Siemens 2008 Annual Report Download - page 288

192 Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts)
It is expected that €33 of net deferred losses in Other components of equity will be reclassied into Cost of goods
sold and services rendered during the year ended September 30, 2009, when the hedged forecasted foreign-cur-
rency denominated sales and purchases occur.
As of September 30, 2008, the maximum length of time over which the Company is hedging its future cash ows
associated with foreign-currency forecasted transactions is 218 months.
Fair value hedges – As of September 30, 2008 and 2007, the Company hedged rm commitments using forward
exchange contracts that were designated as foreign-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, 2008 and 2007, the
hedging transactions resulted in the recognition of nancial assets of €19 and €2, respectively, and nancial
liabilities of €34 and €31, respectively, for the hedged 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 nancial assets and liabilities to changes in market rates of inter-
est. The Company seeks to mitigate such risk by entering into interest rate derivative nancial instruments such
as interest rate swaps (see also Note 33), options and, to a lesser extent, cross-currency interest rate swaps and
interest rate futures.
Derivative 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 referring to
specic assets or liabilities. Such a strategy does not qualify for hedge accounting treatment under IAS 39.
Accordingly, all interest rate derivative instruments used in this strategy are recorded at fair value, either as
Other current nancial assets or Other current 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 offset-
ting relationships are also recorded in Financial income (expense), net.
Fair value hedges of xed-rate debt obligations
Under the interest rate swap agreements outstanding during the years ended September 30, 2008 and 2007,
the Company agrees to pay a variable rate of interest multiplied by a notional principle amount, and receives in
return an amount equal to a specied 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 xed-rate debt obligations. The interest rate swap contracts are reected at fair value in the Compa-
ny’s Consolidated Balance Sheets and the related portion of xed-rate debt being hedged is re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 xed-rate
debt being hedged, are recognized as adjustments to the line item Financial income (expense), net in the Con-
solidated Statements of Income. The net effect recognized in Financial income (expense), net, representing the
ineffective portion of the hedging relationship, amounted to €(7) and €7 in scal 2008 and 2007, respectively.
Net cash receipts and payments relating to such interest rate swap agreements are recorded as interest expense,
which is part of Financial income (expense), net.