Mercedes 2006 Annual Report Download - page 171

Consolidated Financial Statements | Basis of Presentation | 155
Commitments and contingencies. Liabilities for loss contin-
gencies are recorded when it is probable that a liability to third
parties has been incurred and the amount can be reasonably
estimated. Liabilities for loss contingencies are regularly adjusted
as further information develops or circumstances change.
The accrued liability for expected warranty-related costs is estab-
lished when the product is sold, upon lease inception, or when
a new warranty program is initiated. Estimates for accrued warranty
costs are primarily based on historical experience. Because
portions of the products sold and warranted by the Group contain
parts manufactured (and warranted) by suppliers, the amount
of warranty costs accrued also contains an estimate of probable
recoveries from suppliers.
The accrued liability for sales incentives is based on the estimated
cost of the sales incentive programs and the number of vehicles
held in dealers’ inventories. The majority of vehicles held in dealers’
inventories are sold to consumers within the next quarter
and the accrued liability for sales incentives is adjusted to reflect
recent actual experience.
DaimlerChrysler recognizes, at inception of a guarantee, a liability
for the fair value of the non-contingent portion of the obligation
due to the issuance of the guarantee. DaimlerChrysler applies these
provisions for guarantees issued or modified after December 31,
2002. If performance under the guarantee is probable and the
amount can be reasonably estimated, a liability for the contingent
obligation is recognized for any guarantee regardless of its
date of issuance. Further information on the Group’s obligations
under guarantees is included in Note 24b and 31.
DaimlerChrysler records the fair value of an asset retirement
obligation, including obligations whose timing or method of
settlement is conditional upon a future event, in the period in
which it incurs a legal obligation associated with the retirement
of tangible long-lived assets, and subsequently adjusts the carrying
amount for changes in expected cash flows and the passage
of time.
Deposits from direct banking business. Demand deposit
accounts are classified as financial liabilities. Interest paid
on demand deposit accounts is recognized in cost of sales as
incurred.
Stock-based compensation. DaimlerChrysler adopted the fair
value recognition provisions of SFAS 123, “Accounting for Stock-
Based Compensation,” prospectively to all employee awards
granted, modified, or settled after January 1, 2003. Compensation
expense for all stock options granted after December 31, 2002,
has been measured principally at the grant date based on the fair
value of the equity award using a modified Black-Scholes
option-pricing model. Compensation expense is recognized over
the employee service period with an offsetting credit to equity
(paid-in capital). DaimlerChrysler options granted prior to January
1, 2003 continue to be accounted for using the intrinsic value
based approach under Accounting Principles Board Opinion (“APB”)
No. 25, “Accounting for Stock Issued to Employees,” and related
Interpretations. Compensation expense under APB 25 was mea-
sured at the grant date based on the difference between the
strike price of the equity award and the fair value of the underlying
stock as of the date of grant.
The following table illustrates the effect on net income and
earnings per share if the fair value based method had been applied
to all outstanding and unvested awards in periods affected.
(in millions of €)
2,466
81
(113)
2,434
2.43
2.40
2.43
2.40
2,846
57
(59)
2,844
2.80
2.80
2.80
2.79
2005
Net income
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
Pro forma net income
Earnings per share (in €):
Basic
Basic – pro forma
Diluted
Diluted – pro forma
Year ended December 31,
2004