Siemens 2010 Annual Report Download - page 287

147 Consolidated Financial Statements
148 Consolidated Statements of Income
149 Consolidated Statements of Comprehensive Income
150 Consolidated Statements of Financial Position
151 Consolidated Statements of Cash Flow
152 Consolidated Statements of Changes in Equity
154 Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated
and per share amounts)
261 Additional information

mination of the single net foreign currency position and com-
mits the units to hedge it in a narrow band: at least  percent
but no more than  percent of their net foreign currency
position. In addition, the guideline provides a framework of
the organizational structure necessary for foreign currency
exchange management, proposes hedging strategies and de-
fines the hedging instruments available to the entities: for-
ward contracts, currency put and call options and stop-loss
orders. Where it is not contrary to country specific regulations,
hedging activities of the Siemens units are transacted inter-
nally with Corporate Treasury. Hedging transactions with ex-
ternal counterparties in the global financial markets are carried
out under these limitations by Corporate Treasury. This in-
cludes hedging instruments which qualify for hedge account-
ing.
Siemens has a Company-wide portfolio approach which gener-
ates a benefit from any potential off-set of divergent cash flows
in the same currency, as well as optimized transaction costs.
For additional information relating to the effect of this Compa-
ny-wide portfolio approach on the Consolidated Financial
Statements, as well as for a discussion of hedging activities
employed to mitigate or reduce foreign currency exchange
risks, see Note .
The VaR for foreign exchange rates is calculated by aggregation
of the net foreign exchange rate exposure. The figures dis-
closed here are based on the net foreign exchange positions
after hedging. As of September ,  the foreign exchange
rate risk based on historical volatilities and correlations, a ten
day holding period and a confidence level of . percent re-
sulted in a VaR of € compared to a VaR of € in the year be-
fore. Changes in euro values of future cash flows due to volatile
exchange rates might influence the unhedged portion of rev-
enues, but would also affect the unhedged portion of cost of
materials. Future changes in the foreign exchange rates can
impact sales prices and may lead to margin changes, the ex-
tent of which is determined by the matching of foreign cur-
rency revenues and expenses.
Siemens defines foreign exchange rate exposure generally as
items of the Consolidated Statement of Financial Position in
addition to firm commitments which are denominated in for-
eign currencies, as well as foreign currency denominated cash
inflows and cash outflows from anticipated transactions for
the following three months. This foreign currency exposure is
determined based on the respective functional currencies of
the exposed Siemens’ entities.
Effects of currency translation
Many Siemens subsidiaries are located outside the euro zone.
Since the financial reporting currency of Siemens is the euro,
the financial statements of these subsidiaries are translated
into euro for the preparation of the Consolidated Financial
Statements of Siemens. To consider the effects of foreign ex-
change translation risk in the risk management, the assump-
tion is that investments in foreign-based operations are perma-
nent and that reinvestment is continuous. Effects from cur-
rency fluctuations on the translation of net asset amounts into
euro are reflected in the Company ’s consolidated equity posi-
tion.
Interest rate risk
Siemens’ interest rate risk exposure is mainly related to debt
obligations like bonds, loans, commercial paper programs and
interest-bearing deposits and investments. Siemens seeks to
manage this risk through the use of derivative instruments
which allow it to hedge fair value changes by swapping fixed
rates of interest into variable rates of interest. To optimize the
Company ’s position with regard to interest income and interest
expenses and to manage the overall financial interest rate risk
with respect to valuation risk affecting profit and loss and
economic risk of changing interest rates, Corporate Treasury
performs a comprehensive corporate interest rate risk manage-
ment, which manages the interest rate risk relating to the SFS
business and to the remaining group separately. For additional
information see Note .
Where it is not contrary to country-specific regulations, all
Siemens segments and entities generally obtain any required
financing through Corporate Treasury in the form of loans or
intercompany clearing accounts. The same concept is adopted
for deposits of cash generated by the units.
Assuming historical volatilities and correlations, a ten day
holding period and a confidence level of . percent the inter-
est rate VaR was € as of September , , increasing
from the comparable value of € as of September , .
This interest rate risk results primarily from euro and U.S. dol-
lar denominated long-term fixed rate debt obligations and in-
terest-bearing investments. The increase of VaR is due primar-
ily to the realignment of the interest rate management starting
with the first quarter of fiscal . Compared to the former
interest rate overlay management, the benchmark approach
resulted in longer interest periods of derivatives and higher
nominal volumes. For additional information see Note .