There's been posts of it over the years; it all basically ends up in "mostly accurate... sometimes?"

I think we had a big theorycraft thread a long long time ago trying to figure out how Toyota calculates the mpg and such; but we never really settled on a consistent formula/theory.

The FSM has next to nothing in regards to how it works and how to check it's accuracy (which still extends to the newest models of Toyotas so "it's not reading properly" complaints are a pain.)

For example, I have 35's on my 4th gen V8 and I also installed a SpeedoHealer v4 to correct the speedometer (though technically not the actual vehicle speed signal output by the ABS module), my MPGs are generally 1+ real world calculations. i.e. in winter if it says I am getting about 13mpg, I'm usually getting closer to 12mpg. It does seem to become more accurate when I am on long trips/cruising. There's also the added possibility that it is averaging multiple tanks so you're looking an over all vehicle mpg and not tank to tank (though it does calculate your theoretical tank remaining.)

I'll see if I can dig up that thread.