Financial Section
Toyota’s finance receivables are subject to collectibility risks.
These risks include consumer and dealer insolvencies and insuf-
ficient collateral values (less costs to sell) to realize the full carry-
ing values of these receivables. See discussion in the Critical
Accounting Estimates section regarding “Allowance for Doubtful
Accounts and Credit Losses” and note 11 to the consolidated
financial statements regarding the allowance for credit losses.
Toyota continues to originate leases to finance new Toyota
vehicles. These leasing activities are subject to residual value
risk. Residual value risk could arise when the lessee of a vehicle
does not exercise the option to purchase the vehicle at the end
of the lease term. See discussion in the Critical Accounting
Estimates section regarding “Investment in Operating Leases”
and note 2 to the consolidated financial statements regarding
the allowance for residual values losses.
euro and, to a lesser extent, the Australian dollar, the Canadian
dollar and the British pound. Toyota’s consolidated financial
statements, which are presented in Japanese yen, are affected
by foreign currency exchange fluctuations through both transla-
tion risk and transaction risk.
Translation risk is the risk that Toyota’s consolidated financial
statements for a particular period or for a particular date will be
affected by changes in the prevailing exchange rates of the cur-
rencies in those countries in which Toyota does business com-
pared with the Japanese yen. Even though the fluctuations of
currency exchange rates to the Japanese yen can be substantial,
and, therefore, significantly impact comparisons with prior peri-
ods and among the various geographic markets, the translation
risk is a reporting consideration and does not reflect Toyota’s
underlying results of operations. Toyota does not hedge against
translation risk.
Toyota primarily enters into interest rate swap agreements
and cross currency interest rate swap agreements to convert its
fixed-rate debt to variable-rate functional currency debt. A por-
tion of the derivative instruments are entered into to hedge
interest rate risk from an economic perspective and are not
designated to specific assets or liabilities on Toyota’s consolidat-
ed balance sheet and accordingly, unrealized gains or losses
related to derivatives that are not designated are recognized cur-
rently in operations. See discussion in the Critical Accounting
Estimates section regarding “Derivatives and Other Contracts at
Fair Value”, further discussion in the Market Risk Disclosures
section and note 20 to the consolidated financial statements.
In addition, aggregated funding costs can affect the profit-
ability of Toyota’s financial services operations. Funding costs
are affected by a number of factors, some of which are not in
Toyota’s control. These factors include general economic condi-
tions, prevailing interest rates and Toyota’s financial strength.
Funding costs increased during fiscal 2008 as a result of an
increase in borrowings. Funding costs decreased during fiscal
Transaction risk is the risk that the currency structure of
Toyota’s costs and liabilities will deviate from the currency struc-
ture of sales proceeds and assets. Transaction risk relates primarily
to sales proceeds from Toyota’s non-domestic operations from
vehicles produced in Japan.
Toyota believes that the location of its production facilities in
different parts of the world has significantly reduced the level of
transaction risk. As part of its globalization strategy, Toyota has
continued to localize production by constructing production
facilities in the major markets in which it sells its vehicles. In cal-
endar 2007 and 2008, Toyota produced 61.4% and 64.1% of
Toyota’s non-domestic sales outside Japan, respectively. In
North America, 57.2% and 57.4% of vehicles sold in calendar
2007 and 2008 were produced locally, respectively. In Europe,
64.0% and 60.9% of vehicles sold in calendar 2007 and 2008
were produced locally, respectively. Localizing production
enables Toyota to locally purchase many of the supplies and
resources used in the production process, which allows for a
better match of local currency revenues with local currency
expenses.
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009 mainly as a result of lower interest rate.
Toyota launched its credit card business in Japan at the
beginning of fiscal 2002. As of March 31, 2008, Toyota had 6.6
million cardholders, an increase of 0.5 million cardholders com-
pared with March 31, 2007, and as of March 31, 2009, Toyota
had 7.1 million cardholders, an increase of 0.5 million cardhold-
ers compared with March 31, 2008. The credit card receivables
at March 31, 2008 increased by ¥24.5 billion from March 31, 2007
to ¥225.7 billion. The credit card receivables at March 31, 2009
decreased by ¥1.1 billion from March 31, 2008 to ¥224.6 billion.
Toyota also enters into foreign currency transactions and
other hedging instruments to address a portion of its transac-
tion risk. This has reduced, but not eliminated, the effects of for-
eign currency exchange rate fluctuations, which in some years
can be significant. See notes 20 and 21 to the consolidated
financial statements for additional information regarding the
extent of Toyota’s use of derivative financial instruments to
hedge foreign currency exchange rate risks.
Generally, a weakening of the Japanese yen against other cur-
rencies has a positive effect on Toyota’s revenues, operating
income and net income. A strengthening of the Japanese yen
against other currencies has the opposite effect. In fiscal 2008,
the Japanese yen was on average and at the end of the fiscal
year stronger against the U.S. dollar in comparison to the prior
fiscal year. In fiscal 2008, the Japanese yen was on average and
at the end of the fiscal year weaker against the euro in compari-
son to the prior fiscal year. In fiscal 2009, the Japanese yen was
on average and at the end of the fiscal year stronger against the
U.S. dollar and the euro in comparison to the prior fiscal year.
See further discussion in the Market Risk Disclosures section
regarding “Foreign Currency Exchange Rate Risk”.
Other Business Operations
Toyota ’s other business operations consist of housing, including the
manufacture and sale of prefabricated homes; information technol-
ogy related businesses, including information technology and tele-
communications, intelligent transport systems, GAZOO; others.
Toyota does not expect its other business operations to mate-
rially contribute to Toyota ’s consolidated results of operations.
Currency Fluctuations
Toyota is sensitive to fluctuations in foreign currency exchange
rates. In addition to the Japanese yen, Toyota is principally
exposed to fluctuations in the value of the U.S. dollar and the
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TOYOTA MOTOR CORPORATION
