This excerpt taken from the TM 20-F filed Jun 24, 2005.
Cash flow hedges -
Toyota enters into interest rate swaps, and interest rate currency swap agreements to manage its exposure to interest rate risk, and foreign currency exchange risk mainly associated with funding in currencies in which it operates.
Interest rate swap agreements are used by Toyota to manage its exposure to the variability of interest payments due to the changes in interest rates arising principally from variable-rate debts issued by Toyota. Interest rate swap agreements, which are designated as, and qualify as cash flow hedges are executed as an integral part of specific debt transactions and the critical terms of the interest rate swaps and the hedged debt transactions are the same. Toyota uses interest rate currency swap agreements to manage the foreign-currency exposure to variability in functional-currency-equivalent cash flows principally from debts or borrowings denominated in currencies other than functional currencies.
Net derivative gains and losses included in other comprehensive income are reclassified into earnings at the time that the associated hedged transactions impact the income statement. For the year ended March 31, 2003, a net derivative loss of ¥790 million was reclassified to foreign exchange gain (loss), net in the accompanying consolidated statements of income. This net loss were offset by net gains from transactions being hedged. The components of each derivatives gain and loss were included in the assessment of hedge effectiveness, and no hedge ineffectiveness was reported because all critical terms of derivative financial instruments designated as, and qualify as, cash flow hedging instruments were same as those of hedged debt transactions. For the years ended March 31, 2004 and 2005, no gains or losses resulted from cash flow hedges were reported as no derivative instruments were designated as, and qualified as cash flow hedging instruments. Toyota does not expect to reclassify any gains or losses included in other comprehensive income as at March 31, 2005, into earnings in next twelve months because no derivative instruments were designated as, and qualified as, cash flow hedges.