Siemens 2006 Annual Report Download - page 168

Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts)
164
Cash flow hedges – The effective portion of changes in the fair value of derivatives desig-
nated as cash flow hedges are recognized in AOCI, net of applicable deferred income taxes,
and any ineffective portion is recognized immediately in net income. Amounts accumulated
in equity are reclassified into net income in the same periods in which the hedged item affects
net income.
See Note 25, Derivative instruments and hedging activities, for a description of the Com-
pany’s risk management strategies and the effect these strategies have on the Consolidated
Financial Statements.
Income taxes – The Company applies SFAS 109, Accounting for Income Taxes. Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. The effect on deferred
tax assets and liabilities of a change in tax laws is recognized in the results of operations in the
period the new laws are enacted. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets unless it is more likely than not that such assets will be real-
ized.
Asset retirement obligations – Legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction, development or normal use of the
asset are recognized at fair value in the period in which the liability is incurred if a reasonable
estimate of fair value can be made. Such estimates are generally determined based upon
estimated future cash flows discounted using a credit-adjusted risk-free interest rate. The fair
value of the liability is added to the carrying amount of the associated asset. The additional
carrying amount is depreciated over the life of the asset. The liability is accreted each period
through charges to operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on settlement.
Use of estimates – The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and dis-
closure of contingent amounts at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Accounting changes –Standards implemented – As of October 1, 2005, the Company
adopted Statement of Financial Accounting Standards (SFAS) 123 (revised 2004) Share-Based
Payment (SFAS 123R), which replaces SFAS 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and related inter-
pretations. SFAS 123R requires companies to recognize stock-based compensation expense,
with certain limited exceptions, based on fair value. Siemens uses a Black-Scholes option pric-
ing model to determine the fair value of its stock-based compensation plans. In transitioning
to SFAS 123R, the Company applied the modified prospective method. Commencing with the
adoption of SFAS 123R, liability classified awards are remeasured to fair value at each report-
ing date until the award is settled. Equity awards granted, modified, repurchased or cancelled
beginning October 1, 2005 and unvested equity awards granted prior to October 1, 2005, are
measured at their grant-date fair value. Related compensation expense is recognized over the
vesting period for awards expected to ultimately vest. Equity awards vested prior to the effec-
tive date continue to be accounted for under recognition and measurement provisions of APB
Opinion No. 25 and related interpretations.