Fair Value Measurements

12 Months Ended

Mar. 31, 2023

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 13 – Fair Value Measurements

Fair value is defined 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. In order to determine the fair value of our assets and liabilities, we use quoted prices for identical or similar instruments, otherwise we utilize valuation models with observable or calculated inputs. The use of observable quotes for identical or similar instruments and the use of unobservable inputs is reflected in the fair value hierarchy assessment disclosed in the tables within this Note as Level 1, 2 and 3 defined below. 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 a 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. We use prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, 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.

Level 1: Quoted (unadjusted) prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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.

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.

Valuation Adjustments

We may make valuation adjustments to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, our own creditworthiness, as well as constraints due to market illiquidity or unobservable parameters.

Recurring Fair Value Measurements

Cash and cash equivalents and Restricted cash and cash equivalents

The fair value of cash equivalents and restricted cash equivalents approximates the carrying value and these instruments are classified as Level 1 within the fair value hierarchy.

Investments in marketable securities

We estimate the value of our AFS debt securities, including those for which the fair value option was elected, using observed transaction prices, independent third-party pricing valuation vendors, and internal valuation models.

We may hold investments in actively traded open-end and private placement equity investments. Where the equity investments produce a daily net asset value that is quoted in an active market, we use this value to determine the fair value of the equity investment and classify the investment as Level 1 within the fair value hierarchy. The fair value of equity investments that produce a daily net asset value that is not quoted in an active market is estimated using the net asset value per share (or its equivalent) as a practical expedient and are excluded from leveling within the fair value hierarchy.

In addition, we may hold individual securities where valuation methodologies and inputs to valuation models depend on the security type, thus they may be classified differently within the leveling hierarchy. Where possible, quoted prices in active markets for identical or similar securities are used to determine the fair value of the investment securities; those securities are classified as Level 1 or 2, respectively. Where quoted prices in active markets are not available, we use various valuation models for each asset class that are consistent with what market participants use. The inputs and assumptions to the models are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. These investments are generally classified as Level 2 within the fair value hierarchy, however, depending on the significance of the unobservable inputs they may also be classified as Level 3.

Note 13 – Fair Value Measurements (Continued)

Derivatives

We estimate the fair value of our derivatives using industry standard valuation models that require observable market inputs, including market prices, interest rates, foreign exchange rates, volatilities, counterparty credit risk, our own non-performance risk and the contractual terms of the derivative instruments. We consider counterparty credit risk and our own non-performance risk through credit valuation adjustments.

For derivatives that trade in liquid markets, model inputs can generally be verified and do not require significant management judgment. These derivative instruments are classified as Level 2 within the fair value hierarchy.

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 valuation vendor. These derivative instruments are classified as Level 3 within the fair value hierarchy.

Nonrecurring Fair Value Measurements

Nonrecurring fair value measurements include Level 3 net finance receivables that are not measured at fair value on a recurring basis but are subject to fair value adjustments utilizing the fair value of the underlying collateral when there is evidence of impairment. Nonrecurring fair value items as of March 31, 2023 and 2022 were not significant. Retail finance receivables greater than 120 days past due are measured at fair value based on the fair value of the underlying collateral less costs to sell. The fair value of collateral is based on the current average selling prices for like vehicles at wholesale used vehicle auctions.

Note 13 – Fair Value Measurements (Continued)

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. The following tables summarize our financial assets and financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy except for certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient and are excluded from the leveling information provided in the tables below. Fair value amounts presented below are intended to permit reconciliation of the fair value hierarchy to the amounts presented on our Consolidated Balance Sheets.

	March 31, 2023
								Counterparty
								netting &			Fair
	Level 1		Level 2			Level 3		collateral			value
Investments in marketable securities:
Available-for-sale debt securities:
U.S. government and agency obligations	$	740	$	4		$	-	$	-		$	744
Foreign government and agency obligations		-		12			-		-			12
Municipal debt securities		-		8			-		-			8
Corporate debt securities		-		430			-		-			430
Mortgage-backed securities:
U.S. government agency		-		73			-		-			73
Non-agency residential		-		6			3		-			9
Non-agency commercial		-		53			5		-			58
Asset-backed securities		-		80			40		-			120
Available-for-sale debt securities total		740		666			48		-			1,454
Equity investments:
Fixed income mutual funds:
Fixed income mutual funds measured at    net asset value												1,081
Total return bond funds		1,631		-			-		-			1,631
Equity mutual funds		871		-			-		-			871
Equity investments total		2,502		-			-		-			3,583
Investments in marketable securities total		3,242		666			48		-			5,037
Derivative assets:
Interest rate swaps		-		1,888			-		-			1,888
Foreign currency swaps		-		49			-		-			49
Counterparty netting and collateral		-		-			-		(1,886	)		(1,886	)
Derivative assets total		-		1,937			-		(1,886	)		51
Assets at fair value		3,242		2,603			48		(1,886	)		5,088
Derivative liabilities:
Interest rate swaps		-		(468	)		-		-			(468	)
Foreign currency swaps		-		(1,002	)		-		-			(1,002	)
Counterparty netting and collateral		-		-			-		1,453			1,453
Liabilities at fair value		-		(1,470	)		-		1,453			(17	)
Net assets at fair value	$	3,242	$	1,133		$	48	$	(433	)	$	5,071

Note 13 – Fair Value Measurements (Continued)

	March 31, 2022
								Counterparty
								netting &			Fair
	Level 1		Level 2			Level 3		collateral			value
Investments in marketable securities:
Available-for-sale debt securities:
U.S. government and agency obligations	$	504	$	5		$	-	$	-		$	509
Foreign government and agency obligations		-		23			-		-			23
Municipal debt securities		-		10			-		-			10
Corporate debt securities		-		568			-		-			568
Mortgage-backed securities:
U.S. government agency		-		20			-		-			20
Non-agency residential		-		7			3		-			10
Non-agency commercial		-		78			8		-			86
Asset-backed securities		-		75			3		-			78
Available-for-sale debt securities total		504		786			14		-			1,304
Equity investments:
Fixed income mutual funds:
Fixed income mutual funds measured at    net asset value												1,137
Total return bond funds		1,576		-			-		-			1,576
Equity mutual funds		936		-			-		-			936
Equity investments total		2,512		-			-		-			3,649
Investments in marketable securities total		3,016		786			14		-			4,953
Derivative assets:
Interest rate swaps		-		1,425			-		-			1,425
Foreign currency swaps		-		55			-		-			55
Counterparty netting and collateral		-		-			-		(1,419	)		(1,419	)
Derivative assets total		-		1,480			-		(1,419	)		61
Assets at fair value		3,016		2,266			14		(1,419	)		5,014
Derivative liabilities:
Interest rate swaps		-		(822	)		-		-			(822	)
Foreign currency swaps		-		(717	)		-		-			(717	)
Counterparty netting and collateral		-		-			-		1,514			1,514
Liabilities at fair value		-		(1,539	)		-		1,514			(25	)
Net assets at fair value	$	3,016	$	727		$	14	$	95		$	4,989

Level 3 Fair Value Measurements

The Level 3 financial assets and liabilities recorded at fair value which are subject to recurring and nonrecurring fair value measurement, and the corresponding activity and change in the fair value measurements of these assets and liabilities, were not significant to our Consolidated Balance Sheets as of March 31, 2023 and 2022, or Consolidated Statements of Income for the years ended March 31, 2023 and 2022.

Note 13 – Fair Value Measurements (Continued)

Financial Instruments Not Carried at Fair Value

Finance receivables

Our finance receivables consist of retail loans and dealer financing loans, which are comprised of wholesale, real estate and working capital financing. Retail finance receivables are primarily valued using a securitization model that incorporates expected cash flows. Cash flows expected to be collected are estimated using contractual principal and interest payments adjusted for specific factors, such as prepayments, extensions, default rates, loss severity, credit scores, and collateral type. The securitization model utilizes quoted secondary market rates if available, or estimated market rates that incorporate management's best estimate of investor assumptions about the portfolio. The dealer financing portfolio is valued using a discounted cash flow model. Discount rates are derived based on market rates for equivalent portfolio bond ratings. As these valuations utilize unobservable inputs, our finance receivables are classified as Level 3 within the fair value hierarchy.

Unsecured notes and loans payable

The fair value of commercial paper is assumed to approximate the carrying value due to its short duration and generally negligible credit risk. We validate this assumption by recalculating the fair value of our commercial paper using quoted market rates. Commercial paper is classified as Level 2 within the fair value hierarchy.

Other unsecured notes and loans payable are primarily valued using current market rates and credit spreads for debt with similar maturities. Our valuation models utilize observable inputs such as standard industry curves; therefore, we classify these unsecured notes and loans payables as Level 2 within the fair value hierarchy. When observable inputs are not available for all assumptions, we estimate the fair value using internal assumptions such as volatility and expected credit losses. As these valuations utilize unobservable inputs, we classify these unsecured notes and loans payable as Level 3 within the fair value hierarchy.

Secured notes and loans payable

Fair value is estimated based on current market rates and credit spreads for debt with similar maturities. We also use internal assumptions, including prepayment speeds and expected credit losses on the underlying securitized assets, to estimate the timing of cash flows to be paid on these instruments. As these valuations utilize unobservable inputs, our secured notes and loans payables are classified as Level 3 within the fair value hierarchy.

Note 13 – Fair Value Measurements (Continued)

The following tables provide information about assets and liabilities not carried at fair value on a recurring basis on our Consolidated Balance Sheets:

	March 31, 2023
	Carrying								Total Fair
	value		Level 1		Level 2		Level 3		value
Financial assets
Finance receivables
Retail loan	$	78,445	$	-	$	-	$	77,649	$	77,649
Wholesale		3,972		-		-		3,968		3,968
Real estate		4,981		-		-		4,990		4,990
Working capital		3,113		-		-		3,058		3,058
Financial liabilities
Unsecured notes and loans payable	$	78,949	$	-	$	76,401	$	-	$	76,401
Secured notes and loans payable		32,736		-		-		32,173		32,173

	March 31, 2022
	Carrying								Total Fair
	value		Level 1		Level 2		Level 3		value
Financial assets
Finance receivables
Retail loan	$	72,369	$	-	$	-	$	73,385	$	73,385
Wholesale		2,940		-		-		2,931		2,931
Real estate		4,985		-		-		4,961		4,961
Working capital		2,256		-		-		2,171		2,171
Financial liabilities
Unsecured notes and loans payable	$	82,288	$	-	$	80,980	$	-	$	80,980
Secured notes and loans payable	$	26,864	$	-	$	-	$	26,500	$	26,500

Accrued interest related to finance receivables is in Other assets on the Consolidated Balance Sheets; however, TMCC measures the fair value of each class of finance receivables using scheduled principal and interest payments. Therefore, accrued interest has been included in the carrying value of each class of finance receivables in the previous tables, along with finance receivables, deferred origination costs, deferred income, and allowance for credit losses.

Finance receivables in the previous tables exclude related party transactions which are classified as Level 3 within the fair value hierarchy. The previous tables also exclude related party notes receivables and notes payables recorded in Other assets and Other liabilities on the Consolidated Balance Sheets which are classified as Level 3 within the fair value hierarchy. Refer to Note 12 - Related Party Transactions for additional information.