C ONSOLIDATED F INANCIAL S TATEMENTS

Transcription

1 C ONSOLIDATED F INANCIAL S TATEMENTS Nissan Motor Acceptance Corporation and Subsidiaries For the Years Ended March 31, 2015, 2014, and 2013 With Report of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements Years Ended March 31, 2015, 2014, and 2013 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Balance Sheets...3 Consolidated Statements of Income and Comprehensive Income...6 Consolidated Statements of Equity...7 Consolidated Statements of Cash Flows...8 Notes to Consolidated Financial Statements

3 The Board of Directors and Stockholder Nissan Motor Acceptance Corporation Report of Independent Auditors We have audited the accompanying consolidated financial statements of Nissan Motor Acceptance Corporation and subsidiaries, which comprise the consolidated balance sheets as of March 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, equity and cash flows for each of the three fiscal years in the period ended March 31, 2015, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nissan Motor Acceptance Corporation and subsidiaries at March 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended March 31, 2015, in conformity with U.S. generally accepted accounting principles. Nashville, TN June 26, 2015 ey

5 Consolidated Balance Sheets (Dollars in Thousands, Except Par Value) March Assets Cash and cash equivalents $ 88,843 $ 145,980 Restricted cash 1,689,948 1,402,870 Finance receivables net: Retail receivables 15,254,538 12,448,477 Pledged retail receivables 12,007,191 11,579,483 Wholesale receivables 2,216,624 1,995,518 Pledged wholesale receivables 5,193,315 4,986,683 Loans to dealers 2,231,932 1,946,002 Other receivables 299, ,504 Total finance receivables 37,202,768 33,252,667 Allowance for credit losses (250,394) (256,978) Total finance receivables net 36,952,374 32,995,689 Investment in vehicle operating leases net: Leased vehicles net 13,792,941 12,677,113 Pledged leased vehicles net 4,600,028 4,653,910 Allowance for leased vehicle impairment and incentives (1,255,322) (911,563) Total investment in vehicle operating leases net 17,137,647 16,419,460 Receivables from affiliates and other net 769, ,869 Property net 59,808 65,350 Investments in affiliates 721, ,811 Deferred charges and other assets net 1,005, ,185 Deferred tax assets 904, ,294 Total assets $ 59,328,725 $ 53,898,

6 Consolidated Balance Sheets (continued) (Dollars in Thousands, Except Par Value) Liabilities and equity Liabilities: Borrowings: Short-term obligations 13,871,754 March $ $ 12,466,113 Term loans 15,365,488 11,511,720 Securitized debt 11,808,809 12,758,308 Corporate bonds 4,997,252 5,110,213 Total borrowings 46,043,303 41,846,354 Accounts payable and accrued liabilities 624, ,584 Deferred income and incentives 1,032, ,113 Other liabilities 890, ,674 Deferred tax liabilities 5,834,132 5,458,003 Total liabilities 54,425,087 49,887,728 Commitments and contingencies Equity: Nissan Motor Acceptance Corporation (NMAC) stockholder s equity: Common stock ($100 par value authorized, 8,000,000 shares; outstanding, 4,998,163 shares at March 31, 2015 and 2014) 499, ,816 Additional paid-in capital 170, ,616 Retained earnings 3,915,883 3,102,690 Accumulated other comprehensive loss: Unrealized gain on derivative instruments net of tax 25,228 (33,645) Foreign currency translation adjustment (77,060) (37,731) Net accumulated other comprehensive loss (51,832) (71,376) Total NMAC stockholder s equity 4,533,867 3,708,746 Noncontrolling interests 369, ,034 Total equity 4,903,638 4,010,780 Total liabilities and equity $ 59,328,725 $ 53,898,508 See accompanying notes

7 Consolidated Balance Sheets (Dollars in Thousands, Except Par Value) The following table presents the assets and liabilities of our consolidated variable interest entities as well as assets and liabilities transferred to unconsolidated VIEs in non-recourse securitization transactions accounted for as borrowings which have similar economic characteristics. Such assets can only be used to settle obligations of the consolidated variable interest entities or the unconsolidated VIEs involved in the borrowing transactions, and the creditors (or beneficial interest holders) do not have recourse to our general credit. All of these assets and liabilities are included in the consolidated balance sheets above. March Restricted cash $ 1,689,948 $ 1,402,870 Pledged retail receivables* 12,007,191 11,579,483 Pledged wholesale receivables 5,193,315 4,986,683 Allocated allowance for credit losses (109,953) (109,208) Pledged leased vehicles net 4,600,028 4,653,910 Allocated allowance for lease vehicle impairment and incentives (319,275) (246,025) Allocated deferred charges and other assets net 171, ,526 Total assets of VIEs $ 23,232,498 $ 22,465,239 Allocated short-term obligations $ 5,995,284 $ 3,946,029 Securitized debt** 11,808,809 12,758,308 Allocated deferred income and other liabilities 354, ,509 Total liabilities of VIEs $ 18,158,659 $ 17,009,846 See accompanying notes. * Approximately $1,220,714 and $1,494,272 related to non-recourse financing transactions with VIEs for which we are not the primary beneficiary at March 31, 2015 and 2014, respectively. ** Approximately $1,258,658 and $1,499,524 related to non-recourse financing transactions with VIEs for which we are not the primary beneficiary at March 31, 2015 and 2014, respectively

8 Consolidated Statements of Income and Comprehensive Income Revenues: Finance revenues: Leasing 3,716,690 Year Ended March $ $ 3,363,857 $ 3,047,639 Retail 1,130,812 1,071,504 1,047,915 Wholesale 203, , ,546 Loans to dealers 73,455 74,156 69,132 Total finance revenues 5,124,325 4,704,196 4,340,232 Other income net 221, , ,331 Total revenues (Note 6) 5,345,798 4,857,258 4,474,563 Expenses: Depreciation on leased vehicles 2,769,068 2,468,750 2,205,627 Interest net (Note 6) 830, , ,471 Provision for losses finance receivables net 227, ,513 82,369 Provision for impairment investment in vehicle operating leases net 76,091 62,182 (191) General and administrative (Note 6) 257, , ,329 Total expenses 4,160,468 3,742,869 3,267,605 Income before income taxes 1,185,330 1,114,389 1,206,958 Income tax expense 308, , ,895 Net income 876, , ,063 Net income attributable to noncontrolling interests 70,464 68,372 54,737 Net income attributable to NMAC 806, , ,326 Other comprehensive income (loss) net of tax: Unrealized gain (loss) on derivative instruments during the period net of tax of $(45,106), $(39,054) and $13,281 in 2015, 2014, and 2013, respectively 97,014 72,731 (25,775) Foreign currency translation adjustment (77,117) (68,388) 34,240 Total other comprehensive income (loss) net of tax 19,897 4,343 8,465 Comprehensive income 896, , ,528 Comprehensive income attributable to noncontrolling interests 70,817 49,649 66,336 Comprehensive income attributable to NMAC $ 825,644 $ 787,901 $ 788,192 See accompanying notes

9 Consolidated Statements of Equity Years Ended March 31, 2015, 2014, and 2013 NMAC Stockholder s Equity Accumulated Number of Additional Other Common Common Paid-In Retained Comprehensive Noncontrolling Total Shares Stock Capital Earnings Loss Interests Equity Balance April 1, ,998,163 $ 499,816 $ 179,723 $ 2,446,529 $ (91,308) $ 186,069 $ 3,220,829 Additional paid-in capital Dividend paid to NNA (600,000) (600,000) Net income 791,326 54, ,063 Other comprehensive income (loss): Unrealized loss on derivative instruments during the period net of tax of $13,821 and reclassification adjustments (21,895) (3,880) (25,776) Foreign currency translation adjustment 18,761 15,479 34,240 Balance March 31, ,998, , ,772 2,637,855 (94,442) 252,414 3,475,415 Additional paid-in capital (2,156) (29) (2,185) Dividend paid to NNA (300,000) (300,000) Net income 764,835 68, ,207 Other comprehensive income (loss): Unrealized loss on derivative instruments during the period net of tax of $(39,054) and reclassification adjustments 57,918 14,813 72,731 Foreign currency translation adjustment (34,852) (33,536) (68,388) Balance March 31, ,998, , ,616 3,102,690 (71,376) 302,034 4,010,780 Deconsolidation of affiliate (7,616) 7,093 (3,080) (3,603) Net income 806,100 70, ,564 Other comprehensive income(loss): Unrealized gain on derivative instruments during the period net of tax of $(45,106) and reclassification adjustments 58,873 38,141 97,014 Foreign currency translation adjustment (39,329) (37,788) (77,117) Balance March 31, ,998,163 $ 499,816 $ 170,000 $ 3,915,883 $ (51,832) $ 369,771 $ 4,903,638 See accompanying notes. #REF! #REF! #REF! #REF! #REF!

10 Consolidated Statements of Cash Flows Year Ended March Operating activities Net income $ 876,564 $ 833,207 $ 846,063 Adjustments to reconcile net income to net cash provided by operating activities: Change in unrealized gains on derivative instruments, net of reclassification adjustment (24,326) 13,075 3,795 Provision for losses finance receivables net 227, ,513 82,369 Provision (release of provision) for impairment investment in vehicle operating leases net 76,091 62,182 (191) Depreciation on leased vehicles 2,769,068 2,468,750 2,205,627 Amortization of deferred income (761,170) (360,139) (363,344) Amortization of debt issuance costs 19,899 20,595 12,908 Other depreciation and amortization 43,890 18,241 29,880 Deferred tax liabilities 374, , ,293 Interest earned on restricted cash (232) (203) (429) Other (38,930) Changes in operating assets and liabilities: Accounts receivable net (2,603) (59,994) (4,332) Receivables from affiliates and other net 586,941 48, ,280 Deferred charges and other assets net (388,363) (13,104) (50,301) Accounts payable and accrued liabilities 168, , ,920 Deferred retail and lease subvention 915, , ,404 Net cash provided by operating activities 4,843,138 3,881,171 3,578,942 Investing activities Change in restricted cash (286,846) (155,108) (366,053) Purchases of investments (286,287) Proceeds for sale of investment 18,758 Proceeds from maturity of investments 296,077 Vehicles acquired for lease (9,077,894) (8,934,610) (7,971,739) Proceeds from sales of leased vehicles 5,505,733 4,405,533 3,741,177 Originations of retail finance receivables (16,024,816) (14,527,714) (11,991,111) Principal collected from retail finance receivables 12,427,286 11,063,596 9,311,893 Net originations of wholesale finance receivables (1,786,335) (1,115,356) (1,638,942) Originations of loans to dealers (1,499,817) (1,367,619) (494,645) Principal collected from loans to dealers 1,209,444 1,150, ,905 Net (acquisition) disposal of property and software (270) (65,679) 8,300 Net cash used in investing activities (9,514,757) (9,536,794) (9,079,215)

11 Consolidated Statements of Cash Flows (continued) Year Ended March Financing activities Contributions to equity from noncontrolling interests $ $ (2,186) $ 58 Net proceeds (payments) from short-term obligations less than or equal to 90 days (2,291,920) (193,951) (793,604) Payments of short-term obligations greater than 90 days (3,931,203) (3,294,013) (2,812,991) Proceeds from short-term obligations greater than 90 days 5,690,079 5,383,105 2,969,478 Proceeds from issuance of collateralized debt 10,695,522 10,714,632 10,488,495 Payments on collateralized debt (9,588,349) (9,327,818) (6,136,637) Proceeds from issuance of term loans payable 5,149,388 2,617,707 3,185,937 Payments on term loans payable (1,056,219) (1,868,559) (2,284,407) Proceeds from issuance of corporate bonds 1,045,365 1,990,754 1,742,990 Payments on corporate bonds (1,114,500) (250,000) Dividends paid (300,000) (600,000) Net cash provided by financing activities 4,598,163 5,719,671 5,509,318 Net increase (decrease) in cash and cash equivalents (73,456) 64,048 9,045 Effect of exchange rate changes on cash 16,319 (1,583) 937 Cash and cash equivalents beginning of year 145,980 83,515 73,533 Cash and cash equivalents end of year $ 88,843 $ 145,980 $ 83,515 Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 772,929 $ 720,234 $ 705,231 Income taxes net $ 256,278 $ 42,792 $ 287,311 Supplemental schedules of noncash activities Unrealized gain (loss) from cash flow hedges as a component of deferred charges and other assets, deferred income and other liabilities and other comprehensive loss net of taxes $ 58,873 $ 57,919 $ (13,288) Noncash acquisition of real property through repossession $ 1,673 $ $ Long-term interest payment received in capital stock in lieu of cash $ 15,984 $ 13,120 $ 19,602 See accompanying notes

12 Notes to Consolidated Financial Statements March 31, General Nissan Motor Acceptance Corporation (NMAC, we, us, or our) is a wholly owned subsidiary of Nissan North America, Inc. (NNA), which is a wholly owned subsidiary of Nissan Motor Co., Ltd. (NML), a Japanese corporation. NMAC purchases retail installment obligations and lease contracts from dealers in connection with new and used vehicle financing arrangements. NMAC also provides financing to dealers for the acquisition of vehicles for sale, working capital, and dealership mortgages. Nissan-Infiniti LT (NILT), NILT Trust, Nissan Auto Receivables Corporation II (NARC II), Nissan Warehouse LLC (NWL), Nissan Auto Leasing LLC II (NALL II), Nissan Auto Receivables Finance, Inc. (NARF), Nissan Wholesale Receivables Corporation II (NWRC II), Infiniti Auto Leasing Corporation (IALC), Nissan Alberta Company ULC (NAC), Nissan AERO, LLC (NAERO), Nissan Collateralized Auto Receivables LLC (NCAR), and Nissan Signature Direct Finance, LLC (NSDF) are wholly owned direct or indirect subsidiaries of NMAC. NARC II, NARF, and NCAR were incorporated in 2000, 2002, and 2009, respectively, for the purpose of facilitating the securitization and financing of retail receivables. NILT was established in 1998 for the purpose of taking assignments of automobile leases from Nissan and Infiniti dealers and obtaining title to the related leased vehicles. NILT Trust was established in 1998 for the sole purpose of acting as the undivided trust interest beneficiary of NILT. NALL II was established in 2001 and IALC was established in 2004, for the purpose of facilitating the securitization and financing of automobile leases and related leased vehicles. NWL was established in 2001 for the purpose of facilitating the securitization and financing of retail installment contracts and automobile leases and related leased vehicles. NWRC II was established in 2003 for the purpose of facilitating the securitization and financing of dealer floorplan receivables. NAC was established in 2008 for the purpose of facilitating financing in Canada. NAERO was established in 2013 for the purpose of owning and leasing a corporate aircraft. NSDF was established in 2014 for the purpose of direct consumer financing of replacement batteries for Electric Vehicles (EV). In addition, NMAC owns a 51.0% controlling interest in NR Finance México, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada (NRFM), a Mexican corporation. The remaining 49.0% of NRFM is owned by NML affiliates. NRFM was established in Mexico to provide consumer financing for new and used vehicles and commercial financing to dealers. As of March 31, 2015 and 2014, NRFM s net assets totaled $714,358 and $569,829, respectively. In March 2015, a third-party purchased approximately 38% of the Company s interest in its subsidiary, Alliance Inspection Management Holding, Inc. (AIMH). Additionally, the third-party also purchased common shares issued by AIMH. As a result of these transactions, NMAC holds a 50% equity interest in AIMH. Prior to

13 1. General (continued) the transactions, NMAC had consolidated AIMH. Subsequent to the transactions, NMAC determined that it does not have a controlling interest in AIMH and as a result, the Company has deconsolidated AIMH in March 2015 and recognized a gain of $34,400 in other income net in the accompanying consolidated statement of income and comprehensive income for the year ended March 31, The remaining investment in AIMH is accounted for as an equity method investment. NMAC and its subsidiaries are collectively referred to as the Company. 2. Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of NMAC, its controlled subsidiaries and all variable interest entities (VIEs) for which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE s economic performance and the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE. To assess whether we are the primary beneficiary, we consider all the facts and circumstances including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE s economic performance and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of a VIE. To assess whether we have the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, we consider all of our economic interests, including debt and equity interests, servicing rights and fee arrangements, and any other variable interests in the VIE. If we determine that we are the party with the power to make the most significant decisions affecting the VIE, and we have a potentially significant interest in the VIE, then we consolidate the VIE

14 2. Summary of Significant Accounting Policies (continued) We perform ongoing reassessments of whether we are the primary beneficiary of a VIE. The reassessment process considers whether we have acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework. The VIE assets presented in the balance sheet can only be used to settle the obligations of the VIE and serve as the primary repayment for the asset-backed securities issued by these entities. Investors in the asset-backed securities issued by VIE s do not have general recourse to NMAC s general credit, with the exception of customary representation and warranty repurchase provisions and indemnities. The asset backed securitization transactions are typically overcollateralized and further supported by restricted cash balances. Losses on the receivables pledged in asset backed securitization transactions generally do not accrue to the investors until the amount of losses on pledged assets exceeds the overcollateralization amount plus any related restricted cash balances. As a result of this overcollateralization and the restricted cash balances, losses on these pledged assets and the related VIE s have generally accrued to the Company. The Company has certain securitization transactions with an affiliate. Due to rights we hold, the asset transfers involving the affiliate are accounted for as non-recourse financings on the consolidated balance sheets. The trusts to which the assets are transferred are considered to be VIEs, however we do not consider ourselves the primary beneficiary. After the transfers, we are not exposed to losses on the assets as all significant risks transfer to the affiliate and our affiliate also receives the benefits from the assets. The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (GAAP). Cash and Cash Equivalents The Company considers investments purchased with an original maturity of three months or less to be cash equivalents. Such investments are accounted for at cost which approximates fair value

15 2. Summary of Significant Accounting Policies (continued) Restricted Cash Restricted cash consists of compensating balances maintained for securitization trusts and amounts relating to warehouse lending facilities in connection with loan, lease, and floorplan asset transfers accounted for as collateralized borrowings. Cash reserve accounts are maintained at predetermined amounts for certain securitization activities in the event that deficiencies occur in cash flows owed to the investors. Retail Receivables Retail receivables are generally due in monthly installments over a period of one to six years and are collateralized by liens on the related vehicles. Interest income on these receivables is calculated using the effective interest method and is recorded as earned. The accrual of interest income is generally suspended after a loan becomes 120 days delinquent or upon repossession of the underlying collateral, whichever occurs first. NRFM suspends the accrual of interest income after a loan becomes 90 days delinquent. When a loan is placed on nonaccrual, unpaid interest is reversed against interest income. Interest income on nonaccrual loans, if recognized, is either recorded using the cash basis method of accounting or recognized at the end of the loan after the principal has been reduced to zero, depending on the type of loan. If and when borrowers demonstrate the ability to repay a loan in accordance with the contractual terms of a loan classified as nonaccrual, the loan may be returned to accrual status. Loans are generally charged off when they are delinquent for over 120 days. Wholesale Receivables The Company provides financing to certain dealers for the purchase of vehicle inventory. The receivables are collateralized by the related vehicles. Interest income on these receivables is calculated using the effective interest method and is recorded as earned. Accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, the borrower s financial condition is such that collection of interest is doubtful

16 2. Summary of Significant Accounting Policies (continued) Loans to Dealers Loans to dealers primarily consist of mortgage, equipment, and capital loans and direct finance leases to dealers. The loans to dealers are collateralized by liens on the related real and personal property. Interest income on these receivables is calculated using the effective interest method and is recorded as earned. Accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, the borrower s financial condition is such that collection of interest is doubtful. Equipment leases, included in loans to dealers, consist of signs leased to dealers on capital leases. At lease commencement, the aggregate future minimum lease payments, deferred initial direct costs, and unearned income (collectively, Net Investment) are recorded. Income is recognized over the life of the lease to approximate a level rate of return on the Net Investment. Other Receivables Other receivables primarily consist of dealer parts receivables purchased from NNA, interest receivable on retail and wholesale loans and loans to dealers, payments receivable on leases, and charges receivable from customers for excess mileage and excess wear and tear upon lease termination. Origination Fees Origination fees and certain initial direct costs associated with the originations of loans and lease receivables are included in retail receivables, pledged retail receivables, wholesale receivables, and other receivables, as applicable, in the accompanying consolidated balance sheets and are capitalized and amortized over the related loan term using the effective interest method or lease term using the straight line method. Allowance for Credit Losses The allowance for credit losses represents management s estimate of incurred losses in the lending portfolios. Portions of the allowance for credit losses are specified to cover the estimated losses on loans made to dealers specifically identified for impairment. The unspecified portion of

17 2. Summary of Significant Accounting Policies (continued) the allowance for credit losses covers probable and estimable losses on the homogeneous portfolios of finance receivables and loans collectively evaluated for impairment. Additions to the allowance for credit losses are made by charges to the income statement as a provision for credit losses. Amounts determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged-off amounts are credited to the allowance for credit losses. The Company performs periodic reviews of its lending portfolios to identify inherent risks and to assess the overall collectability of those portfolios. The allowance relates to portfolios collectively reviewed for impairment, generally consumer finance receivables and loans, and is based on aggregated portfolio evaluations by product type. Loss models are utilized for these portfolios which consider a variety of factors, including, but not limited to, historical loss experience, current economic conditions and loss trending, anticipated repossessions or foreclosures based on portfolio trends, delinquencies and credit scores, by receivable and loan type. Loans made to dealers are generally reviewed on an individual loan basis and, if necessary, an allowance is established for individual loan impairment. Reserves on loans made to dealers are based on factors, including, but not limited to, historical loss experience, current economic conditions, collateral performance and performance trends within specific geographic and portfolio segments, and any other pertinent information, which result in the estimation of general allowances for credit losses. The allowance related to specifically-identified impaired loans made to dealers is established based on the estimated fair value of the collateral for loans that are solely dependent on the collateral for repayment, discounted expected cash flows, or observable market prices. The evaluation of these factors for both consumer and commercial finance receivables and loans involves complex objective and subjective judgments. Securitization of Finance Receivables and Related Securitized Debt The Company raises a significant portion of its funds to meet borrowing needs through the use of asset-backed securitizations. Finance receivable securitizations are accounted for as collateralized borrowings. These securitizations are structured legally as sales, but for accounting

18 2. Summary of Significant Accounting Policies (continued) purposes are treated as collateralized borrowings. These securitizations do not meet the criteria for derecognition as the trusts to which such assets have been transferred are VIEs that are controlled by the Company. In addition, certain securitized receivables transferred to an affiliate were not proven to be beyond the reach of creditors. Accordingly, the finance receivables remain on the consolidated balance sheets and can only be used to settle the VIE s obligations (included in pledged retail receivables and pledged wholesale receivables in the accompanying consolidated balance sheets). Retained interests are not created for accounting purposes. Corresponding public debt issuances are included in securitized debt, and private short-term warehouse transactions are included in short-term obligations in the accompanying consolidated balance sheets, although such obligations are only secured by and payable from the respective trust s or other issuing entity s assets. There are no cross-collateralization agreements between the issuances of debt by the securitization trusts. The Company records interest income on securitized finance receivables over the life of the loans and interest expense on the debt issued in the securitizations over the life of the securitizations. Deferred debt issuance costs related to the debt are included in deferred charges and other assets in the accompanying consolidated balance sheets and are amortized on a level yield basis over the life of the debt. Investment in Vehicle Operating Leases Net One of the Company s subsidiaries, NILT, purchases vehicles from dealers that have been leased to third parties through financing arrangements with NILT. Investment in vehicle operating leases net represents the leased vehicles at cost less accumulated depreciation and an allowance for incentives and leased vehicle impairment. Income from operating leases, included in leasing revenues in the accompanying consolidated statements of income and comprehensive income, is recorded as scheduled payments become due. Impairment of leased vehicles occurs primarily due to the separate or combined effects of declines in the estimated residual values of vehicles at the end of the lease, excess mileage and wear and tear, and decreases in expected lease cash flows due to credit issues with the underlying lessees. Depreciation expense on vehicles subject to operating leases is provided on a straight-line basis in an amount necessary to reduce the leased vehicle value to its contractual residual value at the end of the lease term

19 2. Summary of Significant Accounting Policies (continued) The Company measures for impairment only upon determination that an impairment indicator exists and that recovery of the full residual value is not expected. If it is determined that the asset may not be recoverable, impairment is recorded against the basis of the vehicle for the amount in which the estimated discounted cash flows will not exceed the carrying value of the asset. Contractual residual values on matured leased vehicles are guaranteed by NNA primarily from residual value support from NNA as long as the lease has not experienced a credit event (i.e., default by the lessee). Impairment reserves for leased vehicles resulting from credit issues are the Company s responsibility and are maintained in an amount considered by management to be appropriate in consideration of historical and other factors that affect the carrying value. Adjustments to such reserves are included in provision for impairment investment in vehicle operating leases in the accompanying consolidated statements of income and comprehensive income. Reductions to the impairment reserve resulting from credit issues are principally the result of disposition of repossessed leased vehicles before completion of the original lease term. Charges to the impairment reserve for residual value losses result primarily from gains/losses at the disposition of matured leased vehicles. Repossessed lease and off-lease vehicles that have not yet been sold at auction are recorded at the lower of cost or fair value and reported in deferred charges and other assets net in the accompanying consolidated balance sheets. In addition to NNA providing residual value support for leases that have not been subject to a credit event, the Company has agreements with NNA that provide for interest supplements and other support payments on certain leasing transactions. These subvention payments from NNA related to investment in vehicle operating leases are recorded by the Company as deferred income. The subvention is then amortized, on a straight-line basis, into leasing revenues over the contractual life of the lease. Upon prepayment of a lease, any remaining unamortized subvention is recognized as leasing revenue. Leased vehicles titled in NILT s name are allocated from time to time to Special Units of Beneficial Interests (SUBIs), which are pledged as collateral for certain financing arrangements. Debt security offerings secured by such pledged SUBIs are included in securitized debt, and

20 2. Summary of Significant Accounting Policies (continued) short-term private placement warehouse borrowings are included in short-term obligations in the accompanying consolidated balance sheets. Leased vehicles that collateralize the SUBIs are presented separately in the accompanying consolidated balance sheets as pledged leased vehicles net. Derivative Financial Instruments The Company uses derivative financial instruments to manage its exposure arising from changes in interest rates and foreign currency exchange rates. The derivative financial instruments include interest rate caps, foreign currency swaps and interest rate swaps. The Company does not hold or issue derivative financial instruments for trading purposes. The use of derivative financial instruments requires the Company to make assumptions in determining fair market values, which may differ substantially at each reporting date. The Company records the fair values of derivatives on the consolidated balance sheets as assets or liabilities, which are included in deferred charges and other assets net and other liabilities. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Certain derivative transactions qualify for hedge accounting. For a derivative designated as a fair value hedge, changes in the fair value of the derivative are recorded in net income and changes in fair value of the hedged item attributable to the hedged risk are recognized in net income. For a derivative designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in accumulated other comprehensive income (OCI) and are recognized in net income when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in other income net and expensed in the period in which the changes occur. If a derivative in an economic hedging relationship is not designated in an accounting hedge relationship or if a derivative designated in an accounting hedge relationship has become ineffective, changes in the fair value of the derivative are recorded in other income net

21 2. Summary of Significant Accounting Policies (continued) Borrowings The Company uses various short-term and long-term financing instruments through capital markets and commercial paper borrowings to finance its operations, as well as borrowings from affiliates. The Company considers borrowings with remaining maturities within twelve months of the balance sheet date to be short-term and borrowings with remaining maturities more than twelve months from the balance sheet date to be long-term. Income Taxes The Company, excluding the foreign entity NRFM which files an income tax return in Mexico, files a consolidated U.S. income tax return and, in certain instances, combined state income tax returns with NNA and other members of the affiliated group. Under the tax allocation agreement with NNA, each group member with taxable income is allocated 100% of its respective current federal tax liability calculated on a separate company basis. Any member without a current federal tax liability on a separate company basis is allocated 100% of the tax benefits of its tax losses and credits that are realized by the group. For those states in which the Company, excluding NRFM, is included in a combined tax return with NNA and other group members, current taxes are allocated in proportion to each member s contribution to the combined tax liability or receivable. The Company provides for deferred income taxes arising from future tax consequences of events that have been recognized in the Company s consolidated financial statements or tax returns on a separate company basis. The effects of these future tax consequences are based on enacted laws and rates. Deferred tax assets in the accompanying consolidated balance sheets are recognized subject to management s judgment that realization is more likely than not. The Company adjusts these deferred tax assets to their realizable value through the recording of a valuation allowance. In making such determination, the Company considers all available positive and negative evidence, including potential carryback claims, scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and projected future taxable income

22 2. Summary of Significant Accounting Policies (continued) Uncertain tax positions are evaluated under the standards of ASC Topic , Income Taxes, (ASC Topic ) which provides a comprehensive model for the recognition, measurement, presentation and disclosure of uncertain tax positions that a company has taken or expects to take on a tax return. ASC Topic provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination. Revenue Recognition Revenue from finance receivables is recognized using the effective interest method. Certain origination costs on receivables are deferred and amortized, using the effective interest method, over the term of the related receivable as a reduction in financing revenue. Rental revenue on operating leases is recognized on a straight-line basis over the term of the lease. Initial direct costs related to leases are deferred and amortized over the term of the lease. Agreements with NNA provide for interest supplements and other support payments to the Company on certain financing and leasing transactions. These subvention payments are recognized as income over the period that the related finance receivables and leases are outstanding using the effective interest and straight-line methods, respectively. Other Income Net Other income net primarily consists of fees from vehicle inspection services, interest earned on restricted cash balances, income earned on other investments, market value adjustments on derivative financial instruments not designated as hedges for accounting purposes or to the extent ineffective as a hedge, remeasurement of foreign currency denominated investments and debt, and gains or losses on equity method investments. Foreign Currency Balances and Transactions Revenues, costs, and expenses of foreign subsidiaries are translated to U.S. dollars at average period exchange rates. Assets and liabilities of foreign subsidiaries are translated to U.S. dollars at period-end exchange rates and the effects of these translation adjustments are reported as a component of accumulated other comprehensive income in equity. Foreign investments and debt are translated to U.S. dollars at period-end exchange rates and the effects of these translations are reported as a component of other income net

23 2. Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates. Estimates are used when accounting for items such as derivatives, allowance for credit losses, impairment allowances for leased vehicle residual value and credit related losses, deferred tax asset valuation allowances, uncertain tax provisions, recoverability of intangibles and other long-lived assets, and legal contingencies. Reclassifications Certain prior period balances have been reclassified to conform to the current presentation. Correction of a Classification Error For the year ended March 31, 2014, the Company identified and corrected a classification error related to pledged and unpledged retail and wholesale receivables. The Company determined that the error correction was immaterial to the consolidated financial statements. The correction of the error resulted in an increase in pledged retail receivables from $10,450,913, as previously presented, to $11,579,483, a decrease to retail receivables from $13,577,047, as previously presented, to $12,448,477, a decrease in pledged wholesale receivables from $6,130,707, as previously presented, to $4,986,683, and an increase in wholesale receivables from $851,494, as previously presented, to $1,995,518 as of March 31, The revisions had no effect on the overall total pledged or unpledged finance receivables nor did it impact total finance receivables. The amount of pledged retail receivables, pledged wholesale receivables, retail receivables, and wholesale receivables presented in the consolidated balance sheets and in the notes to the consolidated financial statements have been revised to reflect this correction

24 2. Summary of Significant Accounting Policies (continued) Customer Concentration At March 31, 2015 and 2014, the three largest aggregate outstanding dealer or dealer group wholesale receivables totaled approximately $685,875 (10.1%) and $664,995 (10.7%), respectively, of all wholesale receivables. All wholesale receivables for these three customers were current as of March 31, Adverse changes in the business or financial condition of a dealer or dealer group to whom the Company has extended a substantial amount of financing or commitments, in particular when the financing is unsecured or not secured by realizable assets, could result in a material adverse effect on the Company s consolidated balance sheets, statements of income and comprehensive income, and statements of cash flows. Concentration of Credit Risk by Geography The states of California, New York, and Texas accounted for 13%, 11%, and 11%, respectively, at March 31, 2015, and the states of California, New York, and Texas accounted for 12%, 12%, and 11%, respectively, at March 31, 2014, of the Company s combined retail receivables and investments in vehicle operating leases in the U.S., including retail receivables and operating leases that are pledged. The states of California, Texas and Florida accounted for 18%, 16%, and 8%, respectively, at March 31, 2015, of the Company s loans to dealers. At March 31, 2014, the states of California, Texas and New York accounted for 19%, 15%, and 7%, respectively, of the Company s loans to dealers in the U.S. The states of California, Texas and New Jersey accounted for 16%, 11%, and 8%, respectively, at March 31, 2015, and the states of California, Texas and New Jersey 16%, 11%, and 8%, at March 31, 2014, respectively, of the Company s wholesale receivables in the U.S., including those that are pledged. Any material adverse changes to the economy of these states could have a material adverse effect on the Company s consolidated balance sheets, statements of income and comprehensive income, and statements of cash flows. See Note 3 regarding loans to customers and dealers in Mexico

25 2. Summary of Significant Accounting Policies (continued) Recent Accounting Pronouncements In July 2013, the FASB issued ASU , Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax loss, or a Tax Credit Carryforward Exists. This update was issued as Topic 740, Income Taxes, does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law to settle any additional income taxes that would result from the disallowance of a tax position or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, This update did not have a material impact on the Company s consolidated financial statements and disclosures. In May 2014, the FASB issued ASU , Revenue from Contracts with Customers, which develops a single standard for recognizing revenue and is intended to increase comparability across all industries. According to this guidance, revenue recognition should depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard also expands disclosure requirements in an effort to provide more useful information to users of the financial statements. ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 16, The Company is currently assessing the impact this update will have on its consolidated financial statements and disclosures

26 2. Summary of Significant Accounting Policies (continued) In June 2014, the FASB issued ASU , Transfers and Servicing, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This update changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. It also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. In addition to these changes, expanded disclosure requirements are also required. ASU is effective for the first interim or annual period beginning after December 15, 2014, except for the disclosures related to transactions accounted for as secured borrowings, which are effective for annual periods beginning after December 14, 2014 and interim periods beginning after December 15, The Company is currently assessing the impact this update will have on its consolidated financial statements and disclosures. In August 2014, the FASB issued ASU , Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity, which addresses the diverse practice of valuing the initial consolidation and subsequent measurement of the financial assets and financial liabilities of a collateralized financing entity. Many reporting entities currently elect or are required to account for the financial assets and the financial liabilities of a consolidated collateralized financing entity at fair value. The fair value, as determined under GAAP, of a collateralized financing entity s financial assets may differ from the fair value of its financial liabilities even when the financing liabilities have recourse only to the financial assets. This update addresses this measurement difference under a consistent valuing model. ASU is effective for fiscal years ending after December 15, 2016, and interim periods beginning after December 15, The Company is currently assessing the impact this update will have on its statements and disclosures. In November 2014, the FASB issued ASU , Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which addresses the diversity in practice by issuers and investors in making this evaluation. This update states that issuers and investors should determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The amendments are not intended to change current guidance, but instead are intended to clarify how this guidance is to be interpreted in an effort to reduce