Siemens 2006 Annual Report Download - page 137

Management’s discussion and analysis 133
Critical accounting estimates
We have prepared our consolidated financial statements in accordance with U.S. GAAP. Our
significant accounting policies, as described in “Notes to Consolidated Financial Statements,”
are essential to understanding our reported results of operations and financial condition.
Certain of these accounting policies require critical accounting estimates that involve complex
and subjective judgments and the use of assumptions, some of which may be for matters that
are inherently uncertain and susceptible to change. Such critical accounting estimates could
change from period to period and have a material impact on financial condition or results of
operations. Critical accounting estimates could also involve estimates where management
reasonably could have used a different estimate in the current accounting period. Manage-
ment cautions that future events often vary from forecasts and that estimates routinely
require adjustment.
Revenue recognition on construction contracts – Our Groups, particularly PG, TS, I&S,
Com, PTD and SBT, conduct a significant portion of their business under construction con-
tracts with customers. We generally account for construction projects using the percentage-of-
completion method, recognizing revenue as performance on a contract progresses. This
method places considerable importance on accurate estimates of the extent of progress
towards completion. Depending on the methodology to determine contract progress, the sig-
nificant estimates include total contract costs, remaining costs to completion, total contract
revenues, contract risks and other judgments. The management of the operating Groups con-
tinually reviews all estimates involved in such construction contracts and adjusts them as nec-
essary. We also use the percentage-of-completion method for projects financed directly or indi-
rectly by Siemens. In order to qualify for such accounting, the credit quality of the customer
must meet certain minimum parameters as evidenced by the customer’s credit rating or by
a credit analysis performed by SFS, which performs such reviews in support of the Corporate
Executive Committee. At a minimum, a customer’s credit rating must be single B from the
rating agencies, or an equivalent SFS-determined rating. In cases where the credit quality
does not meet such standards, we recognize revenue for construction contracts and financed
projects based on the lower of cash if irrevocably received, or contract completion. We believe
the credit factors that we use provide a reasonable basis for assessing credit quality.
Accounts receivable – The allowance for doubtful accounts involves significant manage-
ment judgment and review of individual receivables based on individual customer creditwor-
thiness, current economic trends and analysis of historical bad debts on a portfolio basis. For
the determination of the country-specific component of the individual allowance, we also con-
sider country credit ratings, which are centrally determined based on information from exter-
nal rating agencies. Regarding the determination of the valuation allowance derived from a
portfolio-based analysis of historical bad debts, a decline of receivables in volume results in
a corresponding reduction of such provisions and vice versa. As of September 30, 2006 and
2005, Siemens recorded a total valuation allowance for accounts receivable of €956 million
and €1.199 billion, respectively. Siemens also selectively assists customers through arranging
financing from various third-party sources, including export credit agencies, in order to be
awarded supply contracts. In addition, the Company provides direct vendor financing and
grants guarantees to banks in support of loans to Siemens customers when necessary and
deemed appropriate.
Management’s discussion and analysis