Toyota Motor Corporation Management of Assets - Essay Example

?Toyota Motor Corporation – Management of Assets Now days, the global automotive industry is facing increased worldwide competition more than ever before. Automotive firms are forced to introduce innovative and competitively priced products. Nevertheless, Toyota Motor Corporation with its 70-year history is able to achieve its objectives regardless of the challenges it face today. Evidently, the business model of Toyota for the new era is to provide ultimate user experience through its new relationships while realising that, high-quality services would maximise customer satisfactions and thereby the profitability (Toyota Motor Corporation, 2010). On pursuing its business model, Toyota periodically reviews the carrying value of its long-term assets used in the business, including intangible assets as circumstances deserve such review. The company carries out the review using estimates of future cash flows and fair value that the management think would influence the accurate valuation of assets. In the same way, Toyota also needs to consider the assets like high quality fixed income bonds and fixed income bonds that are presently available and anticipated to be available in the future. The company also takes into account the deferred tax assets as there are chances for the actual taxable income to differ from the estimated amounts due to various assumptions (Toyota Motor Corporation, 2010). There are liquid assets in the business which the company defines cash and cash equivalents, time deposits, marketable debt securities that are taken into account to make sure that the company is in line with its business model. However, goodwill is not material to Toyota’s consolidated balance sheet, and intangible assets with a definite life are amortised on a straight-line basis with estimated useful lifetime of five year. Intangible assets with indefinite life are examined for impairment whenever incidents or circumstance signify that a carrying amount of an asset may not be recuperated. The company evaluates the impairment loss when carrying amount of an asset exceeds the estimated undiscounted cash flows. Toyota’s strategy and aim for plan asset management is to maximise returns on plan assets to meet future benefit payment requirements under risks that the company thinks to be permissible (Toyota Motor Corporation, 2010). Assets in financial accounting can be considered as the economic resources of the firm. Anything that is touchable or intangible and able to be owned by or administered to produce value by preserving it on the process of obtaining a positive economic value can be regarded as an asset. In simple worlds, asset can be stated as an ownership that can be converted into cash (cash itself is an asset). Asset in simple sense is anything of value that a company owns, including cash and should be recorded on the balance sheet of the company. Even if the firm used credit to purchase an asset, the company still owns it. In such case, the original cost of the asset must be recorded on the asst side of the balance sheet as well as the amount that the company owes should be recorded on the liability side of the balance sheet. The three components that constitute a company’s balance sheet, which illustrate the business’s financial position at any point are assets, liabilities, and owners’ equity (U.S. Securities Exchange Commission, 2007). This association among these three components can be explained using the following equation: Assets = Liabilities + Owners’ Equity This equation sets the framework for keeping trace of money as it flows in and out of the business. Every penny in the business should be recorded into appropriate ledgers, every single transaction into the books using a double-entry system of debit and credit. In general accounting practice, assets are recorded on the top left side of the balance sheet. Assets may be classified in many ways and the principal distinction normally made for business purposes is between: Fixed assets and Current assets. There are other business subdivisions which involve intangible assets, that is, those assets which though not visible, add to the earning power of the business, e.g. goodwill, patents, copyrights, etc; liquid assets, and also quoted investments. Current Assets: - These are the assets with the value that continually change such as cash, accounts receivable, inventory or raw materials that the company use to make product. Reimers (2007, p.112) states that, current assets are continually turned over in the course of a business during normal function and can be easily converted into cash. The Current Assets are recorded on the balance sheet in order of their liquidity, which shows how fast they can be converted into cash. The net current assets or the working capital can be calculated by deducting current liabilities from the current assets of the business. Fixed Asset: - Fixed assets, also called plant assets are those permanent things that a business owns such as land, building, equipments, and vehicles. According to Tiffany and Peterson (2005), fixed assets are purchased for the long-term use in the business for earning a rate of profit and cannot be easily converted into cash. In the same way, things like furniture and fittings, computers and appliances remain as fixed assets in the business as long they are used within the business and are not intended for sale. Fixed assets are usually written off against the profits over their expected lifetime by charging an annual amount of depreciation in order to eliminate the original cost (historical cost), less crap value, over the life period of the asset. Investments: - Just like any other individual, a company with perpetual existence can own securities such as stocks and bonds. Any kind of investments, in the form of cash or property can be considered as the asset of the business. Intangible Assets: - Non-material assets or invisible assets that a business owns and that have value are called as intangible assets. For example, patents, copyrights and good will of a business are considered as intangible assets of the business. The following diagram shows how the assets are recorded on the Assets side of the Balance Sheet: Assets Current Assets: Cash XXXX Inventory XXXX Total Current Assets XXXXX Fixed Assets XXXXX Less: Accumulated Depreciation (-) XXXX Net Fixed Assets XXXXX Other Assets XXXX Total Assets XXXXXX Generally, in the usual course of the accounting practise, intangible assets do not appear on the Balance Sheet. Almost all companies possess fame or a very good name; and such good name is called goodwill. Goodwill are considered to be intangible assets and companies leave this item out of their balance sheet as they do not actually purchase it. Intangible assets do not possess a physical substance but provide future economic value to the business through the rights of their ownership (Lawrence A. Kramer, n.d). However, if the company purchases goodwill from a third-party, it must be shown in the financial statement during the accounting period in which the asset was obtained. On the other hand, an asset that is not recorded on the balance sheet does not necessarily mean that it is intangible, but can be tangible asset too. Because, in the context of accounting, an asset is defined as any item of economic value that a business owns, especially those that can generate income and profitability. And therefore, a company’s primary assets are its employees, the secret in the sauce and the glue that holds corporation together; and without them all other assets are valueless. However, assets like work forces including top level managements, though tangible are not recorded on the balance sheet of the company. On the other hand, as Back (2010) comments, they are considered in the financials as they are expense items on the income and expenditure statement. The real value of the manpower can be measured only on the basis of loyalty, devotion, and commitment towards the firm compared with the cost incurred on. In the same way, the company’s reputation is one of its most valuable assets. Back (2010) illustrates the importance of reputation, pointing the Fortune report by Jeffrey Hollender, which estimates that a company’s reputation represents 75% of the total value of an average business. Even if a company invests heavily on innovative projects, unless supported by public recognition, it cannot bring in the expected profitability. Yet another asset that does not appear on the balance sheet is corporate mission. By properly applying the corporate mission, a business can protect all other assets as it provides guidance, enhancing all employees with a sense of purpose, ensuring they love their work. The corporate mission of the business protects the reputation as it controls all decision-making and encompasses its interests in integrating people and society. So, the corporate mission has a great influence on the profitability of the firm, and thus having a value in the operation of a business it can be considered as an asset to the company. However, it is not shown in the balance sheet of the firm. The manpower, goodwill, corporate mission and other intangible assets provide potential future economic growth and so, they should be considered as asset to the business. However, the issue of recording such assets on the balance sheet should be taken into consideration as these assets have the ability to create value for the firm. It remains a big question whether to show such assets on the balance sheet as these items have a high degree of uncertainty (Investopedia, 2011). Such assets must be typically expensed on the basis of their respective life expectancy, considering the fact that they can have either an identifiable or indefinite useful life period. Assets with identifiable useful life expectancy must be amortised using straight-line basis over their economic or legal life time. Until 1970, the general concept was that the cost of an intangible asset with an indefinite life remained on the book until the business came to an end. However, according to the Accounting Standard Board (as cited in Day, 2008), the recorded value of an intangible asset must be written off by systematic charges to income over the periods estimated to be benefited. The International Accounting Standards Board (IASB) provides guidance on how to account the intangible assets on the financial statements. Generally, the legal intangibles that are formed internally are not recognised; on the other hand, legal intangible assets that are obtained from third-parties are recognised and shown in the financial statements. According to Day (2008), many of the third party users of the financial statements put in the amortisation expenses to the net profit, as they know those figures do not exactly show the operations of the Business. In the same way, employees, the primary assets of the company must be considered in the financials as they are expense items on the income and expenditure statement. The real value of the manpower can be measured only on the basis of loyalty, devotion, and commitment towards the firm compared with the cost incurred on. The administrative should measure the health of the company not by the figures on the financials, but by the devotion of the team. A common international broader measure should be implemented to evaluate progress so that no company would be lacking a comprehensive, measurable and regularly reviewed employee response index. Even though the value of corporate mission should not be shown on the balance sheet, it has a great significance as clearly defined mission provides direction on what tangible assets to acquire and where to divest. Therefore, if the manages stop concentrating on the preoccupation with financial statements to these assets including intangibles, the profitability of the fir m will take care of itself. A company that has an objective beyond moneymaking will give importance to its employees, its significant asset, to preserve its reputation while achieving success. References Back, L 2010, ‘The most important assets are not on the balance sheet’, Triple Pundit, Viewed 30 November 2011, Day, JW 2008, ‘Theme: Intangible assets’, Viewed 30 November 2011, Investopedia 2011, ‘CFA level 1-Financial statements: Balance sheet components- Assets’, Viewed 30 November 2011, Lawrence A. Kramer: To The Clouds and Beyond n.d, ‘Intangible assets: Accounting theory’, Viewed 30 November 2011, Reimers, JL 2007, Financial Accounting, Pearson Education India, New Delhi. U.S. Securities and Exchange Commission 2007, ‘Beginner’s guide to financial statements: Balance sheets’, Viewed 30 November 2011, Tiffany, P & Peterson, SD 2005, Business plans for Dummies, John Wiley & Sons, Canada. Toyota Motor Corporation 2010, ‘Annual report 2010’, pp. 1-102, Viewed 30 November 2011, Read More