Toshiba 2013 Annual Report Download - page 86

14 TOSHIBA Annual Report 2013
Management's Discussion and Analysis
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
flow from business related to goodwill.
Also, if the market price of listed shares held by the Group as the marketable securities declines, there is a possibility
that an impairment loss on the relevant shares will be recorded or that the net unrealized losses on securities will be
recognized.
(6) Changes in financing environment and others
The Group has substantial amounts of interest-bearing debt for financing that is highly susceptible to market
environments, including the European debt crisis, interest rate movements and fund supply and demand. Thus, changes
in these factors may have an adverse effect on the Group's funding activities. The Group has also been raising funds by
issuing bonds or taking loans from financial institutions. In the case the financial markets fall into unstable turmoil, the
financial institutions' reduction in their lending in response to the change in capital adequacy requirements, or the
downgrading of the credit rating of the Company given by rating agencies, there can be no assurance that the Group will
obtain refinancing loans or new loans in the future on similar terms. If the Group is unable to obtain loans for the amount
needed by the Group in a timely manner, the Group's financing may be adversely affected.
In addition, 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 the
relevant loan repayments may be accelerated upon demand by the relevant lending financial institutions. Furthermore,
any breach by the Company of those 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 understanding of the lending financial
institutions with respect to this, in order to avoid breaching financial covenants and the consequent acceleration of
repayments. However, if any acceleration of the Company's loan repayments occurs, it may materially affect the
Company's business operations.
3. Risks related to business partners and others
(1) Procurement of components and materials
It is important for the Group's business activities to procure materials, components and other goods in a timely and
appropriate manner. However, such materials, components and goods may only be obtainable from a limited number of