Siemens 2010 Annual Report Download - page 230

6 To our shareholders 21 Corporate Governance 49 Combined management’s discussion and analysis
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fair value disclosure hierarchy is introduced, that distinguishes
fair value measurements by the significance of the inputs used
and reflects the availability of observable market inputs when
estimating fair values. Amendments are also made to enhance
disclosures on liquidity risks, by clarifying the scope of liabili-
ties to be disclosed in a maturity analysis. Siemens decided to
early adopt the amendment in its fiscal  Consolidated
Financial Statements.
Recent accounting pronouncements, not yet adopted
The following pronouncement, issued by the IASB, is not yet
effective and has not yet been adopted by the Company:
In November , the IASB issued IFRS  Financial Instru-
ments. This standard is the first phase of the IASB’s three-
phase project to replace IAS  Financial Instruments: Recogni-
tion and Measurement. IFRS  amends the classification and
measurement requirements for financial assets, including
some hybrid contracts. It uses a single approach to determine
whether a financial asset is measured at amortized cost or at
fair value, replacing the different rules in IAS . The approach
in IFRS  is based on how an entity manages its financial in-
struments (its business model) and the contractual cash flow
characteristics of the financial assets. The new standard also
requires a single impairment method to be used, replacing the
different impairment methods in IAS . The new standard is
applicable for annual reporting periods beginning on or after
January , ; early adoption is permitted. The European
Financial Reporting Advisory Group postponed its endorse-
ment advice, to take more time to consider the output from the
IASB project to improve accounting for financial instruments.
The Company is currently assessing the impacts of the adop-
tion on the Company ’s Consolidated Financial Statements.
The IASB issued various other pronouncements. These re-
cently adopted pronouncements as well as pronouncements
not yet adopted did not have a material impact on Siemens’
Consolidated Financial Statements.
 – Critical accounting estimates
Siemens’ Consolidated Financial Statements are prepared in
accordance with IFRS as issued by the IASB and as adopted by
the EU. Siemens’ significant accounting policies, as described
in Note  are essential to understanding the Company ’s results
of operations, financial positions and cash flows. Certain of
these accounting policies require critical accounting estimates
that involve complex and subjective judgments and the use of
assumptions, some of which may be for matters that are inher-
ently uncertain and susceptible to change. Such critical ac-
counting estimates could change from period to period and
have a material impact on the Company ’s results of operations,
financial positions and cash flows. Critical accounting esti-
mates could also involve estimates where management rea-
sonably could have used a different estimate in the current
accounting period. Management cautions that future events
often vary from forecasts and that estimates routinely require
adjustment.
Revenue recognition on construction contracts – The Com-
pany ’s Sectors, particularly Energy and Industry, conduct a
significant portion of their business under construction con-
tracts with customers. The Company generally accounts for
construction projects using the percentage-of-completion
method, recognizing revenue as performance on contract
progresses. Certain long-term service contracts are accounted
for under the percentage-of-completion method as well. This
method places considerable importance on accurate estimates
of the extent of progress towards completion. Depending on
the methodology to determine contract progress, the signifi-
cant estimates include total contract costs, remaining costs to
completion, total contract revenues, contract risks and other
judgments. Management of the operating Divisions continu-
ally reviews all estimates involved in such construction con-
tracts and adjusts them as necessary. The Company also uses
the percentage-of-completion method for projects financed
directly or indirectly by Siemens. In order to qualify for such
accounting, the credit quality of the customer must meet cer-
tain minimum parameters as evidenced by the customer’s
credit rating or by a credit analysis performed by Siemens
Financial Services (SFS), which performs such reviews on be-
half of the Company ’s Managing Board. In addition, to qualify
for such accounting, at a minimum, a customer’s credit rating
must be single B from external rating agencies or an equiva-
lent SFS-determined rating. In cases where the credit quality
does not meet such standards, the Company recognizes reve-
nue for construction contracts and financed projects based on
the lower of cash if irrevocably received, or contract comple-
tion. The Company believes the credit factors used provide a
reasonable basis for assessing credit quality.
Trade and other receivables – The allowance for doubtful
accounts involves significant management judgment and re-
view of individual receivables based on individual customer
creditworthiness, current economic trends and analysis of