Annual Report US Capital_Version 2_2010_Annual Report US_Version 2_2010 28.04.11 14:57 Seite U1 BMW Annual Report 2010 www.bmw.com BMW US CAPITAL, LLC 5ANNUAL REPORT 2010 Sheer Driving Pleasure
Contents Management Report 03 Responsibility Statement 05 Independent Auditors Report 06 Statements of Financial Position 07 Statements of Comprehensive Income 08 Statements of Changes of Member s Capital 09 Statements of Cash Flows 10 Notes to Financial Statements 11
BMW US Capital, LLC Management Report 03 Management submits their report and the financial statements of BMW US Capital, LLC (the Company) for the year ended December 31, 2010. Principal activities The Company was formed on January 14, 1993, and until December 31, 2000, was a wholly owned subsidiary of BMW (US) Holding Corp., which is ultimately owned by Bayerische Motoren Werke Aktiengesellschaft (BMW AG). Effective January 1, 2001, the Company adopted a legal structure permitted under the Delaware Limited Liability Company Act dated August 1, 1999, and became a limited liability company whose sole member is BMW (US) Holding Corp, which is ultimately owned by BMW AG. The conversion of the Company to a Limited Liability Company (LLC) did not have any effect on the liabilities or obligations of the organization and did not constitute dissolution of the converting entity. The Company s purpose is to assist in the financing of the activities and in managing interest and foreign exchange risk for BMW AG and its affiliates, primarily in the U.S., and to provide ser - vices in connection therewith. The Company s activities mainly consist of providing long- and short-term liquidity and intercompany funding at arm s length for BMW AG and its affiliates and being the leader of the US Dollar cash pool. The Company s aim is to minimize the risks from changes in interest rates and exchange rates. Protection against such risks is primarily provided by hedging with financial instruments with matching maturities, amounts and other properties. Derivative financial instruments are used, such as interest rate swaps, foreign exchange swaps and forward rate agreements, to reduce the risk remaining after netting. Business review The Company s profit arises principally from the net interest margin between funding provided to affiliates and the Company s borrowings, and the fair value gain or loss on financial instruments. Due to the development of interest rates as well as credit spreads, profit from ordinary activities before taxation decreased by $136.7 million USD to $3.3 million USD for the year ended December 31, 2010, compared to the profit reported for the year ended December 31, 2009, in the amount of $140.0 million USD. Continued changes in the maturity profile of the portfolio of financial instruments, as well as changes in market interest rates, resulted in a positive market value of applicable financial instruments compared to prior year. The fair market value gain which ensued amounted to the entire profit for the current year. This increase was offset by the negative contribution from net interest margin, which was the result of higher funding costs during 2010. Management considers the financial position of the Company to be satisfactory at December 31, 2010. The progress of the Company is monitored by financial and non-financial data on a regular basis. Particular attention is paid to key performance indicators, including net interest margin, and loan outstanding at the reporting date. These key performance indicators are reviewed and adjusted regularly in line with the requirements of the business. Outlook The general trend towards an improvement in economic conditions is likely to continue. Levels of activity seen before the financial crisis are, however, not a given and there remains continued uncertainty as to potential setbacks. In particular, continued high unemployment rates might dampen consumer spending. Future inflation rate expectations are also a cause of uncertainty. The volatility of interest rates, exchange rates, credit spreads, as well as the availability of liquidity is expected to be less extreme in 2011 than in prior years. With credit spreads decreasing, net interest margin results can be expected to improve. In the light of the environment discussed above, the Company maintains that it will continue to fulfill its purpose in the financial year 2011. The Company s funding activities on the capital markets depend on the liquidity needs of BMW AG and its affiliates, as well as the conditions of the capital markets. The Company will continue its current activities and no major changes in the organization are expected. Internal Control over Financial Reporting The Company actively participates in the internal control system in place throughout BMW Group aimed at ensuring the effectiveness of operations. It adheres to the principal features of the internal control system, as far as they relate to the Company and the financial reporting processes. A detailed description and explanation of the internal control system is available within the BMW Group Annual Report. Management assesses the design and effectiveness of the internal control over financial reporting on the basis of internal review procedures performed
04 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements at regular intervals and findings of auditors. Effective measures are implemented whenever weaknesses are identified and reported. Based on these assessments, management believes that the Company maintained effective internal controls over financial reporting during the financial year 2010. Principal risks and uncertainties The management of the business and the execution of the Company s strategy are subject to a number of risks. Detailed descriptions of the main risks facing the Company and the instruments used to manage these risks are set out in the notes to the financial statements. Political and charitable contributions The company made no political or charitable contributions during 2010 or 2009. Disclosure of information to auditors Management who held office at the date of approval of this management report confirm that, so far as they are each aware, there is no relevant audit information of which the Company s auditors are unaware; and management has taken all the steps that ought to have taken to make itself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. Research and development The Company does not carry out any research and development. Creditor payment policy The Company s policy concerning the payment of its trade creditors is to pay in accordance with contractual and other legal obligations. Auditors A resolution to reappoint KPMG LLP as auditors to the Company will be proposed for forthcoming year. BMW US Capital, LLC April 4, 2011 Members and members interests The members who held office during the year or subsequently were as follows: BMW (US) Holding Corporation, As sole member Employees During 2010, the Company employed 12 persons, all of which are included within these accounts. Joachim Herr President
BMW US Capital, LLC Responsibility Statement 05 Statement of Management responsibilities in respect of financial statements and the Management Report Management is responsible for preparing the financial statements and the Management Report in accordance with applicable laws and regulations of Luxembourg, which BMW US Capital, LLC has chosen as its Home Member State under the regulations of the EU Transparency Directive. Luxembourg Law, pursuant to the EU Transparency Directive, requires Management to prepare audited financial statements for each financial year. Management has elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS). Management makes every effort to ensure the financial statements present fairly the financial position of the Company and the performance for that period. Management is also responsible for preparing the Management Report that complies with the law. The financial information contained in the Management Report concerning the operations, economic performance and financial condition of the Company is subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Management of the Company, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, the financial information is based upon Management s estimates of fair values and of future costs, using currently available information. Factors that could cause such differences include, but are not limited to: risks of economic slowdown, downturn or recession, risks inherent in changes in market interest rates and spreads, lending conditions to companies turning to the worse, thereby increasing the cost of borrowing, changes in funding markets, including commercial paper and term debt, uncertainties associated with risk management, including credit-, prepayment-, asset/liability-, interest rate- and currency risks, changes in laws or regulations governing the Company business and operations, and changes in competitive factors. Management has a general responsibility to design and implement controls to prevent and detect fraud and other irregularities. Responsibility Statement by the Company s legal representatives To the best of Management s knowledge, and in accordance with the applicable reporting principles, International Financial Reporting Standards, the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of BMW US Capital, LLC, and the Management Report includes a fair review of the development and performance of the business and the position of the BMW US Capital, LLC, together with a description of the principal opportunities and risks associ - ated with the expected development of the BMW US Capital, LLC. BMW US Capital, LLC Joachim Herr President April 4, 2011
06 BMW US Capital, LLC Independent Auditors Report 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements The Member of BMW US Capital, LLC: We have audited the accompanying statements of financial position of BMW US Capital, LLC (whose sole member is BMW (US) Holding Corp.) (the Company) as of December 31, 2010 and 2009 and the related statements of comprehensive income, changes in member s capital, and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BMW US Capital, LLC as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. April 4, 2011
BMW US Capital, LLC Statements of Financial Position December 31, 2010 and 2009 07 in thousands of U.S. dollars 2010 2009 Assets Current Assets: Cash and cash equivalents $ 331,357 560,726 Accrued interest receivable (note 3) 117,690 136,529 Due from affiliates (notes 3 and 9) 9,022,001 11,021,348 Interest rate derivative assets (note 7) 79,759 372,152 Foreign exchange derivative assets (note 8) 267,863 336,768 Other assets 41 Total Current Assets 9,818,711 12,427,523 Non-current assets: Due from affiliates (note 3) 6,317,000 4,075,000 Interest rate derivative assets (note 7) 522,946 753,475 Foreign exchange derivative assets (note 8) 486,159 158,658 Total Non-current Assets 7,326,105 4,987,133 Total Assets $ 17,144,816 17,414,656 Member s Capital and Liabilities Member s capital $ 11,000 11,000 Capital reserves 144,000 144,000 Accumulated other comprehensive loss (note 4) (356) (351) Retained earnings 257,692 255,701 Total Member s Capital 412,336 410,350 Current Liabilities: Term debt short-term (note 6) 1,665,510 2,205,082 Commercial paper (note 5) 2,054,400 1,550,816 Due to affiliates (notes 3) 4,767,083 3,831,235 Interest rate derivatives (note 7) 42,901 105,029 Foreign exchange derivative liabilities (note 8) 267,863 336,768 Other liabilities 69,707 41,354 Total Current Liabilities 8,867,464 8,070,284 Non-current Liabilities: Pension obligation (note 4) 519 458 Term debt long-term (note 6) 7,098,424 8,536,994 Trade payables 992 1,050 Interest rate derivatives (note 7) 256,929 219,096 Foreign exchange derivative liabilities (note 8) 486,159 158,658 Deferred tax liability (note 9) 21,993 17,766 Total Non-current Liabilities 7,865,016 8,934,022 Total Liabilities 16,732,480 17,004,306 Total Member s Capital and Liabilities $ 17,144,816 17,414,656 See accompanying notes to financial statements.
08 BMW US Capital, LLC Statements of Comprehensive Income Years ended December 31, 2010 and 2009 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements in thousands of U.S. dollars 2010 2009 Revenues: Interest income affiliates (note 3) $ 403,822 577,629 Interest income (note 7) 154,455 143,582 Gain on financial instruments (notes 6, 7 and 8) 778,520 718,094 1,336,797 1,439,305 Expenses: Interest expense affiliates (note 3) 4,484 5,886 Interest expense (notes 5 and 6) 559,023 750,883 Loss on financial instruments (notes 6, 7 and 8) 767,899 540,308 General and administrative expense 2,082 2,205 1,333,488 1,299,282 Operating Income 3,309 140,023 Income tax expense (note 9) 1,318 55,743 Profit for the period 1,991 84,280 Other Comprehensive Income, net of tax: Pension obligation (5) 56 Total Comprehensive Income 1,986 84,336 See accompanying notes to financial statements.
BMW US Capital, LLC Statements of Changes of Member s Capital Years ended December 31, 2010 and 2009 09 in thousands of U.S. dollars Accumulated Other Total Member s Capital Comprehensive Retained Member s capital reserves (Loss) Income earnings Capital Balance at December 31, 2008 $ 11,000 144,000 (407) 171,421 326,014 Pension Obligation 56 56 Profit for the period 84,280 84,280 Balance at December 31, 2009 11,000 144,000 (351) 255,701 410,350 Pension Obligation (5) (5) Profit for the period 1,991 1,991 Balance at December 31, 2010 $ 11,000 144,000 (356) 257,692 412,336 See accompanying notes to financial statements.
10 BMW US Capital, LLC Statements of Cash Flows Years ended December 31, 2010 and 2009 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements in thousands of U.S. dollars 2010 2009 Cash flows from operating activities: Profit for the period $ 1,991 84,280 Pension obligation (5) 56 Adjustments to reconcile profit to net cash provided by operating activities: Increase in deferred tax provision 4,227 70,738 Gain on financial instruments (10,621) (177,786) Changes in assets and liabilities: (Increase) decrease in due from affiliates (242,653) 254,436 Decrease in financial instruments 509,248 58,202 Decrease (increase) in accrued interest receivable 18,839 (45,474) (Decrease) in trade payables (58) (205) Increase in other liabilities 28,353 41,354 Increase (decrease) in pension obligation 61 (94) (Increase) decrease in other assets (41) 18,391 Net cash provided by operating activities 309,341 303,898 Cash flows from financing activities: Increase in due to affiliates 935,848 774,046 Increase (decrease) in commercial paper 503,584 (2,023,234) Increase in term debt 449,070 2,550,908 Decrease in term debt from redemptions (2,427,212) (1,107,866) Net cash (used in) provided by financing activities (538,710) 193,854 Net (decrease) increase in cash and cash equivalents (229,369) 497,752 Cash and cash equivalents at beginning of year 560,726 62,974 Cash and cash equivalents at end of year $ 331,357 560,726 Cash payments for: Interest $ 226,587 558,710 Income taxes (2,912) (14,958) See accompanying notes to financial statements.
BMW US Capital, LLC Notes to Financial Statements December 31, 2010 and 2009 (in thousands of U.S. dollars) 11 [1] Nature of Operations The Company s purpose is to assist, via long- and short-term advances, the financing of the activities and assistance in managing interest and foreign exchange risks for BMW AG and its affiliates, primarily in the United States of America, and to provide services in connection therewith. The debts, obligations, and liabilities of the Company, whether arising in contract, tort, or otherwise, shall be solely the debts, obligations, and liabilities of the Company, and no member, manager, and/or officer of the Company shall be obligated personally for any such debt, obligation, or liability of the Company solely by reason of being a member, manager and/or officer. The Company s U.S. affiliates operate primarily in the automotive industry and derive their revenues across North America, with a concentration in states with large population centers such as California, Texas, Florida, New York, and New Jersey. [2] Basis of Preparation and Significant Accounting Policies and Practices (a) Statement of Compliance The financial statements of the Company at December 31, 2010 and 2009, have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The financial statements were authorized for issuance by Management of the Company on April 4, 2011. A new standard is not yet effective for the year ended December 31, 2010, and has not been applied in preparing these consolidated financial statements. The relevant standard not applied is as follows: IFRS 9, Financial Instruments, published on November 12, 2009, as part of phase I of the IASB s comprehensive project to replace IAS 39, Financial Instruments Recognition and Measurement, deals with classification and measurement of financial assets. The requirements of this standard represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets; amortized cost and fair value. A financial asset would be measured at amortized cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset s contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard will eliminate the existing IAS 39 categories of held to maturity, available for sale, and loans and receivables. On October 28, 2010, the IASB reissued IFRS 9 as part of phase II of the comprehensive project to replace IAS 39, dealing with financial liability accounting requirements. The standard is effective for annual period beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently in the process of evaluating the potential effect of this standard. Given the nature of the Company s operations, this standard is expected to have significant impact on the Company s financial statements. (b) Basis of Measurement The financial statements are prepared on the his - torical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments and financial instruments designated as hedged items in fair value hedges under IAS 39. (c) Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equi v - alents. Cash and cash equivalents consist primarily of short-term deposits and short-term commercial paper investments. For cash and cash equivalents, the carrying amount approximates fair value. (d) Functional and Presentation Currency These financial statements are presented in United States dollars (USD), which is the functional currency of the Company. (e) Foreign Currency Transactions Transactions in foreign currencies are translated into USD using exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency using the exchange rate at that date. The economic effect of foreign currency transactions are recognized in profit and loss.
12 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements (f) Derivative Financial Instruments and Hedging Activities IAS 39 requires that all derivative instruments be recorded on the statement of financial position at their respective fair values. Fair value changes are reflected in the statement of comprehensive income. It is the objective of the Company to mitigate exposure to foreign exchange or interest rate fluctuations as well as support the overall value at risk approach applied by BMW AG to manage interest rate risk. The Company enters into US dollar and foreign denominated floating- and fixed-rate term debt to mitigate fluctuations in exchange and interest rates. Derivatives structured to mitigate these fluctuations can be designated as a hedge of the underlying liability. On the date the derivative contract is entered into, the Company designates and records the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). In order to obtain hedge accounting under IAS 39, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. For fair value hedge relationships designated in September 2010 or prior, effectiveness is assessed monthly utilizing the cumulative dollar offset method. Fair value hedge relationships designated in October 2010 or thereafter, utilize the BMW AG regression assessment on a cumulative basis to determine effectiveness. The Company enters into interest rate derivative agreements as part of its overall interest rate risk management program. These transactions are entered into as hedges against the effects of future interest rate fluctuations, and accordingly, the valuations of both the derivative and the underlying instruments offset through the statement of comprehensive income, so long as a highly effective relationship is maintained between the derivative instruments and the corresponding asset or liability position being hedged. If a highly effective relationship is not maintained, then the hedged asset or liability will not provide an offset to the change in fair value of the derivative in the statement of comprehensive income. The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is de-designated as a hedging instrument because a forecasted transaction is no longer highly probable, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. Additional information regarding the Company s objectives and strategies regarding the management of foreign currency and interest rate risk, including the use of derivative instruments, is discussed in notes 6, 7, 8, 10, and 12. (g) Financial Instruments Financial assets are accounted for on a trade datebasis. On initial recognition, they are measured at fair value. When market prices are not available, the fair value of available for sale financial assets is measured using appropriate valuation techniques, e.g., discounted cash flow analysis based on market information available at the statement of financial position date. The Company currently does not hold any available for sale or held for trading financial assets. Loans and receivables which are not held by the Company for trading purposes and held to maturity financial investments are measured, to the extent that they have a fixed term, at amortized cost, using the effective interest method. In accordance with IAS 39, assessments are made regularly as to whether there is any objective evidence that a financial asset or group of assets may be impaired. After an impairment test is carried out, any resulting impairment losses are recognized in profit or loss. Derivative financial instruments are used for hedging purposes in order to reduce the currency and interest rate risks from operating activities and related financing requirements. All derivative financial instruments (such as interest-, currency-, and combined interest/currency swaps as well as forward currency contracts and options) are measured in accordance with IAS 39, at their fair value. The fair values of derivative financial instruments are measured using market information and recognized valuation techniques. In those cases where hedge accounting is applied, changes in fair value are recognized either in profit or loss for fair value hedge relationships or directly to other comprehensive income for cash flow hedge relationships to the extent that they are effective. In the case of fair value hedges, the results of the fair value measurement of the derivative financial instruments and the related hedged items are recognized in the statement of comprehensive income.
13 In the case of fair value changes from cash flow hedges that are used to mitigate the future cash flow risk on a recognized asset or liability or on forecasted transactions, unrealized gains and losses on the hedging instruments are recognized initially directly in accumulated other comprehensive income. Any such gains or losses are recognized subsequently in the statement of comprehensive income when the hedged item is recognized in profit or loss. If hedge accounting cannot be applied, the gains or losses from the fair value measurement of derivative financial instruments are recognized immediately in profit or loss. Financial liabilities are measured on initial recognition at fair value, which is equivalent to the con si d - eration given. Transaction costs are included in this initial measurement. Subsequent to initial recognition, liabilities are, with the exception of derivative financial instruments, measured at amortized cost. (h) Recognition of Interest Income and Expenses Interest income is accrued as earned and interest expense is accrued as incurred. Interest income (expense) is recognized as it accrues, calculated on a daily basis on the amounts outstanding, using the effective-interest method. (i) Gain (Loss) on Financial Instruments Gain (loss) on financial instruments includes realized and unrealized foreign exchange gains and losses and realized and unrealized gains and losses on interest rate derivatives. (j) Income Taxes The Company is a limited liability company, and as such, is not a taxable entity and does not have a separate tax obligation. BMW (US) Holding Corp. has an internal tax sharing arrangement whereby the Company settles its separate company tax attributes or liabilities annually with BMW (US) Holding Corp. As a single member limited liability company, the Company is treated as a division of BMW (US) Holding Corp. which files a consolidated federal, state and local income tax return with its subsidiaries. Income taxes are determined on a separate company basis and allocated to each company based upon the BMW (US) Holding Corp. s internal tax sharing arrangement. The company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and deferred tax liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. (k) Provisions for Pension and Similar Obligations Provisions for pensions and similar obligations are recognized using the projected-unit-credit method in accordance with IAS 19, Employee Benefits. Under this method, not only obligations relating to known vested benefits at the reporting date are recognized, but also the effect of future increases in pensions and salaries. This involves taking into account various assumptions which are evaluated on an actuarial basis. The provision is derived from an independent actuarial valuation, which takes into account the relevant factors and trends. Actuarial gains and losses are recognized, net of deferred tax, directly in equity. The expenses related to the reversal of discounting on pension obligations and the income from the expected return on pension plan assets are reported as part of the comprehensive income. (l) Use of Estimates in Financial Statement Preparation The preparation of financial statements in conformity with IAS 1, Presentation of Financial Statements, requires management to estimate the effects of uncertain future events on assets and liabilities at the statement of financial position date in order to determine the carrying amounts of those assets and liabilities. Actual results may differ from estimates. The Company measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurement: Level 1: Quoted market price (unadjusted) in an active market for an identical instrument. Level 2: Valuation techniques based on observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using, quoted market prices in active markets for similar instruments, quoted prices for identical or similar instruments in markets that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instru-
14 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements ments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Fair value of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Company determines fair value using valuation techniques. Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist. Assumptions in inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other information used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by participants acting at arm s length. The Company uses widely recognized valuation models for determining the fair value of common and more simple financial instruments, like interest rate and currency swaps that use only observable market data and require little management judgment and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, exchange-traded derivates, and simple over-the-counter derivatives like interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgment and estimation and also reduces the uncertainty associated with determination of fair value. Availability of observable market prices and inputs varies depending on the products and markets and is prone to change based on specific events and general condition in the financial markets. For the reporting periods ended 2010 and 2009, all fair values have been measured by using Level 2. Other provisions are recognized when the Company has an obligation to a third party, an outflow of resources is probable, and a reliable estimate can be made of the amount of the obligation. Assumptions and estimates relate principally to the recognition and measurement of provisions, and the recoverability of future tax benefits. Actual amounts could in certain cases differ from those assumptions and estimates. Where new information becomes available, differences are reflected in the statement of comprehensive income. [3] Due from Affiliates, Due to Affiliates, and Accrued Interest Receivable The amounts due from affiliates up to twelve months and accrued interest amounts due from affiliates are short-term in nature; therefore, their carrying amounts approximate fair value. The fair value of long-term amounts due from affiliates is based upon the estimated discounted future cash flows based on rates currently available for debt with similar terms and remaining maturities. Amounts due from affiliates at December 31, 2010 and 2009, along with the range of interest rates charged on such advances are as follows: Short-term Long-term Accrued interest receivable 2010 2009 2010 2009 2010 2009 $ 9,022,001 11,021,348 6,317,000 4,075,000 117,690 136,529 0.38% 5.22% 0.64% 5.70% 1.75% 5.02% 1.51% 5.22%
15 Maturities of amounts due from affiliates are as follows at December 31, 2010 and 2009: 2010 2009 Carrying Carrying value Face value value Face value Up to 3 months $ 5,702,001 5,705,749 6,671,348 6,681,404 3 to 12 months 3,320,000 3,369,622 4,350,000 4,447,122 2011 3,250,000 3,342,071 2,725,000 2,828,380 2012 2,050,000 2,125,607 1,150,000 1,192,030 Thereafter 1,017,000 1,072,171 200,000 213,780 $ 15,339,001 15,615,220 15,096,348 15,362,716 In addition, the Company accepts advances from various affiliates for use in its operations. The amounts due to affiliates are usually short-term in nature; therefore, the carrying value approximates the fair value. Amounts due to affiliates at December 31, 2010 and 2009, along with average annual interest rates on such advances, are as follows: Short-term 2010 2009 $ 4,767,083 3,831,235 0.11% 0.11% [4] Pension and Similar Obligations The Company participates in the Pension, Post Retirement Medical and Life Insurance Plans of BMW (US) Holding Corp. and its affiliates. This Pension Plan is a defined benefit plan. The Post Retirement and Life Insurance Plan is a group plan for retired employees with the appropriate age and years of service. Components of the plan include an annual deductible, employee co-insurance, out-ofpocket limit, no lifetime maximum benefit, and prescription drug coverage. Actuarial gains and losses arising from defined benefit plans are recorded directly in other comprehensive income. These actuarial gains and losses are recognized over the expected average remaining working lives of employees in the plan in the state - ment of comprehensive income. [5] Commercial Paper The Company maintains a BMW AG-guaranteed U.S. commercial paper program of $7,000,000. At December 31, 2010 and 2009, commercial paper outstanding totaled $2,055,078 and $1,551,047, respectively, weighted average interest rate of 0.44% and 0.35%, respectively at December 31 st. All commercial paper matures within 121 days. Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of institutions. Although commercial paper is occasionally issued as an interest bearing note, it typically trades at a discount to its par value. In other words, the purchaser usually purchases commercial paper below par and then receives its face value at maturity. The discount, or the difference between the purchase price and the face value of the note, is amortized over the term of the commercial paper as interest expense. For the years ended December 31, 2010 and 2009, the commercial paper unamortized discount was $678 and $231, respectively. The weighted average interest rate on shortterm commercial paper obligations for the years ended December 31, 2010 and 2009, was.40% and 1.42%, respectively. At December 31, 2010 and 2009, the fair value of the Company s commercial paper obligations approximated the recorded value primarily due to the short-term nature of the outstanding commercial paper.
16 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements [6] Term Debt and Line of Credit Term debt consists of the following at December 31: 2010 2009 Carrying Carrying Face value value Face value value Foreign and U.S. dollar denominated variable-rate notes (interest rates range from 0.30% to 4.88% at 2010 and range from 0.51% to 4.92% at 2009) $ 795,776 794,352 529,180 545,272 Foreign and U.S. dollar denominated fixed-rate notes (interest rates range from 3.01% to 7.92% at 2010 and 2.25% to 7.92% at 2009) 7,723,160 7,971.774 9,393,747 10,199,896 Less unamortized debt discount and issuance costs 2,192 2,192 3,092 3,092 $ 8,516,744 8,763,934 9,919,835 10,742,076 The carrying value amounts are presented inclusive of basis adjustments of $247,190 and $822,241 at December 31, 2010 and 2009, respectively, to adjust the debt for the effective portion of interest rate risk being hedged and foreign currency trans - lations being hedged. Total scheduled payments related to the face and carrying values of term debt for each of the following five fiscal years and thereafter are as follows as of December 31, 2010 and 2009: 2010 2009 Carrying Carrying Face value value Face value value Year of maturity: 2010 $ 1,855,253 2,205,082 2011 1,602,266 1,665,510 1,151,004 1,152,206 2012 2,254,000 2,259,750 2,254,000 2,398,225 2013 920,420 1,160,765 920,420 1,206,201 2014 100,000 111,201 100,000 106,273 2015 3,352,250 3,272,165 3,352,250 3,383,631 Thereafter 290,000 296,735 290,000 293,550 8,518,936 8,766,126 9,922,927 10,745,168 Less unamortized debt discount and issuance costs 2,192 2,192 3,092 3,092 $ 8,516,744 8,763,934 9,919,835 10,742,076 In accordance with IAS 39, the Company has adjusted the carrying value of term debt classified as fair value hedges by the change in fair value of the term debt due to the risk being hedged as of December 31, 2010 and 2009. In 2010 and 2009, the resulting adjustment increased the carrying value of the underlying debt by $247,692 and $684,177, respectively. Concurrently with this adjustment, the derivative instruments classified as fair value hedges were carried at fair value with changes in fair value recorded through earnings. At December 31, 2010 and 2009, $8,518,936 and $9,922,927, respectively, of the unsecured debt is guaranteed by BMW AG. The Company participates with BMW AG in line of credit agreements with commercial banks that permit the Company to borrow up to $8,000,000. These commitments expire in 2012. There were no outstanding borrowings under these commitments as of December 31, 2010 and 2009. Bond discount and private placement fees incurred related to the issuance of term debt are taken into account when initially recording the term debt and are amortized over the remaining lives of the debt. Bond discount is the difference between the face value and the proceeds received when the term debt are issued below face value. As of years ended December 31, 2010 and 2009, the bond unamortized discount is $1,024 and $1,569, respectively. Private placement fees relate to legal and administrative fees associated with the issuance of the term debt. As of the years ended December 31, 2010 and 2009, the unamortized private placement fees are $1,168 and $1,523, respectively.
17 [7] Interest Rate Risk Management As discussed in note 2, the Company enters into interest rate swap and option agreements with both affiliates and external parties to manage its interest rate exposure arising from mismatches between the interest earned on assets and the interest paid on liabilities. These transactions are entered into as hedges against the effects of future interest rate fluctuations. The swap agreements mature at approximately the same time as the related hedged assets or liabilities mature. Floating rates are reset periodically and are based on U.S. dollar LIBOR as published daily by the British Bankers Association. Interest rate swaps are used as both non-hedging instruments and fair value hedging derivative instruments to offset the mismatches of interest flows between receivables from the Company s affiliates and debt. (a) Stand Alone Interest Rate Derivative Financial Instruments The Company manages its interest rate risk exposure using a portfolio-based approach. This approach focuses on mismatches in the structure of the interest terms of assets and liabilities on a total portfolio basis without referring to specific assets or liabilities. Such strategy does not qualify for hedge accounting treatment under IAS 39. Accordingly, all interest rate derivative instruments relating to this strategy are recorded at fair value with the changes in fair value recognized in gain/loss on financial instruments in the statement of comprehensive income. The fair value of these interest rate swap positions are reflected as of December 31, 2010 and 2009, in interest rate derivative assets in the amount of $145,799 and $341,119, respectively, and in interest rate derivative liabilities in the amount of $123,766 and $220,702, respectively. For the years ended December 31, 2010 and 2009, the changes in the fair value of these types of derivatives are included in a gain/loss on the financial instruments in the amounts of a $85,212 and a $286,390 gain, respectively. The following table shows the notional amount and the carrying value of the stand alone interest rate derivatives: Stand alone interest rate derivatives 2010 Notional Carrying value amount Asset Liability Maturity: Due within one year $ 3,827,000 9,540 (31,565) Due between one and five years 9,865,174 95,551 (91,848) Due later than five years 390,000 40,708 (353) $ 14,082,174 145,799 (123,766) Stand alone interest rate derivatives 2009 Notional Carrying value amount Asset Liability Maturity: Due within one year $ 9,713,197 14,911 (101,305) Due between one and five years 11,844,717 272,080 (116,586) Due later than five years 920,000 54,128 (2,811) $ 22,477,914 341,119 (220,702) (b) Fair Value Hedges For those hedging relationships that qualify for fair value hedging under IAS 39, the related portion of fixed rate debt being hedged is reflected at an amount equal to the sum of its book value and an amount representing the change in fair value of the debt obligations attributable to the interest rate risk being hedged. Changes in the fair value of interest rate swap contracts and the offsetting changes in the adjusted carrying value of the related portion of the fixed-rate debt being hedged are recognized in the statement of comprehensive income as adjustments to Gain or Loss on financial instruments. The fair value of these derivatives as of December 31, 2010 and 2009, is reflected as interest rate derivative assets in the amount of $456,906 and $784,508 and liabilities of $176,064 and $103,423, respectively. For the years ended December 31, 2010 and 2009, the changes in the fair value of these types of derivatives are included in a gain/loss on the financial instruments in the amounts of a $649,644 loss and a $178,982 gain, respectively. Hedging ineffectiveness was a $74,592 loss in 2010 and a $37,348 gain in 2009, and is included in Gain and Loss on financial instruments, respectively.
18 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements The following table shows the notional amounts and the carrying values of the interest rate derivatives categorized as fair value hedges defined by IAS 39: Fair Value Hedges 2010 Notional Carrying value amount Asset Liability Maturity: due within one year $ 998,004 70,219 (11,336) due between one and five years 5,999,514 379,911 (164,728) due later than five years 40,000 6,776 $ 7,037,518 456,906 (176,064) Fair Value Hedges 2009 Notional Carrying value amount Asset Liability Maturity: due within one year $ 1,795,253 357,241 (3,724) due between one and five years 1,981,268 357,479 (23,879) due later than five years 3,052,250 69,788 (75,820) $ 6,828,771 784,508 (103,423) [8] Foreign Currency Management At December 31, 2010 and 2009, the Company had forward, swap and option contracts with external parties to buy and/or sell foreign currencies with notional amounts totaling approximately $15,226,709 and $5,442,742, respectively. Correspondingly, the Company had forward, swap and option contracts to buy and/or sell foreign currencies with internal parties with notional amounts totaling approximately $15,226,709 and $5,442,742, respectively. Accordingly, the fair market value of these transactions is recorded on the Company s statement of financial position as both an asset and a liability. The fair value of these contracts at December 31, 2010 and 2009, was $754,022 and $495,426, respectively.
19 [9] Income Taxes The Company s federal and state income tax payments are made by BMW (US) Holding Corp. as part of a consolidated tax return. Included in due (from) to affiliates at December 31, 2010 and 2009, is ($2,912) and ($14,958), respectively, of tax (refund) payments to be made by BMW (US) Holding Corp. on behalf of the Company. The provision for federal, state, and local income taxes for the years ended December 31, 2010 and 2009, consists of the following: 2010 2009 Current: Federal $ (2,371) (12,174) State and local (541) (2,784) (2,912) 14,958) Deferred: Federal 3,719 62,159 State and local 511 8,542 4,230 70,701 Total income tax expense $ 1,318 55,743 Deferred items at December 31, 2010 and 2009, relate primarily to the Company s derivative instruments accounted for under the provisions of IAS 39. A reconciliation of the U.S. federal statutory income tax benefit to the Company s actual income tax expense for the years ended December 31, 2010 and 2009, is as follows: 2010 2009 Income before provision for income taxes $ 3,310 140,023 Applicable statutory federal income tax rate 35% 35% Computed expected federal income tax benefit $ 1,159 49,008 State income taxes, net of federal effect 159 6,735 $ 1,318 55,743 The components of the deferred taxes for years ended December 31, 2010 and 2009, are as follows: 2010 2009 Deferred tax assets: Post retirement medical $ 235 232 Total deferred tax assets 235 232 Deferred tax liabilities: Pension 60 58 Derivatives 22,168 17,940 Total deferred tax liabilities 22,228 17,998 Net deferred tax liabilities $ (21,993) (17,766)
20 03 Management Report 05 Responsibility Statement 06 Independent Auditors Report 07 Statements of Financial Position 08 Statements of Comprehensive Income 09 Statements of Changes of Member s Capital 10 Statements of Cash Flows 11 Notes to Financial Statements [10] Fair Values of Financial Instruments IFRS 7, Financial Instruments: Disclosures, requires an entity to disclose the fair value of that class of assets and liabilities in a way that permits it to be compared with the corresponding carrying amount in the statement of financial position. The fair value estimates made at December 31, 2010 and 2009, were based upon pertinent market data and relevant information on the financial instruments at that time. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portion of the financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected gain or loss experience, current economic conditions, risk characteristics, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments at December 31, 2010: For cash and cash equivalents, the carrying amount approximates the fair value due to their short-term nature. With regards to Due from affiliates and accrued interest receivable, the carrying amounts approximate the fair value for short-term transactions; whereas, long-term transactions are valued by evaluating individual transactions utilizing current market conditions. The fair value of interest rate derivatives is determined by using current market information available at the statement of financial position date using appropriate measurement methods, (e.g., discounted cash flow models for individual transactions). Foreign exchange contracts are determined by using current market information available at the statement of financial position date using appropriate measurement methods, (e.g., discounted cash flow models for individual transactions). The fair value of commercial paper obligations approximates the recorded value primarily due to the short-term nature of the outstanding commercial paper. Term debt classified as fair value hedges by the change in its fair value due to the risk being hedged using foreign exchange and interest rate derivatives. Concurrent with this adjustment, the carrying value of derivative instruments classified as fair value hedges approximated fair value. Fair value is determined by evaluating individual transactions utilizing current market conditions. For all term debt that is not part of a fair value hedge, the fair value is determined by using current market exchange and interest rates. For Due to affiliates, the carrying amounts approximate fair value due to the short-term nature of the position. The following table presents the carrying values and fair values of the Company s financial instruments at December 31, 2010 and 2009: December 31 2010 2009 Carrying Carrying value Fair value value Fair value Financial instruments included on the statement of financial positions: Assets: Cash and cash equivalents $ 331,357 331,357 560,726 560,726 Due from affiliates and accrued interest receivable 15,456,691 15,732,910 15,232,877 15,499,245 Interest rate derivative assets 602,705 602,705 1,125,627 1,125,627 Foreign exchange derivative assets 754,022 754,022 495,426 495,426 Liabilities borrowings and related instruments: Commercial paper 2,054,400 2,054,400 1,550,816 1,550,816 Term debt (short-term and long-term) 8,763,934 8,880,376 10,742,076 11,069,928 Interest rate derivative liabilities 299,830 299,830 324,125 324,125 Foreign exchange derivative liabilities 754,022 754,022 495,426 495,426 Due to affiliates 4,767,083 4,767,083 3,831,235 3,831,235