Siemens 2007 Annual Report Download - page 158

158 Management’s discussion and analysis
Trade and Other Receivables – The allowance for doubtful accounts involves
signifi cant management judgment and review of individual receivables based on
individual customer creditworthiness, current economic trends and analysis of
historical bad debts on a portfolio basis. For the determination of the country-spe-
cifi c component of the individual allowance, we also consider country credit rat-
ings, which are centrally determined based on information from external rating
agencies. Regarding the determination of the valuation allowance derived from a
portfolio-based analysis of historical bad debts, a decline of receivables in volume
results in a corresponding reduction of such provisions and vice versa. As of
September 30, 2007 and 2006, Siemens recorded a total valuation allowance for
accounts receivable of €895 million and €956 million, respectively. Siemens also
selectively assists customers through arranging fi nancing from various third-
party sources, including export credit agencies, in order to be awarded supply
contracts. In addition, the Company provides direct vendor fi nancing and grants
guarantees to banks in support of loans to Siemens customers when necessary
and deemed appropriate.
Impairment – Siemens tests at least annually whether goodwill has suffered
any impairment, in accordance with its accounting policy. The determination of
the recoverable amount of a division to which goodwill is allocated involves the
use of estimates by management. The recoverable amount is the higher of the
division´s fair value less costs to sell and its value in use. The Company generally
uses discounted cash fl ow based methods to determine these values. These dis-
counted cash fl ow calculations use fi ve-year projections that are based on the
fi nancial budgets approved by management. Cash fl ow projections take into
account past experience and represent management’s best estimate about future
developments. Cash fl ows after the planning period are extrapolated using indi-
vidual growth rates. Key assumptions on which management has based its deter-
mination of fair value less costs to sell and value in use include estimated growth
rates, weighted average cost of capital and tax rates. These estimates, including
the methodology used, can have a material impact on the respective values and
ultimately the amount of any goodwill impairment. Likewise, whenever property,
plant and equipment and other intangible assets are tested for impairment, the
determination of the assets’ recoverable amount involves the use of estimates by
management and can have a material impact on the respective values and ulti-
mately the amount of any impairment. For more information, see “Notes to Con-
solidated Financial Statements.”
Pension and Postretirement Benefi t Accounting – Obligations for pension
and other post-employment benefi ts and related net periodic benefi t costs are
determined in accordance with actuarial valuations. These valuations rely on key
assumptions including discount rates, expected return on plan assets, expected
salary increases, mortality rates and health care trend rates. The discount rate
assumptions refl ect the rates available on high-quality fi xed-income investments
of appropriate duration at the balance sheet date. The expected return on plan
assets assumptions are determined on a uniform basis, considering long-term