Mercedes 1999 Annual Report Download - page 111

(in millions of €, except per share amounts)
OTHER NOTES
The methods and assumptions used to determine the fair values of
other financial instruments are summarized below:
Financial Assets and Securities – The fair values of securities in the
portfolio were estimated using quoted market prices. The Group
has certain equity investments in related and affiliated companies
not presented in the table, as certain of these investments are not
publicly traded and determination of fair values is impracticable.
Receivables from Financial Services – The carrying amounts of vari-
able rate finance receivables were estimated to approximate fair
value since they are priced at current market rates. The fair values
of fixed rate finance receivables were estimated by discounting ex-
pected cash flows using the current rates at which comparable
loans of similar maturity would be made as of December 31, 1999
and 1998.
The fair values of residual cash flows and other subordinated
amounts arising from receivable sale transactions were estimated
by discounting expected cash flows at current market rates.
Financial Liabilities – The fair value of publicly traded debt was es-
timated using quoted market prices. The fair values of other long-
term notes and bonds were estimated by discounting future cash
flows using rates currently available for debt of similar terms and
remaining maturities. The carrying amounts of commercial paper
and borrowings under revolving credit facilities were assumed to
approximate fair value due to their short maturities.
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 inter-
est rates over the remaining term of the instrument. Interest rate
options are valued on the basis of quoted market prices or on esti-
mates based on option pricing models.
Currency Contracts – The fair values of forward foreign exchange
contracts were based on EZB reference exchange rates that con-
sider forward premiums or discounts. Currency options were val-
ued on the basis of quoted market prices or on estimates based on
option pricing models.
d) Accounting for and reporting of financial instruments
The income or expense of the Group’s financial instruments (other
than derivative instruments), with the exception of receivables
from financial services and financial liabilities related to leasing
and sales financing activities, are recognized in financial income,
net. Interest income on receivables from financial services and
gains and losses from sales of receivables are recognized as rev-
enues. Interest expense on financial liabilities related to leasing
and sales financing activities are recognized as cost of sales.
The carrying amounts of the financial instruments (other than
derivative instruments) are included in the consolidated balance
sheets under their related captions.
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 agree-
ment designated as a hedge, the gain or loss continues to be de-
ferred and is included in the settlement of the underlying transac-
tion.
Interest differentials paid or received under interest rate swaps
purchased to hedge interest risks on debt are recorded as adjust-
ments to the effective yields of the underlying debt (“accrual
method”).
In the event of an early termination of an interest rate related de-
rivative designated as a hedge, the gain or loss is deferred and re-
corded as an adjustment to interest income, net over the remaining
term of the underlying financial instrument.
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, liabili-
ties or firm commitments are marked to market and any resulting
unrealized gains and losses are recognized currently in financial
income, net. The carrying amounts of derivative instruments are
included under other assets and accrued liabilities.
Derivatives purchased by the Group under macro-hedging tech-
niques, 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 mar-
ket at each reporting period with unrealized gains and losses rec-
ognized 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 transac-
tion, subsequent unrealized gains and losses would be deferred
and recognized along with the effects of the underlying transac-
tion.
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