Mercedes 2003 Annual Report Download - page 130
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2. Scope of Consolidation and Certain Variable Interest Entities
Scope of Consolidation. DaimlerChrysler comprises 440 (2002:
451) German and non-German subsidiaries as well as 3 companies
(variable interest entities) that have been consolidated in accordance
with the requirements of FIN 46R. A total of 100 (2002: 102)
companies are accounted for in the consolidated financial state-
ments using the equity method of accounting. During 2003, 22
subsidiaries were included in the consolidated financial statements
for the first time. A total of 33 subsidiaries were no longer included
in the consolidated group. The effects of changes in the Group’s
consolidated balance sheets and the consolidated statements of
income (loss) are explained further in the notes to the consolidated
financial statements. A total of 327 subsidiaries (“affiliated
companies”) are not consolidated as their combined influence on
the consolidated financial position, results of operations, and cash
flows of the Group is not material (2002: 305). The effect of such
non-consolidated subsidiaries for all periods presented on consoli-
dated assets, revenues and net income (loss) of DaimlerChrysler
was approximately 1%. In addition, 3 (2002: 5) companies adminis-
tering pension funds whose assets are subject to restrictions
have not been included in the consolidated financial statements.
The consolidated financial statements include 71 associated
companies (2002: 112) accounted for at cost and recorded under
investments in related companies, as these companies are not
material to the respective presentation of the consolidated financial
position, results of operations or cash flows of the Group.
Variable Interest Entities. As described in Note 1, DaimlerChrysler
applied certain provisions of FIN 46R as of December 31, 2003. The
implementation of FIN 46R had the following impact on the Group’s
consolidated financial statements:
Consolidated Special Purpose Entities. DaimlerChrysler identified
several leasing arrangements that were off-balance in the past and
qualify as special purpose entities as defined in FIN 46R. Daimler-
Chrysler is the primary beneficiary of those structures and, accord-
ingly, consolidated these arrangements effective December 31,
2003. Under these arrangements, variable interest entities were
established and owned by third parties. The variable interest
entities raised funds by issuing either debt or equity securities to
third party investors. The variable interest entities used the debt
and equity proceeds to purchase property and equipment, which is
leased by the Group and used in the normal course of business.
At the end of the lease term, DaimlerChrysler generally has the
option to purchase the property and equipment or re-lease the
property and equipment under new terms. Total assets and liabilities
of those consolidated entities total €0.4 billion and €0.4 billion,
respectively, as of December 31, 2003. The cumulative effect of
consolidating these special purpose entities on the Group’s
consolidated statement of income (loss) in 2003 was €30 million,
net of taxes of €35 million (see Note 11). The assets consist
primarily of property, plant and equipment that generally serves as
collateral for the entities’ long-term borrowings. The creditors
of these entities do not have recourse to the general credit of the
Group, except to the extent of guarantees provided.
Arrangements with Bank Conduits. DaimlerChrysler sells
automotive receivables to multi-seller and multi-collateralized
bank conduits, which are considered variable interest entities,
in the ordinary course of business. A bank conduit generally
receives substantially all of its funding from issuing asset-backed
securities that are crosscollateralized by the assets held by the
entity. DaimlerChrysler generally remains as servicer. Daimler-
Chrysler also retains residual beneficial interests in the receivables
sold, which are designed to absorb substantially all of the credit,
prepayment, and interest-rate risk of the receivables transferred
to the conduits. Although its interest in these variable interest
entities is significant, DaimlerChrysler has concluded that it is not
the primary beneficiary of these bank conduits and therefore is
not required to consolidate them under FIN 46R. The outstanding
balance of receivables sold to conduits as of December 31, 2003,
was approximately €4.4 billion. The corresponding retained interest
balance as of December 31, 2003, was approximately €0.8 billion,
which represents the Group’s maximum exposure to loss as a
result of its involvement with these variable interest entities.
Other Significant Interests in Investments, Dealerships, and
Executory Contracts. Additionally, DaimlerChrysler has equity or
other interests in a number of other entities, including investments
accounted for using the cost method, dealerships, suppliers, and
service providers. While DaimlerChrysler holds significant variable
interests in those entities, it does not expect that, upon completing
its analysis in the first quarter of 2004, it will conclude that it is
the primary beneficiary. Total assets and liabilities of these entities
were €0.3 billion and €0.3 billion, respectively, as of December 31,
2003. DaimlerChrysler’s maximum exposure to loss as a result of
its involvement with these companies was €0.2 billion as of
December 31, 2003. Individual associated companies included
in the Group’s consolidated financial statements using the equity
method are also subject to the requirements of FIN 46R at the
investee level. Because DaimlerChrysler accounts for its equity in
the earnings and losses of certain associated companies such
as EADS, MMC, and MFTBC on a three-month lag, the initial impact,
if any, of adoption of FIN 46R consolidation requirements for
special purpose entities at the investee level for these associated
companies will be recognized as the cumulative effect of a change
in accounting principle in the Group’s consolidated statement
of income for the three-month period ending March 31, 2004, and
the initial impact of the consolidation requirements for all other
variable interest entities in the Group’s consolidated statement of
income for the three-month period ending June 30, 2004.