TOYOTA MOTOR CREDIT CORP - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - 302 CERTIFICATION - TOYOTA MOTOR CREDIT CORP	exhibit_31-2.htm
EX-31.1 - EXHIBIT 31.1 - 302 CERTIFICATION - TOYOTA MOTOR CREDIT CORP	exhibit_31-1.htm
EX-32.1 - EXHIBIT 32.1 - 906 CERTIFICATION - TOYOTA MOTOR CREDIT CORP	exhibit_32-1.htm
EX-32.2 - EXHIBIT 32.2 - 906 CERTIFICATION - TOYOTA MOTOR CREDIT CORP	exhibit_32-2.htm
EX-12.1 - EXHIBIT 12.1 - RATIO OF EARNINGS TO FIXED CHARGES - TOYOTA MOTOR CREDIT CORP	exhibit_12-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 1-9961

TOYOTA MOTOR CREDIT CORPORATION

(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)	95-3775816 (I.R.S. Employer Identification No.)

19001 S. Western Avenue Torrance, California (Address of principal executive offices)	90501 (Zip Code)

Registrant's telephone number, including area code: (310) 468-1310

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes __ No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer __ Accelerated filer __

Non-accelerated filer x Smaller reporting company __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes __ No x

As of January 31, 2011, the number of outstanding shares of capital stock, no par value per share, of the registrant was 91,500, all of which shares were held by Toyota Financial Services Americas Corporation.

Reduced Disclosure Format

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

TOYOTA MOTOR CREDIT CORPORATION

FORM 10-Q

For the quarter ended December 31, 2010

INDEX

INDEX
PART I	…………………………………………………………………………………………………3
Item 1	Financial Statements……………………………………………………………………………………………	3
	Consolidated Statement of Income……………………….……………………………………………………	3
	Consolidated Balance Sheet……………………………………………………………………………………	4
	Consolidated Statement of Shareholder’s Equity………..……………………………………………………	5
	Consolidated Statement of Cash Flows………………….…………………………………………………..…	6
	Notes to Consolidated Financial Statements……………………….……………………………………..……	7
Item 2	Management’s Discussion and Analysis…………………………………………………………………...….	59
Item 3	Quantitative and Qualitative Disclosures About Market Risk………………………………………....………	86
Item 4	Controls and Procedures......................................................................................................................................	86
PART II	…………………………………………………………………………………………………87
Item 1	Legal Proceedings………………………………………………………………………………………………	87
Item 1A	Risk Factors…………………………………………………………………..…………………………………	88
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds……………………………..……………………	88
Item 3	Defaults Upon Senior Securities…………………………………………………………….…………………	88
Item 4	(Removed and Reserved)………………………………………………………………………………………	88
Item 5	Other Information………………………………………………………………………………………………	88
Item 6	Exhibits…………………………………………………………………………………………………………	88
Signatures	………………………………………………………………………………………………………………….	89
Exhibit Index	………………………………………………………………………………………………………………….	90

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

			Three Months Ended				Nine Months Ended
			December 31,				December 31,
(Dollars in millions)			2010		2009		2010		2009
Financing revenues:
	Operating lease	$	1,236	$	1,179	$	3,652	$	3,550
	Retail		690		778		2,140		2,349
	Dealer		97		80		287		251
Total financing revenues			2,023		2,037		6,079		6,150

	Depreciation on operating leases		872		897		2,507		2,626
	Interest expense		234		438		1,318		1,555
Net financing revenues			917		702		2,254		1,969

Insurance earned premiums and contract revenues			141		112		396		336
Investment and other income, net			118		66		207		171
Net financing revenues and other revenues			1,176		880		2,857		2,476

Expenses:
	Provision for credit losses		(176)		(5)		(479)		334
	Operating and administrative		278		192		785		543
	Insurance losses and loss adjustment expenses		61		51		177		164
Total expenses			163		238		483		1,041

Income before income taxes			1,013		642		2,374		1,435
Provision for income taxes			387		248		909		555

Net income		$	626	$	394	$	1,465	$	880

See Accompanying Notes to Consolidated Financial Statements.

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TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)

(Dollars in millions)		December 31, 2010		March 31, 2010
ASSETS

Cash and cash equivalents		$	4,297	$	4,343
Restricted cash			440		173
Investments in marketable securities			3,192		2,521
Finance receivables, net			57,909		55,087
Investments in operating leases, net			18,908		17,151
Other assets			2,960		1,918
Total assets		$	87,706	$	81,193

LIABILITIES AND SHAREHOLDER'S EQUITY

Debt		$	73,714	$	69,179
Deferred income taxes			4,179		3,290
Other liabilities			3,359		3,451
Total liabilities			81,252		75,920

Commitments and contingencies (See Note 13)

Shareholder's equity:
Capital stock, no par value and $10,000 par value (100,000 shares
	authorized; 91,500 issued and outstanding) at December 31, and
	March 31, 2010, respectively		915		915
Additional paid-in-capital			1		1
Accumulated other comprehensive income			86		104
Retained earnings			5,452		4,253
Total shareholder's equity			6,454		5,273
Total liabilities and shareholder's equity		$	87,706	$	81,193

The following table presents the assets of consolidated variable interest entities that can only be used to settle obligations of the consolidated variable interest entities and the liabilities of those entities for which creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the consolidated balance sheet above.

	(Dollars in millions)	December 31, 2010
	ASSETS
	Finance receivables, net	$	7,571
	Total assets	$	7,571

	LIABILITIES
	Debt	$	6,787
	Other liabilities		2
	Total liabilities	$	6,789

See Accompanying Notes to Consolidated Financial Statements.

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TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY
(Unaudited)

						Accumulated
						other
		Capital		Additional		comprehensive			Retained
(Dollars in millions)		stock		paid-in capital		(loss) income			earnings		Total

BALANCE AT MARCH 31, 2009		$	915	$	1	$	(63)	$	3,240	$	4,093

Net income for the nine months ended
	December 31, 2009		-		-		-		880		880
Net unrealized gain on available-for-sale
	marketable securities, net of tax provision
	of $78 million		-		-		127		-		127
Reclassification adjustment for net loss
	included in net income, net of tax benefit
	of $5 million		-		-		8		-		8
Total comprehensive income			-		-		135		880		1,015

BALANCE AT DECEMBER 31, 2009		$	915	$	1	$	72	$	4,120	$	5,108

BALANCE AT MARCH 31, 2010		$	915	$	1	$	104	$	4,253	$	5,273

Net income for the nine months ended
	December 31, 2010		-		-		-		1,465		1,465
Net unrealized loss on available-for-sale
	marketable securities, net of tax benefit
	of $9 million		-		-		(16)		-		(16)
Reclassification adjustment for net gain
	included in net income, net of tax provision
	of $1 million		-		-		(2)		-		(2)
Total comprehensive income			-		-		(18)		1,465		1,447
Dividends			-		-		-		(266)		(266)
BALANCE AT DECEMBER 31, 2010		$	915	$	1	$	86	$	5,452	$	6,454

See Accompanying Notes to Consolidated Financial Statements.

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TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
				Nine Months Ended December 31,
(Dollars in millions)				2010		2009
Cash flows from operating activities:
	Net income			$	1,465	$	880
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			2,591		2,714
		Recognition of deferred income			(929)		(758)
		Provision for credit losses			(479)		334
		Amortization of deferred origination costs			207		248
		Fair value adjustments and amortization of premiums and			1,537		3,480
			discounts associated with debt, net
	Net gain from sale of marketable securities				(40)		(7)
	Other-than-temporary impairment on marketable securities				-		7
		Net change in:
			Restricted cash		(267)		-
			Derivative assets		(745)		(629)
			Other assets		64		(142)
			Deferred income taxes		899		693
			Derivative liabilities		(285)		(945)
			Other liabilities		179		419
Net cash provided by operating activities					4,197		6,294
Cash flows from investing activities:
	Purchase of investments in marketable securities				(3,212)		(880)
	Disposition of investments in marketable securities				2,553		671
	Acquisition of finance receivables (including term loans)				(17,478)		(15,954)
	Collection of finance receivables (including term loans)				16,262		15,098
	Net change in dealer receivables				(942)		799
	Acquisition of investments in operating leases				(7,888)		(5,009)
	Disposals of investments in operating leases				4,089		3,641
	Advances to affiliates (Note 15)				(1,892)		(1,731)
	Repayments from affiliates (Note 15)				1,525		2,835
	Other, net				(20)		(15)
Net cash used in investing activities					(7,003)		(545)
Cash flows from financing activities:
	Proceeds from issuance of debt				13,999		5,424
	Payments on debt				(12,382)		(13,831)
	Net change in commercial paper				1,393		(853)
	Advances from affiliates (Note 15)				16		2,001
	Repayments to affiliates (Note 15)				-		(28)
	Dividends paid to TFSA (Note 15)				(266)		-
Net cash provided by (used in) financing activities					2,760		(7,287)
Net decrease in cash and cash equivalents					(46)		(1,538)
Cash and cash equivalents at the beginning of the period					4,343		6,298
Cash and cash equivalents at the end of the period				$	4,297	$	4,760
Supplemental disclosures:
	Interest paid			$	1,322	$	1,636
	Income taxes paid, net			$	44	$	9

See Accompanying Notes to Consolidated Financial Statements.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data

Basis of Presentation

The information furnished in these unaudited interim financial statements for the three and nine months ended December 31, 2010 and 2009 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, the unaudited financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The results of operations for the three and nine months ended December 31, 2010 do not necessarily indicate the results that may be expected for the full fiscal year.

These financial statements should be read in conjunction with the Consolidated Financial Statements, significant accounting policies, and other notes to the Consolidated Financial Statements included in Toyota Motor Credit Corporation’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2010 (“fiscal 2010”), which was filed with the Securities and Exchange Commission (“SEC”) on June 10, 2010. References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries.

Summary of Significant Accounting Policies

Investments in Marketable Securities

Investments in marketable securities consist of debt and equity securities. Debt and equity securities designated as available-for-sale (“AFS”) are carried at fair value using quoted market prices where available with unrealized gains or losses included in Accumulated Other Comprehensive Income (“AOCI”), net of applicable taxes. We use the specific identification method to determine realized gains and losses related to our investment portfolio. Realized investment gains and losses are reflected in Investment and Other Income, net in the Consolidated Statement of Income.

Other-Than-Temporary Impairment

We periodically evaluate unrealized losses on our AFS debt securities portfolio for other-than-temporary impairment (“OTTI”). If we have no intent to sell and we believe that it is more likely than not we will not be required to sell these securities prior to recovery, the credit loss component of the unrealized losses is recognized in Investment and Other Income, net in the Consolidated Statement of Income, while the remainder of the loss is recognized in AOCI. The credit loss component recognized in Investment and Other Income, net in the Consolidated Statement of Income is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using a credit cash flow analysis for debt securities.

We perform periodic reviews of our AFS equity securities to determine whether unrealized losses are temporary in nature. If losses are considered to be other-than-temporary, the cost basis of the security is written down to fair value and the write down is reflected in Investment and Other Income, net in the Consolidated Statement of Income.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

Allowance for Credit Losses

We maintain an allowance for credit losses to cover probable and estimable losses on our earning assets resulting from the failure of customers or dealers to make contractual payments. Management evaluates the allowance at least quarterly, considering a variety of factors and assumptions to determine whether the allowance is considered adequate to cover probable and estimable losses incurred as of the balance sheet date. The allowance for credit losses is management’s estimate of the amount of probable incurred credit losses in our existing portfolio.

Management develops and documents the allowance for credit losses on finance receivables based on three portfolio segments. We also separately develop and document the allowance for credit losses for investments in operating leases. Investments in operating leases are not within the scope of accounting guidance governing the disclosure of portfolio segments. The determination of portfolio segments is based primarily on the qualitative consideration of the nature of our business operations and the characteristics of the underlying finance receivables. The three portfolio segments within finance receivables, net are:

Retail Loan Portfolio Segment – The retail loan portfolio segment consists of retail installment sales contracts (“retail contracts”) acquired from vehicle dealers in the U.S. and Puerto Rico. Under a retail contract, we are granted a security interest in the underlying collateral which consists primarily of Toyota or Lexus vehicles. Based on the common risk characteristics associated with the underlying finance receivables, the retail loan portfolio segment is considered a single class of finance receivable.

Commercial Truck and Industrial Equipment Loan & Direct Finance Lease Portfolio Segment (“Commercial Portfolio Segment”) – The commercial portfolio segment consists of commercial installment sales contracts (“commercial loan contracts”) and leasing contracts accounted for as direct finance leases (“commercial lease contracts”) acquired from commercial truck and industrial equipment dealers in the U.S. Under commercial loan and commercial lease contracts, we are granted a security interest in the underlying collateral which consists of various types of commercial trucks and industrial equipment. Based on the common risk characteristics associated with the underlying finance receivables and the similarity of the credit risk with respect to the two types of contracts, the commercial portfolio segment is considered a single class of finance receivable.

Dealer Products Portfolio Segment – The dealer products portfolio segment consists of wholesale loans (also referred to as floorplan financing), real estate loans, working capital loans and revolving lines of credit to vehicle and industrial equipment dealers in the U.S. and Puerto Rico. Wholesale loans are primarily collateralized by new or used vehicle inventory with the outstanding balance fluctuating based on the level of inventory. Real estate loans are collateralized by the underlying real estate, are underwritten on a loan-to-value (“LTV”) basis and are typically for a fixed term. Working capital loans and revolving lines of credit are granted for working capital purposes and are secured by dealership assets. Based on the risk characteristics associated with the underlying finance receivables, the dealer products portfolio segment consists of three classes of finance receivables: wholesale, real estate, and working capital.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

Methodology Used to Develop the Allowance for Credit Losses on Finance Receivables

Retail Loan Portfolio Segment

The level of credit risk in our retail loan portfolio segment is influenced primarily by two factors: default frequency and loss severity, which in turn are influenced by various factors such as economic conditions, the used vehicle market, purchase quality mix, contract term length, and operational changes.

We evaluate the retail loan portfolio segment using methodologies such as roll rate, credit risk grade/tier, and vintage analysis. We review and analyze external factors, such as changes in economic conditions, actual or perceived quality, safety and reliability of Toyota and Lexus vehicles, unemployment levels, the used vehicle market, and consumer behavior. In addition, internal factors, such as purchase quality mix and operational changes are also considered in the reviews. The majority of our allowance for credit losses is related to our retail loan portfolio segment.

Commercial Portfolio Segment

The level of credit risk in our commercial portfolio segment is primarily influenced by two factors: default frequency and loss severity, which in turn are influenced by various economic factors, the used equipment and truck markets, purchase quality mix, contract term length, and operational changes.

We evaluate the commercial portfolio segment using methodologies such as product grouping analysis, historical loss and loss frequency by product. We review and analyze external factors, such as changes in economic conditions, unemployment level, and the used equipment and truck markets. In addition, internal factors, such as purchase quality mix, are also considered in the review.

Dealer Products Portfolio Segment

The level of credit risk in our dealer products portfolio segment is influenced primarily by the financial strength of dealers within our portfolio, dealer concentration, collateral quality, and other economic factors. The financial strength of dealers within our portfolio is influenced by, among other factors, general economic conditions, the overall demand for new and used vehicles and industrial equipment and the financial condition of automotive manufacturers in general.

We evaluate the dealer portfolio by first grouping dealer financing into loan-risk pools, which are determined based on the risk characteristics of the loan (e.g. secured by either vehicles and industrial equipment, real estate or dealership assets, or unsecured). We then analyze dealer pools using an internally developed risk rating. In addition, field operations management and our special assets group are consulted each quarter to determine if any specific dealer loan is considered impaired. If impaired loans are identified, specific reserves are established, as appropriate, and the loan is removed from the loan-risk pool for separate monitoring.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

Accounting for the Allowance for Credit Losses and Impaired Receivables

The majority of the allowance for credit losses covers estimated losses on the retail loan portfolio segment, the commercial portfolio segment and the investment in operating lease contracts, which are collectively evaluated for impairment. The retail loan portfolio segment and the commercial portfolio segment are collectively referred to as the homogeneous portfolio segments (“homogeneous portfolio segments”). The remainder of the allowance for credit losses covers the estimated losses on the dealer products portfolio segment. In addition, we establish specific reserves to cover the estimated losses on individual impaired loans (including loans modified in a troubled debt restructuring) within the dealer products portfolio segment. We also maintain specific reserves on the homogeneous portfolio segments for groups of accounts, if any, modified under specific programs that meet the criteria for a troubled debt restructuring.

Increases to the allowance for credit losses are accompanied by corresponding charges to the provision for credit losses. Account balances in the homogeneous portfolio segments and investments in operating leases are charged off against the allowance for credit losses when payments due are no longer expected to be received or the account is 120 days contractually delinquent, whichever occurs first. Related collateral, if recoverable, is repossessed and sold. Any shortfalls in the homogeneous portfolio segments and investments in operating leases between proceeds received from the sale of repossessed collateral and the amounts due from customers are charged against the allowance. Any shortfalls in the dealer products portfolio segment between proceeds received from the sale of repossessed collateral and the amounts specifically reserved will result in additional losses. The allowance related to our earning assets is included in finance receivables, net and investment in operating leases, net in the Consolidated Balance Sheet.

Beginning with the fourth quarter of fiscal 2010, we changed our charge-off policy from 150 days to 120 days past due. This change resulted in an increase in charge-offs of $38 million for the quarter ended March 31, 2010.

Finance Receivables

We record our finance receivables, which consist of the dealer products portfolio segment and homogeneous portfolio segments at the amount outstanding, including accrued interest and deferred costs, net of the allowance for credit losses, unearned income and any net deferred fees.

Impaired Receivables

For all classes of finance receivables within the dealer products portfolio segment, a receivable account balance is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (including principal and interest) according to the terms of the contract. Factors such as payment history, compliance with terms and conditions of the underlying loan agreement and other subjective factors related to the financial stability of the borrower are considered when determining if a loan is impaired. Impaired receivables include certain nonaccrual dealer products portfolio segment receivables for which a specific reserve has been assessed based on either discounted cash flows, market value, or fair value of the underlying collateral. Impaired receivables are excluded from the loan risk pool used to determine the allowance for credit losses.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

Nonaccrual Policy

Dealer Products Portfolio Segment

Impaired receivables in the dealer product portfolio segment are placed on nonaccrual status if full payment of principal or interest is in doubt, or when principal or interest is 90 days or more past due. Collateral dependent loans are placed on nonaccrual status if collateral is insufficient to cover principal and interest. Interest accrued, but not collected at the date a receivable is placed on nonaccrual status, is reversed against interest income. In addition, the amortization of net deferred fees is suspended. Interest income on nonaccrual receivables is recognized only to the extent it is received in cash. Accounts are restored to accrual status only when interest and principal payments are brought current and future payments are reasonably assured. Receivable balances are charged off against the allowance for credit losses when the loss has been realized.

Homogeneous Portfolio Segments

Receivables within the homogeneous portfolio segments are not placed on nonaccrual status when principal or interest is 90 days or more past due. Rather, these receivables are charged off against the allowance for credit losses when payments due are no longer expected to be received or the account is 120 days contractually delinquent, whichever occurs first. Prior to the fourth quarter of fiscal 2010, an account was charged-off against the allowance for credit losses when it was 150 days past due. Beginning with the fourth quarter of fiscal 2010, we changed our charge-off policy from 150 to 120 days past due.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

New Accounting Guidance

In January 2011, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that temporarily delayed the effective date for disclosures about troubled debt restructurings as part of the credit quality of finance receivables and the allowance for credit losses disclosures. The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

In October 2010, the FASB issued accounting guidance on the capitalization of costs relating to the acquisition or renewal of insurance contracts. This accounting guidance is effective for us on April 1, 2012 with early adoption permitted. We plan to early adopt the accounting guidance on April 1, 2011 and do not expect it to have a material impact on our consolidated financial condition or results of operations.

In October 2009, the FASB issued accounting guidance that sets forth the requirements that must be met for a company to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. This accounting guidance is effective for us on April 1, 2011 and is not expected to have a material impact on our consolidated financial condition or results of operations.

In October 2009, the FASB issued accounting guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements that function together to deliver the product’s essential functionality. The accounting guidance more closely reflects the underlying economics of these transactions. This accounting guidance is effective for us on April 1, 2011 and is not expected to have a material impact on our consolidated financial condition or results of operations.

Recently Adopted Accounting Guidance

On December 31, 2010, we adopted new FASB accounting guidance requiring additional disclosures about the credit quality of finance receivables and the allowance for credit losses. The new disclosures provide transparency regarding the nature of credit risk inherent in finance receivables, how credit risk is analyzed and assessed in arriving at the allowance for credit losses, as well as the reasons for changes in the allowance for credit losses. The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On April 1, 2010, we adopted new FASB accounting guidance for transfers of financial assets. The new accounting guidance removes the concept of a qualifying special purpose entity and revises the accounting criteria for transfer of financial assets to be considered a sale. The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On April 1, 2010, we adopted new FASB accounting guidance on consolidation of variable interest entities. The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On March 31, 2010, we adopted new FASB accounting guidance requiring disclosure of gross transfers in and out of Level 3 as well as transfers between Levels 1 and 2 of the fair value hierarchy.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements

Fair Value Measurement – Definition and Hierarchy

The accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs by requiring that observable inputs be used when available. Fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted (unadjusted) prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Examples of assets currently utilizing Level 1 inputs are most U.S. government securities, actively exchange-traded equity mutual funds, and money market funds.

Level 2: Quoted prices in active markets for similar assets and liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. Examples of assets and liabilities currently utilizing Level 2 inputs are certificates of deposit, commercial paper, U.S. government agency securities, corporate debt securities, most mortgage-backed and asset-backed securities, private placement investments in fixed income mutual funds, and most over-the-counter derivatives.

Level 3: Unobservable inputs that are supported by little or no market activity and may require significant judgment in order to determine the fair value of the assets and liabilities. Examples of assets and liabilities currently utilizing Level 3 inputs are structured over-the-counter derivatives and certain mortgage-backed securities with limited activity or less transparency around inputs to the valuation.

The use of observable and unobservable inputs is reflected in the fair value hierarchy assessment disclosed in the tables within this section. The availability of observable inputs can vary based upon the financial instrument and other factors, such as instrument type, market liquidity and other specific characteristics particular to the financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires additional judgment by management. The degree of management’s judgment can result in financial instruments being classified as or transferred to the Level 3 category.

We review the appropriateness of fair value measurements including validation processes, key model inputs, and the reconciliation of period-over-period fluctuations based on changes in key market inputs. All fair value measurements are subject to our analysis. Review and approval by management is required as part of the validation process.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Fair Value Methods

Fair value is based on quoted market prices, if available. If listed prices or quotes are not available, fair value is based upon internally developed models that primarily use as inputs market-based or independently sourced market parameters. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the availability of prices and inputs may be reduced for certain financial instruments. This condition could result in a financial instrument being reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Valuation Adjustments

Counterparty Credit Valuation Adjustments – Adjustments are required when the market price (or parameter) is not indicative of the credit quality of the counterparty.

Non-Performance Credit Valuation Adjustments – Adjustments reflect our own non-performance risk when our liabilities are measured at fair value.

Liquidity Valuation Adjustments – Adjustments are necessary when we are unable to observe prices for a financial instrument due to market illiquidity.

Valuation Methods

For financial instruments measured at fair value, the following section describes the valuation methodologies, key inputs and significant assumptions.

Cash Equivalents

Cash equivalents, consisting primarily of money market instruments, represent highly liquid investments with maturities of three months or less at purchase. Generally, quoted market prices are used to determine the fair value of money market instruments.

Marketable Securities

The marketable securities portfolio consists of debt and equity securities. We use quoted prices of identical securities for all U.S. government securities, actively exchange-traded equity mutual funds and all other securities if available.

If quoted market prices are not available for specific securities, then we may estimate the value of such instruments using observed transaction prices, independent pricing services, and either internally or externally developed pricing models or discounted cash flows. Where there is limited market activity or less transparency around inputs to the valuation model for certain collateralized mortgage and debt obligations, asset-backed securities, and high-yield debt securities, the determination of fair value may require benchmarking yields to that of similar instruments or analyzing default rates. In addition, asset-backed securities may be valued based on external prices or market spreads, using current market assumptions on prepayment speeds and default rates. For certain other asset-backed securities where the external price is not observable, we may incorporate the deal collateral performance and tranche level attributes into our valuation analysis.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

We hold investments in actively exchange-traded equity mutual funds and private placement fixed income mutual funds. Where the funds produce a daily net asset value that is quoted in an active market, that value is used to value the fund investment and is classified in Level 1 of the fair value hierarchy. Where the funds produce a daily net asset value that is based on a combination of quoted prices from identical and similar securities and/or observable inputs, the funds are classified within Level 2.

Derivatives

As part of our risk management strategy, we enter into derivative transactions to mitigate our interest rate and foreign currency exposures. These derivative transactions are considered over-the-counter for valuation purposes. All of our derivative counterparties to which we had credit exposure at December 31, 2010 were assigned investment grade ratings by a credit rating organization.

We estimate the fair value of our derivatives using industry standard valuation models that require observable market inputs, including market prices, yield curves, credit curves, interest rates, foreign exchange rates, volatilities and the contractual terms of the derivative instruments. For derivatives that trade in liquid markets, such as interest rate swaps, model inputs can generally be verified and do not require significant management judgment.

Certain other derivative transactions trade in less liquid markets with limited pricing information. For such derivatives, key inputs to the valuation process include quotes from counterparties, and other market data used to corroborate and adjust values where appropriate. Other market data includes values obtained from a market participant that serves as a third party pricing agent. In addition, pricing is validated internally using valuation models to assess the reasonableness of changes in factors such as market prices, yield curves, credit curves, interest rates, foreign exchange rates and volatilities.

Our derivative fair value measurements consider assumptions about counterparty credit risk and our own non-performance risk. Generally, we assume that a valuation that uses the London Interbank Offered Rate (“LIBOR”) curve to convert future values to present value is appropriate for derivative assets and liabilities. We consider counterparty credit risk and our own non-performance risk through credit valuation adjustments. In situations in which our net position with a derivative counterparty is an asset, the counterparty credit valuation adjustment calculation uses the credit default probabilities of our derivative counterparties over a particular time period. In situations in which our net position with a derivative counterparty is a liability, we use our own credit default probability to calculate the required non-performance credit valuation adjustment. We use a relative fair value approach to allocate the credit valuation adjustments to our derivatives portfolio.

As of December 31, 2010, we reduced our derivative liabilities by $1 million to account for our own non-performance risk. Derivative assets were reduced $19 million to account for counterparty credit risk. As of March 31, 2010, we reduced our derivative liabilities by $4 million to account for our own non-performance risk. Derivative assets were reduced $10 million to account for counterparty credit risk.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Finance Receivables

Our finance receivables are not carried at fair value on a recurring basis on the balance sheet. In certain instances, for finance receivables for which there is evidence of impairment we may use an observable market price or the fair value of collateral if the loan is collateral dependent. The fair values of impaired finance receivables based on the collateral value or market prices where available are reported at fair value on a nonrecurring basis. We may consider additional adjustments to reflect current market conditions in estimating fair value.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of December 31, 2010, by level within the fair value hierarchy:

					Fair value measurements on a recurring basis
										Counterparty
											netting &		Fair
(Dollars in millions)					Level 1		Level 2		Level 3		collateral1		value
Cash equivalents				$	4,022	$		$	-	$	-	$	4,022
	Available-for-sale securities:
	Debt instruments:
		U.S. government and agency obligations			37		61		-		-		98
		Municipal debt securities			-		15		-		-		15
		Certificates of deposit and commercial paper			-		600		-		-		600
		Foreign government debt securities			-		7		-		-		7
		Corporate debt securities			-		110		-		-		110
		Mortgage-backed securities:
			U.S. government agency		-		67		-		-		67
			Non-agency residential		-		8		-		-		8
			Non-agency commercial		-		13		1		-		14
		Asset-backed securities			-		64		-		-		64
	Equity instruments:
		Fixed income mutual funds:
			Short-term sector fund		-		38		-		-		38
			U.S. government sector fund		-		331		-		-		331
			Municipal sector fund		-		42		-		-		42
			Investment grade corporate sector fund		-		310		-		-		310
			High-yield sector fund		-		23		-		-		23
			Real return sector fund		-		75		-		-		75
			Mortgage sector fund		-		768		-		-		768
			Asset-backed securities sector fund		-		38		-		-		38
			Emerging market sector fund		-		57		-		-		57
			International sector fund		-		135		-		-		135
		Equity mutual fund – S&P 500 index			392		-		-		-		392
	Available-for-sale securities total				429		2,762		1		-		3,192
	Derivative assets: 2
		Foreign currency swaps			-		4,165		117		-		4,282
		Interest rate swaps			-		254		16		-		270
		Counterparty netting and collateral1			-		-		-		(3,223)		(3,223)
	Derivative assets total				-		4,419		133		(3,223)		1,329
	Embedded derivative assets				-		-		1		-		1
Total assets 3					4,451		7,181		135		(3,223)		8,544
	Derivative liabilities: 2
		Foreign currency swaps			-		(298)		(6)		-		(304)
		Interest rate swaps			-		(1,152)		(4)		-		(1,156)
		Interest rate forwards			-		(1)		-		-		(1)
		Counterparty netting and collateral1			-		-		-		1,235		1,235
	Derivative liabilities total				-		(1,451)		(10)		1,235		(226)
	Embedded derivative liabilities				-		-		(56)		-		(56)
Total liabilities 3					-		(1,451)		(66)		1,235		(282)
Total net assets				$	4,451	$	5,730	$	69	$	(1,988)	$	8,262

1	We meet the accounting guidance for setoff criteria and elected to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally enforceable master netting agreements exist.

2	Includes derivative asset counterparty credit valuation adjustment of $19 million and derivative liability non-performance credit valuation adjustment of $1 million.

3	Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of March 31, 2010, by level within the fair value hierarchy:

					Fair value measurements on a recurring basis1
										Counterparty			Fair
(Dollars in millions)					Level 1		Level 2		Level 3	netting & collateral2			value
Cash equivalents				$	4,256	$	-	$	-	$	-	$	4,256
	Available-for-sale securities:
	Debt instruments:
		U.S. government and agency obligations			25		24		-		-		49
		Municipal debt securities			-		6		-		-		6
		Certificates of deposit and commercial paper			-		50		-		-		50
		Foreign government debt securities			-		22		-		-		22
		Corporate debt securities			-		93		-		-		93
		Mortgage-backed securities:
			U.S. government agency		-		120		-		-		120
			Non-agency residential		-		8		-		-		8
			Non-agency commercial		-		23		-		-		23
		Asset-backed securities			-		641		3		-		644
	Equity instruments:
		Fixed income mutual funds:
			Short-term sector fund		-		32		-		-		32
			U.S. government sector fund		-		250		-		-		250
			Municipal sector fund		-		39		-		-		39
			Investment grade corporate sector fund		-		260		-		-		260
			High-yield sector fund		-		22		-		-		22
			Mortgage sector fund		-		360		-		-		360
			Asset-backed securities sector fund		-		30		-		-		30
			Emerging market sector fund		-		37		-		-		37
			International sector fund		-		117		-		-		117
		Equity mutual fund – S&P 500 index			359		-		-		-		359
	Available-for-sale securities total				384		2,134		3		-		2,521
	Derivative assets: 3
		Foreign currency swaps			-		2,454		158		-		2,612
		Interest rate swaps			-		288		39		-		327
		Counterparty netting and collateral2			-		-		-		(2,358)		(2,358)
	Derivative assets total				-		2,742		197		(2,358)		581
	Embedded derivative assets				-		-		4		-		4
Total assets 4					4,640		4,876		204		(2,358)		7,362
	Derivative liabilities: 3
		Foreign currency swaps			-		(370)		(89)		-		(459)
		Interest rate caps			-		(1)		-		-		(1)
		Interest rate swaps			-		(1,180)		(23)		-		(1,203)
		Counterparty netting and collateral2			-		-		-		1,130		1,130
	Derivative liabilities total				-		(1,551)		(112)		1,130		(533)
	Embedded derivative liabilities				-		-		(34)		-		(34)
Total liabilities 4					-		(1,551)		(146)		1,130		(567)
Total net assets				$	4,640	$	3,325	$	58	$	(1,228)	$	6,795

1 Prior period amounts have been reclassified to conform to the current period presentation.

2 We meet the accounting guidance for setoff criteria and elected to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally

enforceable master netting agreements exist.

3 Includes derivative asset counterparty credit valuation adjustment of $10 million and derivative liability non-performance credit valuation adjustment of $4 million.

4 Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The determination in classifying a financial instrument within Level 3 of the fair value hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement. There were no transfers between Level 1 and Level 2 securities during the three and nine months ended December 31, 2010 and 2009. The following tables summarize the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2010 and 2009:

Three Months Ended December 31, 2010

			Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
															Total net
			Available-for-sale												assets
			securities					Derivatives							(liabilities)
			Non-agency
			commercial			Available-						Embedded
			mortgage-			for-sale		Interest		Foreign		derivative
			backed			securities		rate		currency		liabilities,	Total
(Dollars in millions)			securities			total		swaps		swaps		net	Derivatives
Fair value, October 1, 2010			$	-	$	-	$	20	$	125	$	(49)	$	96	$	96
Total gains/(losses)
		Included in earnings		-		-		(5)		12		(6)		1		1
		Included in other
		comprehensive income		-		-		-		-		-		-		-
Purchases, issuances, sales, and
	settlements
		Purchases		1		1		-		-		-		-		1
		Settlements		-		-		(3)		(15)		-		(18)		(18)
Transfers in to Level 31				-		-		-		-		-		-		-
Transfers out of Level 31				-		-		-		(11)		-		(11)		(11)
Fair value, December 31, 2010			$	1	$	1	$	12	$	111	$	(55)	$	68	$	69
The amount of total gains or
(losses) for the period included
in earnings attributable to the
change in unrealized gains or
losses related to assets still held
at the reporting date							$	(5)	$	14	$	(6)	$	3	$	3

1	Transfers in and transfers out are recognized at the end of the reporting period.

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Three Months Ended December 31, 2009

			Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
																	Total net
																	assets
			Available-for-sale securities							Derivatives1							(liabilities)
			Non-agency
			residential				Available-							Embedded
			mortgage-			Asset-	for-sale		Interest		Foreign			derivative
			backed			backed	securities		rate		currency			liabilities,		Total
(Dollars in millions)			securities		securities		total		swaps		swaps			net	Derivatives
Fair value, October 1, 2009			$	1	$	1	$	2	$	24	$	120	$	(29)	$	115	$	117
Total gains/(losses)
		Included in earnings		-		-		-		(20)		(11)		(1)		(32)		(32)
		Included in other
		comprehensive income		-		-		-		-		-		-		-		-
Purchases, issuances, sales, and
	settlements
		Purchases		-		-		-		-		-		-		-		-
		Issuances				-		-		-		-		-		-		-
		Sales		(1)		(1)		(2)		-		-		-		-		(2)
		Settlements		-		-		-		(15)		(30)		-		(45)		(45)
Transfers in to Level 32				-		-		-		-		-		-		-		-
Transfers out of Level 32				-		-		-		-		-		-		-		-
Fair value, December 31, 2009			$	-	$	-	$	-	$	(11)	$	79	$	(30)	$	38	$	38
The amount of total gains or
(losses) for the period included
in earnings attributable to the
change in unrealized gains or
losses related to assets still held
at the reporting date									$	(11)	$	(12)	$	(2)	$	(25)	$	(25)

TOYOTA MOTOR CREDIT CORP - FORM 10-Q - February 10, 2011

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