Mercedes 1998 Annual Report Download - page 81

Financial Instruments — DaimlerChrysler uses derivative
financial instruments for hedging purposes. Financial
instruments, including derivatives (especially currency futures
and currency options, security options, interest rate swaps and
currency swaps), which are not designated as hedges of
specific assets, liabilities, or firm commitments are marked to
market and any resulting unrealized gains or losses are
recognized in income. If there is a direct connection between a
derivative financial instrument and an underlying transaction
and a derivative is so designated, a valuation unit is formed.
Once allocated, gains and losses from these valuation units,
which are used to manage interest rate and currency risks of
identifiable assets, liabilities, or firm commitments, do not
affect income until the underlying transaction is realized (see
Note 29 d).
Accrued Liabilities — The valuation of pension liabilities and
postretirement benefit liabilities is based upon the projected
unit credit method in accordance with Statement of Financial
Accounting Standards (“SFAS”) 87, “Employers’ Accounting for
Pensions” and SFAS 106. An accrued liability for taxes and
other contingencies is recorded when an obligation to a third
party has been incurred, the payment is probable and the
amount can be reasonably estimated. In determining other
accrued liabilities – including warranties and estimated future
losses on open contracts – all applicable costs are taken into
consideration including price increases. The effects of accrued
liabilities relating to personnel and social costs are valued at
their net present value where appropriate.
Use of Estimates — The preparation of financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent amounts at the date of the financial
statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
New Accounting Pronouncements
— On January 1, 1998, the
Group adopted SFAS 130, “Reporting Comprehensive Income.”
SFAS 130 establishes standards for the reporting and
presentation of comprehensive income and its components in
a full set of financial statements. Comprehensive income
consists of net income, foreign currency translation
adjustments, net unrealized gains (losses) on available-for-sale
securities and additional minimum pension liability provisions
and is presented in the consolidated statements of changes in
stockholders´ equity. The Standard requires only additional
disclosure in the consolidated financial statements and does
not affect the Company´s financial position or results of
operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
Effective January 1, 1998, the Group adopted SFAS 131,
“Disclosures about Segments of an Enterprise and Related
Information.” Segment data for 1997 and 1996 has been
restated to conform with the new requirements. See Note 30.
On January 1, 1998, the Group adopted SFAS 132, “Employers’
Disclosures about Pensions and Other Postretirement
Benefits.” SFAS 132 revises employers´ disclosures about
pensions and other postretirement benefit plans. SFAS 132
does not change the method of accounting for such plans. See
Note 22a.
Effective January 1, 1998, DaimlerChrysler adopted Statement
of Position (“SOP”) 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.”
This SOP requires that entities capitalize certain internal-use
software costs once certain criteria are met. Adoption of the
standard did not have a material effect on DaimlerChrysler´s
consolidated financial statements.
In April 1998, the American Institute of Certified Public
Accountants issued SOP 98-5, “Reporting on the Costs of Start-
Up Activities.” DaimlerChrysler is required to adopt the
provisions of SOP 98-5 effective January 1, 1999. SOP 98-5
provides, among other things, guidance on the financial
reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be
expensed as incurred. Adoption of this accounting
pronouncement is not anticipated to have a material effect on
DaimlerChrysler´s consolidated financial statements.
In June 1998, the Financial Accounting Standards Board
issued SFAS 133, “Accounting for Derivative Instruments and
Hedging Activities.” This Standard requires companies to
record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting
from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. This Standard is
effective for fiscal years beginning after June 15, 1999.
DaimlerChrysler plans to adopt this accounting
pronouncement by January 1, 2000.
3. SCOPE OF CONSOLIDATION
Scope of Consolidation — DaimlerChrysler comprises 481
foreign and domestic subsidiaries (1997: 494) and 82 joint
ventures (1997: 92); the latter are generally accounted for on a
pro rata basis. 27 subsidiaries are accounted for in the
consolidated financial statements using the equity method of
accounting. During 1998, 54 subsidiaries and 6 joint ventures
were included in the consolidated financial statements for the
first time. A total of 67 subsidiaries and 16 joint ventures were
no longer included in the consolidated group. Significant
effects of changes in the consolidated group on the consoli-
dated balance sheets and the consolidated statements of
income are explained further in the notes to the consolidated
financial statements. A total of 313 subsidiaries (1997: 285) are
not consolidated as their combined influence on the financial
position, results of operations, and cash flows of the Group is
not material. The effect of such non-consolidated subsidiaries
for all years presented on consolidated assets, revenues and
net income of DaimlerChrysler was less than 2%.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS