USGAAP Annual Report 4

Toyota Motor Corporation 31 July 2003 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of independent auditors F - 2 Consolidated balance sheets at March 31, 2002 and 2003 F - 3 Consolidated statements of income for the years ended March 31, 2001, 2002 and 2003 F - 5 Consolidated statements of shareholders' equity for the years ended March 31, 2001, 2002 and 2003 F - 6 Consolidated statements of cash flows for the years ended March 31, 2001, 2002 and 2003 F - 8 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 Auditors To the Shareholders and Board of Directors of Toyota Jidosha Kabushiki Kaisha ('Toyota Motor Corporation') In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Toyota Motor Corporation and its subsidiaries at March 31, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2003, 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 auditing standards generally accepted in the United States of America, which 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/ PricewaterhouseCoopers PricewaterhouseCoopers June 26, 2003 Nagoya, Japan F-2 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS Yen in millions U.S. ---------------------------- dollars in millions -------- March 31, ---------------------------- March 31, -------- 2002 2003 2003 ------------ ---------- -------- Current assets: Cash and cash equivalents Y 1,657,160 Y 1,592,028 $ 13,245 Time deposits 19,977 55,406 461 Marketable securities 600,737 605,483 5,037 Trade accounts and notes receivable, less allowance for 1,456,935 1,475,797 12,278 doubtful accounts of Y28,182 million in 2002 and Y29,489 million ($246 million) in 2003 Finance receivables, net 2,020,491 2,505,140 20,841 Other receivables 508,970 513,952 4,276 Inventories 961,840 1,025,838 8,534 Deferred income taxes 433,524 385,148 3,204 Prepaid expenses and other current assets 413,211 463,441 3,856 - ---------- --- ---------- --- ---- Total current assets 8,072,845 8,622,233 71,732 - ---------- --- ---------- --- ---- Noncurrent finance receivables, net 2,671,460 2,569,808 21,379 - ---------- --- ---------- --- ---- Investments and other assets: Marketable securities and other securities investments 1,531,126 1,652,110 13,745 Affiliated companies 1,321,950 1,279,645 10,646 Officers and employees receivables 21,151 21,270 177 Other 580,188 804,029 6,689 - ---------- --- ---------- --- ---- 3,454,415 3,757,054 31,257 - ---------- --- ---------- --- ---- Property, plant and equipment: Land 1,032,381 1,064,125 8,853 Buildings 2,421,918 2,521,208 20,975 Machinery and equipment 6,959,054 7,089,592 58,982 Vehicles and equipment on operating leases 1,584,161 1,601,060 13,320 Construction in progress 234,224 211,584 1,760 - ---------- --- ---------- --- ---- 12,231,738 12,487,569 103,890 Less-Accumulated depreciation (7,124,728) (7,283,690) (60,596) - ---------- --- ---------- --- ---- 5,107,010 5,203,879 43,294 - ---------- --- ---------- --- ---- Total assets Y 19,305,730 Y 20,152,974 $ 167,662 - ---------- --- ---------- --- ---- The accompanying notes are an integral part of these 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, -------- 2002 2003 2003 ------------ --------- -------- Current liabilities: Short-term borrowings Y 1,825,564 Y 1,855,648 $ 15,438 Current portion of long-term debt 1,158,814 1,263,017 10,508 Accounts payable 1,420,608 1,531,552 12,741 Other payables 575,011 618,748 5,148 Accrued expenses 928,160 1,063,496 8,848 Income taxes payable 327,713 300,718 2,502 Other current liabilities 436,288 420,757 3,500 - ---------- --- ---------- --- ---- - Total current liabilities 6,672,158 7,053,936 58,685 - ---------- --- ---------- --- ---- - Long-term liabilities: Long-term debt 3,722,706 4,137,528 34,422 Accrued pension and severance costs 754,403 1,052,687 8,758 Deferred income taxes 467,061 371,004 3,086 Other long-term liabilities 133,669 101,353 843 - ---------- --- ---------- --- ---- - Total long-term liabilities 5,077,839 5,662,572 47,109 - ---------- --- ---------- --- ---- - Minority interest in consolidated subsidiaries 291,621 315,466 2,625 - ---------- --- ---------- --- ---- - Shareholders' equity: Common stock, no par value, authorized: 397,050 397,050 3,303 9,780,185,400 shares in 2002 and 9,740,185,400 shares in 2003; issued: 3,649,997,492 shares in 2002 and 3,609,997,492 shares in 2003 Additional paid-in capital 490,538 493,790 4,108 Retained earnings 6,804,722 7,301,795 60,747 Accumulated other comprehensive loss (267,304) (604,272) (5,027) Treasury stock, at cost, 46,449,606 shares in 2002 and (160,894) (467,363) (3,888) 158,940,796 shares in 2003 - ---------- --- ---------- --- ---- - Total shareholders' equity 7,264,112 7,121,000 59,243 - ---------- --- ---------- --- ---- - Commitments and contingencies Total liabilities and shareholders' equity Y 19,305,730 Y 20,152,974 $ 167,662 - ---------- --- ---------- --- ---- - The accompanying notes are an integral part of these financial statements. F-4 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF INCOME Yen in millions ------------------------------------------------------ U.S. dollars in millions For the year ended For the years ended March 31, March 31, -------- 2001 2002 2003 2003 ------------ -------------- ----- -------- Net revenues: Sales of products Y 12,402,104 Y 13,499,644 Y 14,793,973 $ 123,078 Financing operations 553,133 690,664 707,580 5,887 - ---------- --- ---------- --- - --- - ------- --- ---- - 12,955,237 14,190,308 15,501,553 128,965 - ---------- --- ---------- --- - --- - ------- --- ---- - Costs and expenses: Cost of products sold 10,218,599 10,874,455 11,914,245 99,120 Cost of financing operations 427,340 459,195 423,885 3,527 Selling, general and administrative 1,518,569 1,763,026 1,891,777 15,739 - ---------- --- ---------- --- - --- - ------- --- ---- - 12,164,508 13,096,676 14,229,907 118,386 - ---------- --- ---------- --- - --- - ------- --- ---- - Operating income 790,729 1,093,632 1,271,646 10,579 - ---------- --- ---------- --- - --- - ------- --- ---- - Other income (expense): Interest and dividend income 71,358 55,778 52,661 438 Interest expense (40,886) (26,786) (30,467) (253) Foreign exchange gain (loss), net (5,954) (16) 35,585 296 Other income (loss), net 292,042 (150,507) (102,773) (855) - ---------- --- ---------- --- - --- - ------- --- ---- - 316,560 (121,531) (44,994) (374) - ---------- --- ---------- --- - --- - ------- --- ---- - Income before income taxes, minority 1,107,289 972,101 1,226,652 10,205 interest and equity in earnings of affiliated companies Provision for income taxes 523,876 422,789 517,014 4,301 - ---------- --- ---------- --- - --- - ------- --- ---- - Income before minority interest and equity 583,413 549,312 709,638 5,904 in earnings of affiliated companies Minority interest in consolidated (12,129) (10,835) (11,531) (96) subsidiaries Equity in earnings of affiliated companies 103,614 18,090 52,835 439 - ---------- --- ---------- --- - --- - ------- --- ---- - Net income Y 674,898 Y 556,567 Y 750,942 $ 6,247 - ---------- --- ---------- --- - --- - ------- --- ---- - Yen ------------------------------------------------------ U.S. dollars ----- Net income per share: -Basic Y 180.65 Y 152.26 Y 211.32 $ 1.76 - ---------- --- ---------- --- - --- - ------- --- - -Diluted Y 180.65 Y 152.26 Y 211.32 $ 1.76 - ---------- --- ---------- --- - --- - ------- --- - Cash dividends per share: Y 25.00 Y 28.00 Y 36.00 $ 0.30 - ---------- --- ---------- --- - --- - ------- --- - The accompanying notes are an integral part of these 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 at cost ---------- ---------- income (loss) ----------------- Balance at March Y 397,020 Y 487,531 Y 6,156,396 Y (125,347) Y (3,460) Y 6,912,140 31, 2000 Issuance during 30 1,124 1,154 the year Comprehensive income: Net income 674,898 674,898 Other comprehensive income (loss)- Foreign currency 161,280 161,280 translation adjustments Unrealized losses (304,995) (304,995) on securities, net of reclassification adjustments Minimum pension (13,429) (13,429) liability adjustments -------- ------- - Total 517,754 comprehensive income -------- ------- - Dividends paid (88,625) (88,625) Purchase and (263,596) (1,416) (265,012) retirement of common stock - ------- -- ------- - --------- - -------- -------- - -------- - --------- -------- ------- - Balance at March 397,050 488,655 6,479,073 (282,491) (4,876) 7,077,411 31, 2001 Issuance during 1,883 1,883 the year Comprehensive income: Net income 556,567 556,567 Other comprehensive income (loss)- Foreign currency 133,897 133,897 translation adjustments Unrealized losses (3,576) (3,576) on securities, net of reclassification adjustments Minimum pension (114,344) (114,344) liability adjustments Net losses on (790) (790) derivative instruments -------- ------- - Total 571,754 comprehensive income -------- ------- - Change in (3,061) (3,061) subsidiaries' year-ends Dividends paid (98,639) (98,639) Purchase and (129,218) (156,018) (285,236) retirement of common stock - ------- -- ------- - --------- - -------- -------- - -------- - --------- -------- ------- - Balance at March 397,050 490,538 6,804,722 (267,304) (160,894) 7,264,112 31, 2002 Issuance during 3,252 the year Comprehensive income: Net income 750,942 750,942 Other comprehensive income (loss)- Foreign currency (139,285) (139,285) translation adjustments Unrealized losses (26,495) (26,495) on securities, net of reclassification adjustments Minimum pension (171,978) (171,978) liability adjustments Net gains on 790 790 derivative instruments -------- ------- - Total 413,974 comprehensive income -------- ------- - Dividends paid (110,876) (110,876) Purchase and (142,993) (306,469) (449,462) retirement of common stock - ------- -- ------- - --------- - -------- -------- - -------- - --------- -------- ------- - Balance at March Y 397,050 Y 493,790 Y 7,301,795 Y (604,272) Y (467,363) Y 7,121,000 31, 2003 - ------- -- ------- - --------- - -------- -------- - -------- - --------- -------- ------- - The accompanying notes are an integral part of these financial statements. F-6 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY U.S. dollars in millions ----------------------------------------------------------------------------------------- ----- Common Additional Retained Accumulated Treasury Total ------------ stock paid-in earnings other stock, ------- -------- capital comprehensive at cost ---------- -------- income (loss) ------------- Balance at March 31, 2002 $ 3,303 $ 4,081 $ 56,612 $ (2,224) $ (1,338) $ 60,434 Issuance during the year 27 27 Comprehensive income: Net income 6,247 6,247 Other comprehensive income (loss)- Foreign currency translation (1,159) (1,159) adjustments Unrealized losses on (220) (220) securities, net of reclassification adjustments Minimum pension liability (1,431) (1,431) adjustments Net gains on derivative 7 7 instruments ------ ----- - Total comprehensive income 3,444 ------ ----- - Dividends paid (922) (922) Purchase and retirement of (1,190) (2,550) (3,740) common stock - ----- --- ------ - ------ - ------ ------ - ------ - ------ ------ ----- - Balance at March 31, 2003 $ 3,303 $ 4,108 $ 60,747 $ (5,027) $ (3,888) $ 59,243 - ----- --- ------ - ------ - ------ ------ - ------ - ------ ------ ----- - The accompanying notes are an integral part of these 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 year ended For the years ended March 31, March 31, -------- 2001 2002 2003 2003 ------------ -------------- ----- -------- Cash flows from operating activities: Net income Y 674,898 Y 556,567 Y 750,942 $ 6,247 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation 784,784 809,841 870,636 7,243 Provision for doubtful accounts and 27,131 44,407 99,837 831 credit losses Pension and severance costs, less 45,138 53,543 55,637 463 payments Loss on disposal of fixed assets 22,409 46,834 46,492 387 Unrealized losses on trading 13,377 - - - securities, net Unrealized (gains) losses on (11,107) 179,649 111,346 926 available-for-sale securities, net Realized gain on disposition of (180,950) - - - ownership interest in telecommunication subsidiary Gain on securities contribution to (161,151) - - - employee retirement benefit trust Deferred income taxes 49,325 (142,811) (74,273) (618) Minority interest in consolidated 12,129 10,835 11,531 96 subsidiaries Equity in earnings of affiliated (103,614) (18,090) (52,835) (439) companies Changes in operating assets and liabilities: (Increase) decrease in notes and (111,632) 61,997 (46,068) (383) accounts receivable (Increase) decrease in inventories (49,374) 11,705 (38,043) (316) (Increase) decrease in other current 4,486 (253,993) (58,036) (483) assets Increase (decrease) in accounts (7,911) (809) 116,946 973 payable Increase (decrease) in accrued income 141,525 74,888 (27,340) (227) taxes Increase in other current liabilities 220,357 139,954 181,595 1,511 Other 58,198 (41,857) 136,680 1,136 - ---------- ---- ---------- ---- - ---- - ------- --- ---- - Net cash provided by operating 1,428,018 1,532,660 2,085,047 17,347 activities - ---------- ---- ---------- ---- - --- - ------- --- ---- - Cash flows from investing activities: Additions to finance receivables (3,697,376) (3,853,741) (6,481,200) (53,920) Collection of finance receivables 2,801,160 2,453,540 5,252,685 43,700 Proceeds from sale of finance 507,811 624,393 572,771 4,765 receivables Additions to fixed assets excluding (762,274) (940,547) (1,005,931) (8,369) equipment leased to others Additions to equipment leased to (439,132) (608,046) (604,298) (5,027) others Proceeds from sales of fixed assets 61,265 56,525 61,847 515 excluding equipment leased to others Proceeds from sales of equipment 337,047 412,191 286,538 2,384 leased to others The accompanying notes are an integral part of these 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 year ended For the years ended March 31, March 31, -------- 2001 2002 2003 2003 ------------ -------------- ----- -------- (Increase) decrease in investments and other Y (70,906) Y (28,450) Y (30,481) $ (254) assets Purchases of marketable securities and security (949,058) (653,756) (1,113,998) (9,268) investments Proceeds from sales of marketable securities and 234,608 147,722 197,985 1,647 security investments Proceeds on maturity of marketable securities 597,409 604,081 723,980 6,023 and security investments (Increase) decrease in time deposits 45,190 31,519 (33,379) (278) Payment for additional investments in affiliated (34,204) (27,510) (28,229) (235) companies, net of cash acquired Other 49,722 (28,732) 55,303 460 - ---------- -- ---------- -- - -- - ------- --- ---- - Net cash used in investing activities Y (1,318,738) Y (1,810,811) Y (2,146,407) $ (17,857) - ---------- -- ---------- -- - -- - ------- --- ---- - Cash flows from financing activities: Purchase of common stock (265,012) (285,236) (454,611) (3,782) Proceeds from issuance of long-term debt 1,117,360 1,701,727 1,686,564 14,031 Payments of long-term debt (958,475) (1,012,523) (1,117,803) (9,300) Increase in short-term borrowings 28,039 73,884 30,327 252 Dividends paid (88,625) (98,639) (110,876) (922) Other - 12,935 4,074 34 - ---------- -- ---------- -- - -- - ------- --- ---- - Net cash provided by (used in) financing (166,713) 392,148 37,675 313 activities - ---------- -- ---------- -- - -- - ------- --- ---- - Effect of exchange rate changes on cash and cash 39,057 32,271 (41,447) (345) equivalents - ---------- -- ---------- -- - -- - ------- --- ---- - Net increase (decrease) in cash and cash (18,376) 146,268 (65,132) (542) equivalents Cash and cash equivalents at beginning of year 1,529,268 1,510,892 1,657,160 13,787 - ---------- -- ---------- -- - - - ------- --- ---- - Cash and cash equivalents at end of year Y 1,510,892 Y 1,657,160 Y 1,592,028 $ 13,245 - ---------- -- ---------- -- - - - ------- --- ---- - The accompanying notes are an integral part of these 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, assembly and sale of passenger cars, recreational and sport-utility vehicles, minivans, 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 with accounting principles generally accepted in the United States of America. These adjustments were not recorded in the statutory books. 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. Certain foreign subsidiary results were reported in the consolidated financial statements using December 31 year-ends. During the year ended March 31, 2002, the year-ends of certain of these foreign subsidiaries were changed from December 31 to March 31. As a result, Toyota decreased retained earnings by Y3,061 million to reflect the impact of conforming the year-ends at March 31, 2001. 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 which Toyota does not exercise significant influence (generally less than a 20% ownership interest) are stated at cost. 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, postretirement benefits costs and obligations and post-employment benefit costs 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 rates and all income and expense accounts of those subsidiaries are translated at average-period exchange rates. The resulting translation adjustments are included as a component of accumulated other comprehensive income/loss. Foreign currency receivables and payables are translated at appropriate year-end current rates and the resulting transaction gains or losses are taken into income currently. F-10 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Revenue recognition - Revenue from sales of vehicles and parts is 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 the dealer in a certain period of time. Toyota specifies those volume, model or period covered in the incentive programs. Toyota accrues these incentives as revenue reductions at the sale of a vehicle corresponding to the program by the amount determined in the related incentive program. Revenue from the sale 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. Revenue from retail financing contracts and finance leases is recognized using the effective yield method. Revenue from operating leases is 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 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 Y276,596 million, Y319,657 million and Y326,972 million ($2,720 million) for the years ended March 31, 2001, 2002 and 2003, 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 its sale and other factors. Toyota provides 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 still 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 as to warranty claim recoveries from suppliers. Research and development costs are expensed as incurred and were Y475,716 million, Y589,306 million and Y668,404 million ($5,561 million) for the years ended March 31, 2001, 2002 and 2003, respectively. Cash and cash equivalents - Cash and cash equivalents include all highly liquid investments, generally 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. F-11 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 accumulated other comprehensive income/loss in shareholders' equity, net of applicable taxes. Should Toyota acquire securities in the future and designate them as held-to-maturity investments, such securities would be 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 upon 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 - Allowances 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 historical loss experience. 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 credited to 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 present owned portfolio. The F-12 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 Toyota to be appropriate in relation to the estimated losses on the present owned portfolio. Upon disposal of the assets, the allowance for residual losses is adjusted for the difference between the net book value and the proceeds from sale. Inventories - Inventories are valued at cost, not in excess of market, cost being determined on the 'average cost' basis, except for the cost of finished products carried by certain subsidiary companies which is determined on the 'specific identification ' basis or 'last in, first out' ('LIFO') basis. Inventories valued on the LIFO basis totaled Y190,565 million and Y153,879 million ($1,280 million) at March 31, 2002 and 2003, respectively. Had the 'first in, first out' basis been used for those companies using the LIFO basis, inventories would have been Y23,375 million and Y30,489 million ($254 million) higher than reported at March 31, 2002 and 2003, 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 assets according to general class, type of construction and use. 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 basis 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 assets carrying value 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 a definite life are tested for F-13 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 calculated generally determined using a discounted cash flow analysis. Costs related to internally developed intangible assets are expensed as incurred. 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 liability does not reflect any offset for possible recoveries from insurance companies and is not discounted. There were no material changes in the liability 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 liabilities and assets 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 foreign exchange forward 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 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 earnings. 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 3,735,862,211; 3,655,303,873, and 3,553,602,083 for the years ended March 31, 2001, 2002 and 2003, respectively. 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 assumed exercise of dilutive stock options. The effect of dilutive stock options was de-minims for the years ended March 31, 2001, 2002 and 2003. 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 F-14 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 company had applied the fair value recognition provisions of FAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Yen in millions U.S. --------------------------------------- dollars in millions -------- For the years ended March 31, For the --------------------------------------- year ended March 31, -------- 2001 2002 2003 2003 --------- --------- --------- -------- Net income As reported Y 674,898 Y 556,567 Y 750,942 $ 6,247 Deduct: Total stock-based compensation expenses 646 721 1,337 11 determined under fair value based method for all awards, net of related tax effects - ------- - ------- - ------- -- ----- Pro forma Y 674,252 Y 555,846 Y 749,605 $ 6,236 - ------- - ------- - ------- -- ----- Net income per share: -Basic As reported Y 180.65 Y 152.26 Y 211.32 $ 1.76 Pro forma 180.48 152.07 210.94 1.75 -Diluted As reported Y 180.65 Y 152.26 Y 211.32 $ 1.76 Pro forma 180.48 152.07 210.94 1.75 Other comprehensive income/loss - Other comprehensive income/loss 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/loss is primarily comprised of unrealized gains/losses on marketable securities designated as available-for-sale, foreign currency translation adjustments, gains/losses on derivative instruments and adjustments to recognize additional minimum liabilities associated with Toyota's defined benefit pension plans. Accounting changes - In June 2001, the Financial Accounting Standards Board ('FASB') issued FAS No. 141, Business Combinations ('FAS 141') and FAS No. 142, Goodwill and Other Intangible Assets ('FAS 142'). FAS 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30, 2001. FAS 142 requires goodwill and intangible assets having an indefinite useful life to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. Toyota adopted the provisions of FAS 142 as of April 1, 2002. The adoption of FAS 141 and FAS 142 did not have a material impact on Toyota's consolidated financial statements. In August 2001, the FASB issued FAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets ('FAS 144'). FAS 144 supersedes FAS No. 121, Accounting for the Impairment of Long-Lived Assets and F-15 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) for Long-Lived Assets to Be Disposed Of ('FAS 121'), and provides new rules on asset impairment and a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of FAS 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The new rules also supersede the provisions of APB Opinion 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, with regard to reporting the effects of a disposal of a segment of a business and require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred. Toyota adopted the provisions of FAS 144 as of April 1, 2002. The adoption of FAS 144 did not have a material impact on Toyota's consolidated financial statements. Pursuant to FASB Emerging Issues Task Force ('EITF') Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ('EITF 01-9'). Toyota has reclassified certain sales incentives which fall into the scope from selling, general and administrative expenses to a reduction of revenues in the accompanying consolidated statements of income, for all periods presented. In June 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ('FAS 146'). FAS 146 requires to recognize a liability for costs relating to exit or disposal activities when incurred rather than when management's commitment to exit plan as previous accounting guidance requires. Toyota adopted this provision to exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 did not have a material impact on Toyota's consolidated financial statements. In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123 ('FAS 148'). FAS 148 amends FAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, FAS 148 requires more prominent disclosures about the method of accounting used for stock-based compensation and the effect of the method used on reported results. Toyota applied FAS 148 for the year ended March 31, 2003, and followed certain disclosure requirements. Because Toyota continues to apply APB Opinion No. 25, Accounting for Stock Issued to Employees, the adoption of FAS 148 did not have an impact on Toyota's results of operations or financial positions. In November 2002, the FASB issued FASB Interpretation ('FIN') No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 ('FIN 45'). This interpretation elaborates on the disclosure to be made by a guarantor in its financial statements regarding obligations under certain guarantees that it has issued. This interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation due to the issuance of the guarantee. Toyota adopted the initial recognition and initial measurement provisions of FIN 45 on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on Toyota's consolidated financial statements. Toyota also has adopted the disclosure requirements from the year ended March 31, 2003. In January 2003, FASB issued FIN No. 46, Consolidation of Variable Interest Entities - an interpretation of ARB No. 51 ('FIN 46'). This interpretation provides guidance on identifying variable interest entities ('VIE') for which control is achieved through means other than voting rights and on how to determine when a company should consolidate the VIE. It is not limited to special purpose entities and will require more companies to F-16 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) consolidate entities with which they have contractual, ownership, or other pecuniary interests that absorb a portion of that entity's expected losses or receive a portion of the entity's residual returns. Toyota applied FIN 46 to VIEs created after January 31, 2003 and to VIEs in which Toyota obtained an interest after that date and FIN 46 did not have a material impact on Toyota's consolidated financial statements for the year ended March 31, 2003 because of no material such VIEs. For VIEs existed at January 31, 2003, Toyota will apply FIN 46 on July 1, 2003. Toyota enters into securitization transactions with certain special-purpose entities. However, because securitization transactions are primarily with entities that are qualifying special-purpose entities under FAS 140 ('QSPEs'), and because QSPEs are excluded from the scope of FIN 46, the implementation of FIN 46 relating to these securitization transactions is not expected to have a material impact on Toyota's consolidated financial statements. Toyota has invested in several joint ventures. These joint ventures may be deemed as variable interest entities, however, neither the aggregate size of these joint ventures nor Toyota's involvements in these entities are expected to be material to Toyota's consolidated financial statements. In February 2003, EITF reached a consensus on EITF Issue No. 03-2, Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities ('EITF 03-2'), which should be applied retroactively to April 1, 2002, the earliest date on which the separation process begun. EITF 03-2 provides a consensus that the entire process for the transfer of the substitutional portion of the benefit obligation and related plan assets to the Japanese government should be accounted for as a single settlement transaction upon completion of the transfer to the government. Under the consensus reached, the difference between the obligation settled, assuming the remeasurement at fair value immediately prior to the settlement, including the effects of the future salary increases previously accrued under the substitutional arrangement, and the assets transferred to the government, determined pursuant to the government formula, should be accounted for as settlement gain or loss at the time of the settlement. In accounting for the settlement of the substitutional portion of the obligation, a proportionate amount of the unrecognized gain or loss relating to the entire employee pension fund should also be recognized as a settlement gain or loss. Toyota has already begun the separation process by obtaining the approval from the Japanese government of exemption from the benefits related to future employee service under the substitutional portion. However, in accordance with EITF 03-2, no effect of this transaction has been recognized in the consolidated financial statements for the year ended March 31, 2003 as the completion of the transfer of the substitutional portion of the benefit obligation and related plan assets to the Japanese government is expected in the year ending March 31, 2004. Recent pronouncements to be adopted in future periods - In June 2001, the FASB issued FAS No.143 Accounting for Asset Retirement Obligations ('FAS 143'). FAS 143 requires full recognition of asset retirement obligations on the balance sheet from the point in time at which a legal obligation exists. The obligation is required to be measured at fair value. The carrying value of the asset or assets to which the retirement obligation relates would be increased by an amount equal to the liability recognized. This amount would then be included in the depreciable base of the asset and charged to income over its life as depreciation. Toyota adopted FAS 143 on April 1, 2003. Management does not expect this statement to have a material impact on Toyota's consolidated financial statements. In April 2002, the FASB issued FAS No. 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections ('FAS 145'). This statement makes various technical corrections to existing pronouncements including the classification of gain or loss on extinguishment of debt, sale-lease back accounting for certain lease modifications. Toyota adopted FAS 145 on April 1, 2003. Management does not expect this statement to have a material impact on Toyota's consolidated financial statements. In November 2002, EITF reached consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ('EITF 00-21'). EITF 00-21 addresses certain aspects of the accounting by a vendor for F-17 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) arrangements under which it will perform multiple revenue-generating activities. Toyota will apply this consensus for revenue arrangement entered into in periods beginning after June 15, 2003. Toyota is in the process of determining the impact that the adoption of EITF 00-21 will have on Toyota's consolidated financial statements. In March 2003, EITF released Issue No. 02-9, Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold ('EITF 02-9'), prospective for events occurring after April 2, 2003. EITF 02-9 relates to securitizations that have been accounted for as sales under FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities ('FAS 140'). In the event that one or more of the control rules are no longer met, the transferor would have to recognize those assets and the related liabilities on the consolidated balance sheet at the fair value. The implementation of EITF 02-9 is not expected to have a material impact on the Toyota's consolidated financial statements because almost all securitization transactions remain in QSPEs and the control rules of FAS 140 are met. In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ('FAS 149'). This statement amends and clarifies financial accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts and for hedging activities under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities ('FAS 133'). FAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. Management does not expect this statement to have a material impact on Toyota's consolidated financial statements. In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ('FAS 150'). This Statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. FAS 150 requires that those instruments be classified as liabilities in the balance sheets. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Management does not expect this statement to have a material impact on Toyota's consolidated financial statements. Reclassifications - Certain prior year amounts have been reclassified to conform to the presentation of the year ended March 31, 2003. 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 Y120.2 = U.S. $1, the approximate current exchange rate at March 31, 2003, was used for the translation of the accompanying consolidated financial amounts of Toyota as of and for the year ended March 31, 2003. 4. Supplemental cash flow information: Cash payments for income taxes were Y330,203 million, Y530,207 million and Y 584,969 million ($4,867 million) for the years ended March 31, 2001, 2002 and 2003, respectively. Interest payments during the years ended March 31, 2001, 2002 and 2003 were Y250,405 million, Y241,251 million and Y216,888 million ($1,804 million), respectively. F-18 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Capital lease obligations of Y31,252 million, Y2,888 million and Y13,461 million ($112 million) were incurred for the years ended March 31, 2001, 2002 and 2003, respectively. 5. Acquisitions and dispositions: During the year ended March 31, 2001, Toyota's telecommunication subsidiary, IDO Corporation ('IDO'), merged with two Japanese telecommunication companies and Toyota's ownership interest in the surviving entity, DDI Corporation ('KDDI'), became 13.3%. As a result, Toyota recognized a Y180,950 million gain on the disposition of its IDO shares which is included in 'Other income (loss), net' in the accompanying consolidated statements of income and Toyota's consolidated financial statements no longer include the accounts of this former subsidiary from the merger date. The book values of assets and liabilities of IDO at the date of the merger are as follows: Yen in millions ---------- Assets Y 603,627 Liabilities (571,150) During the year ended March 31, 2002, Toyota sold its industrial equipment businesses to an affiliated company. The results of operations and book values of assets and liability of the industrial equipment business were not material. The gain recognized by Toyota on the sale was not material. At March 31, 2001, Toyota had a 36.6% ownership interest in Hino Motor Corporation ('Hino') that was accounted for by the equity method. Hino is primarily engaged in the design, manufacture and sale of trucks, buses and related parts. In August 2001, Toyota acquired an additional ownership interest in Hino for Y66,287 million in cash. As a result, Toyota's ownership interests in Hino increased to 50.2% and Toyota's consolidated financial statements include the accounts of Hino from the acquisition date. The fair values of assets acquired and liabilities assumed at the date of acquisition based on the preliminary allocation of purchase price are as follows: Yen in millions ---------- For the year ended March 31, ---------- 2002 ---------- Assets acquired Y 829,413 Liabilities assumed (674,154) Minority interest (93,366) Goodwill 4,394 Less - Cash acquired (34,801) - -------- - Net cash paid Y 31,486 - -------- - The following represents the unaudited pro forma results of operations of Toyota for the year ended March 31, 2001 and 2002, as if the additional ownership interest in Hino had been acquired as of April 1, 2000. The pro forma information, however, is not necessarily indicative of the results that would have resulted had the acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future results. Yen in millions ------------------------------ For the years ended March 31, ------------------------------ 2001 2002 ------------ ------------ Net revenues Y 13,485,111 Y 14,424,142 Net income 675,554 556,967 Net income per share: -Basic Y 180.83 Y 152.37 -Diluted 180.83 152.37 F-19 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) During the years ended March 31, 2001, 2002 and 2003, Toyota made a number of other acquisitions, however assets acquired and liabilities assumed were not material. 6. Marketable securities and other securities investments: Marketable securities and other securities investments include debt and equity securities for which the aggregate fair value, gross unrealized gains and losses and cost are as follows: Yen in millions --------------------------------------------------------- --- March 31, 2002 --------------------------------------------------------- --- Cost Gross Gross Fair ----------- unrealized unrealized value -------- --- gains losses ---------- ---------- Available-for-sale Debt securities Y 1,443,392 Y 33,656 Y 9,743 Y 1,467,305 Equity securities 481,478 88,196 5,260 564,414 - --------- -- ------- -- ------- - ------ --- Total Y 1,924,870 Y 121,852 Y 15,003 Y 2,031,719 - --------- -- ------- -- ------- - ------ --- Securities not practicable to fair value Debt securities Y 12,629 Equity securities 87,515 - --------- Total Y 100,144 - --------- Yen in millions --------------------------------------------------------- --- March 31, 2003 --------------------------------------------------------- --- Cost Gross Gross Fair ----------- unrealized unrealized value -------- --- gains losses ---------- ---------- Available-for-sale Debt securities Y 1,591,393 Y 26,535 Y 2,525 Y 1,615,403 Equity securities 476,870 53,534 42,770 487,634 - --------- -- ------- -- ------- - ------ --- Total Y 2,068,263 Y 80,069 Y 45,295 Y 2,103,037 - --------- -- ------- -- ------- - ------ --- Securities not practicable to fair value Debt securities Y 53,052 Equity securities 101,504 - --------- Total Y 154,556 - --------- U.S. dollars in millions ------------------------------------------------------ March 31, 2003 ------------------------------------------------------ Cost Gross Gross Fair -------- unrealized unrealized value -------- gains losses ---------- ---------- Available-for-sale Debt securities $ 13,239 $ 221 $ 21 $ 13,439 Equity securities 3,968 445 356 4,057 - ------ ---- ----- ---- ----- - ------ Total $ 17,207 $ 666 $ 377 $ 17,496 - ------ ---- ----- ---- ----- - ------ Securities not practicable to fair value Debt securities $ 441 Equity securities 845 - ------ Total $ 1,286 - ------ F-20 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) At March 31, 2002 and 2003, debt securities classified as available-for-sale mainly consist of Japanese government and municipal bonds and corporate debt securities with maturities from 1 to 10 years. Proceeds from sales of available-for-sale securities were Y234,608 million, Y 147,722 million and Y197,985 million ($1,647 million) for the years ended March 31, 2001, 2002 and 2003, respectively. On those sales, gross realized gains were Y41,134 million, Y8,885 million and Y6,518 million ($54 million) and gross realized losses were Y81 million, Y7 million and Y103 million ($1 million), respectively. During the year ended March 31, 2001, Toyota contributed certain marketable equity securities, not including those of its subsidiaries and affiliated companies, to an employee retirement benefit trust, with no cash proceeds thereon. The fair value of these securities at the time of contribution was Y 269,700 million. The securities held in this trust are qualified as plan assets. Upon contribution of these marketable securities, a net unrealized gain of Y 161,151 million was realized and included in 'Other income (loss), net' in the accompanying consolidated statement of income. Since the unrealized gain, net of tax, had already been recorded as accumulated other comprehensive loss, the contribution itself did not impact the amount of comprehensive income. During the year ended March 31, 2001, 2002 and 2003, Toyota recognized impairment losses on available-for-sale securities of Y38,952 million, Y257,413 million, and Y111,346 million ($926 million), respectively, which are included in 'Other income (loss), net' in the accompanying consolidated statements of income. Impairment loss recognized during the year ended March 31, 2002 includes loss of Y212,909 million for-other-than temporary decline in market value of its 13.3% ownership interest in KDDI. In the ordinary course of business, Toyota maintains long-term investment securities, included in 'Marketable securities and other securities investments ', issued by a number of non-public companies which are recorded at cost, as their fair values were not readily determinable. Toyota's 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. 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 earnings. 7. Finance receivables: Finance receivables consist of the following: Yen in millions U.S. --------------------------- dollars in millions --------- March 31, March 31, -------------------------------- --------- 2002 2003 2003 ------------ --------- --------- Retail Y 2,723,834 Y 3,071,232 $ 25,551 Finance leases 1,391,924 1,129,220 9,394 Wholesale and other dealer loans 952,260 1,365,047 11,356 - ---------- ---- ---------- ---- - ---- --- - - 5,068,018 5,565,499 46,301 Unearned income (323,897) (373,663) (3,109) Allowance for credit losses (52,170) (116,888) (972) - ---------- ---- ---------- ---- - ---- --- - - Finance receivables, net 4,691,951 5,074,948 42,220 Less-Current portion (2,020,491) (2,505,140) (20,841) - ---------- ---- ---------- ---- - ---- --- - - Noncurrent finance receivables, net Y 2,671,460 Y 2,569,808 $ 21,379 - ---------- ---- ---------- ---- - ---- --- - - F-21 -------------------------------------------------------------------------------- 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, 2003 are summarized as follows: Yen in millions U.S. dollars in millions ----------------------------------------- ---------------------------------- Year ending Retail Finance Wholesale Retail Finance Wholesale ----------- -------- March 31: lease and other lease and other ------- --------- ------- dealer dealer loans loans ----------- --------- 2004 Y 1,040,613 Y 293,945 Y 1,269,380 $ 8,658 $ 2,445 $ 10,560 2005 738,406 191,241 17,492 6,143 1,591 145 2006 609,411 140,683 16,470 5,070 1,171 137 2007 435,403 100,292 24,496 3,622 834 204 2008 210,598 43,364 23,290 1,752 361 194 Thereafter 36,801 829 13,919 306 7 116 - --------- - ------- - --------- - ------ - ----- -- ------ Y 3,071,232 Y 770,354 Y 1,365,047 $ 25,551 $ 6,409 $ 11,356 - --------- - ------- - --------- - ------ - ----- -- ------ Finance leases consist of the following: Yen in millions U.S. --------------------------------- dollars in millions -------- March 31, March --------------------------------- 31, -------- 2002 2003 2003 ----------- --------- -------- Minimum lease payments Y 1,018,703 Y 770,354 $ 6,409 Estimated unguaranteed residual values 373,221 358,866 2,985 - --------- ----- --------- --- ---- - 1,391,924 1,129,220 9,394 Less-Unearned income (185,219) (198,777) (1,653) Less-Allowance for credit losses (14,087) (54,452) (453) - --------- ----- --------- --- ---- - Finance leases, net Y 1,192,618 Y 875,991 $ 7,288 - --------- ----- --------- --- ---- - Toyota maintains a program to sell retail finance receivables. Under the program, Toyota's securitization transactions are generally structured as QSPEs, thus Toyota achieves sale accounting treatment under the provisions of 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 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. Prior to the year ended March 31, 2002, Toyota also securitized, sold, and serviced lease finance receivables. During the year ended March 31, 2002, certain Toyota's consolidated subsidiary exercised its option to repurchase remaining outstanding receivables under all lease securitization transactions then outstanding. As a result of the repurchase, there was no outstanding balance of interests in securitized lease finance receivables as of, and subsequent to, March 31, 2002. F-22 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Toyota sold finance receivables under the program and recognized a pretax gain resulting from these sales of Y5,046 million, Y10,628 million and Y16,202 million ($135 million) for the years ended March 31, 2001, 2002 and 2003, respectively, after providing an allowance for estimated credit and residual value 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, 2002 and 2003, Toyota's retained interests relating to these securitizations include interest in trusts, interest-only strips, and other receivables, amounting to Y89,474 million and Y135,700 million ($1,129 million), respectively. Toyota recorded impairments on retained interests totaling Y9,393 million, Y 8,748 million, and Y2,440 million ($20 million) for the years ended March 31, 2001, 2002 and 2003, respectively. These impairments are calculated by discounting cash flows using management's estimates and other key economic assumptions. 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, 2001, 2002 and 2003 were as follows: For the years ended March 31, ------------------------------ 2001 2002 2003 -------- -------- -------- Collateral prepayment speed 0.0% - 1.0% - 1.0% - 1.5% 1.5% 1.5% Weighted average life (in years) 1.39 - 1.26 - 1.45 - 1.61 1.50 1.85 Collateral expected credit losses (per annum) 0.50% - 0.59% - 0.50% - 0.95% 0.70% 0.80% Discount rate used on the subordinated securities 7.6% - 5.0% - 5.0% 8.0% 8.0% Discount rate used on other retained interests 8.0% - 8.0% - 8.0% - 24.5% 24.5% 15.0% The following table summarizes certain cash flows received from and paid to the securitization trusts for the years ended March 31, 2001, 2002 and 2003. Yen in millions -------------------------------------------------------------------------------- For the years ended March 31, -------------------------------------------------------------------------------- U.S. dollars in millions For the year ended For the years ended March 31, March 31, 2001 2002 2003 2003 Retail Leases Retail Leases Retail Retail --------- --------- -------- ------ ------- -------- Proceeds from new Y 505,291 Y - Y 304,578 Y - Y 412,594 $ 3,433 securitizations, net of purchased and retained securities Servicing fees received 2,697 2,188 6,296 675 6,868 57 Excess interest 6,410 641 17,989 225 15,313 127 received from interest only strips Repurchase of lease - (1,017) - (37,943) - - receivables Other repurchases of - - (250) (950) (122) (1) receivables Reimbursement of - 630 500 2,337 122 1 servicer advances Maturity advances 1,116 (14,953) - - - - Reimbursements of - 14,953 - 8,623 - - maturity advances F-23 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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, 2001, 2002 and 2003 were 1.38%, 1.02%, and 0.89%, respectively. Actual cumulative residual value losses were 3.75% and 5.95% for lease securitizations outstanding during the years ended March 31, 2001 and 2002, respectively. At March 31, 2003, 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 millions U.S. ---------------- dollars in millions -------- Prepayment speed assumption (annual rate) 1.0 - 1.6% Impact on fair value of 10% adverse change Y (1,443) $ (12) Impact on fair value of 20% adverse change (2,886) (24) Residual cash flows discount rate (annual rate) 5.0 - 5.0% Impact on fair value of 10% adverse change Y (416) $ (3) Impact on fair value of 20% adverse change (949) (8) Expected credit losses (annual rate) 0.5 - 1.1% Impact on fair value of 10% adverse change Y (982) $ (8) Impact on fair value of 20% adverse change (1,845) (15) This hypothetical scenario does 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; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Actual cash flows may drastically differ from the above analysis. Retail receivable balances and delinquency amounts for managed retail receivables, which include both owned and securitized receivables, as of March 31, 2002 and 2003 are as follows: Yen in millions U.S. ----------------------------- dollars in millions -------- March 31, March ----------------------------- 31, -------- 2002 2003 2003 ----------- ----------- -------- Principal amount outstanding Y 3,314,670 Y 3,745,084 $ 31,157 Delinquent amount over 60 days or more 21,688 28,482 237 Credit losses (net of recoveries) 9,644 21,095 176 Comprised of: Receivables owned Y 2,656,489 Y 2,969,505 $ 24,704 Receivables securitized 658,181 775,579 6,452 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-24 -------------------------------------------------------------------------------- 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, -------- 2002 2003 2003 --------- ----------- -------- Finished goods Y 653,959 Y 711,452 $ 5,919 Raw materials 152,712 135,431 1,127 Work in process 113,195 133,454 1,110 Supplies and other 41,974 45,501 378 - ------- - --------- -- ----- Y 961,840 Y 1,025,838 $ 8,534 - ------- - --------- -- ----- 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, -------- 2002 2003 2003 ----------- --------- -------- Vehicles Y 1,449,341 Y 1,480,556 $ 12,317 Equipment and other 134,820 120,504 1,003 - --------- ---- --------- ---- - --- ---- - 1,584,161 1,601,060 13,320 Less - Accumulated depreciation (356,243) (397,289) (3,305) - --------- ---- --------- ---- - --- ---- - Vehicles and equipment on operating leases, net Y 1,227,918 Y 1,203,771 $ 10,015 - --------- ---- --------- ---- - --- ---- - Rental income from vehicles and equipment on operating leases were Y289,550 million, Y314,626 million and Y293,366 million ($2,441 million) for the years ended March 31, 2001, 2002 and 2003, respectively. Future minimum rentals from vehicles and equipment on operating leases are due in installments as follows: Year ending March 31: Yen in U.S. --------------- millions dollars --------- in millions ------- 2004 Y 281,034 $ 2,338 2005 200,754 1,670 2006 109,028 907 2007 28,652 238 2008 5,441 45 The future minimum rentals as shown above should not be considered indicative of future cash collections. F-25 -------------------------------------------------------------------------------- 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, 2001, 2002 and 2003 is as follows: Yen in millions U.S. ------------------------------------------------ dollars in millions -------- For the years ended March 31, For the ------------------------------------------------ year ended March 31, -------- 2001 2002 2003 2003 --------- ----------- ------- -------- Allowance for doubtful accounts at beginning Y 59,423 Y 40,601 Y 59,864 $ 498 of year Provision for doubtful accounts 5,616 3,728 5,953 50 Write-offs (12,089) (2,052) (6,035) (50) Other (12,349) 17,587 (6,610) (55) - ------- ---- ------ ---- - ----- - --- --- ---- - Allowance for doubtful accounts at end of Y 40,601 Y 59,864 Y 53,172 $ 443 year - ------- ---- ------ ---- - ----- - --- --- ---- - The other amount includes the impact of additional ownership interest acquired in affiliated companies, disposal of ownership interest in subsidiaries including Toyota's telecommunication subsidiary and currency translation adjustment during the years ended March 31, 2001, 2002 and 2003. A portion of the allowance for doubtful accounts balance at March 31, 2002 and 2003 relates to non-current notes receivable balances reported as other assets totaling Y31,682 million and Y23,683 million ($197 million), respectively. 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, 2001, 2002 and 2003 is as follows: Yen in millions U.S. ------------------------------------------------- dollars in millions --------- For the years ended March 31, For the ------------------------------------------------- year ended March 31, --------- 2001 2002 2003 2003 --------- ------------ ------ --------- Allowance for credit losses at beginning of Y 39,680 Y 47,196 Y 63,053 $ 524 year Provision for credit losses 21,515 40,679 93,884 781 Charge-offs, net of recoveries (18,315) (29,628) (51,914) (432) Other 4,316 4,806 11,865 99 - ------- ---- ------- ---- - ---- - ---- ---- ---- - Allowance for credit losses at end of year Y 47,196 Y 63,053 Y 116,888 $ 972 - ------- ---- ------- ---- - ---- - ---- ---- ---- - The other amount primarily includes the impact of currency translation adjustment during the years ended March 31, 2001, 2002 and 2003. F-26 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 12. Investments in and transactions with affiliated companies: Summarized financial information for affiliated companies accounted for by the equity method is shown below: Yen in millions U.S. ----------------------------- dollars in millions -------- March 31, March ----------------------------- 31, -------- 2002 2003 2003 ----------- ----------- -------- Current assets Y 3,234,930 Y 3,405,285 $ 28,330 Noncurrent assets 6,360,853 6,318,131 52,564 - --------- - --------- - ------ Total assets Y 9,595,783 Y 9,723,416 $ 80,894 - --------- - --------- - ------ Current liabilities Y 2,493,933 Y 2,811,018 $ 23,386 Long-term liabilities 2,846,732 2,882,472 23,981 Shareholders' equity 4,255,118 4,029,926 33,527 - --------- - --------- - ------ Total liabilities and shareholders' equity Y 9,595,783 Y 9,723,416 $ 80,894 - --------- - --------- - ------ Toyota's share of shareholders' equity Y 1,264,938 Y 1,231,297 $ 10,244 - --------- - --------- - ------ Number of affiliated companies at end of period 58 58 - --------- - --------- Yen in millions ----------------------------------------------- U.S. dollars in millions For the year ended For the years ended March 31, March 31, 2001 2002 2003 2003 ----------- ------------ ------------ ------ -- Net revenues Y 9,841,869 Y 10,492,823 Y 11,355,044 $ 94,468 - --------- - ---------- - ---------- - ---- -- Gross profit Y 967,337 Y 996,911 Y 1,182,903 $ 9,841 - --------- - ---------- - ---------- - ---- -- Net income Y 269,745 Y 224,287 Y 276,004 $ 2,296 - --------- - ---------- - ---------- - ---- -- Entities comprising a significant portion of Toyota's investment in affiliated companies include Denso Corporation; Aioi Insurance Co., Ltd.; Toyota Industries Corporation; Toyota Tsusho Corporation; and Aisin Seiki Co., Ltd. Certain affiliated companies accounted for by the equity method with carrying amounts of Y1,088,588 million and Y967,463 million ($8,049 million) at March 31, 2002 and 2003, respectively, were quoted on various established markets at an aggregate value of Y1,150,032 million and Y1,034,655 million ($8,608 million), respectively. F-27 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Account balances and transactions with affiliated companies are presented below: Yen in millions U.S. ------------------------ dollars in millions -------- March 31, March ------------------------ 31, -------- 2002 2003 2003 --------- --------- -------- Trade accounts and other receivables Y 201,527 Y 221,241 $ 1,841 Accounts payable 461,569 452,209 3,762 Yen in millions ----------------------------------------------- U.S. dollars in millions For the year ended For the years ended March 31, March 31, 2001 2002 2003 2003 ----------- ----------- ----------- ----- --- Sales of products Y 682,317 Y 749,830 Y 921,636 $ 7,668 Purchases 3,006,546 3,439,208 3,725,315 30,993 Dividends from affiliated companies accounted for by the equity method for the years ended March 31, 2001, 2002 and 2003 were Y13,871 million, Y14,530 million and Y18,270 million ($152 million), respectively. Toyota has convertible debt securities issued by affiliated companies in amount of Y56,034 million and Y41,250 million ($343 million) as of March 31, 2002 and 2003, respectively, which were included in 'Investments and other assets- affiliated companies' in the consolidated balance sheets at cost. Fair value of those securities as of March 31, 2002 and 2003 were Y67,978 million and Y48,991 million ($408 million), respectively. Maturities of these convertible debt securities range from 1 to 3 years. At March 31, 2001, Toyota had a 49.9% ownership interest in The Chiyoda Fire and Marine Insurance Company ('Chiyoda'), which was accounted for by the equity method of accounting, and a 19.3% ownership interest in Dai-Tokyo Fire and Marine Insurance Company Limited ('Dai-Tokyo'), which was accounted for as an investment in marketable security. On April 1, 2001, Chiyoda and Dai-Tokyo merged with Dai-Tokyo being the surviving corporation and Dai-Tokyo changed its name to Aioi Insurance Co., Ltd. ('Aioi'). Toyota's ownership interest in Aioi at the merger was 33.4% and Toyota is accounting for its ownership in Aioi by the equity method of accounting. 13. Short-term borrowings and long-term debt: Short-term borrowings at March 31, 2002 and 2003 consisted of the following: Yen in millions U.S. ----------------------------- dollars in millions -------- March 31, March ----------------------------- 31, -------- 2002 2003 2003 ----------- ----------- -------- Loans, principally from banks, with a weighted-average interest at Y 874,416 Y 774,880 $ 6,447 March 31, 2002 of 1.44% per annum and at March 31, 2003 of 2.05% per annum, respectively Commercial paper with a weighted-average interest at March 31, 2002 951,148 1,080,768 8,991 of 2.19% per annum and at March 31, 2003 of 1.52% per annum, respectively - --------- - --------- - ------ Y 1,825,564 Y 1,855,648 $ 15,438 - --------- - --------- - ------ F-28 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) At March 31, 2003, Toyota has unused short-term lines of credit amounting to Y 1,389,584 million ($11,561 million) of which Y46,282 million ($385 million) related to commercial paper programs. Under these programs, Toyota is authorized to obtain short-term financing at prevailing interest rates for periods not in excess of 360 days. Long-term debt at March 31, 2002 and 2003 comprises the following: Yen in millions U.S. -------------------------------- dollars in millions --------- March 31, March 31, --------------------------------- --------- 2002 2003 2003 ------------ ---------- --------- Unsecured loans, representing obligations principally to Y 562,231 Y 620,234 $ 5,160 banks, due 2002 to 2032 in 2002 and due 2003 to 2025 in 2003 with interest ranging from 0.09% to 17.00% per annum in 2002 and from 0.05% to 18.00% per annum in 2003 Secured loans, representing obligations principally to 61,290 56,283 468 banks, due 2002 to 2019 in 2002 and due 2003 to 2030 in 2003 with interest ranging from 0.35% to 4.70% per annum in 2002 and from 0.35% to 5.06% per annum in 2003 Medium-term notes of consolidated subsidiaries, due 2002 2,632,323 3,064,278 25,493 to 2012 in 2002 and due 2003 to 2013 in 2003 with interest ranging from 0.03% to 8.13% per annum in 2002 and from 0.01% to 7.59% per annum in 2003 Unsecured 0.45% convertible bonds of consolidated 13,308 13,308 111 subsidiaries, due 2003, convertible at Y672 ($6) for one common share, redeemable before due date Unsecured notes of parent company, due 2002 to 2018 in 514,750 550,000 4,576 2002 and due 2003 to 2018 in 2003 with interest ranging from 1.40% to 6.25% per annum in 2002 and from 1.33% to 3.00% per annum in 2003 Unsecured notes of consolidated subsidiaries, due 2002 to 871,142 946,973 7,879 2008 in 2002 and due 2003 to 2008 in 2003 with interest ranging from 0.52% to 7.00% per annum in 2002 and from 0.27% to 7.00% per annum in 2003 Notes payable related to securitized finance receivables 138,103 66,014 549 structured as collateralized borrowings Long-term capital lease obligations, due 2002 to 2017 in 88,373 83,455 694 2002 and due 2003 to 2017 in 2003, with interest ranging from 0.95% to 9.33% per annum in 2002 and from 0.60% to 9.75% per annum in 2003 - ---------- ---- ---------- -- ---- ---- - 4,881,520 5,400,545 44,930 Less - Current portion due within one year (1,158,814) (1,263,017) (10,508) - ---------- ---- ---------- -- ---- ---- - Y 3,722,706 Y 4,137,528 $ 34,422 - ---------- ---- ---------- -- ---- ---- - At March 31, 2003, property, plant and equipment with a book value of Y134,033 million (1,115 million) was pledged as collateral by consolidated subsidiaries for certain debt obligations. In addition, other assets aggregating Y122,732 million ($1,021 million) was pledged as collateral by consolidated subsidiaries for certain debt obligations including 'Notes payable related to securitized finance receivables structured as collateralized borrowings'. F-29 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) At March 31, 2003, approximately 40%, 30%, 14% and 16% of long-term debt is denominated in U.S. dollars, Japanese yen, Euro, and other currencies, respectively. The aggregate amounts of annual maturities of long-term debt during the next five years are as follows: Year ending March 31: Yen in U.S. --------------- millions dollars ----------- in millions -------- 2004 Y 1,263,017 $ 10,508 2005 1,031,109 8,578 2006 783,176 6,516 2007 438,283 3,646 2008 853,870 7,104 Standard agreements with certain banks in Japan include provisions that collateral (including sums on deposit with such banks) or guarantees will be furnished upon the banks' request and that any collateral furnished, pursuant to such agreements or otherwise, will be applicable to all present or future indebtedness to such banks. At March 31, 2003, Toyota has unused long-term lines of credit amounting to Y 1,407,741 million ($11,712 million). Under these programs, Toyota is able to finance its long-term capital requirements under arm's-length conditions. 14. Product warranties: Toyota issues product warranties for certain defects mainly resulted from manufacturing based on warranty contracts with its customers at the time of sale of products. Toyota accrues estimated warranty costs which would incur in the future in accordance with the warranty contracts. The net change in the accrual for the product warranties for the year ended March 31, 2003, which are included in 'Accrued expenses' on the accompanying balance sheet, consist of the following: Yen in U.S. millions dollars ---------- in millions -------- For the For the year ended year March 31, ended 2003 March ---------- 31, 2003 -------- Liabilities for product warranties at beginning of year Y 225,654 $ 1,877 Payments made during year (179,650) (1,494) Warranties issued during year 200,484 1,668 Changes relating to pre-existing warranties (1,670) (14) Other (4,184) (35) - -------- ----------- ------ - - Liabilities for product warranties at end of year Y 240,634 $ 2,002 - -------- ----------- ------ - - The other amount primarily includes the impact of currency translation adjustment. In addition to product warranties above, Toyota initiates recall actions or voluntary service campaigns to repair or to replace parts which are expected to fail from products safety perspective or customer satisfaction standpoints. Toyota accrues costs of these activities based on management's estimates which are not included in the reconciliation above. F-30 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 15. Other payables: Other payables are mainly related to purchases of property, plant and equipment and non-manufacturing purchases. 16. Income taxes: The components of income before income taxes comprise the following: Yen in millions U.S. ------------------------------------------- dollars in millions ------- - For the years ended March 31, For the ------------------------------------------- year ended March 31, ------- - 2001 2002 2003 2003 ----------- --------- ----------- ------- - Income before income taxes: Parent company and domestic subsidiaries Y 920,823 Y 706,795 Y 803,594 $ 6,685 Foreign subsidiaries 186,466 265,306 423,058 3,520 - --------- - ------- - --------- - ----- - Y 1,107,289 Y 972,101 Y 1,226,652 $ 10,205 - --------- - ------- - --------- - ------ The provision for income taxes consisted of the following: Yen in millions U.S. ------------------------------------------------ dollars in millions -------- For the years ended March 31, For the ------------------------------------------------ year ended March 31, -------- 2001 2002 2003 2003 --------- ------------ ------ -------- Current income tax expense: Parent company and domestic subsidiaries Y 371,797 Y 467,891 Y 497,613 $ 4,140 Foreign subsidiaries 102,754 97,709 93,674 779 - ------- --- -------- --- - ---- - ----- --- ---- - Total current 474,551 565,600 591,287 4,919 - ------- --- -------- --- - ---- - ----- --- ---- - Deferred income tax expense (benefit): Parent company and domestic subsidiaries 58,391 (157,152) (102,276) (851) Foreign subsidiaries (9,066) 14,341 28,003 233 - ------- --- -------- --- - ---- - ----- --- ---- - Total deferred 49,325 (142,811) (74,273) (618) - ------- --- -------- --- - ---- - ----- --- ---- - Total provision Y 523,876 Y 422,789 Y 517,014 $ 4,301 - ------- --- -------- --- - ---- - ----- --- ---- - F-31 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Toyota is subject to a number of different income taxes which, in the aggregate, indicate a statutory rate in Japan of approximately 41.3% in 2001, 2002 and 2003. Due to changes in Japanese income tax regulations, effective April 1, 2004, the statutory rate was reduced to approximately 40.1%, and such rate was used to calculate the future expected tax effects of temporary differences, which are expected to be realized on and after April 1, 2004. Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows: For the years ended March 31, -------------------------------------------------- 2001 2002 2003 ---- -------- ---- Statutory tax rate 41.3% 41.3% 41.3% Increase (reduction) in taxes resulting from: Non-deductible expenses 0.7 0.7 0.7 Tax on equity earnings in affiliated companies 2.2 1.0 1.6 Valuation allowance 1.5 1.2 1.3 Income tax credit (0.5) (1.4) (1.9) Changes in tax rate resulting from enactment of income - - 0.6 tax regulations Other 2.1 0.7 (1.5) ---- -------- -------- ---- ---- - Effective income tax rate 47.3% 43.5% 42.1% ---- -------- -------- ---- ---- - Significant components of deferred tax assets and liabilities are as follows: Yen in millions U.S. --------------------------------- dollars in millions -------- March 31, March --------------------------------- 31, -------- 2002 2003 2003 ---------- ---------- -------- Deferred tax assets: Accrued pension and severance costs Y 269,834 Y 412,942 $ 3,435 Warranty reserves and accrued expenses 128,344 150,231 1,250 Other accrued employees' compensation 81,331 93,903 781 Operating loss carryforwards for tax purposes 94,700 156,129 1,299 Inventory adjustments 45,586 45,967 382 Property, plant and equipment and other assets 92,369 98,298 818 Other 183,997 223,442 1,859 - -------- ----- --------- --- ---- - Gross deferred tax assets 896,161 1,180,912 9,824 Less-Valuation allowance (103,211) (119,620) (995) - -------- ----- --------- --- ---- - Total deferred tax assets 792,950 1,061,292 8,829 - -------- ----- --------- --- ---- - Deferred tax liabilities: Unrealized gains on securities (42,834) (23,623) (197) Undistributed earnings of affiliates accounted for by the (287,073) (285,593) (2,376) equity method Basis difference of acquired assets (17,777) (31,164) (259) Lease transactions (239,900) (279,946) (2,329) Gain on securities contribution to employee retirement (66,523) (66,523) (553) benefit trust Other (78,456) (88,620) (737) - -------- ----- --------- --- ---- - Gross deferred tax liabilities (732,563) (775,469) (6,451) - -------- ----- --------- --- ---- - Net deferred tax assets Y 60,387 Y 285,823 $ 2,378 - -------- ----- --------- --- ---- - F-32 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The valuation allowance mainly relates to deferred tax assets of the consolidated subsidiaries with operating loss carryforwards for tax purposes that are not expected to be realized. The net changes in the total valuation allowance for deferred tax assets for the years ended March 31, 2001, 2002 and 2003 consist of the following: Yen in millions U.S. -------------------------------------------------- dollars in millions --------- For the years ended March 31, For the -------------------------------------------------- year ended March 31, --------- 2001 2002 2003 2003 --------- ------------ ------- --------- Valuation allowance at beginning of year Y 72,437 Y 73,339 Y 103,211 $ 858 Additions 27,857 27,976 29,530 246 Deductions (9,561) (16,089) (12,989) (108) Other (17,394) 17,985 (132) (1) - ------- ---- ------- ---- - ----- - ---- ---- ---- - Valuation allowance at end of year Y 73,339 Y 103,211 Y 119,620 $ 995 - ------- ---- ------- ---- - ----- - ---- ---- ---- - The other amount includes the impact of additional ownership interest of acquired affiliated companies, changes in the statutory tax rates and currency translation adjustment during the years ended March 31, 2001, 2002 and 2003. In addition, the other amount during the year ended March 31, 2001 includes the impact of the disposal of ownership interest in Toyota's telecommunication subsidiary. Net deferred tax assets are included in the consolidated balance sheets as follows: Yen in millions U.S. ------------------------------------- dollars in millions -------- March 31, March ------------------------------------- 31, -------- 2002 2003 2003 ---------- -------------- -------- Deferred tax assets: Deferred income taxes (Current assets) Y 433,524 Y 385,148 $ 3,204 Investments and other assets-other 101,342 273,818 2,278 Deferred tax liabilities: Other current liabilities (7,418) (2,139) (18) Deferred income taxes (Long-term (467,061) (371,004) (3,086) liabilities) - -------- ----- -------- ----- - --- ---- - Net deferred tax assets Y 60,387 Y 285,823 $ 2,378 - -------- ----- -------- ----- - --- ---- - Management of Toyota intends to reinvest certain undistributed earnings of their foreign subsidiaries for an indefinite period of time. As a result, no provision for income taxes has been made on undistributed earnings of these subsidiaries not expected to be remitted in the foreseeable future aggregating Y1,090,886 million ($9,076 million) as of March 31, 2003. Toyota estimates an additional tax provision of Y96,666 million ($804 million) would be required at such time if the full amount of these accumulated earnings became subject to Japanese taxes. Operating loss carryforwards for tax purposes of consolidated subsidiaries at March 31, 2003 amounted to approximately Y440,739 million ($3,667 million) and are available as an offset against future taxable income of such subsidiaries. These carryforwards expire in years 2004 to 2010, with the exception of Y148,914 million ($1,239 million) which are not subject to expiration. F-33 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 17. Shareholders' equity: Changes in the number of shares of common stock issued have resulted from the following: For the years ended March 31, ----------------------------------------------------------- 2001 2002 2003 ------------- ---- ---- Common stock issued: Balance at beginning of year 3,749,405,129 3,684,997,492 3,649,997,492 Issuance during the year 588,963 - - Purchase and retirement (64,996,600) (35,000,000) (40,000,000) ------------- --- ---- ------------- ---- - Balance at end of year 3,684,997,492 3,649,997,492 3,609,997,492 ------------- --- ---- ------------- ---- - The Japanese Commercial Code provides that an amount equal to at least 10% of cash dividends and other distributions from retained earnings paid by the parent company and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriation is required when total amount of the legal reserve and capital surplus equals 25% of stated capital. Legal reserve included in retained earnings as of March 31, 2002 and 2003 were Y127,100 million and Y130,481 million ($1,086 million). Legal reserve is restricted and unable to be used for dividend payments. The amounts of unrestricted consolidated retained earnings pursuant to accounting principles generally accepted in Japan were Y6,398,695 million and Y 7,087,245 million ($58,962 million) as of March 31, 2002 and 2003, respectively. In accordance with customary practice in Japan, the appropriations are not accrued in the financial statements for the period to which they relate, but are recorded in the subsequent accounting period after shareholders' approval has been obtained. Retained earnings at March 31, 2003 includes amounts representing final cash dividends of Y69,032 million ($574 million), Y20 ($0.17) per share, which were approved at the shareholders' meeting held on June 26, 2003. Retained earnings at March 31, 2003 includes Y727,310 million ($6,051 million) relating to equity in undistributed earnings of companies accounted for by the equity method. On June 26, 1997, the shareholders of the parent company approved a stock repurchase policy in accordance with the Japanese Commercial Code, which allows the company to purchase treasury stock only for the purpose of retirement of the stock with reducing retained earnings. Under the stock repurchase policy, the shareholders authorized Toyota's repurchase, subject to the approval of the Board of Directors, of up to 370 million shares of its common stock without the limitation of time. In accordance with this plan, the parent company repurchased shares approximately 65 million and 77 million during the years ended March 31, 2001 and 2002, respectively. The results of repurchases and retirement of common stock reduced retained earnings for the years ended March 31, 2001, 2002 and 2003 by Y263,596 million, Y129,218 million and Y142,993 million ($1,190 million), respectively. In October 2001, the Japanese Commercial Code has been changed and allows the company to purchase treasury stock at any reason at any time by the resolution of the Board of Directors up to the limitation approved by the Shareholders' Meeting. In response to the Japanese Commercial Code amendment, on June 26, 2002, the shareholders of the parent company approved the amendment of the stock repurchase policy in the Articles of Incorporation to delete the limitation of the purpose of purchasing treasury stock noted above. As a result, Toyota's unused authorized shares for the repurchase of shares of common stock under the legacy policy elapsed. F-34 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In the same Shareholders' Meeting, the shareholders of the parent company also approved to purchase treasury stock, without any purpose limitation, up to 170 million of shares amounting to Y600,000 million during the period up to the resolution of next Ordinary General Shareholders' Meeting which held in June 26, 2003. In accordance with this plan, as amended, the parent company repurchased shares approximately 155 million during the year ended March 31, 2003. On June 26, 2003, the shareholders of the parent company again approved to purchase treasury stock up to 150 million shares amounting to Y400,000 million during the period until the resolution of next Ordinary General Shareholders' Meeting that will be held in June 2004. In years prior to 1997, Toyota had made free distributions of shares to its shareholders for which no accounting entry is required in Japan. Had the distributions been accounted for in a manner used by companies in the United States of America, Y2,576,606 million ($21,436 million) would have been transferred from retained earnings to the appropriate capital accounts. Detailed components of accumulated other comprehensive loss at March 31, 2002 and 2003 and the related changes, net of taxes for the years ended March 31, 2001, 2002 and 2003 consist of the following: Yen in millions --------------------------------------------------------------------------------------------- --- Foreign Unrealized Minimum Net gains Accumulated currency gains pension (losses) on other translation (losses) on liability derivative comprehensive adjustments securities adjustments instruments income (loss) ----------- ------------ ----------- ----------- ---------- --- Balance at March 31, Y (467,665) Y 342,318 Y - Y - Y (125,347) 2000 Other comprehensive 161,280 (304,995) (13,429) - (157,144) income (loss) -- -------- --- -------- --- - -------- -- ---- -- -------- - ------ --- --- - Balance at March 31, (306,385) 37,323 (13,429) - (282,491) 2001 Other comprehensive 133,897 (3,576) (114,344) (790) 15,187 income (loss) -- -------- --- -------- --- - -------- -- ---- -- -------- - ------ --- --- - Balance at March 31, (172,488) 33,747 (127,773) (790) (267,304) 2002 Other comprehensive (139,285) (26,495) (171,978) 790 (336,968) income (loss) -- -------- --- -------- --- - -------- -- ---- -- -------- - ------ --- --- - Balance at March 31, Y (311,773) Y 7,252 Y (299,751) Y - Y (604,272) 2003 -- -------- --- -------- --- - -------- -- ---- -- -------- - ------ --- --- - U.S. dollars in millions ---------------------------------------------------------------------------------------------- Foreign Unrealized Minimum Net gains Accumulated gains pension (losses) on other currency (losses) derivative comprehensive translation on liability instruments income (loss) adjustments securities adjustments ----------- ------------- ----------- ---------- ----------- Balance at March $ (1,435) $ 281 $ (1,063) $ (7) $ (2,224) 31, 2002 Other comprehensive (1,159) (220) (1,431) 7 (2,803) income (loss) ---- ------ ---- ---- ----- - --------- - -- ---- ------ - ------ ------ - Balance at March $ (2,594) $ 61 $ (2,494) $ - $ (5,027) 31, 2003 ---- ------ ---- ---- ----- - --------- - -- ---- ------ - ------ ------ - F-35 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Tax effects allocated to each component of other comprehensive income for the years ended March 31, 2001, 2002 and 2003 are as follows: Yen in millions ---------------------------------------------------- Pre-tax Tax Net-of-tax amount expense ---------- (benefit) amount ----------- ---------- For the year ended March 31, 2001: Foreign currency translation adjustments Y 163,100 Y (1,820) Y 161,280 Unrealized losses on securities: Unrealized holding gains (losses) arising for the year (322,266) 147,804 (174,462) Less: reclassification adjustments for gains included in net (86,805) 35,833 (50,972) income Less: reclassification adjustments for realized gains on (161,151) 81,590 (79,561) securities contribution to employee retirement benefit trust Minimum pension liability adjustments (22,869) 9,440 (13,429) - -------- --- ------- --- - ---- ----- - Other comprehensive income (loss) Y (429,991) Y 272,847 Y (157,144) - -------- --- ------- --- - ---- ----- - For the year ended March 31, 2002: Foreign currency translation adjustments Y 136,250 Y (2,353) Y 133,897 Unrealized losses on securities: Unrealized holding gains (losses) arising for the year (166,570) 68,686 (97,884) Less: reclassification adjustments for losses included in net 160,606 (66,298) 94,308 income Minimum pension liability adjustments (194,727) 80,383 (114,344) Net losses on derivative instruments (1,074) 284 (790) - -------- --- ------- --- - ---- ----- - Other comprehensive income (loss) Y (65,515) Y 80,702 Y 15,187 - -------- --- ------- --- - ---- ----- - For the year ended March 31, 2003: Foreign currency translation adjustments Y (142,278) Y 2,993 Y (139,285) Unrealized losses on securities: Unrealized holding gains (losses) arising for the year (143,806) 59,707 (84,099) Less: reclassification adjustments for losses included in net 98,100 (40,496) 57,604 income Minimum pension liability adjustments (292,315) 120,337 (171,978) Net gains on derivative instruments 1,074 (284) 790 - -------- --- ------- --- - ---- ----- - Other comprehensive income (loss) Y (479,225) Y 142,257 Y (336,968) - -------- --- ------- --- - ---- ----- - U.S. dollars in millions ---------------------------------------------------- Pre-tax Tax Net-of-tax amount expense ---------- (benefit) amount ----------- ---------- For the year ended March 31, 2003: Foreign currency translation adjustments $ (1,184) $ 25 $ (1,159) Unrealized losses on securities: Unrealized holding gains (losses) arising for the year (1,196) 496 (700) Less: reclassification adjustments for losses included in net 816 (336) 480 income Minimum pension liability adjustments (2,432) 1,001 (1,431) Net gains on derivative instruments 9 (2) 7 - -------- --- ------- --- - ---- ----- - Other comprehensive income (loss) $ (3,987) $ 1,184 $ (2,803) - -------- --- ------- --- - ---- ----- - F-36 -------------------------------------------------------------------------------- Table of Contents TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 18. Stock-based compensation: In June 1997, the parent company's shareholders approved a stock option plan for board members. In June 2001, the shareholders approved the amendment of the plan to include certain employees in addition. Each year, since the plans inception, the shareholders have approved the authorization for grant of options for the purchase of Toyota's common stock. Authorized shares for each year that remain ungranted are unavailable for grant in future years. Stock options with a term ranging from four years to six years are granted with an exercise price equal to 1.025 times the closing price of Toyota's common stock on the date of grant and generally vest two years from the date of grant. Subsequent to March 31, 2003, the shareholders approved the authorization of an additional 1,958,000 shares for issuance under the Toyota's stock option plan for board members and key employees. The following table summarizes stock option activity: Yen ------------ Number of Weighted- Weighted- options average --------- average remaining exercise contractual price life in ------------ years ----------- Balance at March 31, 2000 987,000 Y 3,868 2.63 Granted 455,000 4,838 Exercised (84,000) 3,623 Canceled (35,000) 4,141 --------- ----- Balance at March 31, 2001 1,323,000 4,210 2.24 Granted 1,361,000 4,203 Exercised (166,100) 3,610 Canceled (236,100) 4,320 --------- ----- Balance at March 31, 2002 2,281,800 4,238 2.59 Granted 1,876,000 2,958 Exercised - - Canceled (340,800) 3,888 --------- ----- ----- ------ Balance at March 31, 2003 3,817,000 Y 3,662 3.57 --------- ----- ----- ------ Exercisable at March 31, 2003 625,000 Y 4,503 0.85 --------- ----- ----- ------ The following table summarizes information for options outstanding and options exercisable at March 31, 2003: Outstanding Exercisable ------------------------------------------------------ ------------------------------- Exercise Number Weighted- Weighted- Weighted- Number Weighted- Weighted- of price of shares average average average shares average average --------- exercise exercise remaining ------- exercise range price price life price exercise price Yen Yen Dollars Years Yen Dollars -- --------- --------- --------- --------- --- Y 2,958 - 4,000 1,876,000 Y 2,958 $ 25 5.33 - - - Y 4,001 - 4,838 1,941,000 Y 4,304 $ 36 1.86 625,000 Y 4,503 $ 37 F-37 -------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock Exchange

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