Siemens 2005 Annual Report Download - page 199

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The Company had interest rate swap contracts to pay variable rates of interest (average rate of
2.4% as of September 30, 2005 and 2004) and received fixed rates of interest (average rate of 5.3%
and 5.2% as of September 30, 2005 and 2004). The notional amount of indebtedness hedged as
of September 30, 2005 and 2004 was €3,595 and €3,756, respectively. This resulted in 45% and
44% of the Company’s underlying notes and bonds being subject to variable interest rates as of
September 30, 2005 and 2004, respectively. The notional amounts of these contracts mature at
varying dates based on the maturity of the underlying hedged items. The net fair value of interest
rate swap contracts used to hedge indebtedness as of September 30, 2005 and 2004 was €259 and
€229, respectively.
Cash flow hedges of revolving term deposits
During the years ended September 30, 2005 and 2004, the Company applied cash flow hedge
accounting for a revolving term deposit. Under the interest rate swap agreements entered, the
Company agrees to pay a variable rate of interest multiplied by a notional principle amount, and
to receive in return an amount equal to a specified fixed rate of interest multiplied by the same
notional principal amount. These interest rate swap agreements offset the effect of future
changes in interest payments of the underlying variable-rate term deposit. The interest rate swap
contracts are reflected at fair value and the effective portion of changes in fair value of the inter-
est rate swap contracts that were designated as cash flow hedges are recorded in AOCIas a sepa-
rate component of shareholders’ equity. It is expected that €4 of net deferred gains in AOCIwill be
reclassified into interest income during fiscal 2006, when the interest payments from the term
deposits occur.
Credit risk management
Siemens Financial Services uses credit default swaps to protect from credit risks stemming from
its receivables purchase business. The credit default swaps are classified as derivatives under
SFAS 133.
26 Fair value of financial instruments
The fair value of a financial instrument represents the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a forced sale or liquida-
tion. In determining the fair values of the derivative financial instruments, certain compensating
effects from underlying transactions (e.g., firm commitments and anticipated transactions) are
not taken into consideration.
Derivative financial instruments
The Company enters into derivative financial instruments with various counterparties, princi-
pally financial institutions with investment grade credit ratings.
Derivative interest rate contracts – The fair values of derivative interest rate contracts (e.g.,
interest rate swap agreements) are estimated by discounting expected future cash flows using
current market interest rates and yield curve over the remaining term of the instrument. Interest
rate options are valued on the basis of quoted market prices or on estimates based on option pric-
ing models.
Notes to Consolidated Financial Statements
Consolidated Financial Statements Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated
and per share amounts)