Mercedes 1999 Annual Report Download - page 88

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
82
Leasing – The Group is a lessee of property, plant and equipment
and lessor of equipment, principally passenger cars and commer-
cial vehicles. All leases that meet certain specified criteria in-
tended to represent situations where the substantive risks and re-
wards of ownership have been transferred to the lessee are ac-
counted for as capital leases. All other leases are accounted for as
operating leases. Equipment on operating leases, where the Group
is lessor, is valued at acquisition cost and depreciated over its esti-
mated useful life, generally 3 to 14 years, using the straight-line
method.
Long-Lived Assets – The Group reviews long-lived assets to be held
and used for impairment whenever events or changes in circum-
stances indicate that the carrying amount of an asset may not be
recoverable.
Non-fixed Assets – Non-fixed assets represent the Group’s invento-
ries, receivables, securities and cash, including amounts to be real-
ized in excess of one year. In the accompanying footnotes, the por-
tion of assets and liabilities to be realized and settled in excess of
one year has been disclosed.
Marketable Securities and Investments – Securities are accounted
for at fair values, if readily determinable. Unrealized gains and
losses on trading securities, representing securities bought princi-
pally for the purposes of selling them in the near term, are in-
cluded in income. Unrealized gains and losses on available-for-sale
securities are included in accumulated other comprehensive in-
come, net of applicable deferred income taxes. All other securities
are recorded at cost. Unrealized losses on all marketable securities
and investments that are other than temporary are recognized in
income.
Inventories — Inventories are valued at the lower of acquisition or
manufacturing cost or market, cost being generally determined on
the basis of an average or first-in, first-out method (“FIFO”). Cer-
tain of the Group’s U.S. inventories are valued using the last-in,
first-out method (“LIFO”). Manufacturing costs comprise direct ma-
terial and labor and applicable manufacturing overheads, including
depreciation charges.
Financial Instruments – DaimlerChrysler uses derivative financial
instruments for hedging purposes. Financial instruments, includ-
ing derivatives (especially currency futures, options and swaps, se-
curity options and interest rate 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 de-
rivative financial instrument and an underlying transaction and a
derivative is so designated, a valuation unit is formed. Once allo-
cated, gains and losses from these valuation units, which are used
to manage interest rate and currency risks of identifiable assets, li-
abilities, or firm commitments, do not affect income until the un-
derlying 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 Account-
ing Standards (“SFAS”) 87, “Employers’ Accounting for Pensions,”
and SFAS 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions.” An accrued liability for taxes and other con-
tingencies is recorded when an obligation to a third party has been
incurred, the payment is probable and the amount can be reason-
ably estimated. The effects of accrued liabilities relating to person-
nel and social costs are valued at their net present value where ap-
propriate.
Use of Estimates – Preparation of the financial statements requires
management to make estimates and assumptions that affect the re-
ported amounts of assets and liabilities and disclosure of contin-
gent assets and liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the report-
ing period. Actual results could differ from those estimates.
New Accounting Pronouncements – On January 1, 1999,
DaimlerChrysler adopted Statement of Position (“SOP”) 98-5, “Re-
porting on the Costs of Start-Up Activities,” issued by the Ameri-
can Institute of Certified Public Accountants. 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 did not 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 Ac-
tivities.” This Standard requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair
value. Gains and 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. With
the issuance of SFAS 137, “Accounting for Derivative Instruments
and Hedging Activities – Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of FASB Statement No. 133,”
this Standard is effective for fiscal years beginning after June 15,
2000. DaimlerChrysler plans to adopt SFAS 133 effective January
1, 2000. The new Standard will permit the Group to apply hedge
accounting for certain foreign currency derivative contracts on
qualifying forecasted transactions. Under the Group’s current ac-
counting policies such contracts are marked to market with unreal-
ized gains and losses impacting current earnings. Accordingly, ap-
plication of the new Standard in accounting for such foreign cur-
rency derivative contracts may result in lower current period earn-
ings volatility relating to the Group’s foreign currency risk man-
agement in periods of significant changes in exchange rates.