Siemens 2012 Annual Report Download - page 213

135 D. Consolidated Financial Statements
239 E. Additional Information
130 C. Siemens AG (Discussion on basis of
German Commercial Code)
134 C. Notes and forward-looking statements
129 C. Compensation Report, Corporate Governance
statement pursuant to Section a of the
German Commercial Code, Takeover-relevant
information and explanatory report

wide basis using derivative financial instruments. Depending
on the development of foreign currency exchange and interest
rates, our hedging activities could have significant effects on
our cash flow. Our Sectors and Financial Services (SFS) engage
in currency hedging activities which sometimes do not qualify
for hedge accounting. In addition, our Corporate Treasury has
interest rate hedging activities which do not qualify for hedge
accounting either, and are subject to changes in interest rates.
Accordingly, exchange rate and interest rate fluctuations may
lead to higher volatility and adverse effects on our business, fi-
nancial conditions and results of operations. A strengthening
of the euro (particularly against the U.S. dollar) may change
our competitive position, as many of our competitors may ben-
efit from having a substantial portion of their costs based in
weaker currencies, enabling them to offer their products at
lower prices.
We are exposed to volatile credit spreads: Regarding our
Corporate Treasury activities, widening credit spreads due to
uncertainty and risk aversion in the financial markets might
lead to adverse changes of fair market values of our financial
assets, in particular concerning our derivative financial instru-
ments. In addition, we see a risk of widening credit spreads
leading to increasing refinancing costs if the Eurozone sover-
eign debt crisis with its ongoing significant impact on global
financial markets and the European financial sector in particu-
lar, continues or even worsens. Any such development could
also further increase the costs for buying protection against
credit risks due to a potential increase of counterparty risks.
Our future financing via Corporate Treasury may particu-
larly be affected by the uncertainty of economic conditions
and the development of capital and financial markets: Our
Corporate Treasury is responsible for the financing of the Com-
pany. Negative developments in the foreign exchange, money
or capital markets, such as limited availability of funds (partic-
ularly U.S. dollar funds), may increase our overall cost of fund-
ing. The ongoing Eurozone sovereign debt crisis continues to
have an impact on global capital markets. The resulting higher
risk awareness of governments lead to more regulations on
the use of financial instruments through (i) the Regulation on
OTC derivatives, central counterparties and trade repositories
(European Market Infrastructure Regulation) and (ii)
other sim-
ilar regulations in other jurisdictions, which may have an im-
pact on the future availability or the costs of adequate hedging
instruments for the company. It may even lead to further regu-
lation of the financial sector and the use of financial instru-
ments. Such further regulations could adversely influence our
future possibilities of obtaining debt financing, and/or may sig-
nificantly increase our refinancing costs. Deteriorating credit
quality and/or default of business partners may adversely affect
our business, financial conditions and results of operations.
Downgrades of our ratings could increase our cost of
capital and could negatively affect our businesses: Our
business, financial condition and results of operations are in-
fluenced significantly by the actual and expected performance
of the Sectors and SFS, as well as the Company ’s portfolio
measures. An actual or expected negative development of our
results of operations or cash flows or an increase in our net
debt position could result in the deterioration of our credit rat-
ing. Downgrades by rating agencies could increase our cost of
capital, may reduce our potential investor base and may nega-
tively affect our business, financial conditions and results of
operations.
Our financing activities subject us to various risks, in-
cluding credit, interest rate and foreign exchange risk:
We provide our customers with various forms of direct and
indirect financing in connection with large projects. We also
finance a large number of customer orders, for example, the
leasing of medical equipment, mainly through SFS. SFS also
incurs credit risk by financing third-party equipment or by tak-
ing direct or indirect participation in financings, such as syndi-
cated loans. In part, we take a security interest in the assets we
finance or we receive additional collateral. Our business, finan-
cial conditions and results of operations may be adversely af-
fected if the credit quality of our customers deteriorates or if
they default on their payment obligation to us, if the value of
the assets in which we have taken a security interest or addi-
tional collateral declines, if interest rates or foreign exchange
rates fluctuate, or if the projects in which we invest are unsuc-
cessful. Potential adverse changes in economic conditions
could cause a decline in the fair market values of assets, deriv-
ative instruments as well as collateral, resulting in losses
which could have an adverse effect on our business, financial
condition and results of operations.
Our business, financial condition and results of opera-
tions may be adversely affected by several parameters
influencing the funded status of our pension benefit
plans: The funded status of our pension plans may be affected
by an increase or decrease in the defined benefit obligation
(DBO), as well as by an increase or decrease in the value of
plan assets. Pensions are accounted for in accordance with ac-
tuarial valuations, which rely on statistical and other factors in
order to anticipate future events. These factors include key
pension plan valuation assumptions such as the discount rate,
rate of future compensation increases and pension progres-
sion. Actual developments may differ from assumptions due to
changing market and economic conditions, thereby resulting
in an increase or decrease in the DBO. Significant movements
in financial markets or a change in the portfolio mix of invest-
ed assets could result in corresponding increases or decreases
in the value of plan assets, particularly equity securities. Also,