Management Areas of Judgement
...oss when the asset value being carried on the books exceeds the estimated future cash flows expected to occur from the use of the asset and it’s disposal. These cash flows are considered at an undiscounted value. This seems questionable as the asset would have been initially purchased on an NPV evaluation of it’s potential to generate future cash flows and so we feel that the impairment should be recognized on the same basis also. Perhaps such an evaluation of the assets of Toyota would reveal a much higher level of impairment than the management is prepared to admit to. 5. Post-retirement benefit costs and obligations and post-employment benefit costs: Management have recorded an additional minimum liability $4 billion in 2003 for shortfalls between the accumulated benefit obligation towards it’s employees retirement and the fair value of assets belonging to the pension and severance plan. While this action is prudent on behalf of the management it highlights an alarming trend in the management of the company pension plan. The gap between the accumulated benefit and the fair value of plan assets has widened by Y 300 billion between 2002 and 2003. The burden of future obligations will be a source of extreme financial difficulty on the company and it’s cash flows in future unless drastically more productive ways are devised to grow the value of the assets held in the plan. 6. Other-than-temporary losses on marketable securities: Toyota have provided for an unrealized loss of Y26.5 billion loss on securities in 2003. While this is not as bad as the Y300 billion provided for during the crash of 2000 it still shows that Toyota management are much better at making and selling cars than in managing/investing their cash-flows profitably. In fact another alarming aspect of their financial reporting is the recording of accumulated other losses to the balance sheet rather than the income statement. These accumulated losses result from Losses on foreign currency translation, despite the use of derivitive financial instruments to hedge their risk, Losses on securities, pension liability adjustments and losses on derivative instruments. Incredibly Toyota have provided for losses of Y 337 billion on the balance sheet for 2003 which is equivalent to 45% of the declared net income from the income statement. This reflects the increased liability for pensions and expected currency losses. · Fixed Asset Valuation: Toyota states the value of its Property, plant and equipment at cost while major renewals are capitalized, minor repairs and replacements are expensed in the year of expenditure. However the recording of assets at cost, particularly land and buildings which make up approximately 25% of the companies assets it is believed that assets are very much understated. Given the age of the Toyota company approximately 60 years and the quantum increases in land prices especially in Japan but also world wide in the last 20 years it is not unreasonable to assume that the value of these asstes in the present day are considerably higher than the carrying value on the books. The effect a proper evaluation of the fixed long-term assets on the Return on Asset ratio of the company of the company would be so much that this would be a major reason for the company to record them in the current manner. · Depreciation: Toyota employ the declining balance method of depreciation for the Japanese parent and subsidiaries and straight line method for it’s foreign subsidiaries. It is not clear why they employ 2 different methods of calculation however with approximately 50% of the long-lived assets being held in Japan and the balance overseas it is likely that the two methods balance each other out. One puzzeling aspect is the wide range of depreciation terms applied, on buildings 3-60 years and machinery and equipment 2-20 years. Lease vehicles are depreciated to the residual value over 3 years, the typical lease length, which is reasonable and the company makes provision for any impairment on residual values carried on the books as stated earlier. Toyota employ the declining balance method of depreciation for the Japanese parent and subsidiaries and straight line method for it’s foreign subsidiaries. It is not clear why they employ 2 different methods of calculation however with approximately 50% of the long-lived assets being held in Japan and the balance overseas it is likely that the two methods balance each other out. · Revenue recognition: Revenue from sales of vehicles is recognized upon deliver to dealers. Revenues in 2003 were revised downwards for the previous 2 years 2001 and 2002 as a result of FASB “Emerging Issues Task Force” Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a reseller of a vendors products), which relates to previous sales incentives that had been classified as S,G&A expen...