Siemens 2006 Annual Report Download - page 144

Management’s discussion and analysis
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We are subject to numerous risks relating to legal proceedings to which we are currently
a party or that could develop in the future. In the ordinary course of our business, we become
party to lawsuits, including suits involving allegations of improper delivery of goods or servic-
es, product liability, product defects, quality problems and intellectual property infringement.
There can be no assurance that the results of these or other legal proceedings will not material-
ly harm our business, reputation or brand. We maintain liability insurance for certain legal
risks at levels our management believes are appropriate and consistent with industry practice.
We accrue for litigation risks when it is probable that an obligation has been incurred and the
amount can be reasonably estimated. We may incur losses relating to litigation beyond the
limits, or outside the coverage, of such insurance and such losses may have a material adverse
effect on the results of our operations or financial condition and our provisions for litigation
related losses may not be sufficient to cover our ultimate loss or expenditure.
Credit risks
We provide to our customers various forms of direct and indirect financing in connection with
large projects such as those undertaken by PG and TS. We finance a large number of smaller
customer orders, for example, the leasing of medical equipment, in part, through Siemens
Financial Services (SFS). SFS also incurs credit risk by financing third-party equipment. We
also sometimes take a security interest in the projects we finance. We may lose money if any of
our customers are not able to pay us, if the value of the property that we have taken a security
interest in declines, if interest rates or foreign exchange rates fluctuate, or if the projects in
which we invest are unsuccessful, and such losses could have a material adverse effect on our
financial condition or results of operations.
Market risk
Increasing market fluctuations may result in significant cash-flow and profit volatility risk for
Siemens. Our worldwide operating business as well as our investment and financing activities
are affected by changes in foreign exchange rates, interest rates and equity prices. To optimize
the allocation of the financial resources across the Groups, as well as to secure an optimal
return for our shareholders, we identify, analyze and proactively manage the associated finan-
cial market risks. We seek to manage and control these risks primarily through our regular
operating and financing activities, and when we deem it appropriate, we use derivative instru-
ments.
Management of financial market risk is a key priority for Siemens’ Managing Board. As a
member of this Board, the Chief Financial Officer covers the specific responsibility for this
part of the overall risk management system. At the highest level, the Managing Board retains
ultimate accountability. For practical business purposes, the Managing Board delegates
responsibilities to central functions and to the Groups. SFS holds a minor trading portfolio
which is subject to tight limits. As of September 30, 2006 it has a value-at-risk close to zero.
Within the various methodologies to analyze and manage risk, we have implemented a
system based on “sensitivity analysis.” This tool enables the risk managers to identify the risk
position of the entities. Sensitivity analysis provides an approximate quantification of our
exposure in the event that certain specified parameters were to be met under a specific set of
assumptions. The risk estimates provided here assume:
■a 20% decrease in equity prices of all our investments in marketable securities;
■a simultaneous, parallel foreign exchange rates shift in which the euro appreciates against
all currencies by 10%;
■a parallel shift of 100 basis points of the interest rate yield curves in all currencies