Siemens 2007 Annual Report Download - page 291

Notes to Consolidated Financial Statements 291
(in millions of €, except where otherwise stated and per share amounts)
Notes to Consolidated Financial Statements
Fair value hedges – As of September 30, 2007 and 2006, the Company hedged
fi rm commitments using forward exchange contracts that were designated as for-
eign-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, 2007 and
2006, the hedging transactions resulted in the recognition of fi nancial assets of
€2 and €6, respectively, and fi nancial liabilities of €31 and €7, respectively, for the
hedged fi rm commitments, whose changes in fair value were charged to Cost of
goods sold and services rendered. Changes in fair value of the derivative contracts
were also recorded in Cost of goods sold and services rendered.
Interest rate risk management
Interest rate risk arises from the sensitivity of fi nancial assets and liabilities to
changes in market rates of interest. The Company seeks to mitigate such risk by
entering into interest rate derivative fi nancial instruments such as interest rate
swaps (see also Note 32), options and, to a lesser extent, cross-currency interest
rate swaps and interest rate futures.
Derivative fi nancial instruments not designated as hedges
The Company uses a portfolio-based approach to manage its interest rate risk
associated with certain interest-bearing assets and liabilities, primarily interest-
bearing investments and debt obligations. This approach focuses on mismatches
in the structure of the interest terms of these assets and liabilities without refer-
ring to specifi c assets or liabilities. Such a strategy does not qualify for hedge
accounting treatment under IAS 39, Financial Instruments: Recognition and Mea-
surement. Accordingly, all interest rate derivative instruments used in this strat-
egy are recorded at fair value, either as Other current fi nancial assets or Other cur-
rent fi nancial liabilities, and changes in the fair values are charged to Financial
income (expense), net. Net cash receipts and payments relating to interest rate
swaps used in offsetting relationships are also recorded in Financial income
(expense), net.
Fair value hedges of fi xed-rate debt obligations
Under the interest rate swap agreements outstanding during the year ended Sep-
tember 30, 2007, the Company agrees to pay a variable rate of interest multiplied
by a notional principle amount, and receive in return an amount equal to a speci-
fi ed fi xed rate of interest multiplied by the same notional principal amount. These
interest rate swap agreements offset an impact of future changes in interest rates
on the fair value of the underlying fi xed-rate debt obligations. The interest rate
swap contracts are refl ected at fair value in the Company’s Consolidated Balance
Sheets and the related portion of fi xed-rate debt being hedged is refl ected at an
amount equal to the sum of its carrying amount plus an adjustment representing
the change in fair value of the debt obligations attributable to the interest rate
risk being hedged. Changes in the fair value of interest rate swap contracts and
the offsetting changes in the adjusted carrying amount of the related portion of
fi xed-rate debt being hedged, are recognized as adjustments to the line item