Siemens 2010 Annual Report Download - page 284

6 To our shareholders 21 Corporate Governance 49 Combined management’s discussion and analysis
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As of September , , the maximum length of time over
which the Company is hedging its future cash flows associated
with foreign-currency forecasted transactions is  months.
Fair value hedges – As of September ,  and , the
Company hedged firm commitments using forward exchange
contracts that were designated as foreign-currency fair value
hedges of future sales related primarily to the Company ’s proj-
ect business and, to a lesser extent, purchases. As of Septem-
ber ,  and , the hedging transactions resulted in the
recognition of financial assets of € and €, respectively, and
financial liabilities of € and €, respectively, for the hedged
firm commitments. Changes in fair value of forward exchange
contracts resulted in losses of € and gains of €, respectively.
These effects relate to gains from the valuation of firm com-
mitments of € and losses of €, respectively. Changes in fair
value of the forward exchange contracts as well as of the firm
commitments were recorded in Cost of goods sold and services
rendered.
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 this risk by entering into interest rate
derivative financial instruments such as interest rate swaps
(see also Note ), options and, to a lesser extent, cross-curren-
cy interest rate swaps and interest rate futures, as well as for-
ward rate agreements.
Derivative financial instruments not designated
in a hedging relationship
Starting with the first quarter of fiscal , the interest rate
risk management relating to the Group excluding SFS business
has been realigned with the financial market environment.
Under this portfolio-based approach, derivative financial in-
struments are used to manage interest risk actively relative to
a benchmark, consisting of medium-term interest rate swaps
and forward rates. Compared to the former interest rate overlay
management, the benchmark approach may result in longer
interest periods of derivatives and higher nominal volumes.
The interest rate management relating to the SFS business re-
mains to be managed separately, considering the term struc-
ture of SFS’ financial assets and liabilities on a portfolio basis.
Both approaches do not qualify for hedge accounting treat-
ment under IAS . Accordingly, all interest rate derivative in-
struments used in this relation are recorded at fair value, either
as Other current financial assets / liabilities or Other financial
assets / liabilities, and changes in the fair values are charged to
Financial income (expense), net. Net cash receipts and pay-
ments relating to interest rate swaps used in offsetting rela-
tionships are also recorded 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 ,  and , the Company
agrees to pay a variable rate of interest multiplied by a no-
tional 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 Statements of Financial Position
and the related portion of fixed-rate debt being hedged is re-
flected 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 con-
tracts and the offsetting changes in the adjusted carrying
amount of the related portion of fixed-rate debt being hedged
are recognized as Financial income (expense), net in the Con-
solidated Statements of Income. Adjustments in the carrying
amount of the debt obligations resulted in a loss of € and a
loss of €, respectively. During the same period, the related
swap agreements resulted in a gain of € and a gain of €,
respectively. Therefore, the net effect recognized in Financial
income (expense), net, representing the ineffective portion of
the hedging relationship, amounted to € and € in fiscal
 and , respectively. Net cash receipts and payments
relating to such interest rate swap agreements are recorded as
interest income and expense, respectively.
The Company had interest rate swap contracts to pay variable
rates of interest of an average of . percent and . percent as
of September ,  and , respectively and received
fixed rates of interest (average rate of . percent and . per-
cent as of September ,  and , respectively). The
notional amount of indebtedness hedged as of September ,
 and  was €, and €,, respectively. This
changed  percent and  percent of the Company ’s underly-
ing notes and bonds from fixed interest rates into variable in-
terest rates as of September ,  and , respectively.
The notional amounts of these contracts mature at varying
dates based on the maturity of the underlying hedged items.
The net fair value of interest rate swap contracts (excluding
accrued interest) used to hedge indebtedness as of September
,  and  was €, and €,, respectively.