Siemens 2006 Annual Report Download - page 166

Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts)
162
Earnings per share – Basic earnings per share is computed by dividing income from
continuing operations and net income, respectively, by the weighted average shares outstand-
ing during the year. Diluted earnings per share is calculated by assuming conversion or exer-
cise of all potentially dilutive securities, stock options and stock awards.
Cash and cash equivalents – The Company considers all highly liquid investments with
less than three months maturity from the date of acquisition to be cash equivalents.
Marketable securities and investments – The Company’s marketable securities are
accounted for at fair value if readily determinable. Securities are classified as either available-
for-sale or trading securities. Management determines the appropriate classification of its
investments in marketable securities at the time of purchase and reevaluates such determina-
tion at each balance sheet date. Marketable securities classified as available-for-sale are report-
ed at fair value, with unrealized gains and losses included in Accumulated other comprehen-
sive income (AOCI), net of applicable deferred income taxes. Realized gains and losses for
individual investments are accounted for using the average cost method. Investments for
which there is no readily determinable market value are recorded at cost.
Available-for-sale marketable securities and investments which incur a decline in value
below cost that is judged to be other than temporary are considered impaired. The Company
considers all available evidence such as market conditions and prices, investee-specific factors
and the duration and extent to which fair value is less than cost in evaluating potential impair-
ment of its marketable securities and investments. Impairments are recognized in earnings in
the period in which the decline in value is judged to be other than temporary and a new cost
basis in the marketable security or investment is established.
Inventories – Inventory is valued at the lower of acquisition or production cost or market,
cost being generally determined on the basis of an average or first-in, first-out method. Pro-
duction costs comprise direct material and labor and applicable manufacturing overheads,
including depreciation charges.
Goodwill and Other intangible assets – Intangible assets consist of goodwill and patents,
software, licenses and similar rights. The Company amortizes intangible assets with finite
useful lives on a straight-line basis over their respective estimated useful lives to their esti-
mated residual values. Estimated useful lives for software, patents, licenses and other similar
rights generally range from three to five years, except for intangible assets with finite useful
lives acquired in business combinations. Intangible assets acquired in business combinations
primarily consist of customer relationships and technology. Weighted average useful lives in
specific acquisitions ranged from nine to twenty-two years for customer relationships and
from seven to twelve years for technology. Goodwill and intangible assets other than goodwill
which are determined to have indefinite useful lives are not amortized, but instead tested for
impairment at least annually. Regarding the impairment of intangible assets with finite useful
lives, see Impairment of long-lived assets below. The Company evaluates the recoverability of
goodwill using a two-step impairment test approach at the division level (reporting unit). In
the first step, the fair value of the division is compared to its carrying amount including good-
will. In the case that the fair value of the division is less than its carrying amount, a second
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 all the assets and liabili-
ties of the division (including any unrecognized intangible assets). If the fair value of goodwill
is less than the carrying amount, the difference is recorded as an impairment. See Notes 14
and 15 for further information.