Siemens 2011 Annual Report Download - page 332

6 A. To our shareholders 51 C. Combined management’s discussion and analysis 23 B. Corporate Governance

Position, either in line items Other current financial assets / lia-
bilities or in line items Other financial assets / liabilities, and
changes in fair values are charged to net income (loss).
Cash flow hedging activities
Since June , the Company ’s corporate procurement ap-
plies cash flow hedge accounting for certain firm commit-
ments to purchase copper. Changes in fair value of the swaps
which are used in the hedging relationship are recorded as
follows: the portion of the fair value changes that is deter-
mined to be an effective hedge is recognized in line item Oth-
er comprehensive income, net of tax, whereas the ineffective
portion of the fair value changes is recognized in profit or
loss. As of September ,  and , there was no ineffec-
tive portion that had to be recorded in profit or loss. In fiscal
 and , no gains or losses were reclassified from line
item Other comprehensive income, net of tax into line item
Cost of goods sold and services rendered because the occur-
rence of the related hedged forecast transaction was no lon-
ger probable. The development of line item Other comprehen-
sive income, net of tax resulting from changes in fair value of
these transactions as well as from amounts that were re-
moved and included in profit or loss is presented in
Note 27
Equity.
It is expected that € million of net deferred losses in line
item Other comprehensive income, net of tax will be reclassi-
fied into line item Cost of goods sold and services rendered in
fiscal , when the consumption of the hedged commodity
purchases is recognized in line item Cost of goods sold and
services rendered. As of September , , the maximum
length of time over which the Company is hedging its future
commodity purchases is  months.
 – Financial risk management
Siemens’ financial risk management is an integral part of how
to plan and execute its business strategies. Siemens’ financial
risk management policy is set by the Managing Board.
Siemens’ organizational and accountability structure requires
each of the respective managements of Siemens Sectors, Fi-
nancial Services, Cross-Sector Services, regional Clusters and
Corporate Units to implement financial risk management pro-
grams that are tailored to their specific industries and respon-
sibilities, while being consistent with the overall policy estab-
lished by the Managing Board.
Increasing market fluctuations may result in significant cash
flow and earnings volatility risk for Siemens. The Company ’s
operating business as well as its investment and financing ac-
tivities are affected by changes in foreign exchange rates, in-
terest rates, commodity prices and equity prices. In order to
optimize the allocation of the financial resources across the
Siemens segments and entities, as well as to secure an opti-
mal return for its shareholders, Siemens identifies, analyzes
and proactively manages the associated financial market
risks. The Company seeks to manage and control these risks
primarily through its regular operating and financing activi-
ties, and uses derivative financial instruments when deemed
appropriate.
Within the various methodologies to analyze and manage
risk, Siemens has implemented a system based on parametric
variance-covariance Value at Risk (VaR). The VaR methodology
provides a quantification of market risks based on historical
volatilities and correlations of the different risk factors under
the assumptions of the parametric variance-covariance Value
at Risk model. The VaR figures are calculated based on
> historical volatilities and correlations,
> a ten day holding period, and
> a .% confidence level
for foreign currency exchange rate risk, interest rate risk,
commodity price risk and equity price risk as discussed below.
Actual results that are included in the Consolidated State-
ments of Income or Consolidated Statements of Comprehen-
sive Income may differ substantially from VaR figures due to
fundamental conceptual differences. The Consolidated State-
ments of Income and Consolidated Statements of Comprehen-
sive Income are prepared in accordance with IFRS. The VaR
figures are the output of a model with a purely financial per-
spective and represent the potential financial loss which will
not be exceeded within ten days with a probability of .%.
The concept of VaR is used for internal management of the
treasury activities.
Although VaR is an important tool for measuring market risk,
the assumptions on which the model is based give rise to
some limitations including the following. A ten day holding
period assumes that it is possible to dispose of the underlying
positions within this period. While this is considered to be a
realistic assumption in almost all cases, it may not be valid