Mercedes 2001 Annual Report Download - page 115

Other Notes 111
Information with Respect to Cash Flow Hedges
Changes in the value of forward foreign currency ex-
change contracts and currency options designated and
qualifying as cash flow hedges of forecasted transac-
tions are reported in accumulated other comprehensive
income. These amounts are subsequently reclassified
into earnings, as a component of the value of the fore-
casted transaction, in the same period as the forecasted
transaction affects earnings. Changes in the fair value
of interest rate swaps designated as hedging instru-
ments of variability of cash flows associated with vari-
able-rate long-term debt are also reported in accumu-
lated other comprehensive income. These amounts are
subsequently reclassified into financial income, net,
as a yield adjustment in the same period in which the
related interest on the floating-rate debt obligations
affect earnings.
For the year ended December 31, 2001, net losses
of €12 million (2000: net losses of €3 million), repre-
senting principally the component of the derivative in-
struments’ gain/loss excluded from the assessment of
the hedge effectiveness and the amount of hedge inef-
fectiveness, were recognized in revenues and financial
income, net.
Also included in earnings are gains of €1 million
for the year ended December 31, 2001 (2000: gains of
€2 million), reclassified from accumulated other com-
prehensive income as a result of the discontinuance of
foreign currency cash flow hedges because it was
probable that the original forecasted transaction would
not occur.
It is anticipated that €101 million of net losses in-
cluded in accumulated other comprehensive income at
December 31, 2001, will be reclassified into earnings
during the next year.
As of December 31, 2001, DaimlerChrysler held
derivative financial instruments with a maximum
maturity of 44 months to hedge its exposure to the
variability in future cash flows from foreign currency
forecasted transactions.
Information with Respect to Hedges of the Net Investment
in a Foreign Operation
In specific circumstances, DaimlerChrysler seeks to
hedge the currency risk inherent in certain of its long-
term investments, where the functional currency is
other than the euro, through the use of derivative and
non-derivative financial instruments. For the year
ended December 31, 2001, net gains of €53 million
(2000: net gains of €104 million) hedging the Group’s
net investments in certain foreign operations were
included in the cumulative translation adjustment.
f) Accounting for and Reporting of Financial
Instruments (Prior to Adoption of SFAS 133)
For periods prior to January 1, 2000, financial instru-
ments, including derivatives, purchased to offset the
Group’s exposure to identifiable and committed trans-
actions with price, interest or currency risks were
accounted for together with the underlying business
transactions (“hedge accounting”). Gains and losses on
forward contracts and options hedging firm foreign
currency commitments were deferred off-balance sheet
and were recognized as a component of the related
transactions, when recorded (the “deferral method”).
However, a loss was not deferred if deferral would have
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 continued to be deferred and was included in the
settlement of the underlying transaction.
Interest differentials paid or received under
interest rate swaps purchased to hedge interest risks
on debt were 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 was deferred and recorded as an adjustment to
interest income, net over the remaining term of the
underlying financial instrument.
All other financial instruments, including deriva-
tives, purchased to offset the Group’s net exposure to
price, interest or currency risks, but which were not
designated as hedges of specific assets, liabilities or
firm commitments were marked to market and any
resulting unrealized gains and losses were recognized
currently in financial income, net. The carrying
amounts of derivative instruments were included
under other assets and accrued liabilities.
Derivatives purchased by the Group under macro-
hedging techniques, as well as those purchased to
offset the Group’s exposure to anticipated cash flows,
did not generally meet the requirements for applying
hedge accounting and were, accordingly marked to
market at each reporting period with unrealized gains
and losses recognized in financial income, net. When
the Group met the requirements for hedge accounting
and designated the derivative financial instrument as a
hedge of a committed transaction, subsequent unreal-
ized gains and losses were deferred and recognized
along with the effects of the underlying transaction.