Mercedes 2013 Annual Report Download - page 200

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When objective evidence of impairment is present, estimates
and assessments also have to be made to determine the
recoverable amount of an equity method financial investment.
The determination of the recoverable amount is based on
assumptions regarding future business developments for the
determination of the expected future cash flows of that financial
investment. See Note 13 for the presentation of carrying
values and fair values of equity-method financial investments
in listed companies.
Equipment on operating leases. Daimler regularly reviews
the factors determining the values of its leased vehicles.
In particular, it is necessary to estimate the residual values
of vehicles at the end of their leases, which constitute a
substantial part of the expected future cash flows from leased
assets. In this context, assumptions have to be made regarding
the future supply of and demand for vehicles, as well as the
development of vehicle prices. Those assumptions are determined
either by qualified estimates or by expertise provided by third
parties; qualified estimates are based, as far as they are publicly
available, on external data with consideration of internally
available additional information such as historical experience
of price developments and recent sale prices. The residual
values thus determined serve as a basis for systematic depre-
ciation; changes in residual values lead either to prospective
adjustments to the systematic depreciation or, in the case of a
significant drop in expected residual values, to impairment.
If systematic depreciation is prospectively adjusted, changes
in estimates of residual values do not have a direct effect but
are equally distributed over the remaining periods of the lease
contracts.
Collectability of receivables from financial services.
The Group regularly estimates the risk of default on receivables
from financial services. Many factors are taken into consid-
eration in this context, including historical loss experience,
the size and composition of certain portfolios, current economic
events and conditions and the estimated fair values and ade-
quacy of collateral. Changes in economic conditions can lead
to changes in our customers’ creditworthiness and to changes
in used vehicle prices, which would have a direct effect on the
market values of the vehicles assigned as collateral. Changes
to the estimation and assessment of these factors influence the
allowance for credit losses with a resulting impact on the
Group’s net profit. See also Notes 14 and 32 for further infor-
mation.
Product warranties. The recognition and measurement
of provisions for product warranties is generally connected
with estimates.
The Group provides various types of product warranties depend-
ing on the type of product and market conditions. Provisions
for product warranties are generally recognized when vehicles
are sold, upon lease inception, or when new warranty pro-
grams are initiated. Based on historical warranty claim experi-
ence, assumptions have to be made on the type and extent
of future warranty claims and customer goodwill, as well as
on possible recall or buyback campaigns for each model
series. In addition, the estimates also include assumptions
on the amounts of potential repair costs per vehicle and
the effects of possible time or mileage limits. The provisions
are regularly adjusted to reflect new information.
Further information on provisions for other risks is provided
in Note 23.
Legal proceedings. Various legal proceedings, claims and
governmental investigations are pending against Daimler AG
and its subsidiaries on a wide range of topics. Adverse
decisions in one or more of those proceedings could require
us to pay substantial compensatory and punitive damages
or to undertake service actions, recall campaigns or other costly
actions. Litigation and governmental investigations often
involve complex legal issues and are connected with a high
degree of uncertainty. Accordingly, the assessment of whether
an obligation exists on the balance sheet date as a result
of an event in the past, and whether a future cash outflow is likely
and the obligation can be reliably estimated, largely depends
on estimations by the management. Daimler regularly evaluates
the current stage of legal proceedings, also with the involve-
ment of external legal counsel. It is therefore possible that the
amounts of provisions for pending or potential litigation
will have to be adjusted due to future developments. Changes
in estimates and premises can have a material effect on
the Group’s future profitability. The end of a legal dispute can
result in Daimler having to make payments in excess of the
provisions recognized for that purpose. It is also possible that
the outcome of individual cases for which no provisions could
be recognized might force the Group to make payments whose
amounts or range of amounts could not be reliably estimated
at December 31, 2013. Although the final outcome of such cases
can have a material effect on Daimler’s earnings or cash
flows in a certain reporting period, in our assessment, any such
resulting obligations will not have a sustained impact on
the Group’s financial position. Further information on legal
proceedings is provided in Note 29.