Siemens 2009 Annual Report Download - page 280

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 Reports Supervisory Board /
Managing Board  Corporate Governance  Management’s discussion and analysis  Consolidated Financial Statements
 Consolidated Statements of Income  Consolidated Statements of Income
and Expense Recognized in Equity
 Consolidated Balance Sheets  Consolidated Statements of Cash Flow
item Financial income (expense), net in the Consolidated
Statements of Income. Adjustments in the carrying amount of
the debt obligations resulted in a loss of €848 and a loss of
€276, respectively. During the same period, the related swap
agreements resulted in a gain of €931 and a gain of €269, re-
spectively. Therefore, the net effect recognized in Financial in-
come (expense), net, representing the ineffective portion of
the hedging relationship, amounted to €84 and €(7) in fiscal
2009 and 2008, 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.
The Company had interest rate swap contracts to pay variable
rates of interest of an average of 0.9% and 4.5% as of Septem-
ber 30, 2009 and 2008, respectively and received fixed rates of
interest (average rate of 5.4% and 5.6% as of September 30,
2009 and 2008, respectively). The notional amount of indebt-
edness hedged as of September 30, 2009 and 2008 was €15,565
and €11,766, respectively. This changed 94% and 89% of the
Company ’s underlying notes and bonds from fixed interest
rates into variable interest rates as of September 30, 2009 and
2008, respectively. The notional amounts of these contracts
mature at varying dates based on the maturity of the underly-
ing hedged items. The net fair value of interest rate swap con-
tracts (excluding accrued interest) used to hedge indebted-
ness as of September 30, 2009 and 2008 was €1,224 and €291,
respectively.
Fair value hedges of available-for-sale financial assets
During the year ended September 30 2008, the Company had
applied fair value hedge accounting for certain fixed-rate
Available-for-sale financial assets. However, fair value hedge
accounting was terminated at the beginning of fiscal year
2008 since the majority of the hedged item was derecognised.
There was no such hedging relationship during the year ended
September 30, 2009. To offset the impact of future changes in
interest rates on the fair value of the underlying fixed-rate
available-for-sale financial assets, interest rate swap agree-
ments had been entered into. As long as hedge accounting
was applied, the interest rate swap contracts and the related
portion of the Available-for-sale financial assets were reflected
at fair value in the Company ’s Consolidated Balance Sheets.
Interest rate risk management
Interest rate risk arises from the sensitivity of financial assets
and liabilities to changes in market rates of interest. The Com-
pany seeks to mitigate such risk by entering into interest rate
derivative financial instruments such as interest rate swaps
(see also Note 33), options and, to a lesser extent, cross-cur-
rency interest rate swaps and interest rate futures.
Derivative financial instruments
not designated in a hedging relationship
The Company uses a portfolio-based approach to manage its
interest rate risk associated with certain interest-bearing as-
sets 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 specific assets or liabilities. Such a strat-
egy 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
financial assets or Other current financial liabilities, and
changes in the fair values are charged to Financial income
(expense), net. Net cash receipts and payments relating to in-
terest rate swaps used in offsetting relationships are also re-
corded in Financial income (expense), net.
Fair value hedges of fixed-rate debt obligations
Under the interest rate swap agreements outstanding during
the years ended September 30, 2009 and 2008, 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
specified fixed 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 fixed-rate debt obligations. The interest rate
swap contracts are reflected at fair value in the Company ’s
Consolidated Balance Sheets and the related portion of fixed-
rate debt being hedged is reflected 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 fixed-rate
debt being hedged, are recognized as adjustments to the line