Mercedes 2006 Annual Report Download - page 179

For the contracts signed in 2006 and 2005, expenditures of
€1,023 million are expected to be incurred in total; charges
of €286 million and €570 million were recorded in income for
2006 and 2005, respectively, primarily within cost of sales.
Amounts of €67 million and €100 million concerning 2006 and
2005, respectively, were available under the terms of a deferred
compensation fund set up under the Compensation Framework
Agreement (ERA), a collective bargaining agreement in Germany.
Under this agreement, DaimlerChrysler had to recognize a
liability in prior years for ERA as a portion of the compensation
increase in these years was to be unconditionally paid to
employees at a later date. In an agreement with the Employee
Council of DaimlerChrysler, it was determined that the fund
should be used for purposes such as severance and early retire-
ment benefits with any unused balance distributed to employees
in other ways.
The changes in the liabilities for severance benefits for
2005 and 2006 were as follows:
smart realignment. Based on the unit sales development of
the smart roadster and the smart forfour and the downward
revisions to forecasted sales targets, DaimlerChrysler reduced its
production and notified suppliers about declining production at
the beginning of 2005. These developments resulted in increased
operating and cash flow losses and an expectation that losses
would continue in future periods. Therefore, DaimlerChrysler
evaluated the recoverability of the carrying amount of the
long-lived assets that generate cash flows largely independent of
other assets and liabilities of the Group. The smart roadster had
been assembled in a plant in France until the decision to cease
production, whereas the asset group related to the smart
forfour consisted of owned real estate and equipment for the
production of the smart forfour. As a result of the impairment
tests, DaimlerChrysler recognized charges of €444 million in 2005
in “cost of sales” representing the excess of the carrying
amount of these long-lived assets over their fair value. After the
impairment charge, the remaining carrying amounts of land
and buildings and other assets represented their estimated fair
values.
As a result of the deterioration of operations in the first quarter
of 2005, DaimlerChrysler decided to cease production of the
smart roadster by the end of 2005 and to provide incentives to
dealers related to those vehicles. Thus, charges of €140 million
were also included as a reduction of revenue or in “cost of sales”
during 2005, in order to recognize the effects of inventory write-
downs, higher incentives and lower residual values of vehicles.
Further costs related to the realignment of the smart business
during 2005 amounted to €301 million and arose primarily from
supplier claims which resulted from the discontinuation of the
smart roadster and the reduction of the production volume for the
smart forfour. Estimated payments to the dealer network are
also included in this amount. These charges were recognized in
“cost of sales” and in “selling expenses”.
DaimlerChrysler also decided in 2005 not to proceed with the
development of the smart SUV that was scheduled to be
launched in the markets in 2006. As a result of the decision to
abandon the smart SUV, tooling and equipment located in
the designated assembly plant in Brazil and equipment still under
construction with suppliers, for which firm purchase orders
were in place, were written off in 2005 to the extent those assets
could not be redeployed for other purposes. The charge
amounted to €61 million and is included in “other expenses”.
Further charges of €104 million were recognized during 2005
related to the liabilities arising from the cancellation of supply
contracts and were also recognized as “other expenses”.
In addition, plans to reduce workforce at the locations in Böblingen
(Germany) and Hambach (France) were approved in 2005.
According to those plans, by December 31, 2005, 185 employees
had been transferred to other Group operations and continued
to work there while 236 German employees had accepted termi-
nation benefits in accordance with the terms of a collective
bargaining agreement consisting of cash severance, continued pay
for a period after the end of service and job placement assis-
tance; the employee services ended with the acceptance of the
termination agreements. Therefore, charges for employee
termination benefits of €24 million are included in 2005. In addition,
charges for consulting services have been recorded totaling
€7 million in 2005.
Further expenses of €30 million resulted in 2005 from a goodwill
impairment charge (see Note 11).
(in millions of €)
Consolidated Financial Statements | Notes to the Consolidated Statements of Income | 163
–
570
100
(70)
600
286
67
(783)
170
Balance at January 1, 2005
Initial charges
Reclassifications from ERA
Payments
Balance at December 31, 2005
Additional charges
Reclassifications from ERA
Payments
Balance at December 31, 2006