Mercedes 2006 Annual Report Download - page 215

Cash and cash equivalents. It is assumed that the carrying
amounts of cash and cash equivalents approximate fair values
due to the short-term maturities of these instruments.
Financial liabilities. The fair value of bonds was determined by
discounting future cash flows, using market interest rates over
the remaining term. The carrying amounts of commercial paper
and borrowings under revolving credit facilities were assumed
to approximate fair value due to their short maturities.
Currency contracts. The fair values of forward foreign exchange
contracts were based on reference exchange rates adjusted for
the respective interest rate differentials (premiums or discounts).
Currency options were valued based on quoted market prices
or option pricing models.
Interest rate contracts. The fair values of instruments to hedge
interest rate risks (e. g. interest rate swap agreements, cross
currency interest rate swap agreements) were determined by
discounting expected cash flows, using market interest rates
over the remaining term of the instrument. Interest rate options
are valued based on quoted market prices or option pricing
models.
Equity contracts. The fair values of instruments to hedge equity
price risk of marketable equity securities were determined on
the basis of quoted market prices, if applicable adjusted for the
respective interest rate differentials (premiums or discounts),
or option pricing models. Therein included are also hedging
instruments related to equity investments in publicly traded
companies, which the Group accounts for using the equity
method of accounting.
c) Credit risk
The Group is exposed to credit-related losses in the event
of non-performance by counterparties to financial instruments.
DaimlerChrysler manages the credit risk exposure to financial
institutions through diversification of counterparties and review
of each counterparty’s financial strength. Based on the rating
of the counterparties performed by established rating agencies,
DaimlerChrysler does not have a significant exposure to any
individual counterparty. DaimlerChrysler Financial Services has
established detailed guidelines for the risk management
process related to the exposure to financial services customers.
Additional information with respect to receivables from
financial services and allowance for doubtful accounts is included
in Note 17.
d) Accounting for and reporting of financial instruments
(other than derivative instruments)
The income or expense arising from the Group’s financial
instruments (other than derivative instruments), is recognized in
financial income, net, with the exception of receivables from
financial services and financial liabilities related to leasing and
sales financing activities. Interest income on receivables
from financial services and gains and losses from sales of those
receivables are recognized as revenues. Interest expense on
financial liabilities related to leasing and sales financing activities
are recognized as cost of sales. The carrying amounts of
the financial instruments (other than derivative instruments) are
included in the consolidated balance sheets under their
corresponding captions.
e) Accounting for and reporting of derivative instruments and
hedging activities
Foreign currency risk management. As a consequence of
the global nature of DaimlerChrysler’s businesses, its operations
and its reported financial results and cash flows are exposed
to risks associated with fluctuations in the exchange rates of the
US dollar and other currencies against the euro. The Group’s
businesses are exposed to transaction risk whenever revenues
of a business are denominated in a currency other than the curren-
cy in which the business incurs the costs relating to those
revenues. The Mercedes Car Group segment is primarily exposed
to such risk. The Mercedes Car Group generates its revenues
mainly in the currencies of the countries in which cars are sold,
but it incurs manufacturing costs primarily in euros. The
Truck Group segment is subject to transaction risk to a lesser
extent because of its global production network. At Chrysler
Group, revenues and costs are principally generated in US dollars,
resulting in a relatively low transaction risk for this segment.
The van and bus businesses included in Van, Bus, Other are also
directly exposed to transaction risk, but to a minor degree in
comparison to the Mercedes Car Group and the Truck Group
segment. In addition, Van, Bus, Other is indirectly exposed to
transaction risks through the equity investment in EADS, which
the Group accounts for using the equity method of accounting.
To mitigate the impact of currency exchange rate fluctuations,
DaimlerChrysler continually assesses its exposure to currency
risks and hedges a portion of those risks through the use of
derivative financial instruments. Responsibility for managing
DaimlerChrysler’s currency exposures and use of currency
derivatives is centralized within the Group’s Currency Committee.
The Currency Committee consists of members of senior
management from Corporate Treasury, each of the operating
businesses and Risk Controlling. Corporate Treasury implements
the decisions concerning foreign currency hedging taken by
the Currency Committee. Risk Controlling regularly informs the
Board of Management of the actions of Corporate Treasury
based on the decisions of the Currency Committee.
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