Siemens 2006 Annual Report Download - page 211

Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts) 207
Derivative financial instruments not designated as hedges
The Company manages its risks associated with fluctuations in foreign-currency-denominated
receivables, payables, debt, firm commitments and anticipated transactions primarily
through a Company-wide portfolio approach. This approach concentrates the associated Com-
pany-wide risks centrally, and various derivative financial instruments, primarily foreign
exchange contracts and, to a lesser extent, interest rate and cross-currency interest rate swaps
and options, are utilized to minimize such risks. Such a strategy does not qualify for hedge
accounting treatment under SFAS 133. Accordingly, all such derivative financial instruments
are recorded at fair value on the Consolidated Balance Sheets as either an Other current asset
or Other current liability and changes in fair values are charged to earnings.
The Company also has foreign-currency derivative instruments, which are embedded in
certain sale and purchase contracts denominated in a currency other than the functional
currency of the significant parties to the contract, principally the U.S. dollar. Gains or losses
relating to such embedded foreign-currency derivatives are reported in Cost of sales in the
Consolidated Statements of Income.
Hedging activities
The Company’s operating units applied hedge accounting for certain significant anticipated
transactions and firm commitments denominated in foreign currencies. Specifically, the Com-
pany entered into foreign exchange contracts to reduce the risk of variability of future cash
flows resulting from forecasted sales and purchases and firm commitments resulting from its
business units entering into long-term contracts (project business) and standard product
business which are denominated primarily in U.S. dollars.
Cash flow hedges – Changes in fair value of forward exchange contracts that were designat-
ed as foreign-currency cash flow hedges are recorded in AOCIas a separate component of
shareholders’ equity. During the years ended September 30, 2006 and 2005, net gains of €3
and €37, respectively, were reclassified from AOCIinto cost of sales because the occurrence of
the related hedged forecasted transaction was no longer probable.
It is expected that €29 of net deferred gains in AOCIwill be reclassified into earnings
during the year ended September 30, 2007 when the hedged forecasted foreign-currency
denominated sales and purchases occur.
As of September 30, 2006, the maximum length of time over which the Company is
hedging its future cash flows associated with foreign-currency forecasted transactions is
117 months.
Fair value hedges – As of September 30, 2006 and 2005, the Company hedged firm commit-
ments using forward exchange contracts that were designated as foreign-currency fair value
hedges of future sales related primarily to the Company’s project business and, to a lesser
extent, purchases. As of September 30, 2006 and 2005, the hedging transactions resulted
in the recognition of an Other current asset of €6 and €16, respectively and Other current lia-
bility of €7 and €7, respectively, for the hedged firm commitments, whose changes in fair value
were charged to cost of sales. Changes in fair value of the derivative contracts were also
recorded in cost of sales.
Notes to Consolidated Financial Statements