Mercedes 2003 Annual Report Download - page 165
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Please find page 165 of the 2003 Mercedes annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Receivables from Financial Services. The carrying amounts of
variable rate finance receivables were estimated to approximate
their fair values since the contract rates of those receivables
approximate current market rates. The fair values of fixed rate
finance receivables were estimated by discounting expected cash
flows using the current interest rates at which comparable loans
with identical maturity would be made as of December 31, 2003
and 2002.
The carrying amounts of Cash and Other receivables approximate
fair values due to the short-term maturities of these instruments.
Financial Liabilities. The fair value of publicly traded debt was
estimated using quoted market prices. The fair values of other
long-term bonds were estimated by discounting future cash flows
using market interest rates over the remaining term. The carrying
amounts of commercial paper and borrowings under revolving
credit facilities were assumed to approximate fair value due to their
short maturities.
Currency Contracts. The fair values of forward foreign exchange
contracts were based on European Central Bank reference
exchange rates adjusted for the respective interest rate differen-
tials (premiums or discounts). Currency options were valued on the
basis of quoted market prices or on estimates based on option
pricing models.
Interest Rate Contracts. The fair values of existing instruments to
hedge interest rate risks (e. g. interest rate swap agreements,
cross currency interest rate swap agreements) were estimated by
discounting expected cash flows using market interest rates over
the remaining term of the instrument. Interest rate options are val-
ued on the basis of quoted market prices or on estimates based on
option pricing models.
c) Credit Risk
The Group is exposed to credit-related losses in the event of non-
performance by counterparties to financial instruments. Daimler-
Chrysler manages the credit risk exposure to financial institutions
through diversification of counterparties and review of each coun-
terparties’ financial strength. DaimlerChrysler does not have a sig-
nificant exposure to any individual counterparty, based on the rat-
ing of the counterparties performed by established rating agencies.
DaimlerChrysler Services has established detailed guidelines for
the risk management process related to the exposure to financial
services customers. Additional information with respect to receiv-
ables from financial services and allowance for doubtful accounts
is included in Note 18.
d) Accounting for and Reporting of Financial Instruments (Other
than Derivative Instruments)
The income or expense of the Group’s financial instruments (other
than derivative instruments), with the exception of receivables from
financial services and financial liabilities related to leasing and
sales financing activities, is recognized in financial income, net.
Interest income on receivables from financial services and gains
and losses from sales of receivables are recognized as revenues.
Interest expense on financial liabilities related to leasing and sales
financing activities are recognized as cost of sales. The carrying
amounts of the financial instruments (other than derivative instru-
ments) are included in the consolidated balance sheets under their
related captions.
e) Accounting for and Reporting of Derivative Instruments and
Hedging Activities
Foreign Currency Risk Management. As a consequence of the
global nature of DaimlerChrysler’s businesses, its operations and
its reported financial results and cash flows are exposed to the
risks associated with fluctuations in the exchange rates of the U.S.
dollar, the euro and other world currencies. The Group’s business-
es are exposed to transaction risk whenever revenues of a busi-
ness are denominated in a currency other than the currency in
which the business incurs the costs relating to those revenues.
This risk exposure primarily affects the Mercedes Car Group seg-
ment. The Mercedes Car Group segment generates its revenues
mainly in the currencies of the countries in which cars are sold, but
it incurs manufacturing costs primarily in euros. The Commercial
Vehicles segment is subject to transaction risk, to a lesser extent,
because of its global production network. At Chrysler Group reven-
ues and costs are principally generated in U.S. dollars, resulting
in a relatively low transaction risk for this segment. The Other
Activities segment is exposed to transaction risk resulting primarily
from the U.S. dollar exposure of the aircraft engine business, which
DaimlerChrysler conducts through MTU Aero Engines Group. Effec-
tive December 31, 2003 DaimlerChrysler sold all its equity inter-
ests in MTU Aero Engines Group.
In order to mitigate the impact of currency exchange rate
fluctuations, DaimlerChrysler continually assesses its exposure to
currency risks and hedges a portion of those risks through the
use of derivative financial instruments. Responsibility for managing
DaimlerChrysler’s currency exposures and use of currency
derivatives is centralized within the Group’s Currency Committee.
Until the disposition of MTU Aero Engines Group, effective
December 31, 2003, the Currency Committee consisted of two
separate subgroups, one for the Group’s vehicle businesses
and one for MTU Aero Engines Group. Each subgroup consisted
of members of senior management from each of the respective
businesses as well as from Corporate Treasury and Risk Controlling.
Since January 1, 2004, the Currency Committee consists exclusively
of those members who previously formed the subgroup responsible
for the vehicle business. Corporate Treasury implements decisions
concerning foreign currency hedging taken by the Currency
Committee. Risk Controlling regularly informs the Board of
Management of the actions of Corporate Treasury based on the
decisions of the Currency Committee.
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