Mercedes 1998 Annual Report Download - page 111

Download and view the complete annual report

Please find page 111 of the 1998 Mercedes annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 126

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126

d) Accounting for and reporting earnings of financial
instruments
The earnings of the Group’s on-balance sheet financial
instruments, with the exception of receivables from financial
services, are recognized in financial income, net. Income on
receivables from financial services are recognized as
revenues. The carrying amounts of the on-balance sheet
financial instruments are included in the consolidated balance
sheets under their related captions. The carrying amounts of
off-balance sheet financial instruments are included under
other assets and accrued liabilities.
Financial instruments, including derivatives, purchased to
offset the Group’s exposure to identifiable and committed
transactions with price, interest or currency risks are
accounted for together with the underlying business
transactions (“hedge accounting”). Gains and losses on
forward contracts and options hedging firm foreign currency
commitments are deferred off-balance sheet and are
recognized as a component of the related transactions, when
recorded (the “deferral method”). However, a loss is not
deferred if deferral would lead to the recognition of a loss in
future periods.
In the event of an early termination of a currency exchange
agreement designated as a hedge, the gain or loss continues
to be deferred and is included in the settlement of the
underlying transaction.
Interest differentials paid or received under interest rate swaps
purchased to hedge interest risks on debt are recorded as
adjustments to the effective yields of the underlying debt
(“accrual method”).
In the event of an early termination of an interest rate related
derivative designated as a hedge, the gain or loss is deferred
and recorded as an adjustment to interest income, net over the
remaining term of the underlying transaction.
All other financial instruments, including derivatives,
purchased to offset the Group’s net exposure to price, interest
or currency risks, but which are not designated as hedges of
specific assets, liabilities or firm commitments are marked to
market and any resulting unrealized gains and losses are
recognized currently in financial income, net.
Derivatives purchased by the Group under macro-hedging
techniques, as well as those purchased to offset the Group’s
exposure to anticipated cash flows, do not generally meet the
requirements for applying hedge accounting and are,
accordingly marked to market at each reporting period with
unrealized gains and losses recognized in financial income,
net. At such time that the Group meets the requirements for
hedge accounting and designates the derivative financial
instrument as a hedge of a committed transaction, subsequent
unrealized gains and losses would be deferred and recognized
along with the effects of the underlying transaction.
Interest Rate Contracts – The fair values of existing instruments
to hedge interest rate risks (e.g. interest rate swap agreements)
were estimated by discounting expected cash flows using
market interest rates over the remaining term of the
instrument. Interest rate options are valued on the basis of
quoted market prices or on estimates based on option pricing
models.
Currency Contracts – The fair value of forward foreign exchange
contracts is based on average spot exchange rates that consider
forward premiums or discounts. Currency options are valued on
the basis of quoted market prices or on estimates based on
option pricing models.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS