Siemens 2008 Annual Report Download - page 295

Notes to Consolidated Financial Statements 199
(in millions of €, except where otherwise stated and per share amounts)
Credit risk
The Company is exposed to credit risk in connection with its signicant project business in the elds of public
infrastructure and transport, healthcare, utilities and IT where direct or indirect nancing in various forms may
be provided to customers. In limited cases, the Company may also take an equity interest as part of the project
nancing.
The Company is also exposed to credit risk via its leasing activities, primarily related to medical engineering,
data processing equipment and industrial and consumer products of third party manufacturers. Siemens’ credit
risk regarding such activities presents additional risks as the volume of such transactions is higher, customers
tend to be smaller for which transparent credit histories are often not available.
Credit risk is dened as an unexpected loss in cash and earnings if the customer is unable to pay its obligations
in due time, if the value of property that serves as collateral declines, or if the projects Siemens has invested in
are not successful. The current global nancial crisis may cause customer default rates to increase and collateral
values to decline. The effective monitoring and controlling of credit risk is a core competency of our risk man-
agement system. Corporate Treasury has implemented a binding credit policy for all Siemens segments and
entities. Hence, credit evaluations and ratings are performed on all customers with an exposure or requiring
credit beyond a centrally dened limit.
Customer ratings, analyzed and dened by a designated SFS department, and individual customer limits are
based on generally accepted rating methodologies, the input from external rating agencies and Siemens default
experiences. Such ratings are processed by internal risk assessment specialists. Ratings and credit limits are
carefully considered in determining the conditions under which direct or indirect nancing will be offered to
customers by the operating units.
Credit risk is recorded and monitored on an ongoing basis applying different approaches dependent on the
underlying product. Central systems are used for leasing business, factoring, monitoring of operating counter-
party risk, real-time monitoring of treasury counterparty risk, as are a number of decentralized tools for man-
agement of individual credit risks within the operating units. A central IT application processes data from the
operating units together with rating and default information and calculates an estimate which may be used as a
basis for individual bad debt provisions. Apart from this automated process, individual management judgment
is applied, in particular to incorporate the latest developments and qualitative information.
To mitigate credit risk, Corporate Treasury has developed a guideline under which operating units may sell por-
tions of their receivable portfolio on a non-recourse basis, either directly to SFS or to external parties. Receivable
sales to external parties are generally only performed for customers with a credit rating below investment grade
or for long-term projects with a nancing component.
SFS uses, if necessary, credit default swaps, classied as derivatives, to protect from credit risks stemming from
its receivables purchase business. In respect of nancial assets that are not protected through the use of credit
default swaps the maximum exposure to credit risk, without taking account of any collateral, is represented by
their carrying amount. Credit risks arising from credit guarantees are described in Note 29. There were no sig-
nicant concentrations of credit risk as of September 30, 2008.
Concerning trade receivables and other receivables, as well as other loans or receivables included in Other
nancial assets that are neither impaired nor past due, there were no indications as of September 30, 2008, that
defaults in payment obligations will occur. For further information regarding the concept for the determination
of allowances on receivables see Note 3.