Treasury Today Country Profiles in association with Citi

Treasurers on Mars: getting more from Fair Value reporting

Toyota logo on the front of a Toyota car

Toyota Finance Australia’s response to the local equivalent of the IFRS 13 Fair Value Measurement standard saw it implement a new platform from which it is determined to get as much as possible.

Toyota Finance Australia (Toyota Finance) was the first Toyota-backed finance company established outside of Japan. It is now one of Australia’s leading vehicle finance corporations offering a range of finance, insurance and warranty products and services for individuals, business, fleet and wholesale customers under the Toyota Financial Services, Lexus Financial Services, Hino Financial Services and Toyota Fleet Management brands. The product range includes consumer and business loans, finance leases, novated leases, commercial hire purchase, and fleet finance facilities (including fleet management services) together with insurance, warranty and roadside assistance products.

Toyota Finance actively raises funds directly and in conjunction with the wider Toyota family, both domestically and globally, from a wide set of sources. It uses commercial paper, medium-term notes, Uridashi bonds (denominated in a foreign currency and sold directly to Japanese household investors), securitisation, and bank loans to provide a highly diversified debt portfolio. Interest rate and FX risks associated with these programmes are managed using interest rate swaps, cross-currency swaps and FX swaps. The new system supports a range of debt, linear interest rate and FX products and provides the potential to use more complex derivatives such as option structures.

As part of its broad sweep of operations, Toyota Finance needs to comply with the framework laid down by the Australian Accounting Standards Board (AASB). Since January 2013, financial reporting has been subject to AASB 13 Fair Value Measurement for assets (the Australian equivalent of the International Accounting Standards Board (IASB) IFRS 13 Fair Value Measurement standard).

Risk and reporting at Toyota Finance was managed using a Treasury Management System (TMS) supplemented with data derived by internally-developed tools. Hedging strategies and procedures were operated ‘conservatively’ and well within the constraints imposed by these systems.

The changes to Fair Value have seen a number of changes within Toyota Finance’s reporting processes, not least being the introduction of the Bloomberg Multi-Asset Risk System (MARS) Analytics Package. According to Vice President, Services, and Chief Financial Officer of Toyota Finance, Ian Ritchens, it was the firm’s adherence to Kaizen – the Japanese art of continuous improvement – that enabled it to use and investigate different methods of AASB 13 compliance prior to the implementation of the Bloomberg analytics package and to develop and broaden its use thereafter.

IFRS reporting is but one element in the landscape of continuous improvements to Toyota Finance’s risk management and reporting processes. Driven by regulatory and market imperatives, the company says it has recognised a ‘Kaizen opportunity’ by integrating MARS with the existing TMS to derive further risk management and valuation process efficiencies, largely through automation.

Indeed, the company notes that the new platform, through what it says is a rich source of market data, information and pricing capabilities and the facilitation of a deeper and more advanced engagement with key banking counterparts, it is now supporting treasury in delivering to its businesses and customers increased scope for product innovation.

The switch to MARS took place across its half-year end obligations in September 2013. It was necessary to partner with external consultants to meet the new regulatory challenge in time for Toyota Finance’s first full-year reporting of credit value adjustments (CVA/DVA) in March 2014. During the implementation project, considerable time was invested with internal stakeholders and audit partners to ensure that the solution also supported SOX compliance and business processes.

In practice, the treasury position can be exported from the TMS into MARS either manually or fully automatically. Toyota Finance used the manual method to beta-test, but followed by implementing the fully automated model. The entire project to date has been delivered on time and under budget; however, further phases are to follow. The company says it is still in the early stages of using the facilities within the platform and is expecting to use the system to quantitatively explore the benefits of risk management practices, using this to guide subsequent phases of delivery. As such the business is in active discussion with stakeholders across the group regarding those likely benefits.

Toyota Finance saw IFRS 13/AASB 13 Fair Value Measurement as an opportunity to deliver a strategic response to both treasury derivative valuations and risk management. But it has also used it to expand its treasury capabilities to support the initiatives of the wider business. In essence, the feeling is that the MARS project has been a successful collaboration between vendor and client.