Siemens 2006 Annual Report Download - page 138

Management’s discussion and analysis
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Goodwill – Goodwill is tested for impairment at least annually using a two-step approach
at the division level. In the first step, the fair value of the division is compared to its carrying
amount including goodwill. In order to determine the fair value of the division, significant
management judgment is applied in order to estimate the underlying discounted future free
cash flows. In the case that the fair value of the division is less than its carrying amount, a sec-
ond step is performed which compares the fair value of the division’s goodwill to the carrying
amount of its goodwill. The fair value of goodwill is determined based upon the difference
between the fair value of the division and the net of the fair values of the identifiable assets
and liabilities of the division. If the fair value of goodwill is less than the carrying amount, the
difference is recorded as impairment. As of September 30, 2006 and 2005, Siemens had total
goodwill of €9.776 billion and €8.930 billion, respectively. For more information, see “Notes to
Consolidated Financial Statements.”
Pension and postretirement benefit accounting – Our pension benefit costs and credits
are determined in accordance with actuarial valuations, which rely on key assumptions includ-
ing discount rates and expected return on plan assets. We determine the market-related value
of plan assets for the majority of our domestic pension plans based on the average of the his-
torical market values of plan assets over the four quarters of the preceding fiscal year. This
value is the basis for the determination of the return on plan assets and amortization of unrec-
ognized losses in the fiscal year following the actuarial valuation. For all other pension plans,
asset values are based upon the fair value of plan assets at the measurement date. Due to the
underfunded status, measured against the accumulated benefit obligation (ABO), of certain
pension plans at their respective measurement dates, an additional minimum liability may
result, which is generally recorded net of deferred income tax assets in accumulated other
comprehensive income. If an additional minimum liability has to be recorded, the amount will
be determined at the respective measurement date on a plan-by-plan basis. Our postretire-
ment benefit costs and credits are determined in accordance with actuarial valuations, which
rely on key assumptions including discount rates, and increase or decrease in health care
trend rates. The discount rate assumptions reflect the rates available on high-quality fixed-
income investments of appropriate duration at the measurement dates of each plan. The
expected return on plan assets assumption is determined on a uniform basis, considering
long-term historical returns, asset allocation, and future estimates of long-term investment
returns. Other key assumptions for our pension and postretirement benefit costs and credits
are based in part on current market conditions. Pension and related postretirement benefit
costs or credits could change due to variations in these underlying key assumptions.
The assumptions used for the calculation of net periodic pension cost in fiscal 2007 have
already been determined. A one percentage point increase (decrease) in the discount rate
assumption would result in a decrease (increase) in net periodic pension cost of €226 (€291)
million. A one percentage point increase (decrease) in the assumption for expected return on
plan assets would result in a decrease (increase) of €217 (€217) million. A one percentage point
increase (decrease) in the rates of compensation increase and pension progression would
result in a combined increase (decrease) of €375 (€312) million. If more than one of these
assumptions were changed simultaneously, the cumulative impact would not necessarily be
the same as if only one assumption were changed in isolation. For a discussion of our current
funding status and the impact of these critical assumptions, see “Notes to Consolidated Finan-
cial Statements.”
Accruals – Significant estimates are involved in the determination of provisions related
to contract losses, warranty costs and legal proceedings. A significant portion of the business
of certain of our operating Groups is performed pursuant to long-term contracts, often for
large projects, in Germany and abroad, awarded on a competitive bidding basis. Siemens
records an accrual for contract losses when current estimates of total contract costs exceed