Mercedes 2006 Annual Report Download - page 170

Marketable securities and investments. Securities and certain
investments are accounted for at fair value, if fair value is readily
determinable. Unrealized gains and losses on trading securities,
representing securities bought and held principally for the purpose
of near-term sales, are included in earnings. Unrealized gains
and losses on available-for-sale securities are included as a com-
ponent of accumulated other comprehensive loss, net of
applicable income taxes, until realized. All other securities and
investments are recorded at cost. A decline in value of any
available-for-sale security or cost-method investment below cost
that is deemed to be other than temporary results in an impair-
ment charge to earnings that reduces the carrying amount
of the security or the cost-method investment to fair value
establishing a new cost basis.
Valuation of retained interests in securitized sold receiv-
ables. DaimlerChrysler retains residual beneficial interests in
certain pools of sold and securitized retail and wholesale finance
receivables. The retained interest balance represents Daimler-
Chrysler’s right to receive collections on the transferred receiv-
ables in excess of amounts required by the securitization trust
to pay the interest and principal to investors, servicing fees, and
other required payments. The Group determines the value of its
retained interests using discounted cash flow modeling upon the
sale of receivables and at the end of each quarter. The valuation
methodology considers historical and projected principal and
interest collections on the securitized sold receivables, expected
future credit losses arising from the collection of the securitized
sold receivables, and estimated repayment of principal and inter-
est on notes issued to third parties and secured by the sold
receivables.
The Group recognizes unrealized gains or losses attributable to
the change in the fair value of the retained interests, which are
recorded in a manner similar to available-for-sale securities, net
of related income taxes, as a component of accumulated other
comprehensive loss until realized. The Group is not aware of an
active market for the purchase or sale of retained interests,
and accordingly, determines the estimated fair value of the retained
interests by discounting the estimated cash flow releases
(the cash-out method) using a discount rate that is commensurate
with the risks involved. In determining the fair value of the retained
interests, the Group estimates the future rates of prepayments,
net credit losses and forward yield curves. These estimates are
developed by evaluating the historical experience of comparable
receivables and the specific characteristics of the receivables sold,
and forward yield curves based on trends in the economy.
An impairment adjustment to the carrying value of the retained
interests is recognized in the period a decline in the estimated
cash flows below the cash flows inherent in the cost basis of an
individual retained interest (the pool-by-pool method) is considered
to be other than temporary. Other than temporary impairment
adjustments are generally recorded as a reduction of revenue.
Cash equivalents. The Group’s liquid assets are recorded
under various balance sheet captions as more fully described in
Note 20. For purposes of the consolidated statements of cash
flows, the Group considers cash on hand, checks, demand deposits
at financial institutions and cash equivalents. Those cash
equivalents represent securities with original maturities of three
months or less.
Derivative instruments and hedging activities. DaimlerChrysler
uses derivative financial instruments such as forward contracts,
swaps, options, futures, swaptions, forward rate agreements, caps
and floors for hedging purposes. The accounting of derivative
instruments is based upon the provisions of SFAS 133, “Accounting
for Derivative Instruments and Hedging Activities,” as amended.
On the date a derivative contract is entered into, DaimlerChrysler
designates the derivative as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment
(fair value hedge), a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recog-
nized asset or liability (cash flow hedge), or a hedge of a net
investment in a foreign operation. DaimlerChrysler recognizes all
derivative instruments as assets or accrued liabilities on the
balance sheet and measures them at fair value, regardless of the
purpose or intent for holding them. Changes in the fair value
of derivative instruments are recognized periodically either in
earnings or stockholders’ equity, as a component of accumulated
other comprehensive loss, depending on whether the derivative is
designated as a hedge of changes in fair value or cash flows.
For derivatives designated as fair value hedges, changes in the
fair value of the hedged item and the derivative are recognized
currently in earnings. For derivatives designated as cash flow
hedges, fair value changes of the effective portion of the hedging
instrument are recognized in accumulated other comprehensive
loss on the balance sheet, net of applicable taxes, until the hedged
item is recognized in earnings. The ineffective portions of the fair
value changes are recognized in earnings immediately. Derivatives
not meeting the criteria for hedge accounting are mark-to-
market and affect earnings. SFAS 133 also requires that certain
derivative instruments embedded in host contracts be
accounted for separately as derivatives.
Further information on the Group’s financial instruments
is included in Note 32.
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