Mercedes 2015 Annual Report Download - page 207

214 E | CONSOLIDATED FINANCIAL STATEMENTS | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting estimates and assessments
In the consolidated financial statements, to a certain degree,
estimates, assessments and assumptions have to be made
which can affect the amounts and reporting of assets and liabili-
ties, the reporting of contingent assets and liabilities on the
balance sheet date and the amounts of income and expense
reported for the period. The major items affected by such
estimates, assessments and assumptions are described as
follows. Actual amounts may differ from the estimates.
Changes in the estimates, assessments and assumptions
can have a material impact on the consolidated financial
statements.
Recoverable amounts of cash-generating units
and equity-method investments
In the context of impairment tests for non-financial assets,
estimates have to be made to determine the recoverable
amounts of cash-generating units. Assumptions have to be made
in particular with regard to future cash inflows and outflows
for the planning period and the following periods. The estimates
include assumptions regarding future market share and the
growth of the respective markets as well as regarding the prod-
ucts’ profitability. On the basis of the impairment tests
carried out in 2015, the recoverable amounts are substantially
larger than the net assets of the Group’s cash-generating units.
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 amounts and fair values of equity-method financial
investments in listed companies.
Recoverable amount of 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 assump-
tions are determined either by qualified estimates or by publi-
cations provided by expert 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 depreciation; changes in residual values lead
either to prospective adjustments of the depreciation or, in the
case of a significant decline in expected residual values, to
impairment. If 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 consider-
ation 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 adequacy
of collaterals. 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 information.
Product warranties
The recognition and measurement of provisions for product
warranties is generally connected with estimates.
The Group provides various types of product warranties
depending on the type of product and market conditions.
Provisions for product warranties are generally recognized
when vehicles are sold or when new warranty programs are
initiated. Based on historical warranty claim experience,
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 investiga-
tions are pending against Daimler AG and its subsidiaries
on a wide range of topics. If the outcome of such legal proceed-
ings is detrimental to Daimler, the Group may be required
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 obli-
gation 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. It is also possible that provisions
accrued for some legal proceedings may turn out to be
insufficient once such proceedings have ended. Daimler may
also become liable for payments in legal proceedings no
provisions were established for. Although the final resolution
of any such proceedings could have a material effect on
Daimler’s operating results and cash flows for a particular
reporting period, Daimler believes that it should not materially
affect the Group’s financial position.