Mercedes 2006 Annual Report Download - page 228

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Research and development cost. Under US GAAP, with the
exception of certain software development costs, all develop-
ment costs are expensed as incurred in accordance with SFAS 2,
“Accounting for research and development costs”. Under IFRS,
development costs are capitalized as intangible assets if the criteria
set forth in IAS 38, “Intangible assets”, are met. These capitalized
costs are subsequently amortized on a straight-line basis over
the expected useful lives of the products for which they were
incurred, i.e. they become a part of the production costs of the
vehicles in which the component for which such costs were
incurred is used. Once these vehicles are sold, the amortization
of development costs is included in “cost of sales” and not in
“research and non-capitalized development costs”.
Qualifying special-purpose entities (QSPE). DaimlerChrysler
has entered into agreements to sell certain eligible receivables
from financial services and trade receivables to Special Purpose
Entities (“SPEs”) on a continuing basis. Under IFRS, these SPEs
are consolidated and thus included in the Group’s consolidated
financial statements, while under US GAAP these SPEs are con-
sidered Qualifying Special Purpose Entities in accordance with
SFAS 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities”, and are therefore not
consolidated. As a result, under US GAAP, the transferred re-
ceivables are removed from the balance sheet, with a gain or loss
recognized on the sale of the receivables.
Defined benefit pension plans and other postretirement
benefit plans. In accordance with IFRS 1, “First-time Adoption of
International Financial Reporting Standards”, DaimlerChrysler
elected not to apply the provisions of IAS 19, “Employee Benefits”,
on actuarial gains and losses retroactively to the period since its
defined benefit plans were created. Accordingly, the net liabilities
or net assets from defined benefit plans as of January 1, 2005
are based on the actuarially calculated projected benefit obligation,
taking future salary increases into consideration (defined benefit
obligation – DBO), less the market value of the plan assets and
unrecognized prior service cost.
Due to the significance of actuarial losses not yet recognized, which
are offset from retained earnings in the opening balance sheet,
this effect resulting from the introduction of IFRS is likely to have
the greatest impact on retained earnings within shareholders’
equity. Until the end of financial year 2006, US GAAP required in
certain circumstances the recognition of an additional pension
liability and the related intangible asset and accumulated other
comprehensive income/loss, respectively. IAS 19 does not
account for a minimum pension liability. With the adoption of
SFAS 158, “Employer’s Accounting for Defined Benefit Pension
and Other Postretirement Plans”, the recognition of a minimum
pension liability is eliminated. Also under SFAS 158, which was
adopted as of December 31, 2006, the funded status of defined-
benefit pension plans is recognized as an asset (over-funded
plans) or liability (under-funded plans) in the sponsor’s balance
sheet with respective adjustments in accumulative other com-
prehensive income/loss. The adoption of SFAS 158 leads to a
reduction in the reconciling amount between US GAAP and
IFRS in Group equity. Under IAS 19, unlike with SFAS 158, current
actuarial gains/losses and prior service cost continue to remain
unrecognized in the sponsor’s balance sheet but are disclosed
in
the notes to financial statements. Plan amendments are recog-
nized earlier under IFRS (immediately for vested benefits and until
vested for not yet vested benefits).
Adjustment of EADS impairment. In 2003, DaimlerChrysler
determined that the decline in fair value below the carrying value
of its investment in EADS was other than temporary and re-
duced the carrying value to its market value. The amount of the
impairment was determined using the quoted market price.
Under IFRS, the net realizable value must be determined as the
higher of quoted market price (fair value less cost to sell) and
the value in use. Accordingly, the Group had not impaired the in-
vestment under IFRS because the value in use was higher than
the carrying amount at the time the impairment loss was recog-
nized under US GAAP, resulting in a reconciling amount in stock-
holders’ equity in the IFRS opening balance sheet.