Siemens 2007 Annual Report Download - page 290

290 Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts)
Foreign currency exchange risk management
As described in Note 32, the Company employs various derivative fi nancial instru-
ments in order to mitigate or eliminate certain foreign-currency exchange risks.
Derivative fi nancial instruments not designated as hedges
The Company manages its risks associated with fl uctuations in foreign-currency-
denominated receivables, payables, debt, fi rm commitments and anticipated
transactions and to some extent planned transactions primarily through a Com-
pany-wide portfolio approach. This approach concentrates the associated Com-
pany-wide risks centrally, and various derivative fi nancial instruments, primarily
foreign exchange contracts and, to a lesser extent, interest rate and cross-cur-
rency interest rate swaps and options, are utilized to minimize such risks. Such a
strategy does not qualify for hedge accounting treatment under IAS 39, all such
derivative fi nancial instruments are recorded at fair value on the Consolidated
Balance Sheets, either as Other current fi nancial assets or Other current fi nancial
liabilities, and changes in fair values are charged to net income (loss).
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 signifi cant parties to the contract, prin-
cipally the U.S.$. Gains or losses relating to such embedded foreign-currency
derivatives are reported in Cost of goods sold and services rendered in the Consoli-
dated Statements of Income.
Hedging activities
The Company’s operating units applied hedge accounting for certain signifi cant
anticipated transactions and fi rm commitments denominated in foreign curren-
cies. Specifi cally, the Company entered into foreign exchange contracts to reduce
the risk of variability of future cash fl ows resulting from forecasted sales and pur-
chases and fi rm commitments resulting from its business units entering into
long-term contracts (project business) and standard product business which are
denominated primarily in U.S.$.
Cash fl ow hedges – Changes in fair value of forward exchange contracts that
were designated as foreign-currency cash fl ow hedges are recorded in Other com-
ponents of equity. During the years ended September 30, 2007 and 2006, net gains
of €1 and €3, respectively, were reclassifi ed from Other components of equity into
net income (loss) because the occurrence of the related hedged forecasted trans-
action was no longer probable.
It is expected that €119 of net deferred gains in Other components of equity will
be reclassifi ed into Cost of goods sold and services rendered during the year ended
September 30, 2008, when the hedged forecasted foreign-currency denominated
sales and purchases occur.
As of September 30, 2007, the maximum length of time over which the Com-
pany is hedging its future cash fl ows associated with foreign-currency forecasted
transactions is 184 months.