Mercedes 2008 Annual Report Download - page 160

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If the requirements for hedge accounting set out in IAS 39 are
met, Daimler designates and documents the hedge relationship
from the date a derivative contract is entered into as either a
fair value hedge or a cash flow hedge. In a fair value hedge, the
fair value of a recognized asset or liability or an unrecognized
firm commitment is hedged. In a cash flow hedge, the variability
of cash flows to be received or paid related to a recognized as-
set or liability or a highly probable forecast transaction is hedged.
The documentation of the hedging relationship includes the
objectives and strategy of risk management, the type of hedging
relationship, the nature of risk being hedged, the identification
of the hedging instrument and the hedged item as well as a des-
cription of the method used to assess hedge effectiveness.
The hedging transactions are expected to be highly effective in
achieving offsetting changes in fair value or cash flows and
are regularly assessed to determine that they actually have been
highly effective throughout the financial reporting periods for
which they are designated.
Changes in the fair value of derivative financial instruments are
recognized periodically in either earnings or equity, as a compo-
nent of other reserves, depending on whether the derivative is
designated as a hedge of changes in fair value or cash flows. For
fair value hedges, changes in the fair value of the hedged item
and the derivative are recognized currently in earnings. For cash
flow hedges, fair value changes in the effective portion of the
hedging instrument are recognized in other reserves, net of appli-
cable taxes. Amounts taken to equity are reclassified to the in-
come statement when the hedged transaction affects the income
statement. The ineffective portion of the fair value changes is
recognized in profit or loss.
If derivative financial instruments do not or no longer qualify for
hedge accounting because the qualifying criteria for hedge
accounting are not or are no longer met, the derivative financial
instruments are classified as held for trading.
Pensions and similar obligations. The measurement of defined
benefit plans for pensions and other post-employment benefits
(e.g. medical care) in accordance with IAS 19 “Employee Bene-
fits” is based on the “projected unit credit method.” For the
valuation of defined post-employment benefit plans, differences
between actuarial assumptions used and actual results and
changes in actuarial assumptions result in actuarial gains and
losses, which have to be amortized in future periods. Amor-
tization of unrecognized actuarial gains and losses arising after
the transition to IFRS on January 1, 2005 is recorded in accor-
dance with the “corridor approach.” This approach requires par-
tial amortization of actuarial gains and losses in the following
year with an effect on earnings if the unrecognized gains and los-
ses exceed 10 percent of the greater of (1) the defined post-
employment benefit obligation or (2) the fair value of the plan
assets. In such cases, the amount of amortization recognized
by the Group is the resulting excess divided by the average remai-
ning service period of active employees expected to receive
benefits under the plan.
When the benefits of a plan are changed, the portion of the
change in benefit relating to past service by employees is recog-
nized in profit or loss on a straight-line basis over the average
period until the benefits become vested. To the extent that the
benefits vest immediately, the impact is recognized directly in
profit or loss.
A negative net obligation arising from prepaid future contribu-
tions is only recognized as an asset to the extent that a cash
refund from the plan or reductions of future contributions to the
plan are available. Any exceeding amount is recognized in net
periodic pension costs in the period when it is incurred (“asset
ceiling”).
Provisions for other risks and contingent liabilities. A provi-
sion is recognized when a liability to third parties has been
incurred, an outflow of resources is probable and the amount of
the obligation can be reasonably estimated. In particular, re-
structuring provisions are recognized when the Group has a de-
tailed formal plan that has either commenced implementation
or been announced. Provisions are regularly reviewed and adjust-
ed as further information develops or circumstances change.
The provision for expected warranty-related costs is established
when the product is sold, upon lease inception, or when a new
warranty program is initiated. Estimates for accrued warranty costs
are primarily based on historical experience.
Daimler records the fair value of an asset retirement obligation
from the period in which the obligation is incurred.