Siemens 2006 Annual Report Download - page 130

Management’s discussion and analysis
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Both Moody’s and Standard & Poor’s view SFS as a captive finance company. These ratings
agencies generally recognize and accept higher levels of debt attributable to captive finance
subsidiaries in determining long-term and short-term credit ratings.
The allocated equity for SFS is determined and influenced by the respective credit ratings
of the rating agencies and by the expected size and quality of its portfolio of leasing and fac-
toring assets and equity investments and is determined annually. This allocation is designed
to cover the risks of the underlying business and is in line with common credit risk manage-
ment banking standards. The actual risk profile of the SFS portfolio is monitored and con-
trolled monthly and is evaluated against the allocated equity.
Purchase obligations – At September 30, 2006, Siemens had €12.652 billion in purchase
obligations. Purchase obligations include agreements to purchase goods or services that are
enforceable and legally binding and which specify all of the following items: (i) fixed or mini-
mum quantities, (ii) fixed, minimum or variable price provisions and (iii) approximate timing
of the transaction.
Operating leases – At September 30, 2006, Siemens had a total of €2.589 billion in total
future payment obligations under non-cancelable operating leases.
Siemens is subject to asset retirement obligations related to certain tangible long-lived
assets. Such asset retirement obligations are primarily attributable to environmental clean-up
costs which amounted to €501million as of September 30, 2006 and to costs primarily associ-
ated with the removal of leasehold improvements at the end of the lease term amounting to
€46 million as of September 30, 2006. For additional information with respect to asset retire-
ment obligations, see “Notes to Consolidated Financial Statements.”
Off-balance sheet arrangements
Guarantees – Guarantees are principally represented by credit guarantees and guarantees of
third-party performance. As of September 30, 2006, the undiscounted amount of maximum
potential future payments for guarantees was €2.319 billion. Credit guarantees cover the
financial obligation of third-parties in cases where Siemens is the vendor and/or contractual
partner. In addition, Siemens provides credit line guarantees with variable utilization to asso-
ciated and related companies. The total amount for credit guarantees was €302 million as of
September 30, 2006. Performance bonds and guarantees of advanced payments guarantee the
fulfillment of contractual commitments of partners in a consortium where Siemens may be
the general or subsidiary partner. In the event of non-performance under the contract by the
consortium partner(s), Siemens will be required to pay up to an agreed-upon maximum
amount. Guarantees of third-party performance amounted to €1.489 billion as of September
30, 2006. Furthermore, Siemens has provided indemnification in connection with dispositions
of certain business entities, which protects the buyer from certain tax, legal, and other risks
related to the purchased business entity. These other guarantees were €528 million as of Sep-
tember 30, 2006. In the event that it becomes probable that Siemens will be required to satisfy
these guarantees, provisions are established. Such provisions are established in addition to
the liabilities recognized for the non-contingent component of the guarantees. Most of the
guarantees have fixed or scheduled expiration dates, and in practice such guarantees are
rarely drawn. For additional information with respect to our guarantees, see “Notes to Consoli-
dated Financial Statements.”
Variable Interest Entities – Siemens holds variable interests in various Variable Interest
Entities (VIEs), which are not significant either individually or in the aggregate. The impact of
consolidating certain of these VIE’s on Siemens’ financial statements was not material. For
additional information on VIE’s, see “Notes to Consolidated Financial Statements.”