Siemens 2005 Annual Report Download - page 197

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Derivative financial instruments not designated as hedges
The Company manages its risks associated with fluctuations in foreign-currency-denominated
receivables, payables, debt, firm commitments and anticipated transactions primarily through
a Company-wide portfolio approach. This approach concentrates the associated Company-wide
risks centrally, and various derivative financial instruments, primarily foreign exchange con-
tracts and, to a lesser extent, interest rate and cross-currency interest rate swaps and options, are
utilized to minimize such risks. Such a strategy does not qualify for hedge accounting treatment
under SFAS 133. Accordingly, all such derivative financial instruments are recorded at fair value
on the Consolidated Balance Sheets as either an Other current asset or Other current liability and
changes in fair values are charged to earnings.
The Company also has foreign-currency derivative instruments, which are embedded in cer-
tain sale and purchase contracts denominated in a currency other than the functional currency
of the significant parties to the contract, principally the U.S. dollar. Gains or losses relating to
such embedded foreign-currency derivatives are reported in Cost of sales in the Consolidated
Statements of Income.
Hedging activities
The Company’s operating units applied hedge accounting for certain significant anticipated
transactions and firm commitments denominated in foreign currencies. Specifically, the Com-
pany entered into foreign exchange contracts to reduce the risk of variability of future cash flows
resulting from forecasted sales and purchases and firm commitments resulting from its business
units entering into long-term contracts (project business) and standard product business which
are denominated primarily in U.S. dollars.
Cash flow hedges – Changes in fair value of forward exchange contracts that were designated
as foreign-currency cash flow hedges are recorded in AOCIas a separate component of share-
holders’ equity. During the years ended September 30, 2005 and 2004, net gains of €37 and €21,
respectively, were reclassified from AOCIinto cost of sales because the occurrence of the related
hedged forecasted transaction was no longer probable.
It is expected that €83 of net deferred losses in AOCIwill be reclassified into earnings during
the year ended September 30, 2006 when the hedged forecasted foreign-currency denominated
sales and purchases occur.
As of September 30, 2005, the maximum length of time over which the Company is hedging
its future cash flows associated with foreign-currency forecasted transactions is 88 months.
Fair value hedges – As of September 30, 2005 and 2004, the Company hedged firm commit-
ments using forward exchange contracts that were designated as foreign-currency fair value
hedges of future sales related primarily to the Company’s project business and, to a lesser extent,
purchases. As of September 30, 2005 and 2004, the hedging transactions resulted in the recogni-
tion of an Other current asset of €16 and €20, respectively and Other current liability of €7 and
€33, respectively, for the hedged firm commitments, whose changes in fair value were charged to
cost of sales. Changes in fair value of the derivative contracts were also recorded in cost of sales.
During the year ended September 30, 2005 and 2004 no net gains and losses were recognized in
cost of sales because the hedged firm commitment no longer qualified as a fair value hedge.
Notes to Consolidated Financial Statements
Consolidated Financial Statements Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated
and per share amounts)