TOYOTA: Review the annual report that you selected for potential disclosures rel
ID: 2496845 • Letter: T
Question
TOYOTA:
Review the annual report that you selected for potential disclosures relating to contingent liabilities and contingent assets. What do these disclosures suggest about the company’s potential risk? Support your response with facts from the company’s financial statements and annual report. Include a link to those documents so that other students can reference them.
Look at the annual report notes to the financial statements and describe the company’s handling of lease transactions. Does the company have significant off-balance-sheet assets and liabilities? Would recording these assets and liabilities on the balance sheet change your view of the financial condition of the company?
Explanation / Answer
As the annual report details were not given, i chose to address the queries by referring to the financial data published by Toyoto Motor Coporation in its website. I took the financials for the financial year 2014-15.
http://www.toyota-global.com/investors/financial_result/2015/pdf/q4/summary.pdf
As the detailed annual report is not given , i could not study the details of contingent assets and liabilities. However, conceptually these contingent liabilities mostly are not crystallised liabilities. They would generally contain the probable liabilities faced by the company out of various legal cases filed against the company, litigations the company is presently into with tax authorities, Regulatory authorities across the world etc., As there is uncertainty on the outcome, as a prudent measure these contingent liabilities are being disclosed by companies in annual report. If these liabilities are very high, it signifies that the company may suffer huge hit in its profitability and cash flow in the future when these litigations comes for settlement.
Page 17 of this document in the website contains the consolidated cash flow statement of the company. It specifies that the company procured fixed assets for Yen 1.7 Mn and leased to outsiders. Further, it realised Yen 0.7 Mn through sale of fixed assets which are leased out to others. Conceptually, leases can be of either financial lease or operating lease. When in an lease arrangement, if the ownership of the asset is transferred to the leasee at the end of the lease period or if the lease period covers major part of the economic useful life of the asset or if the leasee has an option to pay lower lease rent when the lease is renewed , then such lease arrangement would be called as Financial lease. All other leases are termed as Operating lease.
From any due diligence or investor point of view, contingent liabilities plays an important role in evaluating the financial condition of the company. As stated above, one has to study the details of each of the liabilities in detail to form an opinion on the financial strength of the company.
Due to limited information available, i could not answer specifically with facts of the case.
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