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, Lexus Financial Services, and Mazda Financial Services.

We provide a variety of finance and voluntary vehicle and payment protection products and services to authorized Toyota and Lexus dealers or dealer groups, private label 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, Lexus, and private label vehicles.

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Finance Operations - 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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Voluntary Protection Operations - 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 voluntary vehicle and payment protection products sold by dealers in the U.S. Our voluntary vehicle and payment protection products include vehicle service, guaranteed auto protection, prepaid maintenance, excess wear and use, tire and wheel protection, key replacement protection, and used vehicle limited warranty contracts (“voluntary protection products”). TMIS also provides coverage and related administrative services to certain of our affiliates in the U.S.

Our finance operations are located in the U.S. and Puerto Rico with earning assets principally sourced through Toyota, Lexus, and private label dealers. As of March 31, 2021, approximately 22 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 voluntary protection operations are located in the U.S. As of March 31, 2021, approximately 24 percent of voluntary protection contracts were concentrated in California, 6 percent in New York, and 5 percent in Maryland, Virginia, and Arizona, 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.

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

In fiscal 2020, we announced the restructuring of our field operations to better serve our dealer partners by streamlining our field office structure and investing in new technology. This restructuring is complete, and our field operations now consist of three DSCs located in Chandler, Arizona (serving the West region), Plano, Texas (serving the Central region), and Alpharetta, Georgia (serving the East region).

On 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. On August 1, 2020, we launched a full suite of voluntary protection products under the name of Mazda Protection Products (MPP). The agreement with Mazda is for an initial term of approximately five years. We are currently leveraging our existing processes and personnel to originate and service the new assets, however, we will continue to evaluate the private label financial services business, which may include partnering with or transitioning the business to our affiliates, some of which are not consolidated with TMCC. We have also made certain technology investments to support the Mazda program and future private label customers. We did not acquire any existing Mazda assets or liabilities pursuant to the agreement and our launch costs were not significant in fiscal year 2021.

On March 24, 2021, we announced that we will restructure our customer service operations over the next two years to better serve our customers by relocating and streamlining the customer service operation, moving our three regional CSCs to be co-located with regional DSCs, and investing in new technology. Costs associated with this restructure are not expected to be significant.

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”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), along with the subsequently issued guidance amending and clarifying various aspects of ASU 2016-13, using the modified retrospective method as required. In accordance with that method, the comparative period’s information continues to be reported under the relevant accounting guidance in effect for that period. Upon adoption of ASU 2016-13, the incurred loss impairment method was replaced with a new impairment model that reflects lifetime expected losses for our finance receivables. The adoption of ASU 2016-13 resulted in a cumulative-effect adjustment to decrease opening retained earnings by approximately $218 million, net of taxes, resulting from a pretax increase to our allowance for credit losses on finance receivables of approximately $292 million. Additionally, we have changed the presentation of accrued interest related to finance receivables in the Consolidated Balance Sheets from Finance receivables, net to Other assets. As of April 1, 2020, we have reclassified accrued interest of $190 million from Finance receivables, net to Other assets. The adoption of this new guidance did not result in a material impact to our available-for-sale debt securities portfolio.

Refer to Note 2 – Investments in Marketable Securities, Note 3 – Finance Receivables, Net, and Note 4 – Allowance for Credit Losses for additional information.

In conjunction with the adoption of ASU 2016-13, we updated our depreciation policy for operating leases so that the useful life of the vehicles incorporates our historical experience on early terminations due to customer defaults. As a result, we changed the presentation for reporting early termination expenses related to customer defaults on investments in operating leases. We now present the effects of operating lease early terminations as part of accumulated depreciation within Investments in operating leases, net in the Consolidated Balance Sheets and Depreciation on operating leases in the Consolidated Statements of Income. The comparative period’s information continues to be reported under the relevant accounting presentation in effect for that period. Refer to Note 5 – Investments in Operating Leases, Net for additional information.

We adopted ASU 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure requirements related to fair value measurement. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

We adopted 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. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

We adopted ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The adoption of this guidance related to Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments did not have a material impact on our consolidated financial statements and related disclosures. The impact on our consolidated financial statements for Topic 326, Financial Instruments – Credit Losses is discussed above.

We adopted ASU 2018-17, Consolidation (Topic 810), which requires that an indirect interest held through related parties in common control arrangements are to be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The adoption of this guidance 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 March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, along with subsequently issued guidance, which provides temporary 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. We plan to adopt this guidance on April 1, 2021. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures.

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, which requires an entity to reevaluate the amortization period for investments in AFS callable debt securities held at a premium each reporting period. The premium is amortized to the earliest call date of the debt security. 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.