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ANALYSIS OF THE FINANCIAL SITUATION
58
FURTHER DEVELOPMENT OF OPERATING PROFIT AND SEG-
MENT REPORTING. In 1997, the Financial Accounting Stand-
ards Board (FASB) revised the requirements for segment re-
porting with the newly issued SFAS 131, “Disclosures about
Segments of an Enterprise and Related Information”. In this
respect the definition of operating profit according to SFAS 14
is no longer applicable. SFAS 131 requires that the reporting
of segment financial results be consistent with the internal
reporting system and with the information used by operating
management to determine the allocation of financial resources
among the segments (management approach).
In light of the merger and the application of SFAS 131, we have
developed segment reporting and a definition of operating
profit that achieves the goal of better international comparabil-
ity and, at the same time, provides the best possible descrip-
tion of the economic situation for each segment.
The following table shows the transition from income before
financial income and income taxes reported in the statements
of income to the segment operating profit.
German and US companies treat company pensions in funda-
mentally different ways. German companies normally carry
the pension liabilities in the balance sheet which represent
provisions for future pension payments. US companies are re-
quired to fund pension obligations on an ongoing basis. This
funding takes the form of contributions by the US company to
external pension funds. The different method of funding
pension obligations by German and US companies results in
significant differences in the amount of pension expense
included in the statement of income. Pension cost for a US
company represents service costs and interest cost reduced by
investment earnings. In contrast the accrual to pension pro-
visions in the consolidated statements of a German company
comprise full interest costs in addition to the service costs.
Because of this inherent difference, we are removing pension
interest cost, net of plan investment income, from the
calculation of operating profit.
In the calculation of operating profit, we are including the
earnings and losses of those affiliated, associated and related
companies, which are not considered to be only financial
investments but in which we have entrepreneurial interest.
Gains and losses on the settlement of financial instruments,
which are intended to be hedges for our operations, but do not
qualify for hedge accounting treatment under US GAAP, are
also included in operating profit.
Consolidaded
Statements of Income
1) 1998: merger costs (after taxes); 1997: tax reduction due to the special
distribution of € 10.23 (DM 20.00) per share of Daimler-Benz AG
(€ 1,487 million) and reversal of the valuation allowance on deferred
tax assets (€ 1,003 million)
97
131,782
(103,721)
(16,229)
(4,971)
1,215
(685)
7,391
763
8,154
(3,075)
(130)
4,949
(129)
4,820
5,221
Revenues
Cost of sales
Selling, administrative
and other expenses
Research and development
Other income
Merger costs
Income before financial
income and income taxes
Financial income, net
Income before
income taxes and
extraordinary item
Income taxes
Minority interests
Income before
extraordinary item
Extraordinary item,
net of taxes
Net income
Net income excluding
non-recurring items1)
117, 572
(92,953)
(15,621)
(4,408)
957
–
5,547
633
6,180
482
(115)
6,547
–
6,547
4,057
€
98
€
98
US $
154,615
(121,692)
(19,041)
(5,833)
1,425
(803)
8,671
896
9,567
(3,607)
(153)
5,807
(151)
5,656
6,126
Income before financial
income and income taxes
+ Interest costs of pensions,
net
+ Operating income from
affiliated, associated and
related companies
+ Gains on unallocated
financial instruments
+ Merger costs
Operating Profit
5,547
721
74
(112)
–
6,230
97
€
98
€
7,391
688
(15)
(156)
685
8,593
in Millions
Reconciliation to
Operating Profit 1998
in Millions