Siemens 2006 Annual Report Download - page 246

International Financial Reporting Standards
(in millions of €)
242
a. Change in presentation of minority interest
Under IFRS, minority interest is reported as a separate item within equity. U.S. GAAP requires
minority interest to be presented separately from equity. Consistent with the balance sheet
presentation, under IFRS the minorities’ share of net income is presented as an allocation of
net income, whereas, under U.S. GAAP, the minorities’ share is considered in determining net
income.
b. Capitalization of development costs
Under IFRS, development costs are capitalized, if specified criteria are met, while they are
expensed under U.S. GAAP, except for internally generated software. The additional capitali-
zation of product development costs (less related amortization) under IFRS increased equity
by €251, €230 and €217 as of September 30, 2006 and 2005, and October 1, 2004, respectively.
The resulting increase in net income in 2006 and 2005 was €17 and €13, respectively.
c. Investments accounted for using the equity method
IFRS requires that the application of the equity method be based on financial information pro-
vided by the associated companies and joint ventures that is in compliance with IFRS. Due to
resulting IFRS adjustments relating to investments accounted for using the equity method,
equity decreased by €141, €164 and €182 as of September 30, 2006 and 2005, and October 1,
2004, respectively. Net income under IFRS increased by €32 and €15 in 2006 and 2005, respec-
tively, as compared to U.S. GAAP.
d. Sale and leaseback transactions
U.S. GAAP and IFRS differ with respect to the accounting for a gain arising from a sale and
leaseback transaction. If the leaseback is an operating lease, any gain on sale is deferred over
the life of the lease under U.S. GAAP. Under IFRS, the gain is immediately recognized in net
income if the sale was established at fair value. Adjustments made in this respect increased
equity under IFRS by €207, €186 and €208 as of September 30, 2006 and 2005, and October 1,
2004, respectively. The effect on net income was an increase of €21 in fiscal 2006 and a
decrease of €22 in fiscal 2005.
e. Financial instruments
Under U.S. GAAP, the conversion feature in debt instruments convertible into shares of the
issuer are generally not separated (bifurcated) from the debt instrument and accounted for
separately at fair value. Under IFRS, a compound financial instrument with terms and condi-
tions that grant the issuer the right to settle the option in cash upon conversion is divided into
separate liability components at inception. The conversion right component is considered a
derivative instrument and measured at fair value through profit or loss. The residual liability
component representing the debt obligation is measured at fair value at inception and is sub-
sequently measured at amortized cost using the effective interest method. In the third quarter
of fiscal 2006, Siemens decided to waive the cash settlement option of the convertible bond
and reclassified the conversion right component, which is deemed to be an equity component,
to Additional paid-in capital. As of September 30, 2006, equity increased by €230 mainly due
to this reclassification of the conversion right component. As of September 30, 2005, and Octo-
ber 1, 2004, the bifurcated conversion right component reduced equity by €375 and €350,
respectively, due to the consideration of the conversion right as a derivative instrument and its
re-measurement to fair value as well as the accretion of the debt component. Net income
decreased by €198 and €25 in fiscal 2006 and 2005, respectively, due to the fair value re-meas-
urement of the conversion right and additional interest expense.