Siemens 2010 Annual Report Download - page 228

6 To our shareholders 21 Corporate Governance 49 Combined management’s discussion and analysis
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Cash and cash equivalents – The Company considers all
highly liquid investments with less than three months matu-
rity from the date of acquisition to be cash equivalents. Cash
and cash equivalents are measured at cost.
Available-for-sale financial assets – Investments in equity
instruments, debt instruments and fund shares are all classi-
fied as available-for-sale financial assets and are measured at
fair value, if reliably measurable. Unrealized gains and losses,
net of applicable deferred income taxes, are recognized in
Other comprehensive income. Provided that fair value cannot
be reliably determined, Siemens measures available-for-sale
financial instruments at cost. This applies to equity instru-
ments that do not have a quoted market price in an active
market, and decisive parameters cannot be reliably estimated
to be used in valuations models for the determination of fair
value.
When available-for-sale financial assets incur a decline in fair
value below acquisition cost and there is objective evidence
that the asset is impaired, the cumulative loss that has been
recognized in equity is removed from equity and recognized in
the Consolidated Statements of Income. The Company consid-
ers all available evidence such as market conditions and prices,
investee-specific factors and the duration and the extent to
which fair value is less than acquisition cost in evaluating po-
tential impairment of its available-for-sale financial assets. The
Company considers a decline in fair value as objective evidence
of impairment, if the decline exceeds  percent of costs or
continues for more than six months. An impairment loss is
reversed in subsequent periods for debt instruments, if the
reasons for the impairment no longer exist.
Loans and receivables – Financial assets classified as loans
and receivables are measured at amortized cost using the ef-
fective interest method less any impairment losses. Impair-
ment losses on trade and other receivables are recognized us-
ing separate allowance accounts. See Note  for further infor-
mation regarding the determination of impairment. Loans and
receivables bearing no or lower interest rates compared to
market rates with a maturity of more than one year are being
discounted.
Financial liabilities – Siemens measures financial liabilities,
except for derivative financial instruments, at amortized cost
using the effective interest method.
Derivative financial instruments – Derivative financial instru-
ments, such as foreign currency exchange contracts and inter-
est rate swap contracts, are measured at fair value. Derivative
instruments are classified as held for trading unless they are
designated as hedging instruments, for which hedge account-
ing is applied. Changes in the fair value of derivative financial
instruments are recognized periodically either in net income
or, in the case of a cash flow hedge, in Other comprehensive
income, net of applicable deferred income taxes. Certain de-
rivative instruments embedded in host contracts are also ac-
counted for separately as derivatives.
Fair value hedges – The carrying amount of the hedged item is
adjusted by the gain or loss attributable to the hedged risk.
Where an unrecognized firm commitment is designated as the
hedged item, the subsequent cumulative change in its fair
value is recognized as a separate financial asset or liability with
corresponding gain or loss recognized in net income.
For hedged items carried at amortized cost, the adjustment is
amortized such that it is fully amortized by maturity of the
hedged item. For hedged firm commitments the initial carry-
ing amount of the assets or liabilities that result from meeting
the firm commitments are adjusted to include the cumulative
changes in the fair value that were previously recognized as
separate financial assets or liabilities.
Cash flow hedges – The effective portion of changes in the fair
value of derivative instruments designated as cash flow
hedges are recognized in Other comprehensive income, net of
applicable deferred income taxes, and any ineffective portion
is recognized immediately in net income. Amounts accumu-
lated in equity are reclassified into net income in the same
periods in which the hedged item affects net income, see Note
 for further information.
Share-based payment – IFRS  distinguishes between cash-
settled and equity-settled share-based payment transactions.
For both types, the fair value is measured at grant date and
compensation expense is recognized over the vesting period
during which the employees become unconditionally entitled
to the awards granted. Cash-settled awards are re-measured at
fair value at the end of each reporting period and upon settle-
ment. Siemens uses an option pricing model to determine the
fair value of stock options. The fair value of other share-based
awards, such as stock awards, matching shares, and shares
granted under the Jubilee Share Program, is determined as the
market price of Siemens shares, considering dividends during