Siemens 2005 Annual Report Download - page 127

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We are subject to numerous risks relating to legal proceedings to which we are currently a
party or that could develop in the future. In the ordinary course of our business we become party
to lawsuits, including suits involving allegations of improper delivery of goods or services, prod-
uct liability, product defects, quality problems and intellectual property infringement. There can
be no assurance that the results of these or other legal proceedings will not materially harm our
business, reputation or brand. We maintain liability insurance for certain legal risks at levels
our management believes are appropriate and consistent with industry practice. We accrue for
litigation risks when it is probable that an obligation has been incurred and the amount can be
reasonably estimated. We may incur losses relating to litigation beyond the limits, or outside the
coverage, of such insurance and such losses may have a material adverse effect on the results of
our operations or financial condition, and our provisions for litigation related losses may not be
sufficient to cover our ultimate loss or expenditure.
Credit risks
We provide to our customers various forms of direct and indirect financing in connection with
large projects such as those undertaken by Com, PG and TS. For example, financing of GSM or
UMTS wireless network equipment for Com customers who lack established credit histories may
cause special credit risks for us. We also finance a large number of smaller customer orders,
through for example, the leasing of telephone systems and medical equipment, in part, through
SFS. SFS also incurs credit risk by financing third-party equipment. We also sometimes take a
security interest in the projects we finance. We may lose money if any of our customers are not
able to pay us, if the value of the property that we have taken a security interest in declines, if
interest rates or foreign exchange rates fluctuate, or if the projects in which we invest are unsuc-
cessful and such losses could have a material adverse effect on our financial condition and results
of operations.
Market risk
Prudent financial market risk management is a key priority for Siemens. Our international opera-
tions, financing activities and investments expose us to financial market risks from changes in
foreign currency exchange rates, interest rates and equity prices from our marketable securities
in the ordinary course of business. Our objective for managing such risks is to capitalize on the
opportunities available in the global market for our products and services while proactively man-
aging the associated financial market risk. We seek to manage and control these risks primarily
through our regular operating and financing activities, but when we deem it appropriate, we use
derivative instruments.
Siemens has no material commodity price risk resulting from derivative instruments. SFS
uses credit default swaps to protect against credit risks stemming from its receivable purchase
business. Credit default swaps are excluded from this market risk analysis, since risk categories
like credit risk, liquidity risk and operational risk are not analyzed in this disclosure. SFS holds a
minor foreign exchange trading portfolio which is subject to tight limits and as of September 30,
2005 has a value-at-risk close to zero. Any market sensitive instruments, including equity and
interest bearing securities, that our pension plan hold are not included in this quantitative and
qualitative disclosure. For additional information, see “Notes to Consolidated Financial State-
ments.”
Management’s discussion and analysis
Consolidated Financial Statements Notes to Consolidated Financial Statements