Chapter 12

On March 19, 2014, Toyota Motor Corporation agreed to settle an outstanding legal issue with the U.S. Department of Justice by paying a $1.2 billion (USD) penalty. This amount represented approximately 1/3 of the company’s total profit in 2013. The issue related to a problem of unintended acceleration in various Toyota vehicles and the subsequent investigation of those problems. These problems received widespread media attention between November 2009 and January 2010, when Toyota recalled over 9 million vehicles worldwide to replace faulty floor mats and repair sticking accelerator pedals. The effect of this problem, and the resulting media frenzy, was significant: in one week of trading in January 2010, Toyota’s share price dropped by 15%. The total cost to the company is difficult to determine, but is likely several billion dollars when the effects of lost sales, repairs, and the settled and outstanding lawsuits are combined with the above penalty.

Companies like Toyota that manufacture complex consumer products can face significant product liabilities. Automobiles are likely to carry warranties that may require service over a period of several years. The costs of providing this service may be significant if there are product quality issues. As well, automobile manufacturers engage in a process of voluntary recalls when product faults potentially impact public safety. When product faults cause injury or death, the company faces further liabilities in the form of legal actions taken by the survivors.

From an accounting perspective, the question is whether these warranty and product safety costs represent liabilities and, if so, how can they be measured? On Toyota’s March 31, 2015, financial statement, an amount of 1,328,916 million yen was accrued as a “liability for quality assurance.” Note 13 describes this amount as a combination of estimated warranty costs and costs for recalls and other safety measures. Since 2013, this amount had risen by 15% from the previous year by 32%.

Toyota has recognized both the warranty costs and the recall costs as liabilities at the time of sale, based on the terms of the warranty contract and past experience. Although past experience can certainly provide a base for these estimations, there is no precise way to predict future expenditures, as there are numerous variables that affect product quality.

With respect to legal actions taken by customers, these are even more difficult to predict, as the results are determined through the due process of the legal system. As a consequence of the unintended acceleration issue, Toyota faced hundreds of lawsuits, both individual and class action, claiming a wide range of damages. Note 23 of Toyota’s March 31, 2015, financial statements indicated that the company was “unable to estimate a reasonably possible loss” beyond the amounts accrued.

It is clear that companies like Toyota face significant challenges in accounting for product warranty and product safety issues. These amounts do, however, need to be accrued and disclosed when possible, as the amounts can be material to the operation of the business.

(Sources: Douglas & Fletcher, 2014; Toyota Motor Corporation, 2016)