Mercedes 2006 Annual Report Download - page 173

Consolidated Financial Statements | Basis of Presentation | 157
3. Significant Equity Method Investments
EADS. At December 31, 2006, the European Aeronautic
Defence and Space Company EADS N.V. (“EADS”) was the most
significant investment accounted for under the equity method.
On July 7, 2004, DaimlerChrysler entered into a securities lending
agreement with Deutsche Bank AG concerning an approximate
3% interest in EADS shares. The securities lending has several
tranches with terms ranging between three and four years. As
collateral, DaimlerChrysler received a lien on a securities account
of equivalent value to the shares loaned by DaimlerChrysler.
Simultaneously the Group also entered into options based on EADS
shares which provide it with the rights to sell these EADS shares
between October 2007 and October 2008 at a fixed strike price but
give the counterparty the right to participate in increases of the
share price above a higher threshold while obtaining protection
against a decrease of the share price below a minimum amount
per share.
In addition, on April 4, 2006, DaimlerChrysler entered into a
forward transaction with several financial institutions pertaining
to a 7.5% interest in EADS. Simultaneously, DaimlerChrysler
entered into a securities lending agreement with those financial
institutions for the same number of shares of EADS. As collateral,
DaimlerChrysler received a lien on a securities account of equiva-
lent value to the shares loaned by DaimlerChrysler.
The transactions contracted on July 7, 2004, and April 4, 2006,
reduced the Group’s legal ownership percentage in EADS, which
was 22.5% as of December 31, 2006. As these transactions,
however, do not meet the criteria of a sale, the EADS shares
underlying these transactions continue to be carried as an
investment on the balance sheet and, accordingly, DaimlerChrysler
still accounted in 2006 for its 33% equity interest in EADS using
the equity method of accounting. All derivatives relating to EADS
shares are accounted for as derivatives with changes in fair value
subsequent to initial measurement recognized in income. The
mark-to-market valuations of these derivatives resulted in unre-
alized gains of €519 million in 2006, unrealized losses of
€197 million in 2005 and unrealized gains of €3 million in 2004.
In the Group’s consolidated statements of income, these unreal-
ized gains/losses are included in “financial income (expense), net.”
2. Scope of Consolidation and Certain Variable Interest
Entities
Scope of consolidation. DaimlerChrysler comprises, besides
DaimlerChrysler AG, 433 (2005: 494) German and non-German
subsidiaries as well as 3 (2005: 4) companies (variable interest
entities) that have been consolidated in accordance with the
requirements of FASB Interpretation No. 46 (revised December
2003) “Consolidation of Variable Interest Entities” (“FIN 46R”).
A total of 103 (2005: 96) companies are accounted for in the
consolidated financial statements using the equity method
of accounting. In addition, 1 (2005: 3 companies) company
administering pension funds whose assets are subject to
restrictions has not been included in the consolidated financial
statements.
Variable interest entities. DaimlerChrysler determined that it is
the primary beneficiary of several leasing arrangements that
are consolidated in accordance with the provisions of FIN 46R.
Under the leasing arrangements, variable interest entities were
established which raised funds by issuing either debt or equity
securities to third-party investors. The variable interest entities
used the debt and equity proceeds to purchase property and
equipment, which is partially leased by the Group and used in
the normal course of business. Another part of the property and
equipment is leased by suppliers and is used for the production
of goods delivered to DaimlerChrysler. Total assets of those con-
solidated entities amount to €0.1 billion and €0.5 billion and total
liabilities amount to €0.2 billion and €0.7 billion as of December 31,
2006 and 2005, respectively.
In addition, DaimlerChrysler has equity or other variable interests
in a number of other variable interest entities where it is not
the primary beneficiary. Among these entities are Toll Collect,
multi-seller bank conduits, and other variable interest entities.
Note 3 provides disclosure about the Group's involvement in Toll
Collect, while multi-seller bank conduits are discussed in Note
33. DaimlerChrysler’s aggregate maximum exposure to loss arising
from its investments in the other variable interest entities was
€0.4 billion as of December 31, 2006.