Asset Liability Management (ALM) is a critical function for any manufacturer industry. Toyota is one of the company which leading the car manufacturer industry. Therefore, ALM is become increasingly important to define, measure, monitor and manage. There are two types of asset which are tangible and intangible. The tangible assets is asset that has physical form which include buildings, land, equipment, products, office automation equipment, networks, cash, securities and bonds. However, the intangible assets is asset that not physical in nature which consists of intellectual property rights, such as patent rights, trademarks, copyrights and design rights. Toyota is one of the big company who lead the car manufacturing industry also posses variety of tangible and intangible assets to improve and extend their business. Toyota manages its assets effectively to prevent from being lost, stolen or used illegally.
Toyota will not use the company's tangible assets for personal unless those authorized by the company. Toyota follows the rules with regard to the treatment of tangible assets (e.g. rules relating to the removal of assets from the company premises) to prevent loss or theft. On the other hand, Toyota also not allow tangible assets of personal or other companies inside the company unless the action has been approved with company rules and procedures. Besides that, intangible assets mainly software that are created directly or indirectly by Toyota employee should belong to Toyota. This intangible assets will easily stolen by others. In order to prevent all the software copyright stolen by competitor, Toyota had protected all intellectual property of the company against any infringements.
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Allowance for doubtful accounts is one of the method used by Toyota for asset and liabilities management. The allowance for doubtful accounts is a balance sheet account that reduces the reported amount of accounts receivable. This is useful method to be used by Toyota who selling products on credit to thousands of customers with likely risk that a few customers who will not able to pay the full amount they owe to the company. Collectability risks are consumer and dealer insolvencies and insufficient collateral values (less costs to sell) to realize the full carrying values of these receivables. Therefore, estimate amount of allowance by management is needed for doubtful accounts and credit losses to represent the asset impairment in the portfolios of finance, trade and other receivables. A systematic, ongoing review and evaluation performed as part of the credit-risk evaluation process for Toyota to determine and estimate the allowance should be allocated to the doubtful accounts and credit losses. Financial reports are encouraged recording amount in the allowance for doubtful accounts. In order to reduce the bad debt risk, the historical loss experience, the size and composition of the portfolios, current economic events and situation, the estimated fair value, adequacy of collateral and other relevant factors are important as part of the considerations factor before approving any sales and purchase. (Toyota annual report, 2009).
Marketable securities and Individual securities are important assets to Toyota as well. Marketable securities is one of the liquid securities which can be converted into cash faster. Toyota's marketable securities consist of debt and equity securities. These kind of securities play an important role to help Toyota increase their revenue but with certain amount of risk. Another securities which is Individual securities. Individual securities is a available-for-sale are reduced to net realizable value for other-than-temporary declines in market value. Toyota will consider the length of time and fair value to determine if a decline in value is other-than-temporary. Toyota's strategy to invest on securities via retain its investment in the company for a period of time so that is sufficient to allow for any anticipated recovery in market value. Average-cost method is use to determine the company's gains and losses which reflect in the statement of income. (Toyota annual report, 2009).
Financial instrument is a document which represent a legally enforceable agreement between two or more parties on payment right. Toyota has certain financial instruments, including financial assets and liabilities and off-balance sheet financial instruments in the normal course of business. All Toyota's financial instruments are executed by financial institutions, and almost all foreign currency contracts are denominated in U.S. dollars, euros and other major industrialized countries currencies. These instruments are subject to price fluctuations and credit risk in the event counterparty. If the counterparties fail to meet the contractual terms of a foreign currency or an interest rate instrument, Toyota's risk is only limited to the fair value of the instrument. Although Toyota may be uncovered to losses in the event of nonperformance by counterparties, it does not anticipate significant losses due to the nature of its counterparties. Moreover, Toyota does not have a significant exposure to any individual counterparty. Based on the creditworthiness of these financial institutions, collateral is not required of the counterparties or of Toyota. Toyota believes that the overall credit risk related to its financial instruments is not significant (Toyota annual report, 2009).
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In order to reduce losing risk, Toyota choose Interest Rate Swap agreement between two or more counterpaties for future interest payment exchanged for another based on a specified principal amount. Interest rate currency swap agreements primarily to convert its fixed-rate debt to variable-rate debt. Toyota uses interest rate swap agreements in managing interest rate risk exposure. Interest rate swap agreements are implemented as an integral part of specific debt transactions. Toyota uses interest rate currency swap agreements to hedge exposure to currency exchange rate fluctuations on principal and interest payments for borrowings denominated in foreign currencies. Notes and loans payable issued in foreign currencies are hedged by concurrently executing interest rate currency swap agreements, which involve the exchange of foreign currency principal and interest obligations for each functional currency obligations at agreed-upon currency exchange and interest rates (Toyota annual report,2009).
Generally, Toyota has funded its capital expenditures and research and development activities primarily through cash generated by operations. In year 2009, cash generated by operations decreased as a result of the performance dropped in the vehicle sales. The rapid contraction of the automotive market caused the sales decreased in year 2009. Therefore, Toyota funded cash partially through additional loans and issuance of notes. However, Toyota gained sufficiently fund its capital expenditures and research and development activities mainly through cash and cash equivalents on hand, cash generated by operations, loans and issuance of notes during year 2010. Other than that, Toyota also funds its financing programs for customers and dealers, including loans and leasing programs (Toyota annual report, 2010).