Research one multinational corporation like Procter and Gamble, Unilever, IBM, Microsoft, Honda and etc. Identify and describe how their subsidiaries are managed and how technology has assisted them in their corporate and/or local operations. Further, identify one Philippine company that has gone worldwide (eg. Jollibee and BENCH) and describe their strategies. Evaluate the strategies of foreign companies with that of Philippine corporations.
HONDA
History
In October 1946, Soichiro Honda established the Honda Technical Research Institute in Hamamatsu, Japan, to develop and produce small 2-cycle motorbike engines. Two years later, Honda Motor Company, Ltd. was born, and in 1959 Honda opened its first storefront in Los Angeles with six industrious employees.
Operations OverviewWe opened our first U.S. plant in 1979 and have evolved into a company that directly employs more than 25,000 Americans. More than 100,000 workers are employed at authorized Honda automobile, motorcycle and power-equipment dealerships in the United States. Tens of thousands of additional Americans are employed by more than nearly 600 U.S. suppliers from which Honda purchases parts and materials. Honda is proud to provide jobs that help better the American economy and will continue to work hard to do so.
- How Honda manage their Subsidiary - | Notes to Consolidated Financial Statements |
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| Honda Motor Co., Ltd. and Subsidiaries |
1. General and Summary of Significant Accounting Policies
(a) Description of Business
Honda Motor Co., Ltd. (the "Company") and its subsidiaries (collectively "Honda") develop, manufacture, distribute and provide financing for the sale of its motorcycles, automobiles and power products. Honda's manufacturing operations are principally conducted in 32 separate factories, 4 of which are located in Japan. Principal overseas manufacturing facilities are located in the United States of America, Canada, Mexico, the United Kingdom, France, Italy, Spain, China, India, Indonesia, Malaysia, Pakistan, the Philippines, Taiwan, Thailand, Vietnam, Brazil and Turkey.
Net sales and other operating revenue by category of activity for the year ended March 31, 2006 were derived from: motorcycle business 12.4%, automobile business 80.8%, financial services 3.1%, and power products and other businesses 3.7%. Operating income by category of activity for the year ended March 31, 2006 was derived from: motorcycle business 13.1%, automobile business 72.3%, financial services 10.4%, and power products and other businesses 4.2%. The total assets at March 31, 2006 were attributable to: motorcycle business 9.5%, automobile business 45.0%, financial services 47.4%, power products and other businesses 2.8%, and corporate assets (net of company-wide accounts eliminated in consolidation) (4.7%).
Honda sells motorcycles, automobiles and power products in most countries in the world. For the year ended March 31, 2006, 79.6% of net sales and other operating revenue (¥7,885,997 million; $67,132 million) was derived from subsidiaries operating outside Japan (2005: ¥6,666,923 million, 2004: ¥6,283,459 million). Net sales and other operating revenue for the year ended March 31, 2006 was geographically broken down based on the location of customers as follows: Japan 17.1%, North America 55.1%, Europe 10.2%, Asia 11.0% and others 6.6%. For the year ended March 31, 2006, 57.8% of operating income (¥502,410 million; $4,277 million) was generated from foreign subsidiaries, disregarding the effect of elimination of unrealized profits between domestic operations and foreign operations (2005: ¥456,282 million, 2004: ¥404,464 million). Also, 74.3% of Honda's assets at March 31, 2006 (¥7,854,270 million; $66,862 million) was identified with foreign operations (2005: ¥6,597,463 million).
(b)Basis of Presenting Consolidated Financial Statements
The Company and its domestic subsidiaries maintain their books of account in conformity with financial accounting standards of Japan, and its foreign subsidiaries generally maintain their books of account in conformity with those of the countries of their domicile.
The consolidated financial statements presented herein have been prepared in a manner and reflect the adjustments which are necessary to conform them with U.S. generally accepted accounting principles.
(c) Consolidation Policy
The consolidated financial statements include the accounts of the Company, its subsidiaries and those variable interest entities where the Company is the primary beneficiary under FASB Interpretation No.46 (revised December 2003), "Consolidation of Variable Interest Entities". All significant intercompany balances and transactions have been eliminated in consolidation.
Investments in affiliates in which the Company has the ability to exercise significant influence over their operating and financial policies, but where the Company does not have a controlling financial interest are accounted for using the equity method.
Minority interests in net assets and income are not significant and, accordingly, are not presented separately in the accompanying consolidated balance sheets and statements of income. The amount of minority interest recognized in earnings, included in other expenses-other, for each of the years in the three-year period ended March 31, 2006 were ¥11,753 million, ¥11,559 million and ¥15,287 million ($130million), respectively.
(d) Use of Estimates
Management of Honda has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Significant items subject to such estimates and assumptions include, but are not limited to, allowance for credit losses, allowance for losses on lease residual values, valuation allowance for inventories and deferred tax assets, impairment of long-lived assets, product warranty, and assets and obligations related to employee benefits. Actual results could differ from those estimates.
(e) Revenue Recognition
Sales of manufactured products are recognized when persuasive evidence of an arrangement exists, delivery has occurred, title and risk of loss have passed to the customers, the sales price is fixed or determinable, and collectibility is probable.
Honda provides dealer incentives passed on to the end customers generally in the form of below-market interest rate loans or lease programs. The amount of interest or lease subsidies paid is the difference between the amount offered to retail customers and a market-based interest or lease rate. Honda also provides dealer incentives retained by the dealer, which generally represent discounts provided by Honda to the dealers. These incentives are classified as a reduction of sales revenue as the consideration is paid in cash and Honda does not receive an identifiable benefit in exchange for this consideration. The estimated costs are accrued at the time the product is sold to the dealer.
Interest income from finance receivables is recognized using the interest method. Finance receivable origination fees and certain direct origination costs are deferred, and the net fee or cost is amortized using the interest method over the contractual life of the finance receivables.
Finance subsidiaries of the Company periodically sell finance receivables. Gain or loss is recognized equal to the difference between the cash proceeds received and the carrying value of the receivables sold and is recorded in the period in which the sale occurs. Honda allocates the recorded investment in finance receivables between the portion(s) of the receivables sold and portion(s) retained based on the relative fair values of those portions on the date the receivables are sold. Honda recognizes gains or losses attributable to the change in the fair value of the retained interests, which are recorded at estimated fair value and accounted for as "trading" securities. Honda determines the fair value of the retained interests by discounting the future cash flows. Those cash flows are estimated based on prepayments, credit losses and other information as available and are discounted at a rate which Honda believes is commensurate with the risk free rate plus a risk premium. A servicing asset or liability is amortized in proportion to and over the period of estimated net servicing income. Servicing assets and servicing liabilities at March 31, 2005 and 2006 were not significant.
(f) Cash Equivalents
Honda considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.
(g) Inventories
Inventories are stated at the lower of cost, determined principally by the first-in, first-out method, or market.
(h) Investments in Securities
Honda classifies its debt and equity securities in one of three categories: available-for-sale, trading, or held-to-maturity. Debt securities that are classified as "held-to-maturity" securities are reported at amortized cost. Debt and equity securities classified as "trading" securities are reported at fair value, with unrealized gains and losses included in earnings. Other debt and equity securities are classified as "available-for- sale" securities and are reported at fair value, with unrealized gains or losses, net of deferred taxes included in accumulated other comprehensive income (loss) in the stockholders' equity section of the consolidated balance sheets. Honda did not hold any "trading" securities at March 31, 2005 and 2006, except for retained interests in the sold pools of finance receivables, which are accounted for as "trading" securities and included in finance subsidiariesreceivables.
Honda periodically reviews the fair value of investment securities. If the fair value of investment securities has declined below our cost basis and such decline is judged to be other-than-temporary, Honda recognizes the impairment of the investment securities and the carrying value is reduced to its fair value through a charge to income. The determination of other-than-temporary impairment is based upon an assessment of the facts and circumstances related to each investment security. In determining the nature and extent of impairment, Honda considers such factors as financial and operating conditions of the issuer, the industry in which the issuer operates, degree and period of the decline in fair value and other relevant factors.
(i) Goodwill
Goodwill is not amortized but instead is tested for impairment at least annually. Goodwill is considered impaired if its estimated fair value is less than the carrying value. Honda completed its annual test effective March 31, 2004, 2005 and 2006 and concluded no impairment needed to be recognized. The carrying amount of goodwill at March 31, 2005 and 2006 was ¥17,887 million and ¥27,951 million ($238 million), respectively.
(j) Depreciation
Depreciation of property, plant and equipment is calculated principally by the declining-balance method based on estimated useful lives and salvage values of the respective assets.
The estimated useful lives used in computing depreciation of property, plant and equipment are as follows:
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Honda's long-lived assets and certain identifiable intangibles having finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of by sale are reported at the lower of the carrying amount or estimated fair value less costs to sell.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
(m) Product-Related Expenses
Advertising and sales promotion costs are expensed as incurred. Advertising expenses for each of the years in the three-year period ended March 31, 2006 were ¥239,332 million, ¥246,997 million and ¥287,901 million ($2,451 million), respectively. Provisions for estimated costs related to product warranty are made at the time the products are sold to customers or new warranty programs are initiated. Estimated warranty expenses are provided based on historical warranty claim experience with consideration given to the expected level of future warranty costs as well as current information on repair costs. Included in warranty expenses accruals are costs for general warranties on vehicles Honda sells and product recalls.
(n) Basic Net Income per Common Share
Basic net income per common share has been computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each year. The weighted average number of common shares outstanding for the years ended March 31, 2004, 2005 and 2006 was 953,638,262, 933,767,978 and 920,399,836 respectively. There were no potentially dilutive shares outstanding during the years ended March 31, 2004, 2005 or 2006.
(o)Foreign Currency Translation
Foreign currency financial statement amounts are translated into Japanese yen on the basis of the year-end rate for all assets and liabilities and the weighted average rate for the year for all income and expense amounts. Translation adjustments resulting therefrom are included in accumulated other comprehensive income (loss) in the stockholders' equity section of the consolidated balance sheets.
Foreign currency receivables and payables are translated at the applicable current rates on the balance sheet date. All revenue and expenses associated with foreign currencies are converted at the rates of exchange prevailing when such transactions occur. The resulting exchange gains or losses are reflected in other income (expense) in the consolidated statements of income.
Foreign currency transaction gains (losses) included in other income (expenses)—other for each of the years in the three-year period ended March 31, 2006 are as follows:
(p)Derivative Financial Instruments
Honda has entered into foreign exchange agreements and interest rate agreements to manage currency and interest rate exposures. These instruments include foreign currency forward contracts, currency swap agreements, currency option contracts and interest rate swap agreements.
Honda recognizes the fair value of all derivative financial instruments in its consolidated balance sheet.
Starting from the year ended March 31, 2006, Honda adopted hedge accounting for certain foreign currency forward contracts related to forecasted foreign currency transactions between the Company and its subsidiaries. These are designated as cash flow hedges on the date derivative contracts entered into. The Company has a currency rate risk management policy documented. In addition, it documents all relationships between all derivative financial instruments designated as cash flow hedges and the relevant hedged items to identify the relationship between them. The Company assesses, both at the hedge's inception and on an ongoing basis, whether the derivative financial instruments designated as cash flow hedge are highly effective to offset changes in cash flows of hedged items.
When it is determined that a derivative financial instrument is not highly effective as a cash flow hedge, when the hedged item matures, is sold or is terminated, or when it is identified that the forecasted transaction is no longer probable, the Company discontinues hedge accounting. To the extent derivative financial instruments are designated as cash flow hedges and have been assessed as being highly effective, changes in their fair value are recognized in other comprehensive income (loss). The amounts are reclassified into earnings in the period when forecasted hedged transactions affect earnings. When these cash flow hedges prove to be ineffective, changes in the fair value of the derivatives are immediately recognized in earnings.
In conformity with Financial Accounting Standards (SFAS) No.133, changes in the fair value of derivative financial instruments not designated as accounting hedges are recognized in earnings in the period of the change.
The amount recognized in earnings included in other income (expenses)—other during the year ended March 31, 2004, 2005 and 2006 are ¥122,583 million gain, ¥44,905 million gain and ¥55,516 million ($473 million) loss, respectively. In relation to this, the Company included gains and losses on translation of debts of finance subsidiaries denominated in foreign currencies intended to be hedged of ¥36,410 million loss, ¥10,667 million gain and ¥45,046 million ($383 million) gain in other income (expenses)—other during the years ended March 31, 2004, 2005 and 2006, respectively. In addition, net realized gains and losses on interest rate swap contracts not designated as accounting hedges by finance subsidiaries of ¥38,894 million loss, ¥28,000 million loss and ¥827 million ($7 million) gain are included in other income (expenses)—other during the years ended March 31, 2004, 2005 and 2006, respectively. These gains and losses are presented on a net basis.
Honda doesn't hold any derivative financial instruments for trading purposes.
(q) Shipping and Handling Costs
Shipping and handling costs included in selling, general and administrative expenses for each of the years in the three-year period ended March 31, 2006 are as follows:
(r) Asset Retirement Liability
During the year ended March 31, 2006, Honda adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 47, "Accounting for Conditional Asset Retirement obligations-an interpretation of FASB Statement No. 143". FIN47 clarifies the term conditional asset retirement obligation as used in SFAS No. 143 and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. Asset retirement obligations covered by this Interpretation include those for which an entity has a legal obligation to perform an asset retirement activity, however the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity.
Adoption of FIN47 had no material impact on Honda's consolidated financial position or results of operations.
(s) New Accounting Pronouncements Not Yet Adopted
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4." SFAS No. 151 amends the guidance in ARB No.43, "Inventory Pricing," for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) requiring that those items be recognized as current-period expenses regardless of whether they meet the criterion of "so abnormal," as described in ARB No. 43. This statement also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. Management does not expect this statement to have a material impact on Honda's consolidated financial position or results of operations.
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 156, "Accounting for Servicing of Financial Assets". This statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 gives revised guidance as to when servicing assets and servicing liabilities should be recognized. It also revises guidance regarding the initial and subsequent measurement of servicing assets and liabilities. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006, with early adoption being permitted. Management is currently in process of determining whether to early adopt this statement and quantifying the financial impact of adoption. It is not anticipated that adoption will have a material impact on the Company's financial position or results of operations.
(t) Reclassifications
Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the presentation used for the year ended March 31, 2006. In the current year, management has classified cash dividends received from affiliates in operating activities in the consolidated statements of cash flows. Consequently management has revised the consolidated statements of cash flows for the years ended March 31, 2004 and 2005 to include such cash dividends in operating activities, instead of investing activities, to achieve a comparable presentation for all periods presented herein.
2. Basis of Translating Financial Statements
The consolidated financial statements are expressed in Japanese yen. However, the consolidated financial statements as of and for the year ended March 31, 2006 have been translated into United States dollars at the rate of ¥117.47= U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on March 31, 2006. Those U.S. dollar amounts presented in the consolidated financial statements and related notes are included solely for the reader. This translation should not be construed as a representation that all the amounts shown could be converted into U.S. dollars.
