Siemens 2006 Annual Report Download - page 247

International Financial Reporting Standards
(in millions of €) 243
Moreover, the “short-cut-method” that may be applied under U.S. GAAP to hedge interest
rate risk, if certain conditions are met, is not allowed under IFRS. As the requirements for the
application of hedge accounting under IFRS are more restrictive, hedge accounting related to
interest rate risk for certain fixed-rate debt obligations was discontinued. IFRS 1 requires that
the corresponding basis adjustments recognized under U.S. GAAP as of September 30, 2004 be
carried forward to the IFRS opening balance and deferred over the remaining life of the relat-
ed instrument. The termination of hedge accounting resulted in a decrease in equity as of Sep-
tember 30, 2006 of €7 and an increase in equity as of September 30, 2005 of €89. The effect on
net income was a decrease of €96 in fiscal 2006 and an increase of €89 in fiscal 2005.
Under U.S. GAAP, equity instruments for which there is no readily determinable market val-
ue are recorded at cost. Under IFRS, all equity instruments, including non-exchange traded
equity investments are measured at fair value, if reliably measurable, with unrealized gains
and losses included in Other components of equity, net of applicable deferred income taxes.
Investments for which a fair value is not reliably measurable are recorded at cost. The adjust-
ments increased equity as of September 30, 2006 and 2005, and October 1, 2004, by €29, €20
and €115, respectively. The adjustment of €115 relates primarily to fair value adjustments on
shares in Juniper Networks, Inc. (Juniper), which under U.S. GAAP were measured at cost
because they were subject to sales restrictions until September 30, 2004.
f. Pensions and other post-employment benefits
Under IFRS, actuarial gains and losses resulting from changes in actuarial assumptions used
to measure pension plan obligations are recognized directly in equity in the period in which
they occur based on the new alternative introduced by IAS 19 (amended), which Siemens
decided to use in connection with the early adoption of this amended standard. As of October
1, 2004 (the date of transition to IFRS), all actuarial gains and losses and vested past service
cost previously unrecognized under U.S. GAAP were recorded in retained earnings. Under U.S.
GAAP, unrecognized actuarial gains and losses exceeding the “corridor” continue to be amor-
tized over the average remaining service period of active plan participants. Likewise, unrecog-
nized vested past service cost continues to be amortized over the average remaining service
period of active plan participants. As the effect of actuarial gains and losses do not impact the
income statement under IFRS, increased net income resulted under IFRS of €602 and €549 in
2006 and 2005, respectively, as compared to U.S. GAAP for which amortization of net unrecog-
nized actuarial losses existed.
U.S. GAAP defines an accumulated benefit obligation (ABO) that, in contrast to the projected
benefit obligation, does not include assumptions about future compensation increases. If the
ABO exceeds the fair value of plan assets, a liability at least equal to such difference – referred
to as the minimum liability – is recorded on the balance sheet. The difference between the
amount recorded on the balance sheet and the minimum liability – referred to as the addition-
al minimum liability (AML) – is recognized either as an intangible pension asset, to the extent
that past service cost exists, or within Accumulated Other Comprehensive Income (AOCI) (sim-
ilar to Other components of equity under IFRS). As the AML recorded by the Company under
U.S. GAAP represents a significant portion of the total unrecognized actuarial losses existing
at each balance sheet date presented, the reduction in equity compared to U.S. GAAP resulting
from pensions was significantly less than the amount of such unrecognized actuarial losses.
The overall impact associated with these changes was an increase in the unfunded liabili-
ties for pension plans and similar commitments and a decrease in equity of €1,588, €749 and
€1,877 as of September 30, 2006 and 2005, and as of October 1, 2004, respectively.