Mercedes 2010 Annual Report Download - page 191

Consolidated Financial Statements | Notes to the Consolidated Financial Statements | 187
Product warranties. The recognition and measurement of
provisions for product warranties is generally connected with
estimates. The Group provides various types of product war-
ranties depending on the type of product and market conditions.
Provisions for product warranties are generally recognized when
vehicles are sold, upon lease inception, or when new warranty
programs are initiated. Based on historical warranty claim expe-
rience, assumptions have to be made on the type and extent
of future warranty claims and customer goodwill, as well as on
possible recall or buyback campaigns for each model series.
In addition, the estimates also include assumptions on the amounts
of potential repair costs per vehicle and the effects of possible
time or mileage limits. The provisions are regularly adjusted to
reflect new information.
Further information on provisions for other risks is provided in
Note 23.
Legal proceedings. Various legal proceedings, claims and gov-
ernmental investigations are pending against Daimler AG and its
subsidiaries on a wide range of topics. Adverse decisions in one
or more of those proceedings could require us to pay substantial
compensatory and punitive damages or to undertake service
actions, recall campaigns or other costly actions. Litigation and
governmental investigations often involve complex legal issues
and are connected with a high degree of uncertainty. Accordingly,
the assessment of whether an obligation exists on the balance
sheet date as a result of an event in the past, and whether a future
cash outflow is likely and the obligation can be reliably esti mat-
ed, largely depends on estimations by the management.
Daimler regularly evaluates the current stage of legal proceed-
ings, also with the involvement of external legal counsel. It is
therefore possible that the amounts of the provisions for pend-
ing or potential litigation will have to be adjusted due to future
developments. Changes in estimates and premises can have
a material effect on the Group’s future profitability. The end
of a legal dispute can result in Daimler having to make payments
in excess of the provisions recognized for that purpose. It is
also possible that the outcome of individual cases for which no
provisions could be recognized might force the Group to make
payments whose amounts or range of amounts could not be
reli ably estimated at December 31, 2010. Although the final
outcome of such cases can have a material effect on Daimler’s
earnings or cash flows in a certain reporting period, in our
assessment, any such resulting obligations will not have a sus tained
impact on the Group’s financial position. Further information
on legal proceedings is provided in Note 28.
Pension obligations. To calculate the present values of defined-
benefit pension obligations, it is necessary among other things
to determine discounting factors. The discounting factors are to
be determined by reference to market yields at the end of the
reporting period on high quality corporate bonds in the respec-
tive markets. In addition, at the beginning of the financial year,
Daimler has to estimate the expected returns on plan assets on
the basis of market expectations for the types of investments
included in the plan assets. The level of the discount rate has
a material effect on the funded status of the pension plans
and the expected return on plan assets has a significant effect
on net periodic pension costs. Due to the use of the corridor
approach, changes in the assumptions do not directly affect the
consolidated statement of financial position or the consolidated
statement of income/loss. Further information in this context
is provided in Note 22.
Income taxes. For the calculation of deferred tax assets, assump-
tions have to be made regarding future taxable income and
the time of realization of the deferred tax assets. In this context,
we take into consideration, among other things, the projected
earnings from business operations, the effects on earnings of
the reversal of taxable temporary differences, and realizable
tax strategies. As future business developments are uncertain
and are sometimes beyond Daimler’s control, the assumptions
to be made in connection with accounting for deferred tax assets
are connected with a substantial degree of uncertainty. On
each balance sheet date, Daimler carries out impairment tests
on deferred tax assets on the basis of the planned taxable
income in future financial years; if Daimler assesses that the
probability of future tax advantages being partially or fully
unrealized is more than 50%, the deferred tax assets are impaired.
Further information is provided in Note 9.