Mercedes 2004 Annual Report Download - page 114

When below market rate loans under special financing programs
are used to promote sales of vehicles and the Services segment
finances the vehicle, the effect of the rate differential at the con-
tract origination date is deducted from revenues and recorded as
unearned income in the consolidated balance sheet. Services
amortizes the unearned income balance into earnings using the
interest method over the original (contractual) life of the receiv-
ables. Upon prepayment or sale of the receivable, the unamor-
tized unearned income is recognized into earnings.
Sales under which the Group guarantees the minimum resale val-
ue of the product, such as in sales to certain rental car company
customers, are accounted for similar to an operating lease in
accordance with EITF 95-1, “Revenue Recognition on Sales with a
Guaranteed Minimum Resale Value.” The guarantee of the resale
value may take the form of an obligation by DaimlerChrysler to
pay the deficiency, if any, between the proceeds the customer
receives upon resale in an auction and the guaranteed amount or
an obligation to reacquire the vehicle after a certain period of
time at a set price. Gains or losses from resale of these vehicles
are included in gross profit.
Revenue from operating leases is recognized on a straight-line
basis over the lease term.
Revenue from sales financing and finance lease receivables is
recognized using the interest method. Recognition of revenue is
generally suspended when a finance or lease receivable becomes
contractually delinquent for periods ranging from 60 to 120 days.
The Group sells significant amounts of finance receivables as
asset-backed securities through securitization transactions. The
Group sells a portfolio of receivables to a non-consolidated trust
and usually remains as servicer for a servicing fee. Servicing fees
are recognized on a consistent yield basis over the remaining
term of the related receivables sold. In a subordinated capacity,
the Group retains residual cash flows, a beneficial interest in
principal balances of receivables sold and certain cash deposits
provided as credit enhancements for investors. Gains and losses
from the sale of finance receivables are recognized in the period
in which the sale occurs. In determining the gain or loss for
each qualifying sale of finance receivables, the investment in
the receivable pool sold is allocated between the portion sold
and the portion retained based upon their relative fair values.
Estimated Credit Losses. DaimlerChrysler determines its
allowance for credit losses based on an ongoing systematic
review and evaluation performed as part of the credit-risk evalua-
tion process. The evaluation performed considers historical loss
experience, the size and composition of the portfolios, current
economic events and conditions, the estimated fair value and
adequacy of collateral and other pertinent factors. Certain homo-
geneous loan portfolios are evaluated collectively, taking into
consideration primarily historical loss experience adjusted for the
estimated impact of current economic events and conditions,
including fluctuations in the fair value and adequacy of collateral.
Other receivables, such as wholesale receivables and loans to
large commercial borrowers, are evaluated for impairment indi-
vidually based on the fair value of the underlying collateral. Credit
exposures deemed to be uncollectible are charged against the
allowance for doubtful accounts. DaimlerChrysler generally does
not originate or purchase receivables for resale. Loans that are
classified as held for sale are carried at the lower of cost or mar-
ket when it is determined that market price for the loan represent
the estimated future cash flows on the loan.
Research and Development and Advertising. Research and
development and advertising costs are expensed as incurred.
Sales of Newly Issued Subsidiary Stock. Gains and losses
resulting from the issuance of stock by a Group subsidiary to
third parties that reduce DaimlerChrysler’s percentage owner-
ship (“dilution gains and losses”) and DaimlerChrysler’s share of
any dilution gains and losses reported by its investees accounted
for under the equity method are recognized in the Group’s
consolidated statement of income (loss) in the line item “Other
financial income (expense), net.”
Discontinued Operations. The results of operations of discon-
tinued Group components and gains or losses from their disposal
are each presented separately net of tax in the Group’s state-
ment of income (loss) for all periods presented. A Group compo-
nent is considered a discontinued operation if its operations and
cash flows have been or will be eliminated from the ongoing
activities of the Group as a result of the disposal transaction, the
Group will not have any significant subsequent continuing
involvement with the component, and the component can be
clearly distinguished, operationally and for financial reporting
purposes. If not disposed of by the balance sheet date, to qualify
as discontinued operations, a component must also meet the
conditions to be classified as held for sale. Net assets of a dis-
continued Group component classified as held for sale are mea-
sured at the lower of its carrying amount or fair value less cost to
sell. Gains from the sale of a discontinued Group component are
recognized in the period realized and reported separately.
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