Mercedes 2001 Annual Report Download - page 85

Notes to Consolidated Financial Statements 81
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”). Certain of the
Group’s U.S. inventories are valued using the last-in,
first-out method (“LIFO”). Manufacturing costs com-
prise direct material and labor and applicable manufac-
turing overheads, including depreciation charges.
Financial Instruments – DaimlerChrysler uses de-
rivative financial instruments such as forward foreign
exchange contracts, swaps, options, futures, swaptions,
forward rate agreements, caps and floors for hedging
purposes. Effective January 1, 2000, DaimlerChrysler
adopted SFAS 133, “Accounting for Derivative Instru-
ments and Hedging Activities,” as amended by SFAS
137 and 138 (see Note 10). SFAS 133 requires that all
derivative instruments are recognized as assets or
liabilities on the balance sheet and measured at fair
value, regardless of the purpose or intent for holding
them. Changes in the fair value of derivative instru-
ments are recognized periodically either in earnings
or stockholders’ equity (as a component of other com-
prehensive income), depending on whether the deriva-
tive is designated as a hedge of changes in fair value or
cash flows. For derivatives designated as fair value
hedges, changes in fair value of the hedged item and
the derivative are recognized currently in earnings. For
derivatives designated as cash flow hedges, fair value
changes of the effective portion of the hedging instru-
ment are recognized in accumulated other comprehen-
sive income on the balance sheet until the hedged item
is recognized in earnings. The ineffective portion of the
fair value changes are recognized in earnings immedi-
ately. SFAS 133 also requires that certain derivative
instruments embedded in host contracts be accounted
for separately as derivatives.
Prior to the adoption of SFAS 133, derivative
instruments which were not designated as hedges of
specific assets, liabilities, or firm commitments were
marked to market and any resulting unrealized gains
or losses recognized in earnings. If there was a direct
connection between a derivative instrument and an
underlying transaction and a derivative was so desig-
nated, a valuation unit was formed. Once allocated,
gains and losses from these valuation units, which
were used to manage interest rate, equity price and
currency risks of identifiable assets, liabilities, or firm
commitments, did not affect earnings until the underly-
ing transaction was realized.
Further information on the Group’s financial
instruments is included in Note 30.
Accrued Liabilities – The valuation of pension and
postretirement benefit liabilities is based upon the pro-
jected unit credit method in accordance with SFAS 87,
“Employers’ Accounting for Pensions,” and SFAS 106,
“Employers’ Accounting for Postretirement Benefits
Other Than Pensions.” 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.
Accrued liabilities relating to personnel and social costs
are valued at their net present value where appropriate.
Use of Estimates – Preparation of the financial
statements requires management to make estimates
and assumptions that affect the reported amounts of as-
sets and liabilities and disclosure of contingent assets
and liabilities 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. Due to current economic conditions
and events in 2001, it is possible that these conditions
and events could have a significant effect on such
estimates made by management.
New Accounting Pronouncements – In September
2000, the Financial Accounting Standards Board
(“FASB”) issued SFAS 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments
of Liabilities – a replacement of FASB Statement No.
125.” This statement revised the standards of account-
ing for securitizations and other transfers of financial
assets and collateral and requires certain financial
statement disclosures. SFAS 140 was effective for
transactions occurring after March 31, 2001. Adoption
of this replacement standard did not have a material
effect on DaimlerChrysler’s consolidated financial
statements (see Note 31).
During 2000, the Emerging Issues Task Force
reached a final consensus on Issue 00-14, “Accounting
for Certain Sales Incentives.” The issue requires that an
entity recognizes sales incentives at the latter of (1) the
date at which the related revenue is recorded by the
entity or (2) the date at which the sales incentive is of-
fered. The issue also requires that when recognized, the
reduction in or refund of the selling price of the product
or service resulting from any cash sales incentive
should be classified as a reduction of revenue. If the
sales incentive is a free product or service delivered at
the time of the sale, the cost of the free product or ser-
vice should be classified as cost of sales. The consensus
reached in the issue was effective for DaimlerChrysler
in its financial statements beginning April 1, 2001.
DaimlerChrysler applied the consensus prospectively
in 2001. The adoption of Issue 00-14 did not have a
material impact on the Group’s consolidated financial
statements.