Siemens 2011 Annual Report Download - page 336

6 A. To our shareholders 51 C. Combined management’s discussion and analysis 23 B. Corporate Governance
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The risk implied from the values shown in the table above re-
flects the one-sided scenario of cash outflows only. Obliga-
tions under finance leases, trade payables and other financial
liabilities mainly originate from the financing of assets used
in Siemens’ ongoing operations such as property, plant,
equipment and investments in working capital – e.g. invento-
ries and trade receivables. These assets are considered in the
Company ’s overall liquidity risk management. A considerable
portion of the irrevocable loan commitments result from as-
set-based lending transactions meaning that the respective
loans can only be drawn after sufficient collateral has been
provided by the borrower. To monitor existing financial assets
and liabilities as well as to enable an effective controlling of
future risks, Siemens has established a comprehensive risk re-
porting covering its worldwide business units.
The balanced view of liquidity and financial indebtedness is
stated in the calculation of the Net debt. Net debt results from
total debt less total liquidity. Total debt comprises line item
Short-term debt and current maturities of long-term debt as
well as line item Long-term debt, as stated on the Consolidat-
ed Statements of Financial Position. Total debt comprises
items Notes and bonds, Loans from banks, Obligations under
finance leases and Other financial indebtedness such as com-
mercial paper. Total liquidity refers to the liquid financial as-
sets, which Siemens had available at the respective period-
end dates to fund its business operations and to pay for near-
term obligations. Total liquidity comprises line items Cash
and cash equivalents as well as line item Available-for-sale fi-
nancial assets, as stated on the Consolidated Statements of Fi-
nancial Position. Management uses the Net debt measure for
internal corporate finance management, as well as for external
communication with investors, analysts and rating agencies.
September ,
(in millions of €)  
Short-term debt and current
maturities of long-term debt 3,660 2,416
Long-term debt 14,280 17,497
Total debt 17,940 19,913
Cash and cash equivalents (12,468) (14,108)
Available-for-sale financial assets (current) (477) (246)
Total liquidity (12,945) (14,354)
Net debt (Total debt less Total liquidity) 4,995 5,560
Siemens’ capital resources consist of a variety of short- and
long-term financial instruments including, but not limited to,
loans from financial institutions, commercial paper, medium-
term notes and bonds. In addition to cash and cash equiva-
lents and to available-for-sale financial assets liquid resources
consist of future cash flows from operating activities.
Siemens’ capital requirements include, among others,
scheduled debt service, regular capital spending, ongoing
cash requirements from operating, Corporate Treasury and
SFS financing activities, dividend payments, pension plan
funding, portfolio activities and cash outflows in connection
with restructuring measures.
Credit risk
Credit risk is defined as an unexpected loss in cash and earn-
ings if the customer is unable to pay its obligations in due
time or if the value of property or equipment that serves as
collateral declines.
Siemens provides its customers with various forms of direct
and indirect financing particularly in connection with large
projects. Siemens finances a large number of smaller custom-
er orders, for example the leasing of medical equipment, in
part through SFS. SFS is also exposed to credit risk by financ-
ing third-party equipment or by taking direct or indirect par-
ticipations in financings, such as syndicated loans. In part,
Siemens takes a security interest in the assets Siemens fi-
nances or Siemens receives additional collateral. Siemens
may incur losses if the credit quality of its customers deterio-
rates or if they default on their payment obligations to
Siemens, such as a consequence of the financial crisis and
the global downturn.
The effective monitoring and controlling of credit risk is a core
competency of our risk management system. Siemens has im-
plemented a binding credit policy for all entities. Hence, credit
evaluations and ratings are performed for all customers with an
exposure or requiring credit beyond a centrally defined limit.
Customer ratings, analyzed and defined by a designated SFS
department, and individual customer limits are based on gen-
erally accepted rating methodologies, with the input consist-
ing of information obtained from external rating agencies, da-
ta service providers and Siemens’ customer default experienc-
es. Such ratings are processed by internal risk assessment
specialists. Ratings and credit limits are carefully considered
in determining the conditions under which direct or indirect
financing will be offered to customers.