Form 20-F (1c/4)

Toyota Motor Corporation 24 June 2005 Table of Contents Objects and Purposes Article 2 of Toyota's articles of incorporation states that its purpose is to engage in the following businesses: â€¢ the manufacture, sale, leasing and repair of: â€¢ motor vehicles, industrial vehicles, ships, aircraft, other transportation machinery and apparatus, space machinery and apparatus, and parts thereof; â€¢ industrial machinery and apparatus, other general machinery and apparatus, and parts thereof; â€¢ electrical machinery and apparatus, and parts thereof; and â€¢ measuring machinery and apparatus, medical machinery and apparatus, and parts thereof; â€¢ the manufacture and sale of ceramics and synthetic resin products, and materials thereof; â€¢ the manufacture, sale and repair of construction materials and equipment, and machinery and apparatus relating to residential buildings; â€¢ the planning, designing, supervision, execution and undertaking of construction work, civil engineering work, land development, urban development and regional development; â€¢ the sale, purchase, leasing, brokerage and management of real estate; â€¢ information processing, information communications and information supply services, and the development, sale and leasing of software; â€¢ the design and development of product sales systems that utilize networks such as the Internet; â€¢ the sale, leasing and maintenance of product sales systems that utilize networks, and sales of products through the use of such systems; â€¢ the inland transportation, marine transportation, air transportation, stevedoring, warehousing and tourism businesses; â€¢ the printing, publishing, advertising and publicity, general leasing, security and temporary staffing businesses; â€¢ credit card operations, the purchase and sale of securities, investment consulting, investment trust operations, and other financial services; â€¢ the operation and management of facilities, such as parking lots, showrooms, educational facilities, medical care facilities, sports facilities, marinas, airfields, food and drink stands and restaurants, lodging facilities, retail stores and others; â€¢ the non-life insurance agency business and the life insurance agency business; â€¢ the production and processing through the use of biotechnology of agricultural products, including trees, and the sale of such products; â€¢ the sale of goods related to each of the preceding items and mineral oil; and â€¢ conducting engineering, consulting and research and inventing products related to each of the preceding items and the utilization of such inventions and research, and any businesses incidental to or related to any of the preceding businesses. Dividends Dividends - General Under its articles of incorporation, Toyota's financial accounts will be closed on March 31 of each year and cash dividends, if any, will be paid to shareholders, beneficial shareholders, and pledgees of record as of that date. 85 -------------------------------------------------------------------------------- Table of Contents Under the New Company Law, subject to certain limitation on the distributable surplus, dividends, if any, may be paid to shareholders, beneficial shareholders, and pledgees of record as of a record date as set forth by Toyota's articles of incorporation or as determined by the board of directors from time to time. Dividends shall be paid by way of distribution of surplus. Dividends may be distributed in cash, or in kind subject to certain conditions being met. Toyota may make distribution of dividends by a resolution of a general meeting of shareholders. However, Toyota may generally determine such matters by a resolution of the board of directors under certain conditions such as that Toyota's articles of incorporation so provide. Dividends - Interim cash dividends In addition to year-end cash dividends, the board of directors may by resolution declare an interim cash dividend to shareholders, beneficial shareholders, and pledgees of record as of September 30 of each year. Under the New Company Law, notwithstanding the necessity of obtaining approval of general meeting of shareholders in general under the New Company Law as described above, Toyota is allowed to make payment of interim dividends during a fiscal year by way of distribution of surplus by resolution of the board of directors; provided, however, that such payment of interim dividends shall be limited to cash dividends and also limited to once per any fiscal year. Dividends - Distributable amount Under the Commercial Code, however, Toyota cannot declare or pay dividends unless specified financial criteria are met based on the amount of its stated capital, additional paid-in capital and legal reserves. Under the New Company Law, Toyota is permitted to make distribution of surplus to the extent that the aggregate book value of the assets to be distributed to shareholders does not exceed the Distributable Amount provided for by the New Company Law and the ordinance of the Ministry of Justice as at the effective date of such distribution of surplus. The amount of surplus at any given time shall be the amount of Toyota's assets and the book value of Toyota's treasury stock after subtracting and adding the amounts of the items provided for by the New Company Law and the ordinance of the Ministry of Justice. Dividends - Ex-dividend date and prescription Under its articles of incorporation, Toyota is not obligated to pay any dividends which are left unclaimed for a period of three years after the date on which they first became payable. Capital Accounts The entire amount of the issue price of new shares is required to be accounted for as stated capital, although Toyota may account for an amount not exceeding one-half of the issue price as additional paid-in capital. Under the Commercial Code, Toyota may at any time transfer the whole or any part of its additional paid-in capital and legal reserve to stated capital by resolution of the board of directors. However, under the New Company Law, resolution of general meetings of shareholders is required for such transfer of the additional paid-in capital and legal reserve to the stated capital. Toyota may also reduce the sum of its legal reserve and additional paid-in capital to one-quarter or more of its stated capital by resolution of a general meeting of shareholders. Under the New Company Law, Toyota may reduce the sum of its legal reserve and additional paid-in capital without the limitation of the amount to be reduced as mentioned above. 86 -------------------------------------------------------------------------------- Table of Contents The whole or any part of retained earnings which may be distributed as year-end dividends may also be transferred to stated capital by resolution of an ordinary general meeting of shareholders. Under the New Company Law, not only ordinary general meetings of shareholders but also extraordinary general meetings of shareholders will be able to approve such transfer of retained earnings to stated capital, Stock Splits Toyota may at any time split the outstanding shares into a greater number of shares by resolution of the board of directors. Toyota must give public notice of the stock split, specifying a record date for the stock split, not less than two weeks prior to the record date. In addition, promptly after the stock split takes effect, Toyota must give notice to each shareholder specifying the number of shares to which the shareholder is entitled by virtue of the stock split. After the New Company Law becomes effective, no such notice to each shareholder is required. Consolidation of Shares Toyota may at any time consolidate shares in issue into a smaller number of shares by a special shareholders resolution (as defined in 'Voting Rights'). When a consolidation of shares is to be made, Toyota must give public notice and notice to each shareholder that, within a period of not less than one month specified in the notice, share certificates must be submitted to Toyota for exchange. Toyota must disclose the reason for the consolidation of shares at the general meeting of shareholders. Japanese Unit Share System General. Consistent with the requirements of the Commercial Code (or when the New Company Law becomes effective, the New Company Law), Toyota's articles of incorporation provide that 100 shares constitute one 'unit'. Although the number of shares constituting a unit is included in the articles of incorporation, any amendment to the articles of incorporation reducing (but not increasing) the number of shares constituting a unit or eliminating the provisions for the unit of shares may be made by resolution of the board of directors rather than by a special shareholders resolution, which is otherwise required for amending the articles of incorporation. The number of shares constituting one unit, however, cannot exceed the lesser of 1,000 shares and one-two hundredths (1/200) of the number of all issued shares. Voting Rights under the Unit Share System. Under the unit share system, shareholders have one voting right for each unit of shares that they hold. Any number of shares less than a full unit will carry no voting rights. Share Certificate for Less Than a Full Unit of Shares. Toyota's articles of incorporation provide that generally no share certificate for any number of shares less than a unit will be issued. As the transfer of shares normally requires delivery of share certificates, any fraction of a unit for which share certificates are not issued will not be transferable. Repurchase by Toyota of Shares Constituting Less Than a Unit. A holder of shares constituting less than a full unit may require Toyota to purchase those shares at their market value in accordance with the provisions of Toyota's share handling regulations. Surrender of American Depositary Shares. As a result of the unit share system, ADR holders will only be permitted to surrender ADRs and withdraw underlying shares constituting whole units. If a holder surrenders an ADR representing shares that do not constitute an integral number of whole units, the depositary will deliver to that holder only those shares which constitute a whole unit. The depositary will then issue to the holder a new ADR representing the remaining shares. Holders of an ADR that represents less than a whole unit of underlying shares will be unable to withdraw the underlying shares. As a result, those holders will be unable to require Toyota to purchase their underlying shares to the extent those shares constitute less than one whole unit. 87 -------------------------------------------------------------------------------- Table of Contents Voting Rights Toyota holds its ordinary general meeting of shareholders in June of each year in or near Toyota City or in Nagoya City, Japan. In addition, Toyota may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks' advance notice. Under the Commercial Code (or when the New Company Law becomes effective, the New Company Law), notice of any shareholders' meeting must be given to each shareholder having voting rights or, in the case of a non-resident shareholder, to his resident proxy or mailing address in Japan in accordance with Toyota's share handling regulations, at least two weeks prior to the date of the meeting. A holder of shares constituting one or more whole units is generally entitled to one vote per unit of shares subject to the limitations on voting rights set forth in this paragraph. In general, under the Commercial Code (or when the New Company Law becomes effective, the New Company Law), a resolution can be adopted at a general meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Commercial Code (or when the New Company Law becomes effective, the New Company Law) and Toyota's articles of incorporation require a quorum for the election of directors and corporate auditors of not less than one-third of the total number of outstanding shares having voting rights. Toyota's shareholders are not entitled to cumulative voting in the election of directors. A corporate shareholder whose outstanding shares are in turn more than one-quarter directly or indirectly owned by Toyota (or when the New Company Law becomes effective, management of which is being controlled in substance by Toyota as provided for by an ordinance of the ministry of Justice) does not have voting rights. Shareholders may exercise their voting rights through proxies, provided that those proxies are also shareholders who have voting rights. The Commercial Code (or when the New Company Law becomes effective, the New Company Law) provides that a quorum of at least one-third of outstanding shares (or, when the New Company Law becomes effective and in the event that Toyota's articles of incorporations provide for a percentage more than one-third, such percentage) with voting rights must be present at a shareholders' meeting to approve any material corporate actions such as: (1) amendment of the articles of incorporation; (2) acquisition of its own shares from a specific party; (3) consolidation of shares; (4) any offering of new shares at a 'specially favorable' price (or any offering of stock acquisition rights to subscribe for or acquire shares of capital stock, or bonds with stock acquisition rights at 'specially favorable' conditions) to any persons other than shareholders; (5) the removal of a director (when the New Company Law becomes effective, the removal of a director who was elected by cumulative voting) or a corporate auditor; (6) the exemption of liability of a director or corporate auditor with certain exceptions; (7) a reduction of stated capital (when the New Company Law becomes effective, with certain exceptions in which a shareholders' resolution is not required); (8) (when the New Company Law becomes effective) a distribution of in-kind dividends which meets certain requirements; (9) dissolution, merger, or consolidation with certain exceptions in which a shareholders' resolution is not required; (10) the transfer of the whole or a material part of the business; (11) the taking over of the whole of the business of any other corporation with certain exceptions in which a shareholders' resolution is not required; 88 -------------------------------------------------------------------------------- Table of Contents (12) share exchange or share transfer for the purpose of establishing 100% parent-subsidiary relationships with certain exceptions in which a shareholders' resolution is not required; or (13) separating of the corporation into two or more corporations with certain exceptions in which a shareholders' resolution is not required. At least two-thirds of the shares (or, when the New Company Law becomes effective and in the event that Toyota's articles of incorporations provide for a percentage more than two-thirds, such percentage) having voting rights represented at the meeting must approve these actions. The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders. Subscription Rights Holders of shares have no preemptive rights under Toyota's articles of incorporation. Under the Commercial Code, the board of directors may, however, determine that shareholders shall be given subscription rights in connection with a particular issue of new shares, stock acquisition rights or bonds with stock acquisition rights. In this case, such rights must be given on uniform terms to all shareholders as of a specified record date by at least two weeks' prior public notice to shareholders of the record date. Individual notice must be given to each of these shareholders at least two weeks prior to the date of expiration of the subscription rights. Rights to subscribe for new shares may be transferable or nontransferable and may be made substantially below the market price of shares. Accordingly, rights offerings can result in substantial dilution or can result in rights holders not being able to realize the economic value of those rights. Liquidation Rights In the event of a liquidation of Toyota, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among the shareholders in proportion to the respective number of shares they own. Liability to Further Calls or Assessments All of Toyota's currently outstanding shares, including shares represented by the ADSs, are fully paid and nonassessable. Transfer Agent UFJ Trust Bank Limited is the transfer agent for the shares. UFJ Trust's office is located at 4-3, Marunouchi 1-chome, Chiyoda-ku, Tokyo, 100-0005 Japan. UFJ Trust maintains Toyota's register of shareholders and records transfers of record ownership upon presentation of share certificates. Record Date The close of business on March 31 is the record date for Toyota's year-end dividends, if paid. A holder of shares constituting one or more whole units who is registered as a holder on Toyota's register of shareholders or register of beneficial ownership at the close of business as of March 31 is also entitled to exercise shareholders' voting rights at the ordinary general meeting of shareholders with respect to the fiscal year ending on March 31. The close of business on September 30 of each year is the record date for interim dividends, if paid. In addition, Toyota may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks' public notice. The shares generally trade ex-dividend or ex-rights in the Japanese stock exchanges on the third business day before a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings. 89 -------------------------------------------------------------------------------- Table of Contents Repurchase by Toyota of Shares Toyota may acquire its own shares (i) through a stock exchange on which such shares are listed or by way of tender offer (pursuant to an ordinary resolution of an ordinary general meeting of shareholders or a resolution of the board of directors), (ii) by purchase from a specific party (pursuant to a special resolution of an ordinary general meeting of shareholders) or (iii) from a subsidiary of Toyota (pursuant to a resolution of the board of directors). Under the New Company Law, not only ordinary general meetings of shareholders but also extraordinary general meetings of shareholders will be able to approve the acquisition by of its own shares in the cases of (i) and (ii) above. When such acquisition is made by Toyota from a specific party other than a subsidiary of Toyota, any other shareholder may make a demand to a representative director, more than five calendar days prior to the relevant shareholders' meeting, that Toyota also purchase the shares held by such shareholder. However, under the New Company Law, the acquisition of its own shares at a price not exceeding the then market price to be provided under an ordinance of the Ministry of Justice will not trigger the right of any shareholder to include him/her as the seller of his/her shares in such proposed purchase. Any such acquisition of shares must satisfy certain requirements, including, in a case other than the acquisition by Toyota of its own shares pursuant to a resolution of the board of directors or the acquisition by Toyota of its shares from its subsidiaries, that the total amount of the purchase price may not exceed the amount of the retained earnings available for dividend payments after taking into account any reduction, if any, of the stated capital, additional paid-in capital or legal reserve (if such reduction of the stated capital, additional paid-in capital or legal reserve has been authorized pursuant to a resolution of the relevant ordinary general meeting of shareholders), minus the amount to be paid by way of appropriation of retained earnings for the relevant fiscal year and the amount to be transferred to stated capital pursuant to a resolution of the relevant ordinary general meeting of shareholders. If Toyota purchases shares pursuant to a resolution of the board of directors or if Toyota purchases shares from its subsidiaries, the total amount of the purchase price may not exceed the amount of the retained earnings available for an interim dividend payment minus the amount of any interim dividend Toyota actually paid. However, if it is anticipated that the net assets on the balance sheet as at the end of the immediately following fiscal year will be less than the aggregate amount of the stated capital, additional paid-in capital and certain other items, Toyota may not acquire such shares. Under the New Company Law, the restriction on the source of funds for the acquisition by Toyota of its own shares will be integrated into those for the distribution of surplus to the shareholders. See 'Dividends'. Shares acquired by Toyota may be held by it for any period or may be cancelled by resolution of the board of directors. Toyota may also transfer to any person the shares held by it, subject to a resolution of the board of directors, and subject also to other requirements similar to those applicable to the issuance of new shares. Toyota may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company. The Commercial Code (or when the New Company Law becomes effective, the New Company Law) generally prohibits any subsidiary of Toyota from acquiring shares of Toyota. Acquisition or Disposition of Shares or ADS Under the Foreign Exchange and Foreign Trade Law and the cabinet orders and ministerial ordinances thereunder (collectively, the 'Foreign Exchange Regulations'), all aspects of regulations on foreign exchange and foreign trade transactions are, with minor exceptions relating to inward direct investments (which are not generally applicable to Toyota's shares), only subject to post transaction reporting requirements. Acquisitions and dispositions of shares of common stock or ADS by non-residents of Japan (including foreign corporations not resident in Japan) are generally not subject to this reporting requirement. However, the Minister of Finance has the power to impose a licensing requirement for transactions in limited circumstances. 90 -------------------------------------------------------------------------------- Table of Contents Report of Substantial Shareholdings The Securities and Exchange Law of Japan and regulations under the Law require any person who has become a holder (together with its related persons) of more than 5% of the total issued shares of a company listed on any Japanese stock exchange (including ADSs representing such shares) to file with the Director of a competent Local Finance Bureau, within five business days, a report concerning those shareholdings. A similar report must also be filed to reflect any change of 1% or more in any shareholding or any change in material matters set out in reports previously filed. Copies of any report must also be furnished to the company and to all Japanese stock exchanges on which the company's shares are listed. For this purpose, shares issuable to a 5% or greater shareholder upon exercise of stock acquisition rights are taken into account in determining both the number of shares held by that holder and the company's total issued share capital. 10.C MATERIAL CONTRACTS All contracts concluded by Toyota during the two years preceding this filing were entered into in the ordinary course of business. 10.D EXCHANGE CONTROLS The Foreign Exchange and Foreign Trade Law of Japan and its related cabinet orders and ministerial ordinances (the 'Foreign Exchange Regulations') govern the acquisition and holding of shares of capital stock of Toyota by 'exchange non-residents' and by 'foreign investors.' The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen. Exchange non-residents are: â€¢ individuals who do not reside in Japan; and â€¢ corporations whose principal offices are located outside Japan. Generally, branches and other offices of non-resident corporations that are located within Japan are regarded as residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents. Foreign investors are: â€¢ individuals who are exchange non-residents; â€¢ corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and â€¢ corporations (1) of which 50% or more of their voting rights are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside of Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents. In general, the acquisition of shares of a Japanese company (such as the shares of capital stock of Toyota) by an exchange non-resident from a resident of Japan is not subject to any prior filing requirements. In certain limited circumstances, however, the Minister of Finance may require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the case where a resident of Japan transfers shares of a Japanese company (such as the shares of capital stock of Toyota) for consideration exceeding Y100 million to an exchange non-resident, the resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a bank, securities company or financial futures trader licensed under Japanese law. 91 -------------------------------------------------------------------------------- Table of Contents If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of capital stock of Toyota) and, as a result of the acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds 10% or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company's shares was made overseas. In limited circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition. Under the Foreign Exchange Regulations, dividends paid on, and the proceeds of sales in Japan of, shares held by non-residents of Japan may in general be converted into any foreign currency and repatriated abroad. Under the terms of the deposit agreement pursuant to which Toyota's ADSs are issued, the Depositary is required, to the extent that in its judgment it can convert yen on a reasonable basis into dollars and transfer the resulting dollars to the United States, to convert all cash dividends that it receives in respect of deposited shares into dollars and to distribute the amount received (after deduction of applicable withholding taxes) to the holder of ADSs. 10.E TAXATION The following discussion is a general summary of the principal U.S. federal income and Japanese national tax consequences of the acquisition, ownership and disposition of shares of common stock or ADSs. This summary does not purport to address all material tax consequences that may be relevant to holders of shares of common stock or ADSs, and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks, insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, partnerships and other pass-through entities, investors liable for the U.S. alternative minimum tax, investors that own or are treated as owning 10% or more of Toyota's voting stock, investors that hold shares of common stock or ADSs as part of a straddle, hedge, conversion transaction or other integrated transaction and U.S. Holders (as defined below) whose functional currency is not the U.S. dollar) may be subject to special tax rules. This summary is based on the tax laws and regulations of the United States and Japan, judicial decisions, published rulings and administrative pronouncements all as in effect on the date hereof, as well as on the current income tax convention between the United States and Japan (the 'Treaty'), as described below, all of which are subject to change (possibly with retroactive effect), and to differing interpretations. In addition, this summary is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement, and in any related agreement, will be performed in accordance with its terms. For purposes of this discussion, a 'U.S. Holder' is any beneficial owner of shares of common stock or ADSs that, for U.S. federal income tax purposes, is: 1. an individual who is a citizen or resident of the United States, 2. a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States, any state thereof, or the District of Columbia, 3. an estate the income of which is subject to U.S. federal income tax without regard to its source, or 4. a trust that is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons, or that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. An 'Eligible U.S. Holder' is a U.S. Holder that: 1. is a resident of the United States for purposes of the Treaty, 92 -------------------------------------------------------------------------------- Table of Contents 2. does not maintain a permanent establishment in Japan (a) with which the Shares or ADSs are effectively connected or, (b) of which the Shares or ADSs form part of the business property, and 3. is eligible for benefits under the Treaty with respect to income and gain derived in connection with the shares of common stock or ADSs. This summary does not address any aspects of U.S. federal tax law other than income taxation, and does not discuss any aspects of Japanese tax law other than such income taxation, as limited to national taxes and inheritance and gift taxation. This summary also does not cover any state or local, or non-U.S. non-Japanese tax considerations. Investors are urged to consult their tax advisors regarding the U.S. federal, state and local and Japanese and other tax consequences of acquiring, owning and disposing of shares of common stock or ADSs. In particular, where relevant, investors are urged to confirm their status as Eligible U.S. Holders with their tax advisors and to discuss with their tax advisors any possible consequences of their failure to qualify as Eligible U.S. Holders. In general, taking into account the earlier assumption, for purposes of the Treaty and for U.S. federal income and Japanese income tax purposes, owners of ADRs evidencing ADSs will be treated as the owners of the shares of common stock represented by those ADSs, and exchanges of shares of common stock for ADSs, and exchanges of ADSs for shares of common stock, will not be subject to U.S. federal income or Japanese income tax. The discussion below is intended for general information only and does not constitute a complete analysis of all tax consequences relating to ownership of shares of common stock or ADSs. Prospective purchasers of shares of common stock or ADSs should consult their own tax advisors concerning the tax consequences of their particular situations. Japanese Taxation The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of common stock and of ADSs who are either individuals who are non residents of Japan or non-Japanese corporations, without a permanent establishment in Japan ('non-resident Holders'). Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits in themselves are not subject to Japanese income tax. In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to non-residents of Japan or non-Japanese corporations is 20 percent. With respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of common stock of Toyota) to any corporate or individual shareholders (including those shareholders who are non-Japanese corporations or non-residents of Japan, such as non-resident Holders), except for any individual shareholder who holds 5 percent or more of the total issued shares issued by the relevant Japanese corporation, the aforementioned 20 percent withholding tax rate is reduced to (i) 7 percent for dividends due and payable on or before March 31, 2008, and (ii) 15 percent for dividends due and payable on or after April 1, 2008. At the date of this annual report, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15 percent for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the U.K. Under the Treaty, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to an Eligible U.S. Holder that is a portfolio investor is generally limited to 10 percent of the gross amount actually distributed, and Japanese withholding tax with respect to dividends paid by a Japanese corporation to an Eligible U.S. Holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund. 93 -------------------------------------------------------------------------------- Table of Contents If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Toyota to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder who is entitled to a reduced rate of or exemption from Japanese withholding tax on payment of dividends on shares of common stock by Toyota is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends in advance through Toyota to the relevant tax authority before the payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits two Application Forms (one before payment of dividends, the other within eight months after Toyota's fiscal year-end or semi-fiscal year-end). To claim this reduced rate or exemption, any relevant non-resident Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. A non-resident Holder who is entitled, under an applicable income tax treaty, to a reduced treaty rate lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit the required application in advance will be entitled to claim the refund of withholding taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the applicable income tax treaty) or the whole of the withholding tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority. Gains derived from the sale of shares of common stock or ADSs outside Japan by a non-resident Holder holding such shares of common stock or ADSs as portfolio investors are, in general, not subject to Japanese income or corporation tax. Eligible U.S. Holders are not subject to Japanese income or corporation tax with respect to such gains under the Treaty. Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares of common stock or ADSs as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident. Holders of shares of common stock or ADSs should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. Holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan. U.S. Federal Income Taxation U.S. Holders The following discussion is a summary of the principal U.S. federal income tax consequences to holders of shares of common stock of Toyota and of ADSs that are U.S. Holders and that hold those shares of common stock or ADSs as capital assets (generally, for investment purposes). Taxation of Dividends Subject to the passive foreign investment company rules discussed below, the gross amount of any distribution made by Toyota in respect of shares of common stock or ADSs (without reduction for Japanese withholding taxes) will constitute a taxable dividend to the extent paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. The U.S. dollar amount of such a dividend generally will be included in the gross income of a U.S. Holder, as ordinary income, when actually or constructively received by the U.S. Holder, in the case of shares of common stock, or by the depositary, in the case of ADSs. Dividends paid by us will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. Subject to certain exceptions for short-term and hedged positions, and provided that we are not a passive foreign investment company (as discussed below), dividends received by certain U.S. Holders (including individuals) prior to January 1, 2009 with respect to the common stock or ADSs will be subject to U.S. federal 94 -------------------------------------------------------------------------------- Table of Contents income taxation at a maximum rate of 15%. However, the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which shareholders (and intermediaries) will be permitted to rely on certifications from issuers to establish that dividends qualify for the reduced rate of U.S. federal income taxation. Because such procedures have not yet been issued, we are not certain that we will be able to comply with them. U.S. Holders of ADSs or common stock should consult their own tax advisors regarding the availability of the reduced rate in the light of their own particular circumstances. The U.S. dollar amount of a dividend paid in Japanese yen will be determined based on the Japanese yen/U.S. dollar exchange rate in effect on the date that the dividend is included in the gross income of the U.S. Holder, regardless of whether the payment is converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is included in the gross income of a U.S. Holder through the date that payment is converted into U.S. dollars (or otherwise disposed of) will be treated as U.S. source ordinary income or loss. U.S. Holders should consult their own tax advisors regarding the calculation and U.S. federal income tax treatment of foreign currency gain or loss. To the extent, if any, that the amount of any distribution received by a U.S. Holder in respect of shares of common stock or ADSs exceeds Toyota's current and accumulated earnings and profits, as determined under U.S. federal income tax principles, the distribution first will be treated as a tax-free return of capital to the extent of the U.S. Holder's adjusted tax basis in those shares or ADSs, and thereafter will be treated as U.S. source capital gain. Distributions of additional shares of common stock that are made to U.S. Holders with respect to their shares of common stock or ADSs, and that are part of a pro rata distribution to all of Toyota's shareholders, generally will not be subject to U.S. federal income tax. For U.S. foreign tax credit purposes, dividends included in gross income by a U.S. Holder in respect of shares of common stock or ADSs will constitute income from sources outside the United States, and will be subject to various classifications and other limitations. Subject to generally applicable limitations under U.S. federal income tax law and the Treaty, any Japanese withholding tax imposed in respect of a Toyota dividend may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, or if the U.S. Holder does not elect to claim a credit for any foreign taxes paid as a deduction from such U.S. Holder's taxable income. Special rules generally will apply to the calculation of foreign tax credits in respect of dividend income that qualifies for preferential U.S. federal income tax rates. Additionally, special rules apply to individuals whose foreign source income during the taxable year consists entirely of 'qualified passive income' and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return). Further, under some circumstances, a U.S. Holder that: (i) has held shares of common stock or ADSs for less than a specified minimum period, or (ii) is obligated to make payments related to Toyota dividends, will not be allowed a foreign tax credit for Japanese taxes imposed on Toyota dividends. Investors are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances. The Internal Revenue Service (the 'IRS') has expressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Accordingly, investors should be aware that the discussion above regarding the creditability of Japanese withholding tax on dividends could be affected by future actions that may be taken by the IRS. Taxation of Capital Gains and Losses In general, upon a sale or other taxable disposition of shares of common stock or ADSs, a U.S. Holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other taxable disposition and the U.S. Holder's adjusted tax basis in those shares of common stock or ADSs. A U.S. Holder generally will have an adjusted tax basis in a share of common stock or an ADS equal to its U.S. dollar cost. Subject to the passive investment company rules discussed below, gain or loss recognized on the sale or other taxable disposition of shares of common stock or ADSs generally will be 95 -------------------------------------------------------------------------------- Table of Contents capital gain or loss and, if the U.S. Holder's holding period for those shares or ADSs exceeds one year, will be long-term capital gain or loss. Certain U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. Under U.S. federal income tax law, the deduction of capital losses is subject to limitations. Any gain or loss recognized by a U.S. Holder in respect of the sale or other disposition of shares of common stock or ADSs generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. Deposits and withdrawals of common stock in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes. Passive Foreign Investment Companies A non-U.S. corporation generally will be classified as a passive foreign investment company (a 'PFIC') for U.S. federal income tax purposes in any taxable year in which, after applying look-through rules, either (1) at least 75% of its gross income is passive income, or (2) on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions. The PFIC determination is made annually and generally is based on the value of a non-U.S. corporation's assets (including goodwill) and composition of its income. Toyota does not believe that it is a PFIC for U.S. federal income tax purposes, and intends to continue its operations in such a manner that it will not become a PFIC in the future. Because the application of the PFIC rules to a corporation such as Toyota which among other things is engaged in leasing and financing through several subsidiaries is not entirely clear, no assurances can be made regarding determination of our PFIC status in the current or any future taxable year. If Toyota becomes a PFIC, U.S. Holders could be subject to additional U.S. federal income taxes on gain recognized with respect to the shares of common stock or ADSs and on certain distributions. In addition, an interest charge may apply to the portion of the U.S. federal income tax liability on such gains or distributions treated under the PFIC rules as having been deferred by the U.S. Holder. Moreover, dividends that a U.S. Holder receives from us will not be eligible for the reduced U.S. federal income tax rates described above on dividends if we are a PFIC either in the taxable year of the dividend or the preceding taxable year (and instead will be taxable at rates applicable to ordinary income). Toyota will inform U.S. Holders if it believes that it will be classified as a PFIC in any taxable year. Prospective investors should consult their own tax advisors regarding the potential application of the PFIC rules to shares of common stock or ADSs. Non-U.S. Holders The following discussion is a summary of the principal U.S. federal income tax consequences to beneficial holders of shares of common stock or ADSs that are neither U.S. Holders nor partnerships for U.S. federal income tax purposes (' Non-U.S. Holders'). Subject to the discussion below under 'Backup Withholding and Information Reporting', a Non-U.S. Holder generally will not be subject to any U.S. federal income or withholding tax on distributions received in respect of shares of common stock or ADSs unless the distributions are effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States (and, if an applicable tax treaty requires, is attributable to a U.S. permanent establishment or fixed base of such Non-U.S. Holder). Subject to the discussion below under 'Backup Withholding and Information Reporting', a Non-U.S. Holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale or other disposition of shares of common stock or ADSs, unless: (i) the gain is effectively connected with a trade or business conducted by the Non-U.S. Holder within the United States (and, if an applicable tax treaty requires, is attributable to a U.S. permanent establishment or fixed base of such Non-U.S. Holder), or 96 -------------------------------------------------------------------------------- Table of Contents (ii) the Non-U.S. Holder is an individual who was present in the United States for 183 or more days in the taxable year of the disposition and other conditions are met. Backup Withholding and Information Reporting In general, information reporting requirements will apply to dividends paid to a U.S. Holder in respect of shares of common stock or ADSs, and to the proceeds received upon the sale, exchange or redemption of the shares of common stock or ADSs within the United States by U.S. Holders. Furthermore, a backup withholding tax may apply to those amounts (currently at a 28% rate) if a U.S. Holder fails to provide an accurate tax identification number, to certify that such U.S. Holder is not subject to backup withholding or to otherwise comply with the applicable requirements of the backup withholding requirements. Dividends paid to a Non-U.S. Holder in respect of shares of common stock or ADSs, and proceeds received in the sale, exchange or redemption of shares of common stock or ADSs by a Non-U.S. Holder, generally are exempt from information reporting and backup withholding under current U.S. federal income tax law. However, a Non-U.S. Holder may be required to provide certification of non-U.S. status in order to obtain that exemption. Persons required to establish their exempt status generally must provide such certification under penalty of perjury on IRS Form W-9, entitled Request for Taxpayer Identification Number and Certification, in the case of U.S. persons, and on IRS Form W-8BEN, entitled Certificate of Foreign Status (or other appropriate IRS Form W-8), in the case of non-U.S. persons. Backup withholding is not an additional tax. The amount of backup withholding imposed on a payment generally may be claimed as a credit against the holder's U.S. federal income tax liability provided that the required information is properly furnished to the IRS. THE SUMMARY OF U.S. FEDERAL INCOME AND JAPANESE TAX CONSEQUENCES SET OUT ABOVE IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. PROSPECTIVE PURCHASERS OF COMMON STOCK OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF COMMON STOCK OR ADSs, BASED ON THEIR PARTICULAR CIRCUMSTANCES. 10.F DIVIDENDS AND PAYING AGENTS Not applicable. 10.G STATEMENT BY EXPERTS Not applicable. 10.H DOCUMENTS ON DISPLAY Toyota files annual reports on Form 20-F and reports on Form 6-K with the SEC. You may read and copy this information at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or by accessing the SEC's home page (http://www.sec.gov). You can also request copies of the documents, upon payment of a duplicating fee, by writing to the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. In addition, Toyota's reports, proxy statements and other information may be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. Copies of the documents referred to herein may also be inspected at Toyota's offices by contacting Toyota at 1 Toyota-cho, Toyota City, Aichi Prefecture 471-8571, Japan, attention: Financial Reporting Department, Accounting Division, telephone number: 81-565-28-2121. 10.I SUBSIDIARY INFORMATION Not applicable. 97 -------------------------------------------------------------------------------- Table of Contents ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Toyota is exposed to market risk from changes in foreign currency exchange rates, interest rates and 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 recognizes 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 agreements 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, selling 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 United States and Western European countries. Toyota uses a value-at-risk analysis ('VAR') to evaluate its exposure to changes in foreign currency exchange rates. The value-at-risk of the combined foreign exchange position represents a potential loss in pre-tax earnings that are estimated to be Y37.8 billion as of March 31, 2004 and Y57.1 billion as of March 31, 2005. Based on Toyota's overall currency exposure (including derivative positions), the risk during the year ended March 31, 2005 to pre-tax cash flow from currency movements was on average Y50.6 billion, with a high of Y57.1 billion and a low of Y46.6 billion. The VAR was estimated by using a Monte Carlo Simulation method and assumed 95% confidence level on the realization date and a 10-day holding period. Interest Rate Risk Toyota is subject to market risk from exposures to changes in interest rates based on its financing, investing and cash management activities. Toyota enters into various financial instrument transactions to maintain the desired level of exposure to the risk of interest rate fluctuations and to minimize interest expense. Certain exchange traded future and option contracts, interest rate caps and floors, along with various investments, have been entered into to reduce the interest rate risk related to these activities. The potential decrease in fair value resulting from a hypothetical 100 basis point upward shift in interest rates would be approximately Y29.6 billion as of March 31, 2004 and Y56.3 billion as of March 31, 2005. There are certain shortcomings inherent to the sensitivity analyses presented. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve; however, in reality, changes are rarely instantaneous. Although certain assets and liabilities may have similar maturities or periods to repricing, they 98 -------------------------------------------------------------------------------- Table of Contents may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Finance receivables are less susceptible to prepayments when interest rates change and, as a result, Toyota's model does not address prepayment risk for automotive related finance receivables. However, in the event of a change in interest rates, actual loan prepayments may deviate significantly from the assumptions used in the model. Commodity Price Risk Commodity price risk is the possibility of higher or lower costs due to changes in the prices of commodities, such as non-ferrous (e.g., aluminum), precious metals (e.g., palladium, platinum and rhodium) and ferrous alloys (e.g., steel), which Toyota uses in the production of motor vehicles. Toyota does not use derivative instruments to hedge the price risk associated with the purchase of those commodities and controls its commodity price risk by holding minimum stock levels. Equity Price Risk Toyota holds investments in various available-for-sale equity securities which are subject to price risk. The fair value of available-for-sale equity securities was Y952.5 billion as of March 31, 2004 and Y904.8 billion as of March 31, 2005. The potential change in the fair value of these investments, assuming a 10% change in prices, would be approximately Y95.2 billion as of March 31, 2004 and Y90.4 billion as of March 31, 2005. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 99 -------------------------------------------------------------------------------- Table of Contents PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS None. ITEM 15. CONTROLS AND PROCEDURES 15.A DISCLOSURES CONTROLS AND PROCEDURES Toyota performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the fiscal 2005. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in the Form 20-F that Toyota files under the Exchange Act is accumulated and communicated to its management including the chief executive officer and the principal accounting and financial officer. The disclosure controls and procedures also ensures that the Form 20-F that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. The evaluation was performed under the supervision of Hiroshi Okuda, Toyota's Chairman of the Board and Mitsuo Kinoshita, Toyota's Executive Vice President, Member of the Board. Toyota's disclosures controls and procedures are designed to provide reasonable assurance of achieving its objectives. Managerial judgment was necessary to evaluate the cost-benefit relationship of possible controls and procedures. Mr. Okuda and Mr. Kinoshita have concluded that Toyota's disclosure controls and procedures are effective at the reasonable assurance level. There have been no changes in Toyota's internal control over financial reporting during fiscal 2005 that have materially affected, or are reasonably likely to materially affect, Toyota's internal control over financial reporting. 15.B (RESERVED) 15.C (RESERVED) 15.D (RESERVED) ITEM 16. (RESERVED) 16.A AUDIT COMMITTEE FINANCIAL EXPERT Toyota maintains a corporate auditor system, in accordance with the Japanese Commercial Code (the 'Code') and the Law concerning Exceptional Measures to the Commercial Code with respect to Auditing, etc. of Joint Stock Corporations (the 'Special Exception Law'). Toyota's board of corporate auditors is comprised of seven corporate auditors, four of whom are outside corporate auditors. Each corporate auditor has been appointed at its shareholders' meetings and has certain statutory powers independently, including auditing the business affairs and accounts of Toyota. Toyota's board of corporate auditors has determined that it does not have an ' audit committee financial expert' serving on the board of corporate auditors. The qualifications for, and powers of, the corporate auditor delineated in the Code and the Special Exception Law are different from those anticipated for any audit 100 -------------------------------------------------------------------------------- Table of Contents committee financial expert. Corporate auditors have the authority to be given reports from a certified public accountant or an accounting firm concerning audits, including technical accounting matters. At the same time, each corporate auditor has the authority to consult internal and external experts on accounting matters. Each corporate auditor must fulfill the requirements under Japanese laws and regulations and otherwise follow Japanese corporate governance practices and, accordingly, Toyota's board of corporate auditors has confirmed that it is not necessarily in Toyota's best interest to nominate as corporate auditor a person who meets the definition of audit committee financial experts. Although Toyota does not have an audit committee financial expert on its board of corporate auditors, Toyota believes that Toyota's current corporate governance system, taken as a whole, including the corporate auditors' ability to consult internal and external experts, is fully equivalent to a system having an audit committee financial expert on its board of corporate auditors. 16.B CODE OF ETHICS Toyota has adopted a code of ethics that applies to its directors and managing officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of Toyota's code of ethics was filed as an exhibit to the annual report on Form 20-F for the year ended March 31, 2003 and is incorporated herein by reference. 16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES ChuoAoyama PricewaterhouseCoopers has served as our independent public accountants for each of the financial years in the three-year period ended March 31, 2005, for which audited financial statements appear in this annual report on Form 20-F. The following table presents the aggregate fees for professional services and other services rendered by ChuoAoyama PricewaterhouseCoopers and the various member firms of the PricewaterhouseCoopers to Toyota in fiscal 2005 and fiscal 2004. Yen in millions 2004 2005 Audit Fees (1) 1,606 1,797 Audit-related Fees (2) 407 1,139 Tax Fees (3) 768 782 All Other Fees (4) 97 106 Total 2,878 3,824 -------- (1) Audit Fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor reasonably can provide, and include the services of annual audit, quarter reviews and semi-annual reviews of Toyota and its subsidiaries and affiliates; the services associated with SEC registration statements or other documents issued in connection with securities offerings such as comfort letters and consents; consultations as to the accounting or disclosure treatment of transactions or events. (2) Audit-related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the external auditor, and mainly include the services such as due diligence; agreed-upon or expanded audit procedures; internal control reviews and assistance; review of the effectiveness of the internal audit function; assistance with implementation of the requirements of SEC rules pursuant to the Sarbanes-Oxley Act; financial statement audits of employee benefit plans. (3) Tax Fees include fees billed for tax compliance services, including the services such as tax planning, advice and compliance of federal, state, local and international tax; the review of tax returns; assistance with tax audits and appeals; tax only valuation services including transfer pricing and cost segregation studies; expatriate tax assistance and compliance. 101 -------------------------------------------------------------------------------- Table of Contents (4) All Other non-audit Fees mainly include fees billed for risk management advisory services of assessment and testing of security infrastructure controls; advisory services relating to accounting manual and accounting control; advisory services relating to establishment of a new subsidiary; assistance with continuing education and training; services providing information related to automotive market conditions and sales networks and advisory services on information systems related to dealer controls. Policies and Procedures of the Board of Corporate Auditors Below is a summary of the current policies and procedures of the board of corporate auditors for the pre-approval of audit and permissible non-audit services performed by Toyota's independent public accountants. Under the policy, the Representative Directors submit a request for general pre-approval of audit and permissible non-audit services for the following fiscal year, which shall include details of the specific services and estimated fees for the services, to the board of corporate auditors, which reviews and determines whether or not to grant the request by the end of March of the fiscal year. Upon the general pre-approval of the board of corporate auditors, the Representative Directors are not required to obtain any specific pre-approval for audit and permissible non-audit services so long as those services fall within the scope of the general pre-approval provided. The board of corporate auditors makes further determination of whether or not to grant a request to revise the general pre-approval for the applicable fiscal year if such request is submitted by the Representative Directors or the Managing Officer authorized by the Representative Director. Such request may include (i) adding any audit or permissible non-audit services other than the ones listed in the general pre-approval and (ii) obtaining services, which are listed in the general pre-approval but of which the total fee amount exceeds the amount affirmed by the general pre-approval. The determination of whether or not to grant a request to revise the general pre-approval noted in the foregoing may alternatively be made by an Executive Corporate Auditor, who is designated in advance by a resolution of the board of corporate auditors, in which case such Executive Corporate Auditor shall report such decision at the next meeting of the board of corporate auditors. The performance of audit and permissible non-audit services and the payment of fees are subject to review by the board of corporate auditors at least once every fiscal half year. 16.D (RESERVED) 102 -------------------------------------------------------------------------------- Table of Contents 16.E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS The following table sets forth Toyota's purchases of its common stock during fiscal 2005: Period (a) Total (b) (c) Total (d) ---- Number of Average Number of Maximum Shares Price Shares Number Purchased1 Paid per Purchased of Shares Share as that (Yen) Part of May Yet Be Publicly Purchased Announced Under the Plans Plans or or Programs2 Programs2 April 1, 2004 - April 30, 2004 6,524 Y 3,920.96 0 56,971,800 May 1, 2004 - May 31, 2004 2,744 3,894.48 0 56,971,800 June 1, 2004 - June 30, 2004 19,637,018 4,150.02 19,630,000 37,341,800 July 1, 2004 - July 31, 2004 11,124 4,340.60 0 65,000,000 August 1, 2004 - August 31, 2004 6,915 4,256.94 0 65,000,000 September 1, 2004 - September 30, 2004 29,409,147 4,319.98 29,400,000 35,600,000 October 1, 2004 - October 31, 2004 10,275 4,157.31 0 35,600,000 November 1, 2004 - November 30, 2004 14,107 4,055.60 0 35,600,000 December 1, 2004 - December 31, 2004 24,556 3,951.84 0 35,600,000 January 1, 2005 - January 31, 2005 9,792 4,129.12 0 35,600,000 February 1, 2005 - February 28, 2005 6,764 4,088.40 0 35,600,000 March 1, 2005 - March 31, 2005 14,062,712 4,109.98 14,056,500 21,543,500 Total 63,201,678 - 63,086,500 - -------- 1 All purchases other than purchases publicly announced were made as a result of holders of shares constituting less than one unit, which is 100 shares of common stock, requesting Toyota to purchase shares that are a fraction of a unit, in accordance with Toyota's share handling regulations. Toyota is required to comply with such requests pursuant to the Commercial Code (or when the New Company Law becomes effective, the New Company Law). See 'Memorandum and Articles of Association - Japanese Unit Share System.' 2 On June 26, 2003, share repurchases were approved at the ordinary general meeting of shareholders pursuant to which Toyota may purchase during a one-year period until the next ordinary general meeting of shareholders up to the lesser of 150,000,000 shares of common stock or the number of shares equivalent to Y400.0 billion in cost of repurchase. This share repurchase program expired on June 23, 2004. On June 23, 2004, share repurchases were approved at the ordinary general meeting of shareholders pursuant to which Toyota may purchase during a one-year period until the next ordinary general meeting of shareholders up to the lesser of 65,000,000 shares of common stock or the number of shares equivalent to Y250.0 billion in cost of repurchase. This share repurchase program expired on June 23, 2005. For a discussion of past and current share repurchases, see 'Business Overview - Toyota's Strategy - Focus on Shareholder Value.' In addition, according to the resolution of the ordinary general meeting of shareholders on June 23, 2004, Toyota may repurchase its own shares through a stock exchange on which such shares are listed or by way of tender offer pursuant to a resolution of the board of directors under Article 6 of Toyota's articles of incorporation. However, Toyota has never repurchased its own shares under such provision. 103 -------------------------------------------------------------------------------- Table of Contents PART III ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18. FINANCIAL STATEMENTS The following financial statements are filed as part of this annual report on Form 20-F. 104 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F - 2 Consolidated balance sheets at March 31, 2004 and 2005 F - 3 Consolidated statements of income for the years ended F - 5 March 31, 2003, 2004 and 2005 Consolidated statements of shareholders' equity for the years ended F - 6 March 31, 2003, 2004 and 2005 Consolidated statements of cash flows for the years ended F - 8 March 31, 2003, 2004 and 2005 Notes to consolidated financial statements F - 10 All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. Financial statements of 50% or less owned persons accounted for by the equity method have been omitted because the registrant's proportionate share of the income from continuing operations before income taxes is less than 20% of consolidated income from continuing operations before income taxes and the investment in and advances to each company is less than 20% of consolidated total assets. F-1 -------------------------------------------------------------------------------- Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Toyota Jidosha Kabushiki Kaisha ('Toyota Motor Corporation') In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Toyota Motor Corporation and its subsidiaries at March 31, 2004 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ ChuoAoyama PricewaterhouseCoopers Nagoya, Japan June 23, 2005 F-2 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS Yen in millions U.S. dollars in millions March 31, March 31, 2004 2005 2005 Current assets Cash and cash equivalents Y 1,729,776 Y 1,483,753 $ 13,816 Time deposits 68,473 63,609 592 Marketable securities 448,457 543,124 5,058 Trade accounts and notes receivable, less allowance for doubtful 1,531,651 1,616,341 15,051 accounts of Y28,966 million in 2004 and Y18,656 million ($174 million) in 2005 Finance receivables, net 2,622,939 3,010,135 28,030 Other receivables 396,788 438,676 4,085 Inventories 1,083,326 1,306,709 12,168 Deferred income taxes 457,161 475,764 4,430 Prepaid expenses and other current assets 509,882 501,994 4,675 Total current assets 8,848,453 9,440,105 87,905 Noncurrent finance receivables, net 3,228,973 3,976,941 37,033 Investments and other assets Marketable securities and other securities investments 2,241,971 2,704,142 25,181 Affiliated companies 1,370,171 1,570,185 14,621 Employees receivables 35,857 49,538 461 Other 960,156 798,506 7,435 Total investments and other assets 4,608,155 5,122,371 47,698 Property, plant and equipment Land 1,135,665 1,182,768 11,014 Buildings 2,801,993 2,935,274 27,333 Machinery and equipment 7,693,616 7,897,509 73,540 Vehicles and equipment on operating leases 1,493,780 1,828,697 17,029 Construction in progress 237,195 214,781 2,000 13,362,249 14,059,029 130,916 Less - Accumulated depreciation (8,007,602 ) (8,263,435 ) (76,948 ) Property, plant and equipment, net 5,354,647 5,795,594 53,968 Total assets Y 22,040,228 Y 24,335,011 $ 226,604 The accompanying notes are an integral part of these consolidated financial statements. F-3 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY Yen in millions U.S. dollars in millions March 31, March 31, 2004 2005 2005 Current liabilities Short-term borrowings Y 2,189,024 Y 2,381,827 $ 22,179 Current portion of long-term debt 1,125,195 1,150,920 10,717 Accounts payable 1,709,344 1,856,799 17,290 Other payables 665,624 693,041 6,454 Accrued expenses 1,133,281 1,289,373 12,006 Income taxes payable 252,555 292,835 2,727 Other current liabilities 522,968 562,411 5,238 Total current liabilities 7,597,991 8,227,206 76,611 Long-term liabilities Long-term debt 4,247,266 5,014,925 46,698 Accrued pension and severance costs 725,569 646,989 6,025 Deferred income taxes 778,561 811,670 7,558 Other long-term liabilities 65,981 84,342 785 Total long-term liabilities 5,817,377 6,557,926 61,066 Minority interest in consolidated subsidiaries 446,293 504,929 4,702 Shareholders' equity Common stock, no par value, 397,050 397,050 3,697 authorized: 9,740,185,400 shares in 2004 and 2005; issued: 3,609,997,492 shares in 2004 and 2005 Additional paid-in capital 495,179 495,707 4,616 Retained earnings 8,326,215 9,332,176 86,900 Accumulated other comprehensive loss (204,592 ) (80,660 ) (751 ) Treasury stock, at cost, 280,076,395 shares in 2004 and (835,285 ) (1,099,323 ) (10,237 ) 341,918,553 shares in 2005 Total shareholders' equity 8,178,567 9,044,950 84,225 Commitments and contingencies Total liabilities and shareholders' equity Y 22,040,228 Y 24,335,011 $ 226,604 The accompanying notes are an integral part of these consolidated financial statements. F-4 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF INCOME Yen in millions U.S. dollars in millions For the years ended March 31, For the year ended March 31, 2003 2004 2005 2005 Net revenues Sales of products Y 14,793,973 Y 16,578,033 Y 17,790,862 $ 165,666 Financing operations 707,580 716,727 760,664 7,083 15,501,553 17,294,760 18,551,526 172,749 Costs and expenses Cost of products sold 11,914,245 13,506,337 14,500,282 135,025 Cost of financing operations 423,885 364,177 369,844 3,444 Selling, general and administrative 1,891,777 1,757,356 2,009,213 18,709 14,229,907 15,627,870 16,879,339 157,178 Operating income 1,271,646 1,666,890 1,672,187 15,571 Other income (expense) Interest and dividend income 52,661 55,629 67,519 629 Interest expense (30,467 ) (20,706 ) (18,956 ) (177 ) Foreign exchange gain, net 35,585 38,187 21,419 199 Other income (loss), net (102,773 ) 25,793 12,468 117 (44,994 ) 98,903 82,450 768 Income before income taxes, minority interest and 1,226,652 1,765,793 1,754,637 16,339 equity in earnings of affiliated companies Provision for income taxes 517,014 681,304 657,910 6,126 Income before minority interest and equity in 709,638 1,084,489 1,096,727 10,213 earnings of affiliated companies Minority interest in consolidated subsidiaries (11,531 ) (42,686 ) (64,938 ) (605 ) Equity in earnings of affiliated companies 52,835 120,295 139,471 1,299 Net income Y 750,942 Y 1,162,098 Y 1,171,260 $ 10,907 Yen U.S. dollars Net income per share - Basic Y 211.32 Y 342.90 Y 355.35 $ 3.31 - Diluted Y 211.32 Y 342.86 Y 355.28 $ 3.31 Cash dividends per share Y 36.00 Y 45.00 Y 65.00 $ 0.61 The accompanying notes are an integral part of these consolidated financial statements. F-5 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Yen in millions Common Additional Retained Accumulated Treasury Total stock paid-in earnings other stock, capital comprehensive income (loss) at cost Balances at March 31, 2002 Y 397,050 Y 490,538 Y 6,804,722 Y (267,304 ) Y (160,894 ) Y 7,264,112 Issuance during the year 3,252 3,252 Comprehensive income Net income 750,942 750,942 Other comprehensive income (loss) Foreign currency translation (139,285 ) (139,285 ) adjustments Unrealized losses on securities, (26,495 ) (26,495 ) net of reclassification adjustments Minimum pension liability (171,978 ) (171,978 ) adjustments Net gains on derivative 790 790 instruments Total comprehensive income 413,974 Dividends paid (110,876 ) (110,876 ) Purchase and retirement of (142,993 ) (306,469 ) (449,462 ) common stock Balances at March 31, 2003 397,050 493,790 7,301,795 (604,272 ) (467,363 ) 7,121,000 Issuance during the year 1,389 1,389 Comprehensive income Net income 1,162,098 1,162,098 Other comprehensive income (loss) Foreign currency translation (203,257 ) (203,257 ) adjustments Unrealized gains on securities, 329,672 329,672 net of reclassification adjustments Minimum pension liability 273,265 273,265 adjustments Total comprehensive income 1,561,778 - Dividends paid (137,678 ) (137,678 ) Purchase and reissuance of (367,922 ) (367,922 ) common stock Balances at March 31, 2004 397,050 495,179 8,326,215 (204,592 ) (835,285 ) 8,178,567 Issuance during the year 528 528 Comprehensive income Net income 1,171,260 1,171,260 Other comprehensive income Foreign currency translation 75,697 75,697 adjustments Unrealized gains on securities, 38,455 38,455 net of reclassification adjustments Minimum pension liability 9,780 9,780 adjustments Total comprehensive income 1,295,192 Dividends paid (165,299 ) (165,299 ) Purchase and reissuance of (264,038 ) (264,038 ) common stock Balances at March 31, 2005 Y 397,050 Y 495,707 Y 9,332,176 Y (80,660 ) Y (1,099,323 ) Y 9,044,950 The accompanying notes are an integral part of these consolidated financial statements. F-6 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) U.S. dollars in millions Common Additional Retained Accumulated Treasury Total stock paid-in earnings other stock, capital comprehensive income (loss) at cost Balances at March 31, 2004 $ 3,697 $ 4,611 $ 77,532 $ (1,905 ) $ (7,778 ) $ 76,157 Issuance during the year 5 5 Comprehensive income Net income 10,907 10,907 Other comprehensive income Foreign currency translation adjustments 705 705 Unrealized gains on securities, net of 358 358 reclassification adjustments Minimum pension liability adjustments 91 91 Total comprehensive income 12,061 Dividends paid (1,539 ) (1,539 ) Purchase and reissuance of common stock (2,459 ) (2,459 ) Balances at March 31, 2005 $ 3,697 $ 4,616 $ 86,900 $ (751 ) $ (10,237 ) $ 84,225 The accompanying notes are an integral part of these consolidated financial statements. F-7 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Yen in millions U.S. dollars in millions For the years ended March 31, For the year ended March 31, 2003 2004 2005 2005 Cash flows from operating activities Net income Y 750,942 Y 1,162,098 Y 1,171,260 $ 10,907 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 870,636 969,904 997,713 9,291 Provision for doubtful accounts and credit losses 99,837 83,138 63,154 588 Pension and severance costs, less payments 55,637 (159,267 ) (52,933 ) (493 ) Losses on disposal of fixed assets 46,492 39,742 49,159 458 Unrealized losses on available-for-sale securities, 111,346 3,063 2,324 22 net Deferred income taxes (74,273 ) 120,828 84,711 789 Minority interest in consolidated subsidiaries 11,531 42,686 64,938 605 Equity in earnings of affiliated companies (52,835 ) (120,295 ) (139,471 ) (1,299 ) Changes in operating assets and liabilities, and other Increase in accounts and notes receivable (191,027 ) (90,721 ) (178,363 ) (1,661 ) Increase in inventories (38,043 ) (53,609 ) (191,545 ) (1,784 ) (Increase) decrease in other current assets (58,036 ) 43,445 34,674 323 Increase in accounts payable 116,946 159,120 153,747 1,432 Increase (decrease) in accrued income taxes (27,340 ) (66,006 ) 41,228 384 Increase in other current liabilities 181,595 203,535 190,450 1,773 Other 136,680 (150,927 ) 79,894 743 Net cash provided by operating activities 1,940,088 2,186,734 2,370,940 22,078 Cash flows from investing activities Additions to finance receivables (3,439,936 ) (4,547,068 ) (4,296,966 ) (40,013 ) Collection of finance receivables 2,356,380 3,152,302 3,311,974 30,841 Proceeds from sale of finance receivables 572,771 243,128 65,536 610 Additions to fixed assets excluding equipment (1,005,931 ) (945,803 ) (1,068,287 ) (9,948 ) leased to others leased to others Additions to equipment leased to others (604,298 ) (542,738 ) (854,953 ) (7,961 ) Proceeds from sales of fixed assets excluding 61,847 73,925 69,396 646 equipment leased to others Proceeds from sales of equipment leased to others 286,538 288,681 316,456 2,947 Purchases of marketable securities and security (1,113,998 ) (1,336,467 ) (1,165,791 ) (10,856 ) investments Proceeds from sales of marketable securities and 197,985 183,808 121,369 1,130 security investments Proceeds upon maturity of marketable securities and 723,980 1,252,334 452,574 4,214 security investments Payment for additional investments in affiliated (28,229 ) (20,656 ) (901 ) (8 ) companies, net of cash acquired Changes in investments and other assets, and other (8,557 ) (17,941 ) (11,603 ) (107 ) Net cash used in investing activities Y (2,001,448 ) Y (2,216,495 ) Y (3,061,196 ) $ (28,505 ) The accompanying notes are an integral part of these consolidated financial statements. F-8 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Yen in millions U.S. dollars in millions For the years ended March 31, For the year ended March 31, 2003 2004 2005 2005 Cash flows from financing activities Purchase of common stock Y (454,611 ) Y (357,457 ) Y (264,106 ) $ (2,459 ) Proceeds from issuance of long-term debt 1,686,564 1,636,570 1,863,710 17,354 Payments of long-term debt (1,117,803 ) (1,253,045 ) (1,155,223 ) (10,757 ) Increase in short-term borrowings 30,327 353,833 140,302 1,306 Dividends paid (110,876 ) (137,678 ) (165,299 ) (1,539 ) Other 4,074 - - - Net cash provided by financing activities 37,675 242,223 419,384 3,905 - Effect of exchange rate changes on cash and cash (41,447 ) (74,714 ) 24,849 231 equivalents Net increase (decrease) in cash and cash (65,132 ) 137,748 (246,023 ) (2,291 ) equivalents Cash and cash equivalents at beginning of year 1,657,160 1,592,028 1,729,776 16,107 Cash and cash equivalents at end of year Y 1,592,028 Y 1,729,776 Y 1,483,753 $ 13,816 The accompanying notes are an integral part of these consolidated financial statements. F-9 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of operations: Toyota Motor Corporation (the 'parent company') and its subsidiaries (collectively 'Toyota') are primarily engaged in the design, manufacture, and sale of sedans, minivans, compact cars, sport-utility vehicles, trucks and related parts and accessories throughout the world. In addition, Toyota provides retail and wholesale financing, retail leasing and certain other financial services primarily to its dealers and their customers related to vehicles manufactured by Toyota. 2. Summary of significant accounting policies: The parent company and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan, and its foreign subsidiaries in conformity with those of their countries of domicile. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform to accounting principles generally accepted in the United States of America. Significant accounting policies after reflecting adjustments for the above are as follows: Basis of consolidation and accounting for investments in affiliated companies - The consolidated financial statements include the accounts of the parent company and those of its majority-owned subsidiary companies. All significant intercompany transactions and accounts have been eliminated. Investments in affiliated companies in which Toyota exercises significant influence, but which it does not control, are stated at cost plus equity in undistributed earnings. Consolidated net income includes Toyota's equity in current earnings of such companies, after elimination of unrealized intercompany profits. Investments in non-public companies in which Toyota does not exercise significant influence (generally less than a 20% ownership interest) are stated at cost. The accounts of variable interest entities as defined by the Financial Accounting Standard Board ('FASB') Interpretation No. 46(R) Consolidation of Variable Interest Entities (revised December 2003) - an interpretation of ARB No.51 ('FIN 46(R)') are included in the consolidated financial statements, if applicable. Estimates - The preparation of Toyota's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The more significant estimates include: product warranties, allowance for doubtful accounts and credit losses, residual values for leased assets, impairment of long-lived assets, pension costs and obligations, fair value of derivative financial instruments and other-than-temporary losses on marketable securities. Translation of foreign currencies - All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate year-end current exchange rates and all income and expense accounts of those subsidiaries are translated at the average exchange rates for each period. The foreign currency translation adjustments are included as a component of accumulated other comprehensive income. Foreign currency receivables and payables are translated at appropriate year-end current exchange rates and the resulting transaction gains or losses are recorded in operations currently. F-10 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Revenue recognition - Revenues from sales of vehicles and parts are generally recognized upon delivery which is considered to have occurred when the dealer has taken title to the product and the risk and reward of ownership have been substantively transferred, except as described below. Toyota's sales incentive programs principally consist of cash payments to dealers calculated based on vehicle volume or a model sold by a dealer during a certain period of time. Toyota accrues these incentives as revenue reductions upon the sale of a vehicle corresponding to the program by the amount determined in the related incentive program. Revenues from the sales of vehicles under which Toyota conditionally guarantees the minimum resale value is recognized on a pro rata basis from the date of sale to the first exercise date of the guarantee in a manner similar to lease accounting. The underlying vehicles of these transactions are recorded as assets and are depreciated in accordance with Toyota's depreciation policy. Revenues from retail financing contracts and finance leases are recognized using the effective yield method. Revenues from operating leases are recognized on a straight-line basis over the lease term. Toyota on occasion sells finance receivables in transactions subject to limited recourse provisions. These sales are to trusts and Toyota retains the servicing rights and is paid a servicing fee. Gains or losses from the sales of the finance receivables are recognized in the period in which such sales occur. Other costs - Advertising and sales promotion costs are expensed as incurred. Advertising costs were Y326,972 million, Y371,677 million and Y379,702 million ($3,536 million) for the years ended March 31, 2003, 2004 and 2005, respectively. Toyota generally warrants its products against certain manufacturing and other defects. Provisions for product warranties are provided for specific periods of time and/or usage of the product and vary depending upon the nature of the product, the geographic location of the sale and other factors. Toyota 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 Y668,404 million, Y 682,279 million and Y755,147 million ($7,032 million) for the years ended March 31, 2003, 2004 and 2005, 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 changes in unrealized gains or losses included as a component of F-11 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) accumulated other comprehensive income in shareholders' equity, net of applicable taxes. Debt securities designated as held-to-maturity investments are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity 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 severity. Other factors affecting collectibility are also evaluated in determining the amount to be provided. Losses are charged to the allowance when it has been determined 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 termination. Toyota maintains an allowance to cover probable estimated losses related to unguaranteed residual values on its owned portfolio. The allowance is evaluated considering projected vehicle return rates and projected loss severity. Factors considered in the determination of projected return rates and loss severity include historical and market information on used vehicle sales, trends in lease returns and new car markets, and general 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. F-12 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 companies which is determined on the 'specific identification ' basis or 'last-in, first-out' ('LIFO') basis. Inventories valued on the LIFO basis totaled Y190,642 million and Y233,440 million ($2,174 million) at March 31, 2004 and 2005, respectively. Had the 'first-in, first-out' basis been used for those companies using the LIFO basis, inventories would have been Y21,463 million and Y31,894 million ($297 million) higher than reported at March 31, 2004 and 2005, respectively. Property, plant and equipment - Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation of property, plant and equipment is mainly 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 estimated useful lives of the respective assets according to general class, type of construction and use. The estimated useful lives range from 3 to 60 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 three 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 future 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 obligations are measured by actuarial calculations in accordance with a Statement of Financial F-13 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Accounting Standard ('FAS') No. 87 Employers' accounting for pensions ('FAS 87 '), 'Accrued pension and severance costs' are determined by amounts of obligations, plan assets, unrecognized prior service costs and unrecognized actuarial gains/losses. A minimum pension liability is recorded for plans where the accumulated benefit obligation net of plan assets exceeds the accrued pension and severance costs. 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 estimated by using current technology available and various engineering, 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 periods presented. Income taxes - The provision for income taxes is computed based on the pretax 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 consequences 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 forward foreign currency exchange contracts, foreign currency options, interest rate swaps, interest rate currency swap agreements and interest rate options to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Toyota does not use derivatives for speculation or trading purposes. Changes in the fair value of derivatives are recorded each period in current earnings or through other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized currently in operations. Net income per share - Basic net income per common share is calculated by dividing net income by the weighted-average number of shares outstanding during the reported period. The calculation of diluted net income per common share is similar to the calculation of basic net income per share, except that the weighted-average number of shares outstanding includes the additional dilution from the assumed exercise of dilutive stock options. Stock-based compensation - Toyota measures compensation expense for its stock-based compensation plan using the intrinsic value method. Toyota accounts for the stock-based compensation plans under the recognition and measurement principles of the Accounting Principles Board ('APB') Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price higher than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the F-14 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) company had applied the fair value recognition provisions of FAS No. 123, Accounting for Stock-Based Compensation ('FAS 123'), to stock-based employee compensation. See note 18 to the consolidated financial statements for weighted-average assumptions used in option pricing model. Yen in millions U.S. dollars in millions For the years ended March 31, For the year ended March 31, 2003 2004 2005 2005 Net income As reported Y 750,942 Y 1,162,098 Y 1,171,260 $ 10,907 Deduct: Total stock-based compensation expenses (1,406 ) (1,292 ) (1,571 ) (15 ) determined under fair value based method for all awards, net of related tax effects Pro forma Y 749,536 Y 1,160,806 Y 1,169,689 $ 10,892 Net income per share - Basic As reported Y 211.32 Y 342.90 Y 355.35 $ 3.31 Pro forma 210.92 342.51 354.87 3.30 - Diluted As reported Y 211.32 Y 342.86 Y 355.28 $ 3.31 Pro forma 210.92 342.48 354.80 3.30 Other comprehensive income - Other comprehensive income refers to revenues, expenses, gains and losses that, under accounting principles generally accepted in the United States of America are included in comprehensive income, but are excluded from net income as these amounts are recorded directly as an adjustment to shareholders' equity. Toyota's other comprehensive income is primarily comprised of unrealized gains/losses on marketable securities designated as available-for-sale, foreign currency translation adjustments, gains/losses on certain derivative instruments and adjustments attributed to additional minimum pension liabilities associated with Toyota's defined benefit pension plans. Accounting changes - In September 2004, the Emerging Issues Task Force ('EITF') reached consensus on the disclosure provisions in its Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (' EITF 03-1') for investments accounted for under FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and FAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. See Note 6 for disclosures required by those provisions. Recent pronouncements to be adopted in future periods - In November 2004, the Financial Accounting Standards Board ('FASB') issued FAS No. 151, Inventory Costs - an amendment of ARB No. 43, Chapter 4 ('FAS 151'). FAS 151 amends the guidance in ARB No. 43, Chapter 4, 'Inventory Pricing,' to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that '. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .'. FAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of 'so abnormal.' In addition, this Statement requires that allocation of fixed production overheads to the costs of F-15 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) conversion be based on the normal capacity of the production facilities. FAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect this statement to have a material impact on Toyota's consolidated financial statements. In December 2004, FASB issued FAS No. 123(R), Share-Based Payment (revised 2004) ('FAS 123(R)'). FAS 123(R) is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation ('FAS 123'), supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees ('APB 25'), and its related implementation guidance. FAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. FAS 123(R) also requires a public entity to initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value will be recognized as compensation cost over that period. Although Toyota is required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005 under Statement No. 123(R), the Securities and Exchange Commission has amended the compliance date and Toyota is required to adopt the Standard for the year ending March 31, 2007. Management does not expect this statement to have a material impact on Toyota's consolidated financial statements. In December 2004, FASB issued FAS No. 153, Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29 ('FAS 153'). The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion; however, included certain exceptions to that principle. FAS 153 amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Management does not expect this statement to have a material impact on Toyota's consolidated financial statements. In March 2005, FASB issued the FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143 ('FIN 47'). This Interpretation clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 requires a company to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Management does not expect this statement to have a material impact on Toyota's consolidated financial statements. In May 2005, FASB issued FAS No. 154, Accounting Changes and Error Corrections - a replacement of APB NO. 20 and FAS No. 3 ('FAS 154'). FAS 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. APB Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS 154 requires retrospective F-16 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) application to prior periods' financial statements of changes in accounting principle. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of applying FAS 154 will depend on the change, if any, that Toyota may identify and record in future periods. Reclassifications - Certain prior year amounts have been reclassified to conform to the presentations for the year ended March 31, 2005. 3. U.S. dollar amounts: U.S. dollar amounts presented in the consolidated financial statements and related notes are included solely for the convenience of the reader and are unaudited. These translations should not be construed as representations that the yen amounts actually represent, or have been or could be converted into, U.S. dollars. For this purpose, the rate of Y107.39 = U.S. $1, the approximate current exchange rate at March 31, 2005, was used for the translation of the accompanying consolidated financial amounts of Toyota as of and for the year ended March 31, 2005. 4. Supplemental cash flow information: Cash payments for income taxes were Y584,969 million, Y627,483 million and Y 694,985 million ($6,472 million) for the years ended March 31, 2003, 2004 and 2005, respectively. Interest payments during the years ended March 31, 2003, 2004 and 2005 were Y216,888 million, Y203,257 million and Y226,615 million ($2,110 million), respectively. Capital lease obligations of Y13,461 million, Y4,826 million and Y3,571 million ($33 million) were incurred for the years ended March 31, 2003, 2004 and 2005, respectively. For the year ended March 31, 2005, Toyota decided to change its presentation of cash flows attributed to a certain portion of finance receivables in the consolidated statements of cash flows. Certain prior-period amounts have been reclassified to conform to the current year presentation. The decision to change the classification was based on concerns raised by the staff of the Division of Corporation Finance of the Securities and Exchange Commission. Historically, Toyota had reported the origination and collection activities of its wholesale financing transactions as investing activities in the consolidated statements of cash flows. Consequently, when Toyota's products were sold to its dealers through the use of Toyota's wholesale financing program, investing cash outflows were reported on the basis that the Financial Services operations originated the wholesale finance receivables, while operating cash inflows were reported on the basis that the Automotive sales operations collected the trade receivables despite the fact that no cash received from a consolidated perspective related to the trade receivables as it was an intercompany transaction. The change in classification in the statements of cash flows for all periods presented reflects the fact that no cash was received by Toyota upon a sale to dealers and as a result, eliminates the effects of the intercompany transactions and reflects cash receipts from the sale of inventory as operating activities. In addition, the cash flows from finance receivables relating to the sale of Toyota product inventories, other than the above-described wholesale receivables, were also reclassified from investing activities to operating activities. Such cash flows include cash flows from sales-type lease receivables attributed to sales-type lease transactions involving inventories of Toyota products. The current presentation in the statements of cash flows reflects all cash flows relating to the sale of inventories as 'Changes in accounts and notes receivable ' in operating activities. Net cash outflows from finance receivables relating to the sale of inventories reported in operating activities in the consolidated statements of cash flows for the year ended March 31, 2005 was Y55,951 million ($521 million). F-17 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The table below is a reconciliation of Toyota's current year presentation of cash flows attributed to finance receivables compared to the presentation of cash flows reported in prior years. Yen in millions For the years ended March 31, 2003 2004 Net cash provided by operating activities - As previously reported Y 2,085,047 Y 2,283,023 Amount reclassified from investing activities (144,959 ) (96,289 ) - After reclassification Y 1,940,088 Y 2,186,734 Net cash provided by investing activities - As previously reported Y (2,146,407 ) Y (2,312,784 ) Amount reclassified to operating activities 144,959 96,289 - After reclassification Y (2,001,448 ) Y (2,216,495 ) 5. Acquisitions and dispositions: During the year ended March 31, 2004, Toyota acquired additional ownerships in the following four contract manufacturers, Toyota Auto Body Corporation, Kanto Auto Works LTD, Central Motor CO.,LTD, and P.T. Toyota Motor Manufacturing Indonesia. All of them are primarily engaged in manufacturing Toyota brand vehicles. Until the date of each acquisition, Toyota accounted for its investments in these contract manufacturers by the equity method because Toyota was considered to have significant influence of these companies. Subsequent to the date of each acquisition, Toyota's consolidated financial statements include the accounts of these contract manufacturers. The fair values of assets acquired and liabilities assumed at the dates of acquisition based on the allocation of the aggregate purchase price for these acquisitions are as follows: Yen in millions For the year ended March 31, 2004 Assets acquired Y 488,939 Liabilities assumed (372,277 ) Minority interest (97,008 ) Goodwill 9,557 Less - Cash acquired (11,703 ) Net cash paid Y 17,508 Pro forma information related to these acquisitions is not included because the impact of these acquisitions, either individually or in the aggregate, on Toyota's consolidated results of operations is not considered to be material. During the years ended March 31, 2003, 2004 and 2005, Toyota made a number of other acquisitions, however assets acquired and liabilities assumed were not material. F-18 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 6. Marketable securities and other securities investments: Marketable securities and other securities investments include debt and equity securities for which the aggregate cost, gross unrealized gains and losses and fair value are as follows: Yen in millions March 31, 2004 Cost Gross Gross Fair unrealized unrealized gains losses value Available-for-sale Debt securities Y 1,606,685 Y 10,094 Y 1,626 Y 1,615,153 Equity securities 460,778 492,483 720 952,541 Total Y 2,067,463 Y 502,577 Y 2,346 Y 2,567,694 Securities not practicable to determine fair value Debt securities Y 43,382 Equity securities 79,352 Total Y 122,734 Yen in millions March 31, 2005 Cost Gross Gross Fair unrealized unrealized gains losses value Available-for-sale Debt securities Y 2,205,420 Y 14,113 Y 6,928 Y 2,212,605 Equity securities 451,903 453,494 593 904,804 Total Y 2,657,323 Y 467,607 Y 7,521 Y 3,117,409 Securities not practicable to determine fair value Debt securities Y 19,917 Equity securities 109,940 Total Y 129,857 U.S. dollars in millions March 31, 2005 Cost Gross Gross Fair unrealized unrealized gains losses value Available-for-sale Debt securities $ 20,537 $ 131 $ 64 $ 20,604 Equity securities 4,208 4,223 6 8,425 Total $ 24,745 $ 4,354 $ 70 $ 29,029 Securities not practicable to determine fair value Debt securities $ 185 Equity securities 1,025 Total $ 1,210 F-19 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Unrealized losses continuously over a 12 month period or more in the aggregate were not material at March 31, 2004 and 2005. At March 31, 2004 and 2005, debt securities classified as available-for-sale mainly consist of Japanese government bonds and corporate debt securities with maturities from one to ten years. Proceeds from sales of available-for-sale securities were Y197,985 million, Y 183,808 million and Y121,369 million ($1,130 million) for the years ended March 31, 2003, 2004 and 2005, respectively. On those sales, gross realized gains were Y6,518 million, Y8,780 million and Y14,551 million ($135 million) and gross realized losses were Y103 million, Y139 million and Y231 million ($2 million), respectively. During the years ended March 31, 2003, 2004 and 2005, Toyota recognized impairment losses on available-for-sale securities of Y111,346 million, Y3,063 million, and Y2,324 million ($22 million), respectively, which are included in ' Other income (loss), net' in the accompanying consolidated statements of income. In the ordinary course of business, Toyota maintains long-term investment securities, included in 'Marketable securities and other securities investments' and issued by a number of non-public companies which are recorded at cost, as their fair values were not readily determinable. Management employs a systematic methodology to assess the recoverability of such investments by reviewing the financial viability of the underlying companies and the prevailing market conditions in which these companies operate to determine if Toyota's investment in each individual company is impaired and whether the impairment is other-than-temporary. Toyota performs this impairment test semi-annually for significant investments recorded at cost. If the impairment is determined to be other-than-temporary, the cost of the investment is written-down by the impaired amount and the losses are recognized currently in operations. 7. Finance receivables: Finance receivables consist of the following: Yen in millions U.S. dollars in millions March 31, March 31, 2004 2005 2005 Retail Y 3,643,998 Y 4,780,250 $ 44,513 Finance leases 912,622 758,632 7,064 Wholesale and other dealer loans 1,680,907 1,773,440 16,514 6,237,527 7,312,322 68,091 Unearned income (298,153 ) (233,417 ) (2,173 ) Allowance for credit losses (87,462 ) (91,829 ) (855 ) Total finance receivables, net 5,851,912 6,987,076 65,063 Less - Current portion (2,622,939 ) (3,010,135 ) (28,030 ) Noncurrent finance receivables, net Y 3,228,973 Y 3,976,941 $ 37,033 As discussed in Note 4, from the year ended March 31, 2005, Toyota reclassified cash flows attributed to a certain portion of its finance receivables in the consolidated statements of cash flows. Included in finance receivables are receivables relating to the sale of inventories amounting to Y595,532 million and Y677,236 million ($6,306 million) as of March 31, 2004 and 2005, respectively. The allowance for credit losses attributed to theses receivables is not significant. F-20 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The contractual maturities of retail receivables, the future minimum lease payments on finance leases and wholesale and other dealer loans at March 31, 2005 are summarized as follows: Yen in millions U.S. dollars in millions Years ending March 31, Retail Finance Wholesale Retail Finance Wholesale --------------- lease and other lease and other dealer dealer loans loans 2006 Y 1,422,669 Y 204,611 Y 1,477,817 $ 13,248 $ 1,905 $ 13,761 2007 1,230,247 131,518 71,824 11,456 1,225 669 2008 1,029,558 99,357 59,051 9,587 925 550 2009 705,674 38,024 87,415 6,571 354 814 2010 328,916 13,307 57,082 3,063 124 532 Thereafter 63,186 779 20,251 588 7 188 Y 4,780,250 Y 487,596 Y 1,773,440 $ 44,513 $ 4,540 $ 16,514 Finance leases consist of the following: Yen in millions U.S. dollars in millions March 31, March 31, 2004 2005 2005 Minimum lease payments Y 617,890 Y 487,596 $ 4,540 Estimated unguaranteed residual values 294,732 271,036 2,524 - - - 912,622 758,632 7,064 Less - Unearned income (104,736 ) (71,702 ) (668 ) Less - Allowance for credit losses (25,015 ) (6,502 ) (60 ) - - - Finance leases, net Y 782,871 Y 680,428 $ 6,336 - - - Toyota maintains a program to sell retail and lease finance receivables. Under the program, Toyota's securitization transactions are generally structured as qualifying SPEs ('QSPE's), thus Toyota achieves sale accounting treatment under the provisions of FAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ('FAS 140'). Toyota recognizes a gain or loss on the sale of the finance receivables upon the transfer of the receivables to the securitization trusts structured as a QSPE. Toyota retains servicing rights and earns a contractual servicing fee of 1% per annum on the total monthly outstanding principal balance of the related securitized receivables. In a subordinated capacity, Toyota retains interest-only strips, subordinated securities, and cash reserve funds in these securitizations, and these retained interests are held as restricted assets subject to limited recourse provisions and provide credit enhancement to the senior securities in Toyota's securitization transactions. The retained interests are not available to satisfy any obligations of Toyota. Investors in the securitizations have no recourse to Toyota beyond Toyota's retained subordinated interests and any amounts drawn on the revolving liquidity notes. Toyota's exposure to these retained interests exists until the associated securities are paid in full. Investors do not have recourse to other assets held by Toyota for failure of obligors on the receivables to pay when due or otherwise. F-21 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table summarizes certain cash flows received from and paid to the securitization trusts for the years ended March 31, 2003, 2004 and 2005. Yen in millions U.S. dollars in millions For the years ended March 31, For the year ended March 31, 2003 2004 2005 2005 Proceeds from new securitizations, net of purchased and Y 412,594 Y 168,135 Y 48,958 $ 456 retained securities Servicing fees received 6,868 6,860 3,762 35 Excess interest received from interest only strips 15,313 20,514 9,140 85 Repurchases of receivables (11,466 ) (33,614 ) (34,675 ) (323 ) Servicing advances (1,098 ) (792 ) (215 ) (2 ) Reimbursement of servicing and maturity advances 122 1,358 860 8 Toyota sold finance receivables under the program and recognized pretax gains resulting from these sales of Y16,202 million, Y5,608 million and Y323 million ($3 million) for the years ended March 31, 2003, 2004 and 2005, respectively, after providing an allowance for estimated credit losses. The gain on sale recorded depends on the carrying amount of the assets at the time of the sale. The carrying amount is allocated between the assets sold and the retained interests based on their relative fair values at the date of the sale. The key economic assumptions initially and subsequently measuring the fair value of retained interests include the market interest rate environment, severity and rate of credit losses, and the prepayment speed of the receivables. All key economic assumptions used in the valuation of the retained interests are reviewed periodically and are revised as considered necessary. At March 31, 2004 and 2005, Toyota's retained interests relating to these securitizations include interest in trusts, interest-only strips, and other receivables, amounting to Y50,625 million and Y18,896 million ($176 million), respectively. Toyota recorded impairments on retained interests totaling Y2,440 million for the year ended March 31, 2003. These impairments were calculated by discounting cash flows using management's estimates and other key economic assumptions. No impairment losses on retained interests were recorded for the years ended March 31, 2004 and 2005. Key economic assumptions used in measuring the fair value of retained interests at the sale date of securitization transactions completed during the years ended March 31, 2003, 2004 and 2005 were as follows: For the years ended March 31, 2003 2004 2005 Prepayment speed related to securitizations 1.0% - 1.5% 1.0% - 1.5% 0.7% - 1.1% Weighted-average life (in years) 1.45 - 1.85 1.70 - 1.85 1.85 Expected annual credit losses 0.50% - 0.80% 0.50% - 0.80% 0.30% Discount rate used on the subordinated securities 5.0% 5.0% - Discount rate used on other retained interests 8.0% - 15.0% 8.0% - 15.0% 15.0% Expected cumulative static pool losses over the life of the securitizations are calculated by taking actual life to date losses plus projected losses and dividing the sum by the original balance of each pool of assets. Expected cumulative static pool credit losses for the retail loans securitized for the years ended March 31, 2003, 2004 and 2005 were 0.54%, 0.50%, and 0.47%, respectively. F-22 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The key economic assumptions and the sensitivity of the current fair value of the retained interest to an immediate 10 and 20 percent adverse change in those economic assumptions are presented below. Yen in U.S. millions dollars in millions March 31, March 2005 31, 2005 Prepayment speed assumption (annual rate) 0.7%-1.7 % Impact on fair value of 10% adverse change Y (861 ) $ (8 ) Impact on fair value of 20% adverse change (1,725 ) (16 ) Residual cash flows discount rate (annual rate) 5.0%-15.0 % Impact on fair value of 10% adverse change Y (258 ) $ (2 ) Impact on fair value of 20% adverse change (617 ) (6 ) Expected credit losses (annual rate) 0.50%-1.04 % Impact on fair value of 10% adverse change Y (352 ) $ (3 ) Impact on fair value of 20% adverse change (705 ) (7 ) These hypothetical scenarios do not reflect expected market conditions and should not be used as a prediction of future performance. As the figures indicate, changes in the fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. Actual changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Actual cash flows may differ from the above analysis. Outstanding receivable balances and delinquency amounts for managed retail and lease receivables, which include both owned and securitized receivables, as of March 31, 2004 and 2005 are as follows: Yen in millions U.S. dollars in millions March 31, March 31, 2004 2005 2005 Principal amount outstanding Y 4,819,938 Y 5,585,672 $ 52,013 Delinquent amounts over 60 days or more 19,379 23,396 218 Comprised of: Receivables owned Y 4,328,906 Y 5,305,464 $ 49,404 Receivables securitized 491,032 280,208 2,609 Credit losses, net of recoveries attributed to managed retail and lease receivables for the years ended March 31, 2004 and 2005 totaled Y48,011 million and Y34,455 million ($321 million), respectively. 8. Other receivables: Other receivables relate to arrangements with certain component manufacturers whereby Toyota procures inventory for these component manufactures and is reimbursed for the related purchases. F-23 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 9. Inventories: Inventories consist of the following: Yen in millions U.S. dollars in millions March 31, March 31, 2004 2005 2005 Finished goods Y 717,201 Y 890,118 $ 8,289 Raw materials 155,162 189,675 1,766 Work in process 165,597 179,943 1,676 Supplies and other 45,366 46,973 437 Y 1,083,326 Y 1,306,709 $ 12,168 10. Vehicles and equipment on operating leases: Vehicles and equipment on operating leases consist of the following: Yen in millions U.S. dollars in millions March 31, March 31, 2004 2005 2005 Vehicles Y 1,387,404 Y 1,736,238 $ 16,168 Equipment 106,376 92,459 861 - - - 1,493,780 1,828,697 17,029 Less - Accumulated depreciation (375,861 ) (424,609 ) (3,954 ) - - - Vehicles and equipment on operating leases, net Y 1,117,919 Y 1,404,088 $ 13,075 - - - Rental income from vehicles and equipment on operating leases was Y293,366 million, Y267,252 million and Y291,205 million ($2,712 million) for the years ended March 31, 2003, 2004 and 2005, respectively. Future minimum rentals from vehicles and equipment on operating leases are due in installments as follows: Years ending March 31, Yen in U.S. ----------- millions dollars in millions 2006 Y 304,672 $ 2,837 2007 214,761 2,000 2008 128,713 1,198 2009 51,124 476 2010 14,718 137 Thereafter 11,123 104 Total minimum future rentals Y 725,111 $ 6,752 The future minimum rentals as shown above should not be considered indicative of future cash collections. F-24 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 11. Allowance for doubtful accounts and credit losses: An analysis of activity within the allowance for doubtful accounts relating to trade accounts and notes receivable for the years ended March 31, 2003, 2004 and 2005 is as follows: Yen in millions U.S. dollars in millions For the years ended March 31, For the year ended March 31, 2003 2004 2005 2005 Allowance for doubtful accounts at beginning of year Y 59,864 Y 53,172 Y 61,121 $ 569 Provision for doubtful accounts 5,953 16,540 15,752 147 Write-offs (6,035 ) (2,598 ) (12,855 ) (120 ) Other (6,610 ) (5,993 ) (8,267 ) (77 ) Allowance for doubtful accounts at end of year Y 53,172 Y 61,121 Y 55,751 $ 519 The other amount includes the impact of consolidation and deconsolidation of certain entities due to changes in ownership interest and currency translation adjustments for the years ended March 31, 2003, 2004 and 2005. A portion of the allowance for doubtful accounts balance at March 31, 2004 and 2005 totaling Y32,155 million and Y37,095 million ($345 million), respectively, is attributed to certain non-current receivable balances which are reported as other assets in the consolidated balance sheets. An analysis of the allowance for credit losses relating to finance receivables and vehicles and equipment on operating leases for the years ended March 31, 2003, 2004 and 2005 is as follows: Yen in millions U.S. dollars in millions For the years ended March 31, For the year ended March 31, 2003 2004 2005 2005 Allowance for credit losses at beginning of year Y 63,053 Y 116,888 Y 87,462 $ 815 Provision for credit losses 93,884 66,598 47,402 441 Charge-offs, net of recoveries (51,914 ) (92,835 ) (44,587 ) (415 ) Other 11,865 (3,189 ) 1,552 14 Allowance for credit losses at end of year Y 116,888 Y 87,462 Y 91,829 $ 855 The other amount primarily includes the impact of currency translation adjustments for the years ended March 31, 2003, 2004 and 2005. F-25 -------------------------------------------------------------------------------- More to follow This information is provided by RNS The company news service from the London Stock Exchange

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