Toyota Motor Credit Corporation (“TMCC”) is a wholly-owned subsidiary of Toyota Financial Services International Corporation (“TFSIC”), a California corporation, which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide financial services operations. References herein to the “Company”, “we”, “our”, and “us” denote TMCC and its consolidated subsidiaries. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.

We provide a variety of finance and insurance products to authorized Toyota and Lexus dealers or dealer groups and, to a lesser extent, other domestic and import franchise dealers (collectively referred to as “dealers”) and their customers in the United States of America (excluding Hawaii) (the “U.S.”) and Puerto Rico. Our business is substantially dependent upon the sale of Toyota and Lexus vehicles.

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Finance - We acquire retail installment sales contracts from dealers in the U.S. and Puerto Rico (“retail contracts”) and leasing contracts accounted for as operating leases (“lease contracts”) from dealers in the U.S. We collectively refer to our retail and lease contracts as the “consumer portfolio.” We also provide dealer financing, including wholesale financing, working capital loans, revolving lines of credit and real estate financing to dealers in the U.S. and Puerto Rico. We collectively refer to our dealer financing portfolio as the “dealer portfolio.”

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Insurance - Through Toyota Motor Insurance Services, Inc., a wholly-owned subsidiary, and its insurance company subsidiaries (collectively referred to as “TMIS”), we provide marketing, underwriting, and claims administration for vehicle and payment protection products sold by dealers in the U.S. Our vehicle and payment protection products include vehicle service agreements, guaranteed auto protection agreements, prepaid maintenance agreements, excess wear and use agreements, tire and wheel protection agreements, key replacement protection, and used vehicle limited warranty agreements. TMIS also provides coverage and related administrative services to certain of our affiliates in the U.S. Although the vehicle and payment protection products are generally not regulated as insurance products, for ease of reference we collectively refer to the group of products provided by TMIS herein as “insurance products.”

Our finance operations are located in the U.S. and Puerto Rico with earning assets principally sourced through Toyota and Lexus dealers. As of March 31, 2020, approximately 23 percent of retail and lease contracts were concentrated in California, 11 percent in Texas, 7 percent in New York, and 5 percent in New Jersey. Our insurance operations are located in the U.S. As of March 31, 2020, approximately 25 percent of insurance policies and contracts were concentrated in California, 6 percent in New York, and 5 percent in Maryland, New Jersey, and Virginia, respectively. Any material adverse changes to the economies or applicable laws in these states could have an adverse effect on our financial condition and results of operations.

On April 16, 2019, we announced that we will restructure our field operations over the next two years to better serve our dealer partners by streamlining our field office structure into three regional locations and investing in new technology. This restructure is expected to be completed in fiscal year 2021 and costs associated with this restructure are not expected to be significant.

As of April 1, 2020, TMCC began providing private label financial services to third-party automotive and mobility companies commencing with the provision of services to Mazda Motor of America, Inc. (“Mazda”). We currently offer exclusive private label automotive retail, lease, and dealer financing products and services marketed under the brand Mazda Financial Services to Mazda customers and dealers in the United States. TMCC’s agreement with Mazda is for an initial term of approximately five years. We intend to leverage our existing processes and personnel to service the newly originated assets, and we expect to make certain technology investments to support the Mazda program. TMCC will not acquire any existing Mazda assets or liabilities pursuant to the agreement and we do not expect launch costs to be significant through fiscal year 2021.

Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)

Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). Related party transactions presented in the Consolidated Financial Statements are disclosed in Note 12 – Related Party Transactions.

The consolidated financial statements include the accounts of TMCC, its wholly-owned subsidiaries and all variable interest entities (“VIE”) of which we are the primary beneficiary. All intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because of inherent uncertainty involved in making estimates, actual results could differ from those estimates and assumptions. The accounting estimates that are most important to our business are the accumulated depreciation related to our investments in operating leases and the allowance for credit losses.

Our significant accounting policies are found in the respective Note for which the policy is applicable.

Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)

We adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), along with the subsequently issued guidance amending and clarifying various aspects of the new lease guidance, using the modified retrospective method. In accordance with that method, the comparative period’s information has not been restated and continues to be reported under the lease accounting guidance in effect for that period. We also elected to apply the package of practical expedients permitted under the transition guidance of the new standard which allowed us to not reassess our historical lease classification, initial direct costs, and whether or not contracts entered into prior to adoption are or contain leases. As a lessor, the adoption of ASU 2016-02, did not have a significant impact on our financial statements. As a lessee, the adoption of ASU 2016-02 added right-of-use (“ROU”) assets of $115 million and operating lease liabilities of $122 million, which are included in Other assets, and in Other liabilities, respectively, in our Consolidated Balance Sheet. The adoption of this new guidance did not impact our Consolidated Statement of Income and did not result in a cumulative-effect adjustment to opening retained earnings.

Refer to Note 4 – Investments in Operating Leases, Net and Note 9 – Commitments and Contingencies for additional information.

We adopted ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs, which requires certain premiums on callable debt securities to be amortized to the earliest call date. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

We adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The adoption of this guidance did not have an impact on our consolidated financial statements and related disclosures as we no longer have hedge accounting derivatives.

In the second quarter of fiscal 2020, we adopted ASU 2019-07, Codification Updates to Securities and Exchange Commission (“SEC”) Sections – Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, “Disclosure Update and Simplification,” and Nos. 33-10231 and 33-10442, “Investment Company Reporting Modernization,” and Miscellaneous Updates. This guidance was effective upon issuance in July 2019 and aligns the guidance in various SEC sections to the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification with the requirements of certain already effective SEC final rules. While most of the amendments in this release eliminate outdated or duplicative disclosure requirements, the final rule release amends the interim financial statement requirements to include a reconciliation of changes in shareholder’s equity for each period for which an income statement is required to be filed. We have disclosed the required information in the Consolidated Statements of Shareholder’s Equity. The other eliminations or amendments did not have a material impact on our consolidated financial statements and related disclosures.

Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance introduces a new impairment model based on expected losses rather than incurred losses for certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The FASB subsequently issued guidance amending and clarifying aspects of the new impairment model. This ASU and the related amendments are effective for us on April 1, 2020. Upon adoption of the guidance on April 1, 2020, based on our current loan portfolio attributes and forecasts of future economic conditions, we estimate an increase in our allowance for credit losses on finance receivables of approximately $292 million and a corresponding reduction to our opening retained earnings, net of income taxes. Additionally, the adoption of this ASU and the related amendments will not have a material impact to our available-for-sale debt securities portfolio.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure requirements related to fair value measurement. This ASU is effective for us on April 1, 2020. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software, which aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This ASU is effective for us on April 1, 2020. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810), which requires indirect interests held through related parties in common control arrangements to be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. This ASU is effective for us on April 1, 2021. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The applicable provisions of this ASU are effective for us on April 1, 2020. The adoption of guidance related to Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, will not have a material impact on our consolidated financial statements. Our adoption status for Topic 326, Financial Instruments—Credit Losses is discussed above.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. The provisions of this update are available until December 31, 2022, when the reference rate replacement activity is expected to have completed. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.