrealized gains or losses included as a
component of accumulated other comprehensive income in
shareholders’ equity, net of applicable taxes. Individual securi-
ties classified as available-for-sale are reduced to net realizable
value for other-than-temporary declines in market value. In
determining if a decline in value is other-than-temporary,
Toyota considers the length of time and the extent to which the
fair value has been less than the carrying value, the financial
condition and prospects of the company and Toyota’s ability
and intent to retain its investment in the company for a period
of time sufficient to allow for any anticipated recovery in market
value. Realized gains and losses, which are determined on the
average-cost method, are reflected in the statement of income
when realized.
Security investments in non-public companies
Security investments in non-public companies are carried at
cost as fair value is not readily determinable. If the value of a
non-public security investment is estimated to have declined
and such decline is judged to be other-than-temporary, Toyota
recognizes the impairment of the investment and the carrying
value is reduced to its fair value. Determination of impairment is
based on the consideration of such factors as operating results,
business plans and estimated future cash flows. Fair value is
determined principally through the use of the latest financial
information.
Finance receivables
Finance receivables are recorded at the present value of the
related future cash flows including residual values for finance
leases.
Allowance for credit losses
Allowance for credit losses are established to cover probable
losses on receivables resulting from the inability of customers to
make required payments. The allowance for credit losses is
based primarily on the frequency of occurrence and loss severi-
ty. Other factors affecting collectibility are also evaluated in
determining the amount to be provided.
Losses are charged to the allowance when it has been deter-
mined that payments will not be received and collateral cannot
be recovered or the related collateral is repossessed and sold.
Any shortfall between proceeds received and the carrying cost
of repossessed collateral is charged to the allowance.
Recoveries are reversed from the allowance for credit losses.
Allowance for residual value losses
Toyota is exposed to risk of loss on the disposition of off-lease
vehicles to the extent that sales proceeds are not sufficient to
cover the carrying value of the leased asset at lease termina-
tion. Toyota maintains an allowance to cover probable estimat-
ed losses related to unguaranteed residual values on its owned
portfolio. The allowance is evaluated considering projected
vehicle return rates and projected loss severity. Factors consid-
ered in the determination of projected return rates and loss
severity include historical and market information on used vehi-
cle sales, trends in lease returns and new car markets, and gen-
eral economic conditions. Management evaluates the
foregoing factors, develops several potential loss scenarios, and
reviews allowance levels to determine whether reserves are
considered adequate to cover the probable range of losses.
The allowance for residual value losses is maintained in
amounts considered by Toyota to be appropriate in relation to
the estimated losses on its owned portfolio. Upon disposal of
the assets, the allowance for residual losses is adjusted for the
difference between the net book value and the proceeds from
sale.
Inventories
Inventories are valued at cost, not in excess of market, cost
being determined on the “average-cost” basis, except for the
cost of finished products carried by certain subsidiary compa-
nies which is determined on the “specific identification” basis
or “last-in, first-out” (“LIFO”) basis. Inventories valued on the
LIFO basis totaled ¥357,055 million and ¥283,735 million ($2,832
million) at March 31, 2007 and 2008, respectively. Had the “first-
in, first-out” basis been used for those companies using the
LIFO basis, inventories would have been ¥13,780 million and
¥30,360 million ($303 million) higher than reported at March 31,
2007 and 2008, respectively.
Property, plant and equipment
Property, plant and equipment are stated at cost. Major
renewals and improvements are capitalized; minor replace-
ments, maintenance and repairs are charged to current opera-
tions. Depreciation of property, plant and equipment is mainly