Siemens 2010 Annual Report Download - page 224

6 To our shareholders 21 Corporate Governance 49 Combined management’s discussion and analysis
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nized on a straight-line basis over the term of the contract or,
if the performance pattern is other than straight-line, as the
services are provided, i.e. generally under the percentage-of-
completion method. Operating lease income for equipment
rentals is recognized on a straight-line basis over the lease
term. Arrangements that are not in the legal form of a lease are
accounted for as a lease if based on the substance of the ar-
rangement it is dependent on the use of a specific asset or as-
sets and the arrangement conveys a right to use the asset.
Receivables from finance leases, in which Siemens as lessor
transfers substantially all the risks and rewards incidental to
ownership to the customer are recognized at an amount equal
to the net investment in the lease. Finance income is subse-
quently recognized based on a pattern reflecting a constant
periodic rate of return on the net investment using the effec-
tive interest method. A selling profit component on manufac-
turing leases is recognized based on the policies for outright
sales. Royalties are recognized on an accrual basis in accor-
dance with the substance of the relevant agreement.
Sales of goods and services as well as software arrangements
sometimes involve the provision of multiple elements. In these
cases, the Company determines whether the contract or ar-
rangement contains more than one unit of accounting. An ar-
rangement is separated if () the delivered element(s) has
(have) value to the customer on a stand-alone basis, () there
is reliable evidence of the fair value of the undelivered
element(s) and (), if the arrangement includes a general right
of return relative to the delivered element(s), delivery or per-
formance of the undelivered element(s) is (are) considered
probable and substantially in the control of the Company. If all
three criteria are fulfilled, the appropriate revenue recognition
convention is then applied to each separate unit of accounting.
Generally, the total arrangement consideration is allocated to
the separate units of accounting based on their relative fair
values. The hierarchy of fair value evidence is as follows: (a)
sales prices for the component when it is regularly sold on a
stand-alone basis, (b) third-party prices for similar components
or, under certain circumstances, (c) cost plus an adequate
business-specific profit margin related to the relevant element.
By this means, reliable fair values are generally available. How-
ever, there might be cases when fair value evidence according
to (a) and (b) is not available and the application of the cost
plus-method (c) does not create reasonable results because the
costs incurred are not an appropriate base for the determina-
tion of the fair value of an element. In such cases the residual
method is used, if fair value evidence is available for the unde-
livered but not for one or more of the delivered elements, i.e.
the amount allocated to the delivered elements equals the to-
tal arrangement consideration less the aggregate fair value of
the undelivered elements. If the three separation criteria () to
() are not met, revenue is deferred until such criteria are met
or until the period in which the last undelivered element is
delivered. The amount allocable to the delivered elements is
limited to the amount that is not contingent upon delivery of
additional elements or meeting other specified performance
obligations.
Dividends are recognized when the right to receive payment is
established. Interests are recognized using the effective inter-
est method.
Functional costs – In general, operating expenses by types are
assigned to the functions following the functional area of the
corresponding profit and cost centers. Expenses relating to
cross-functional initiatives or projects are assigned to the re-
spective functional costs based on an appropriate allocation
principle.
Government grants – Government grants are recognized
when there is reasonable assurance that the conditions at-
tached to the grants are complied with and the grants will be
received. Grants awarded for the purchase or the production of
fixed assets (grants related to assets) are generally offset
against the acquisition or production costs of the respective
assets and reduce future depreciations accordingly. Grants
awarded for other than non-current assets (grants related to
income) are reported in the Consolidated Statements of In-
come under the same functional area as the corresponding
expenses. They are recognized as income over the periods
necessary to match them on a systematic basis to the costs
that are intended to be compensated. Government grants for
future expenses are recorded as deferred income.
Product-related expenses and losses from onerous con-
tracts – Provisions for estimated costs related to product war-
ranties are recorded in Cost of goods sold and services ren-
dered at the time the related sale is recognized, and are estab-
lished on an individual basis, except for the standard product
business. The estimates reflect historic trends of warranty
costs, as well as information regarding product failure experi-
enced during construction, installation or testing of products.
In the case of new products, expert opinions and industry data
are also taken into consideration in estimating product war-
ranty provisions. Expected losses from onerous contracts are
recognized in the period when the current estimate of total
contract costs exceeds contract revenue.