Toyota 2008 Annual Report Download - page 92

90 TOYOTA •Annual Report 2008 •
Financial Section
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The two most critical assumptions impacting the calculation
of pension costs and obligations are the discount rates and the
expected rates of returns on plan assets. Toyota determines the
discount rates mainly based on the rates of high quality fixed
income bonds or fixed income governmental bonds currently
available and expected to be available during the period to
maturity of the defined benefit pension plans. Toyota deter-
mines the expected rates of return for pension assets after con-
sidering several applicable factors including, the composition of
plan assets held, assumed risks of asset management, historical
results of the returns on plan assets, Toyota’s principal policy
for plan asset management, and forecasted market conditions.
A weighted-average discount rate of 2.7% and a weighted-aver-
age expected rate of return on plan assets of 3.4% are the
results of assumption used for the various pension plans in cal-
culating Toyota’s consolidated pension costs for fiscal 2008.
Also, a weighted-average discount rate of 2.8% is the result of
assumption used for the various pension plans in calculating
Toyota’s consolidated pension obligations for fiscal 2008.
• Sensitivity Analysis
The following table illustrates the effects of assumed changes in
weighted-average discount rate and the weighted-average
expected rate of return on plan assets, which we believe are
critical estimates in determining pension costs and obligations,
assuming all other assumptions are consistent.
Yen in millions
Effect on pre-tax income
for the year ending Effect on PBO
March 31, 2009 as of March 31, 2008
Discount rates
0.5% decrease............ ¥(12,386) ¥127,310
0.5% increase ............. 12,028 (109,674)
Expected rate of return
on plan assets
0.5% decrease............ ¥(6,410)
0.5% increase ............. 6,410
■Derivatives and Other Contracts at Fair Value
Toyota uses derivatives in the normal course of business to
manage its exposure to foreign currency exchange rates and
interest rates. The accounting is complex and continues to
evolve. In addition, there are significant judgments and esti-
mates involved in the estimating of fair value in the absence of
quoted market values. These estimates are based upon valua-
tion methodologies deemed appropriate under the circum-
stances. However, the use of different assumptions may have a
material effect on the estimated fair value amounts.
■Marketable Securities
Toyota’s accounting policy is to record a write-down of such
investments to net realizable value when a decline in fair value
below the carrying value is other-than-temporary. 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 invest-
ment in the company for a period of time sufficient to allow for
any anticipated recovery in market value.
Toyota is exposed to market risk from changes in foreign cur-
rency exchange rates, interest rates, certain commodity and
equity security prices. In order to manage the risk arising from
changes in foreign currency exchange rates and interest rates,
Toyota enters into a variety of derivative financial instruments.
A description of Toyota’s accounting policies for derivative
instruments is included in note 2 to the consolidated financial
statements and further disclosure is provided in notes 20 and 21
to the consolidated financial statements.
Toyota monitors and manages these financial exposures as an
integral part of its overall risk management program, which recog-
nizes the unpredictability of financial markets and seeks to reduce
the potentially adverse effects on Toyota’s operating results.
The financial instruments included in the market risk analysis
consist of all of Toyota’s cash and cash equivalents, marketable
securities, finance receivables, securities investments, long-term
and short-term debt and all derivative financial instruments.
Toyota’s portfolio of derivative financial instruments consists of
forward foreign currency exchange contracts, foreign currency
options, interest rate swaps, interest rate currency swap agree-
ments and interest rate options. Anticipated transactions
denominated in foreign currencies that are covered by Toyota’s
derivative hedging are not included in the market risk analysis.
Although operating leases are not required to be included,
Toyota has included these instruments in determining interest
rate risk.
■Foreign Currency Exchange Rate Risk
Toyota has foreign currency exposures related to buying, sell-
ing and financing in currencies other than the local currencies in
which it operates. Toyota is exposed to foreign currency risk
related to future earnings or assets and liabilities that are
exposed due to operating cash flows and various financial
instruments that are denominated in foreign currencies.
Toyota’s most significant foreign currency exposures relate to
the U.S. dollar and the euro.
Market Risk Disclosures