Mercedes 2006 Annual Report Download - page 166

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The Group records as a reduction to revenue at the time of sale to
the dealer the estimated impact of sales incentives programs
offered to dealers and consumers. This estimated impact repre-
sents the incentive programs offered to dealers and consumers
as well as the expected modifications to these programs in order
for the dealers to sell their inventory.
The Group offers extended, separately priced warranty contracts
for certain products. Revenues from these contracts are deferred
and recognized into income over the contract period in pro-
portion to the costs expected to be incurred based on historical
information. In circumstances in which there is insufficient
historical information, income from extended warranty contracts
is recognized on a straight-line basis. A loss on these contracts
is recognized in the current period if the sum of expected costs for
services under the contract exceeds unearned revenue.
For transactions with multiple deliverables, such as when
vehicles are sold with free service programs, the Group allocates
revenue to the various elements based on their relative fair
values when criteria for separation are met.
When below market rate loans under special financing programs
are used to promote sales of vehicles and the Financial Services
segment finances the vehicle, the effect of the rate differential at
the contract origination date is deducted from revenues and
recorded as unearned income in the consolidated balance sheet.
The Financial Services segment amortizes the unearned income
balance into earnings using the interest method over the original
(contractual) life of the receivables. Upon prepayment or sale
of the receivable, the unamortized unearned income is recognized
into earnings.
Sales under which the Group guarantees the minimum resale
value of the product, such as in sales to certain rental car company
customers, are accounted for similarly to an operating lease
in accordance with Emerging Issues Task Force (“EITF”) 95-1,
“Revenue Recognition on Sales with a Guaranteed Minimum
Resale Value.” The guarantee of the resale value may take the form
of an obligation by DaimlerChrysler to pay any deficiency between
the proceeds the customer receives upon resale in an auction and
the guaranteed amount or an obligation to reacquire the vehicle
after a certain period of time at a set price. Gains or losses from
the resale of these vehicles are included in gross profit.
Revenue from operating leases is recognized on a straight-line
basis over the lease term.
Revenue from sales financing and finance lease receivables is
recognized using the interest method. Recognition of revenue is
generally suspended when a finance or lease receivable becomes
contractually delinquent for periods ranging from 60 to 120 days.
Sales of receivables. The Group transfers significant amounts of
automotive finance receivables in the ordinary course of business
to trusts in “asset-backed securitizations” and “whole loan sales”
and usually remains as servicer for a servicing fee. The accounting
for securitized sold receivables is based upon the financial
component approach that focuses on control according to the
provisions of Statement of Financial Accounting Standards
(“SFAS”) 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities.”
Servicing fees are recognized on a consistent yield basis over
the remaining term of the related receivables sold.
Gains and losses from the sale of finance receivables are recog-
nized as revenues in the period in which the sale occurs. In
determining the gain or loss for each qualifying sale of finance
receivables, the investment in the receivable pool sold is allo-
cated between the portion sold and the portion retained based
upon their relative fair values.
Further information on the Group’s securitized sold receivables
is included in Note 33.